International Trade Policy Outline Dunoff Fall 2012
I) Economics of International Trade
a) Comparative advantage
i) Two people value same thing differently, opens to trade
(1) Both parties are better off
(a) Drives market transactions
ii) Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing.
(1) Neither will want to import what it could make more cheaply at home.
(a) Both are better off than they would be if they did not trade.
(b) If each country specializes in products in which it has a comparative advantage, both will gain from trade.
(i) It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad.
(2) When two parties make two or more sets of goods, both parties are better off when using comparative advantage even if one has the absolute advantage
a) Liberalized trade
(1) Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. According to the law of comparative advantage, the policy permits trading partners mutual gains from trade of goods and services
(2) Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation.
b) Why countries restrict trade
i) Policy and governmental issues with trade that complicate matters
(1) Some products, countries do not want to be subject to the whims and caprices of international trade
ii) Domestically consider voters getting upset with trade policy decisions
iii) Economic logic may be divergent with political logic –re-election concerns
(1) Cultural, protectionism or nationalism
(2) Risk aversion
(3) Galapagos syndrome
(4) Political barriers
(5) Increased local competition
(6) Thinking that jobs will be lost as a result because of the two way door that is trade
i) Smoot-Hawley act (1930)—jacked up US tariffs to highest level ever
(1) Thought that they wanted to protect domestic sectors and focus on exports more than imports (naively) –mercantilism –pursue strategy to be a net exporter, so raise barriers to imports
(a) This becomes a large collective action problem
(i) Volume of international trade goes way down because all the large nations contributed to this net export thought and there was no where to export to since these barriers were so high—this protectionism lead to great depression, people go together and said lets no do this again
(ii) Trade frictions lead to political frictions, trade wars could lead to military wars
ii) GATT by default, becomes the lead body to govern international trade for five decades—
(1) was not suppose to be permanent, was suppose to be folded into larger organization and only temporary
(2) The GATT language was not suppose to be an organization—it had a birth defect—lacked important features due to its history
(3) GATT is like a contract, so decisions to alter could only be taken by consensus of the member states—not many states work that way—any one state could block a decision and is a veto player
(4) GATT was viewed as deficient in several ways (slow process, no services, no agriculture, no formal structure, consensus)
(a) The practice of consensus decision-making in GATT had led to the odd situation where a losing party in a dispute settlement proceeding could prevent the adoption by GATT of the relevant dispute settlement report and thereby avoid losing.
iii) World Trade Organization (WTO) comes into force (1995)
(1) US and EU leave GATT for WTO—huge power play to draw the rest of the world to the WTO
II) WTO- History, Structure and Benefits
a) What it is :
i) It’s an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules.
ii) negotiating forum.. the negotiations have helped to liberalize trade.
iii) It’s a set of rules… At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. These documents provide the legal ground-rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits.
(1) the rules have to be “transparent” and predictable.
iv) Help trade flow as freely as possible — so long as there are no undesirable side-effects —
(1) health and safety issues, dislocation of domestic workers, national security, environmental concerns,
(2) which side effects are sufficiently harmful to undermine the case for trade either in principle or, more importantly, in the eyes of the negotiating states? It is that question that will determine the extent to which liberalized trade is embraced.
v) Free trade promotes a mutually profitable division of labor, greatly enhances the potential real national product of all nations, and makes possible higher standards of living all over the globe.
b) WTO Elements
i) Need for informality
(1) informal consultations in various forms play a vital role in allowing consensus to be reached, but they do not appear in organization charts, precisely because they are informal
(1) The WTO shall continue the practice of decision-making by consensus followed under GA TT 1947.
(a) Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting. . . .
(b) Decisions . . . shall be taken by a majority of the votes cast. . . .
(i) In certain situations the rules require a super-majority
(1) Other states have joined (and will join in the future) through the accession process.
(a) To do so a state must agree on a set of terms negotiated between itself and the WTO.
(i) This includes a set of commitments to be made by the entering state with respect to tariff rates, market access, and so on.
(ii) When a state joins the WTO it is required to accept all of the above agreements and obligations, with the exception of the “plurilateral” ones
iv) Dispute Settlement
(a) WTO Dispute Settlement Understanding system
(i) Panels of three (retired diplomats, academics)
(ii) Produce a report that needs to be adopted by the membership
(iii) WTO takes GATT consensus rule and flips it upside down—the rule comes out and it is adopted automatically unless every single country says “NO” get rid of it (de facto adaptation)
1. standing appellate body —can make decisions and only rejected if consensus
2. no unilateralism –US is happy
(b) The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements
(2) Article XXII Consultation
(a) Each contracting party shall accord sympathetic consideration to, and shall afford adequate opportunity for consultation regarding, such representations as may be made by another contracting party with respect to any matter affecting the operation of this Agreement.
