QIN, INTERNATIONAL TRADE, FALL 2014
Chapter 1: Trade and Economic Policy
Why do we care about the international trade system (i.e. WTO)?
Whether aware of the system or not, it affects (directly/indirectly) the lives of ordinary people, and directly regulates gov’ts (which directly regulate domestic producers and consumers)
Impacts employment, direction of domestic economies, etc.
Public int’l trade system (WTO law) is the most advanced int’l legal system
Comprehensive membership; mandatory jurisdiction of WTO legal proceedings/real consequences if lose.
Civil society opposition to WTO: too much emphasis on trade/efficiency/etc. at expense of non-economic values (equal distribution, environmental costs, etc.)
*MNCs pushing for globalization through WTO; like free trade b/c gov’t doesn’t put barriers in path to globalize
MNC/private sector very involved in WTO. Like domestic lobbying
Public Int’l Trade law: when gov’t is involved, i.e. regulates (internationally or domestically), get trade barriers.
Trade barriers: tariffs (taxes imposed on import/export), regulations (restrictions) that must be complied with (taxation is a form of (internal) regulation).
When have trade barriers, not necessarily bad, but becomes an issue of int’l law
WTO: global system set up to regulate member gov’ts; purpose to minimize trade barriers/liberalize trade
Huge background factor of WTO legal regime is difference btw developed and developing countries
Theoretical foundation of the int’l trade system: comparative advantage.
Why such different attitudes towards trade v. technological innovation?
Each country sees what it loses/gains from trade, thinks other country got better deal
Losers of trade easier to spot than winners
Trade raises suspicions, xenophobia, worries that country is being taken advantage of
Technology associated w/ ‘progress’
Trade has increased at much faster pace than GDP. Besides lower tariffs (gov’t policies), cost of trading has fallen dramatically thanks to new/cheaper methods of transportation and communication (tech. changes).
Current wave of globalization: increased trade flows, growth in capital, and migration flows
First wave of globalization 1870-1914; second wave of globalization 1960s-?
Chief similarities: aggregate trade-to-GDP and capital-flows-to-GDP ratios; both waves driven by radical reductions in technical/policy barriers to int’l transactions
Fundamental difference: impact of reductions on trade in goods v. trade in ideas – uniqueness of recent globalization is heavily shaped by dramatic reduction in communications cost, i.e. “end of distance”
2d fundamental difference: at start of first wave, world fairly homogenous – poor/agrarian. At start of second wave, world sharply divided btw rich industrial nations v poor primary producers
The claim that trade will increase the overall income of a country is widely acknowledged and accepted
Comparative advantage: about maximizing human/natural resources of the world; about division of labor; economic efficiency; should serve all trading nations.
Underlying (economic/theoretical) foundation of GATT/WTO system.
Overall income increases with liberalized trade, even if state liberalizes unilaterally
It is not self-evident that an increase in a country’s overall income is necessarily good. The most popular concern is that while trade will increase overall income, it will generate undesirable distributional effects.
Does not refer to a country’s ability to produce more than another country, but to the particular products that the country produces most efficiently relative to its trading partners.
When two countries open up to trade, both are made better off in the sense that the total wealth of the countries is increased.
If every country produces that which it is most efficient at producing and trades to acquire goods and services it wishes to consume, increase the wealth of the world and individual countries.
P9 Q3: isn’t the country better off keeping the money within its borders and not to trade?
If keep all money and have no foreign competition, domestic product will get worse
Non-economic reasons, i.e. fostering political relations
Opportunity costs: maybe US auto makers can make something else better/cheaper
What if can purchase based on comparative advantage and make something else instead? Don’t need to have absolute advantage over you to buy something from someone who has comparative advantage over you (if you have something else better to do!)
