3: International Negotiations And Preferential Trading Agreements (Up To FC21 FOCUS) Flashcards
Why do we need an international organisation for trade?
Explain in terms of prisoners dilemma and the outcome
Prisoners dilemma: best outcome is free trade, but each country would choose protection if it takes the other country’s policy as given. (Since incentive to deviate to protect), so both end up protected.
So both better off if both free trade, but unstable since there is incentive to deviate (if one country chooses to protect, earn 20 instead of 10)
So what does free trade require
International coordination through agreements
Advantages of negotiation (2)
Gets exporters to support free trade if they believe export markets will expand.
Can avoid trade wars where each country enacts trade restrictions
1st benefit of negotiation:
Gets exporters to support free trade if they believe export markets will expand.
Name example
E.g US removes import quota on Japanese cars (benefitting Japan car producers) , Japan removes import tariff on US high-tech goods.
So both US and Japanese consumers and exporters support the deal for free trade, offsetting opposers (import competing groups: the US car producers and Japanese tech producers who will be negatively impacted by free trade)
Rounds of negotiations : Geneva 1955 (largest)
Length of negotiation
How many countries
Value of tariff concessions
Largest tariff removal:
5 months, 26 countries, close to $2.5bn tariff concessions (removed)
(This was under GATT, changed to WTO following Uruguay round)
8th Uruguay : what happened
Led to WTO
WTO functions (3)
Sets trading rules
Negotiating forum
Settles trade disputes (through dispute settlement procedure)
WTO is based on a number of agreements (3)
General Agreement on Tariffs and Trade (GATT): covers trade in goods.
General Agreement on Tariffs and Services (GATS): covers trade in services
Agreement on Trade-Related Aspects of Intellectual Property: e.g patents and copyrights
3 ways WTO addresses loosen trade restrictions
Reduce tariffs
Binding tariffs - agree to not raise it in future
Eliminating NTBS - quotas and export subsidies are switched to tariffs, since tariffs are easier to negotiate. (Only subsidies for agricultural exports remain)
5 Key principles/values of GATT/WTO
Non-discrimination: any tariff cut with one WTO partner should be extended to all partners (exceptions: PTA’s, developing countries/if goods unfairly traded)
Reciprocity: concessions should be reciprocated
National treatment: imports treated same as domestic products (customs duty technically does not violate this since NT only applies once product has entered the market!)
Special and differential treatment (SDT): for developing countries e.g longer time periods for implementing commitments
Safeguards: temporary exemption from rules in cases of market disruption
Suspiciously timed trade disputes have occurred.
What are they lined to
Trade disputes linked with electoral timings = more likely to file before re-elections, and involve industries involved in swing states of US.
So shows trade disputes may only be driven for political reasons
We saw earlier agricultural subsidies are the only exception to NTBS not being swapped to tariffs.
Do the agricultural subsidies in rich countries hurt poor countries
Yes: subsidies lower world price of products; thus making it harder to compete
What is the MFN clause of WTO
B) exception to this
Most favoured nation clause: non discrimination:
Each country in WTO promises that all countries will pay tariffs no higher than the nation that
pays the lowest i.e the same!
B) if they strike preferential trading agreements! (Topic focus!)
Preferential trading agreements is an exception to MFN.
When else can countries deviate from MFN (charge different tariffs for countries)
Countries can give developing countries special access (S&D treatment for developing countries)
Countries can raise tariff for unfairly traded products
GATT/WTO allow for preferential trading agreements given (3)
Preferences are 100%
There is a timeline for achieving free trade
It does not increase protection against the RoW (just lowers for the specific other party)
2 types of PTA
FTA - free trade for members, but own trade policy for non members e.g USMCA
Customs union - free trade for members but common external tariff
Trend of PTA’s overtime
Increased across the world
e.g EU-UK TCA (since Brexit) , USMCA, ASEAN etc.
And also across regions (spaghetti bowl phenomenon)
Is joining a PTA always beneficial for national welfare
When yes and when no
Yes if trade creation (replaces home production with more efficient partners), welfare improves
No If leads to trade diversion (production moves from efficient foreign to less efficient partner), welfare falls.
Tariff diagram surpluses and revenue diagram
B) what is national welfare overall, and how can it tell if PTA are welfare improving or not
National welfare (b+d) - e
b+d is trade creation
e is trade diversion
When is a country more likely to gain from PTA (when TC>TD)
If PTA members are more large, since more efficent
(Larger = more likely trade creation (b+d) outweighs trade diversion)
Why may FTA not actually be so free?
To get free trade, must pass rules of origin
Long term goal of WTO
Common non-preferential rules of origin, since they differ country to country.
Thus rules of origin can underestimate trade diversion in a FTA.
How?
Since if not made up of the amount required, cannot qualify for free tariffs. Thus it can prevent consumers choosing most efficent suppliers! So trade diversion is underestimated
Regionalism vs multilateralism argument
Countries lower trade barriers for only a small group of partners and discriminate against the ROW
Multilateralism is non-discriminatory (says you should apply tariffs equally)
Do regional trade agreements promote or hinder multilateral free trade
Depends on trade bloc:
Increasing size of CUs tend to increase common external tariffs, moving away from global free trade
Others found increasing size of FTA reduces tariffs and move towards global free trade
(So answer is no for CU, and yes for FTA’s)
How can a domino effect exist
Expansion of a regional trade agreement (CU or FTA) can further expansion.
Since more members increase the internal tariff free market, incentivising further countries to join, making it larger and larger, until global free trade reached
Problem to the domino effect idea:
B) what is effect this known as
Members may not have incentive to continue letting new members in
Juggernaut effect - can become too saturated with more foreign firms joining, domestic import-competing firms may not be able to compete and leave
Who are trade blocs a threat to?
Countries that are unwilling to negotiate multilaterally, as can risk losing access to key markets etc. especially as trade blocs get larger, so more world is interlinked while they are excluded and face tariffs and other restrictions to more and more of the world
Main argument against regionalism
Could encourage TD (move from foreign efficent to less efficient partners)
