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International Trade
University of Illinois School of Law
Davey, William J.

International Trade Policy

I. Introduction to Economics

B. Law of Intl Economic Relations has 3 levels of analysis:

1. Private law of the transaction – K and sales law of the 2 nations

involved, conflict of laws rules, insurance, corporate, and maritime law,

dispute resolution.

2. National gov regulation of the regulatory activity (transaction) – law of

customs, tariffs, export and import, quality and packaging standards, internal taxes, mixing and purchasing requirements.

3. International law or law of international institutions that binds govs

and effects private transactions.

D. Economics of Int’l Trade

1. Comparative Advantages of Trade – labor theory of value. [Invalid theory bc labor is not homogeneous, goods are not produced by labor alone, and labor content varies among products/industries.] Value of a commodity within a country is determined by its labor content. If the product can be sold for more than the value of the labor it contains, labor will transfer into that industry from other occupations to earn profits available there. Supply will expand until the price is brought down to the value of the labor it contains. If a product sells for less than the worth of its labor, labor will move away to other industries until the gap is closed. Equal wages result in prices of goods equal to their labor (i.e. if wages are higher in CA then NY, labor will migrate to CA, which will lower wages in CA and increase wages in NY. Movement will continue until the return to labor is equal in the 2 regions. When the regions have equal wages, they will produce and sell to each other what each region can make the cheapest.) This theory does not work internationally for labor will not migrate as such. However, a nation that produces a product with a value more than its labor, will export this product, and in turn import a product that is comparatively disadvantageous. (i.e. US makes 6 bushels of wheat to export to the UK, which makes 10 yards of cloth to export to the U.S. A comparative advantage is always accompanied by a comparative disadvantage. Comparative costs are different bc diff goods require diff factor inputs (i.e. more land over labor), and diff countries have diff factor endowments (i.e. more free land over population). Diff in comparative costs also depend on a country’s specialization in diff commodities, which provides a basis for trade since each country can produce one good cheaper than the other.

2. Effect of Restraints on Trade

a. Efficiency v. Distribution – Aggregate gains, if one adds up the effect of a movement toward free trade on all affected parties, consumers, producers, and gov, the net effect is positive. It increases the sum of producer and consumer surplus in the economy, plus gov revenue. These aggregate effects are the “efficiency” consequences of trade policy. There is political opposition to free trade bc there are winners and losers, and there are changes in income distribution.

b. Consequences of Tariffs and Quotas – Restraints on imports are tariffs (taxes levied on imports that increases the price of the product sold), and quotas (limit on quantity or value of imports allowed during a time period). Free trade without tariffs or quotas is the first theorem of welfare economics theory. Imported goods at higher prices also allow domestic producers to higher their. Int’l economic analysis depends on general-equilibrium theory, not on supply and demand curves for domestic economies. General equilibrium analysis on tariffs in an importing country reduces the demand for imports, the home currency appreciates, and exports become more expensive for foreign purchasers.

3. Validity of Arguments in Favor of Trade Restraints

a. Argue trade liberalization would decrease US jobs. Economists view this as false bc the # of jobs in an economy will be determined by the labor supply and by the reservation wages of workers. A decline in real wages may be expected to reduce the labor force in a field, and the reverse if real wages rise. In the long run, supply and demand in the labor market balance themselves out.

b. National security is threatened bc a country needs to preserve its steel, textile, mining, and agricultural fields to be able to sustain itself during war. This is untrue unless peacetime procurement is insufficient to support vital productive facilities. The need for these resources to sustain a war is much less than the levels of domestic production, unless import dependence exists at the reduced levels of domestic consumption. Even if an industry is closed its exports during wartime, the industry can still reopen and rebuild itself to satisfy its export needs.

4. Reasons for or “Political Economy” of Trade Restraints

Free trade without externalities is efficient. Trade intervention, by introducing 2 distortions instead of 1, may only solve one problem, but cause another. (i.e. Infant-industry argument – A tariff protects a young industry while it learns to be efficient, and some market failure would make it impossible for competitive firms to take advantage of what could be a profitable opportunity.) A tariff or import restriction can be used temporarily to make the operation profitable while the learning process is underway, but it may be difficult to ever remove the protection. For optimal free trade, a country cannot have any influence through its policies, over the prices at which it trades bc free trade is not from a national perspective, but exists in a degree of trade intervention. The Optimal Tariff argument is that gain by one country occurs at another’s expense, in exploitative trade intervention.