Difficult to distinguish technological change from opening up to trade:
Both give a state a larger set of possible strategies to create goods and services;
Both increase states’ income b/c they allow production to take place at a lower cost
Both can create dislocations for affected individuals – creating winners/losers
Comparative trade: when states open their borders to trade, they increase the production possibilities available to them, which allows them to specialize in production of goods/services in which they have comparative advantage
Distributional impact of trade: changes in trading patterns (whether opening to trade, closing to trade, or simply changes in what a country produces) impacts the individuals working in the affected industries.
That gov’ts have repeatedly demonstrated a willingness to impose barriers to trade is generally thought to be explained more by politics of int’l trade than by any weakness in the arguments for trade.
World price (of goods/services) is determined by global supply and demand.
Deadweight loss: value lost as a result of the imposition of a tariff
Non-economic reasons supporting liberalized trade
Quite often economic cooperation is entered into for mainly political reasons such as forging or confirming friendly relations between two nations, rewarding a country for help in other efforts, or to limit the chances of animosity/war.
Traditional arguments against trade
Domestic Market Failures: relies on assumption that some market in domestic economy is not functioning well; The Domestic Market Failure Argument Against Free Trade (P. Krugman & M. Obstfeld)
Theory of 2d best: hands-off policy is desirable in a market only if all other markets are working properly. If they are not, gov’t intervention that appears to distort incentives in one market may increase welfare by offsetting consequences of market failures elsewhere.
Imperfections in economy’s internal functioning may justify interfering in external econ relations
Int’l trade is not source of problem; suggests trade policy can provide at least a partial solution.
Two lines of defense for free trade:
Domestic market failures should be corrected by domestic policies aimed directly at problems’ sources: preferable to deal w/market failures as directly as possible b/c indirect policy responses lead to unintended distortions or incentives elsewhere in the economy.
Trade policies justified by domestic market failure are never most efficient response; they are always ‘second-best’ rather than ‘first-best’ policies.
Any proposed trade policy should be compared w/purely domestic policy aimed at correcting same problem; if domestic policy appears too costly/has undesirable side effects, trade policy almost surely less desirable (though costs may be less apparent)
A subsidy is more likely to provoke significant political opposition than a tariff
Economists cannot diagnose market failure well enough to prescribe policy; market failures are typically hard to identify precisely, so it is difficult to be sure about appropriate policy response.
Most of it is a judgment about politics rather than economics
Distribution: turns on notion of comparative advantage. That wealth of every country is increased does not imply every person is better off – only claiming gains of ‘winners’ from trade liberalization outweigh losses of ‘losers.’
“Given appropriate distributional mechanisms, everybody could be made better off”: total gains could be redistributed so losers fully compensated for losses, and there would remain additional gains that some members of society would enjoy.
*Such redistribution rarely takes place
Infant Industry: protection that increases, rather than reduces, state’s wealth; developing state has a potential comparative advantage in some product/production method, but local firms presently in that industry unable to compete int’lly b/c lack necessary scale, experience, distribution channels, technology, etc. If get temporary gov’t support, grow/strengthen and become capable of competing on world marketsàw/draw gov’t support
Only valid if industry actually ‘grows up’: an industry that enjoys gov’t support will always seek to retain it/may fail to change in ways necessary to become competitive.
For protection to be sensible policy, future gains from successful industry must be large/near enough in time to make up for economic losses imposed by protection.
Future profits of industry/spillover benefits to other industries > costs of relevant gov’t measures
That an industry needs time before it can be competitive is not a sufficient reason for gov’t intervention.
Optimal Tariffs: tariff on imports reduces domestic demand for product (b/c increase price paid by consumers). If country is large (i.e. tariff policies can influence prices), reduction in demand will cause int’l price of product to fall à price of country’s imports is reduced.
Reluctance: doubts about ability of gov’t to identify/implement correct level of protection.
Even when done perfectly, imposes harms on foreign countries that exceed gains to implementing country
Strategic Trade Policy: state’s wealth may be enhanced by actions different from complete liberalization of trade; relies on notion that one country can capture gains that would otherwise go to another country.
Reduces overall wealth/can increase wealth of one state at the expense of another
Requires environment in which int’l markets are imperfectly competitive, meaning some producers able to extract excess returns; gov’t intervenes in markets so their firms capture more of these imperfectly competitive industries. Relies on success of gov’ts picking winners/cutting off losers
National Security: a nation must be self-sufficient (or at least more so than it would be absent protectionism) in certain key materials or products to maintain its ability to defend itself.
Claim that some value (nat’l security) is important enough to justify surre
lization are those that did not play by the rules
Globalization remains restricted in areas where further relaxation would yield greatest economic benefits.
New conventional wisdom emerging:
Globalization contributes to rising inequality, stagnant median wages, and growing sense of insecurity in advanced economies; unclear to what extent globalization is dominant influence
Trade/financial openness unlikely to lead to economic growth on their own, and may occasionally backfire, absent wide range of complementary institutional and governance reforms
Globalization requires a range of institutional complements in order to deliver full benefit/remain sustainable. In developed countries, complementary measures relate to improved social safety nets and enhanced adjustment assistance. In developing countries, requisite institutional reforms range from anti-corruption to labor/financial market reforms
Likely gains from further liberalization in goods/capital markets are small as long as world remains poltc fragmented and transaction costs due to jurisdictional discontinuities prevent ‘deep’ econ integration
Kicking Away the Ladder: The “Real” History of Free Trade
Take from this article: US HISTORY: Civil war was as much about tariffs as about slavery
South had one condition re: Constitution: no tax/duty laid on duties exported from any state
Theory: South wanted to secede b/c of diverse economic interests. North wanted to protect infant industry, voted to impose high import tariffs (at different stages of industrialization, want different protections) à US imposed high import tariffs, so other countries did too in retaliation
US is only country that const. prohibits imposition of export duty b/c South was main exporter at the time and they didn’t want to tariffs to become a barrier to exports!
When developed countries developing, no free tradeàpromoted nat’l industries via tariffs, subsidies, etc.
All ‘now-developed countries’ (NDC) actively used interventionist trade/industrial policies aimed at promoting infant industries during their catch-up periods
Today’s developing countries need to impose much higher tariff rate than those used by NDCs in earlier times if want to provide same degree of protection to industries as hose accorded to NDC industries in the past à today’s developing countries are less protectionist than the NDCs in earlier times
Chapter 3: The Making and Impact of Trade Agreements in National Legal Systems
Systemic problems in nat’l trade policymaking, to great extent, explain why int’l agreements to liberalize trade are necessary. Failures in domestic policymaking, i.e. nat’l politicians not internalizing the full cost of their trade policies, that, at least to some extent, explains the very creation of the WTO.
In US, powers to make trade agreements split between Executive and Legislative branches
Executive Branch: President; US Trade Representative; Department Of Commerce; Customs Service
USTR: face of US gov’t in int’l trade; est. 1962
Represents US gov’t in trade negotiations/agreements.
Goes to int’l law/WTO tribunals to litigate on behalf of the US
DOC: in particular, Int’l Trade Administration actively involved in trade related matters on daily basis
Investigates whether foreign products are dumped in US; whether there are subsidies provided by foreign gov’ts that are alleged, etc.
Customs Service: less and less important b/c trade issues not only related to border issues/tariffs.
Int’l Trade Commission: independent, quasi-judicial agency; btw Congress and President
6 Commissions appointed jointly by the Congress and the President
Customs & Border Protection: only agency that can provide legally binding advice or ruling on classifications of imports.
Politically ‘neutral’ – 6 Democrats and 6 Republicans.
3 missions: (1) maintain US Tariff Schedule–tariffs set under const. law (Congress) and int’l agreements, Pres/Congress power joins; (2) advise Congress/Pres on trade issues–Commissioners mostly/generally economists; (3) specific trade matters–injury issues in AD/subsidy investigations (i.e. what DOC investigates doesn’t change into a duty unless find injury; determine whether there was an injury) and IP.