(b) The CONTRACTING PARTIES may, at the request of a contracting party, consult with any contracting party or parties in respect of any matter for which it has not been possible to find a satisfactory solution through consultation under paragraph 1
c) Benefits of WTO
i) The most relevant in our view are those, which relate to the creation of market conditions conducive to individual economic activity in national and global markets and to the provision of a secure and predictable multilateral trading system
(1) Doctrine of direct effect
(a) obligations addressed to States are construed as creating legally enforceable rights and obligations for individuals—corporations benefit
ii) Many of the benefits to Members which are meant to flow as a result of the acceptance of various disciplines under the GATT/WTO depend on the activity of individual economic operators in the national and global market places
(1) Purpose is to produce certain market conditions which would allow this individual activity to flourish
(1) their relations in the field of trade and economic endeavor should be conducted with a view to :
(a) raising standards of living
(b) ensuring full employment
(c) Large and steadily growing volume of real income and effective demand
(d) expanding the production of and trade in goods and services
iv) Why unilateral decisions are bad
(1) Negative Effects of a law reserving the right for unilateral measures to be taken contrary to DSU rules and procedures, may constitute an ongoing threat and produce a “chilling effect” causing serious damage in a variety of ways.
(a) The threat alone of conduct prohibited by the WTO would enable the Member concerned to exert undue leverage on other Members.
(b) prompt economic operators to change their commercial behavior in a way that distorts trade
(i) The threat of unilateral action can be as damaging on the market-place as the action itself.
(c) Section 301 Case :
(i) Although the law (sec 301)is inconsistent as written with art 23, we take it that the US will honor their word and not invoke art 23 unless it is consistent with WTO
v) International Organizations
(1) Why use IO?
(a) Decentralized, informal ad hoc meetings are other options
(b) What is good about these IOs,
doctrine of precedent, but that does not mean they are unimportant, they create legitimate expectations, taken into account where relevant, but not binding precedent
ii) But the reality is that, if you are not citing previous cases, the case is not valid—de facto precedent here—expectation that like cases will be treated alike, despite saying there is no precedent
IV) Non-Violation Disputes
a) Nullification or Impairment of an agreed upon benefit
i) Art. 23 Key Text
(1) Nullification or Impairment
(a) If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of
(i) the failure of another contracting party to carry out its obligations under this Agreement, or
(ii) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or
(iii) the existence of any other situation
(b) the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned.
(i) Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it.
(c) If the CONTRACTING PARTIES consider that the circumstances are serious enough to justify such action, they may authorize a contracting party or parties to suspend the application to any other contracting party or parties of such concessions or other obligations under this Agreement as they determine to be appropriate in the circumstances
b) Non-violation Remedy
i) In order to encourage contracting parties to make tariff concessions
(1) right of redress when a reciprocal concession is impaired by another contracting party as a result of the application of any measure, whether or not it conflicts with the Agreement
(a) the main value of a tariff concession is that it provides an assurance of better market access through improved price competition.
(i) Contracting parties negotiate tariff concessions primarily to obtain that advantage.
(2) If no right of redress were given to them in such a case they would be reluctant to make tariff concessions and the Agreement would no longer be useful as a legal framework for incorporating the results of trade negotiations
ii) have only been eight cases
(a) tariff concessions have never been viewed as creating a guarantee of trade volumes, but rather as creating expectations as to competitive relationships
(1) Fact and Arguments:
(a) Japan recognized that there would be serious competition for Japanese manufacturers and their products and that foreign enterprises would be able to displace domestic manufacturers
(i) Japanese manufacturers therefore jointly devised a plan to streamline Japan's distribution system while at the same time bringing it under the control of domestic producers, something they have wanted to do for years and was justified by the low productivity
(b) Japan responds that the aim of MITI’s distribution policies was not to block imports but to modernize the Japanese distribution industry and help it to meet the foreign competitive challenge that would be unleashed by liberalization.
(i) Japan argues- Nothing in MITI’s distribution policies or any other so-called “liberalization countermeasures” did anything to encourage or facilitate the creation of an exclusionary market structure that discriminates against imported film or paper.
(c) United States struggles to establish some connection between MITI’s policies and the market structure that is the main target of its complaints.
(2) Issue is whether the benefits to the US have been nullified or impaired by Japanese measures