E. Sources of Tension between Global Market and Social Stability

1. Reduced barriers to trade and investment for people who can cross int’l borders, such as owners of capital, skilled workers, and professionals who can take there resources to where they are in demand, and those who cannot, such as unskilled or semi skilled workers. Globalization makes the demand for unskilled workers more elastic as the services of the working population can be more easily substituted by services of people across national boundaries. Increased substitutability for workers means workers have to pay a larger share of the cost of improving work conditions and benefits, incur greater instability in earnings and hours in response to labor demand or productivity, and bargaining power decreases over wages and benefits.

2. Globalization makes conflicts between nations over domestic norms and social institutions. Values are attached to processes and outcomes, such as workplace practices, legal rules, and social safety. Issues for “fair trade” policies include labor standards, environmental effects, competition, and corruption.

3. Globalization makes it hard for govs of advanced countries to provide social insurance, its central function to maintain social cohesion and domestic political support. The effect of the above tensions may set a new division of classes, between those who prosper in the globalized economy, and those who cannot, which essentially harms all.

F. Protesting Globalization

1. Rules of globalization are unfair and designed to benefit the advanced countries, making poor countries worse off.

2. Advances material values over values of life and environment

3. Takes away developing countries’ sovereignty and power to make decisions regarding their citizens.

4. People in developed and developing nations have lost economically.

5. Economic systems forced upon developing countries is grossly damaging and has Americanized the economic policies and cultures of other nations that has caused resentment.

6. US has made Free Trade Agreements (NAFTA) with developing countries that have exploited low wages for other workers and use of their resources. Thus the US has not experienced wage inequality, likely bc the products imported are no longer produced domestically (specialization), or bc th

ays needs protection and is a drag on the economy. Or some countries may have enough power in the market so they can manipulate their tariff to bring more to themselves. Free trade does promote efficiency and gives the world more access to resources. Brazil has .6 tariff, US .4, EU .33, and Scandinavia .24, which reflect the domestic policies that they follow that cause the inequalities in tariffs. The bigger and higher tariff countries have larger safety nets. It is not really the case that the system does not protect values.

II. Legal Structure of WTO/GATT

1. GATT General Agreement on Tariffs and Trade Treaty applies to gov actions that regulate international trade to prevent distorting or restraining trade. “MFN” Most Favored Nation Clause of Art. I states gov import or export regulations should not discriminate between other countries’ products. Art III states a nation shall not discriminate against imports. Art II states the tariff limits expressed in each contracting party’s schedule of concessions shall not be exceeded, meaning each country commits to limit its tariffs on particular items to the level it negotiated. For grandfather rights to be invoked, the existing legislation must be mandatory, thus the WTO Charter ended the open-ended grandfather rights. The decision making procedure was vote don by members and adopted by contracting parties with mutual understanding of implementation.

2. GATS General Agreement on Trade in Services includes over 100 sectors of banking, legal, medical, tourism, etc. It has a system of schedules of concessions, rules on competition and monopoly policy (antitrust), exceptions on health, morals, and national security, and clauses on transparency for info affecting traders.

3. TRIPS Agreement on Trade Related Aspects of Intellectual Property Rights makes govs ensure a minimum level of protection for patents, copyright, industrial design, trademark, and business secrets that are enforceable. Govs must provide civil and administrative procedures and remedies.

4. WTO Charter includes dispute settlement provisions. WTO is a mini charter regarding institutional measures and no substantive rules. It is flexible and allows texts and annexes to be added and evolve over time as necessary for implementation of the rules. It establishes an international organization.

a. Annex 1A – Multilateral Agreements are all mandatory

b. Annex 1B – General Agreement on Trade in Services includes a series of schedules for concessions.

c. Annex 1C – Agreement on Trade Related Aspects of IP (TRIPS)

d. Annex 2 – dispute settlement rules that are obligatory and form a unitary dispute settlement mechanism for all agreements in Annex 1, 2, 4. The General Council is the Dispute Settlement Body.

e. Annex 3 – Trade Policy Review Mechanism (TPRM), where the WTO reviews trade policies of each member and focus on the impact of trade policies on the country examined and its trading partners.

f. Annex 4 has 4 option agreements, the plurilateral agreements, deal with gov procurement, trade in civil aircraft, meat and dairy. MC can add or delete trade agreements from Annex 4 by consensus.

The WTO’s decision making procedure includes: