EC4371 Chapter 2 Flashcards
Instruments of trade policy Administered protection The WTO
Define trade policy.
A trade policy is a set of governmental policies governing trade with other countries.
The instruments of trade policy are tariff and non-tariff barriers.
What are the instruments of trade policy?
- Tariff barriers–act on price
- Non-tariff barriers–act on quantity
What was the Bretton Woods conference? What were its aims? What were the results?
The Bretton Woods conference was held near the end of WWII (1944).
Its aims were to
- regulate the post-war international monetary and financial order, and
- to avoid the mistakes of the 1920s and 1930s.
The result was the conception of three major international economic institutions:
GATT, IRBD, IMF (G.I.I / gee)
- General agreement on Tariffs and Trade (GATT)
- International Bank for Reconstruction and Development (IBRD) or modern-day World Bank
- International Monetary Fund (IMF)
What are the two GATT principles?
-
Non-discrimination (MFN principle)
Member states must apply to the same treatment to imports from all trading partners. -
National treatment
Once inside importing country’s borders, all foreign imports must be treated like domestic goods.
How are the WTO and GATT related?
GATT came first–post Bretton Woods
WTO was born during the Uruguay Round of GATT negotiations–1994
Details regarding WTO’s functions (e.g. TRIPS, GATS) are discussed in each round of GATT negotiations
What is the MFN principle?
Most-favoured Nation principle
Under GATT, member states must apply the same treatment to imports from different trading partners.
What is the structure of the WTO?
(T)eenage (M)utant (P)sychic (D)ugongs
- Trade policy review mechanism
- Multilateral agreements
- Plurilateral agreements
- Dispute Settlement
Trade policy review mechanism
- Monitors members’ trade policies—includes goods, services and property rights
- The greater the weight of a member in the trading system, the more frequently it is reviewed
- Every 2 years for 4 largest, every 4 years for next 16, every 6 years for the rest (with concessions)
ALL Multilateral agreements
- WTO is a forum for rounds of negotiations, aimed at reducing trade barriers
- Tariff reduction = concession
- General agreement on tariffs and trade (GATT)
- General agreement on trade in services (GATS)
- General agreement on Trade-Related aspects of Intellectual Property (TRIPS)
SOME Plurilateral agreements
- Excludes regional trade organisations e.g. ASEAN
- Deals with specific issues involving only some of WTO’s member states—conditions apply only to agreed members
Dispute settlement
- Uses Dispute Settlement Process to enforce multilateral and pluritaleteral agreements
- After Uruguay Round, DSP now covers trade in all goods
- Has consistent and clear rules
- Prevents blocking
- Has an exact timetable for completion of each step
What is the WTO’s stance on Regional Trade Agreements (RTAs)?
Not covered by WTO because it violates MFN principle
BUT WTO will permit it because it furthers economic integration, GIVEN THAT the following conditions are met:
- Existing rade barriers against non-RTA members don’t increase (preference without prejudice)
- All trade barriers between RTA members are eliminated within a reasonable amount of time
What are WTO safeguards?
Safeguards exempt member countries from WTO rules for a fixed period of time–i.e. allow members to have trade restrictions
Safeguards are granted to members for the following purposes:
-
Protect domestic producers following trade liberalisation
BUT restrictions must be non-discriminatory and last 4+4 years max - Offset damage to domestic producers when other members have acted unfairly, either through government subsidies or predatory pricing
What are the different classes of tariffs?
What are some methods of measuring tariff barriers? What are the problems associated with each method of measurement?
(1) Examine tariff schedule, which lists tariff rates applied to each category of imports
Problem: bound and applied rates can differ
(2) Compare number of tariff lines
Problem: developing and developed economies tend to have more tariff lines compared to transition economies. This is in order to make more detailed distinctions between goods—not necessarily an indication of greater protection
Problem: obscures tariff escalation (higher tariffs applied to goods further along the production chain)—cannot properly evaluate “damage” caused by tariff barriers
(3) Measure effective rate of protection (ERP)—protective effect is the increased output of the domestic good as a result of the tariff + takes tariff escalation into consideration!!
Problem: omits payments to factors of production + possible spillover effects on other industries—understates degree of trade protectionism
Problem: value can be negative if industry receives direct or indirect subsidies
(4) Compare percentage of tariff lines bound (i.e. those with a maximum tariff limit)
Problem: import value of goods might differ—goods not under bound tariff line might not constitute a large percentage of total import value
(5) Compare bound and applied rates
Problem: applied rates can fall below bound rates—changes in bound rates don’t actually reflect changes (if any) in applied rates. Comparison not meaningful, might imply reduction in trade protectionism when none has occurred
What are the four types of NTBs? Why do they pose a problem to free trade?
(1) Quantitative restrictions—e.g. import and export quotas, licensing
Problem: can lead to rent-seeking
(2) Voluntary export restraints—exporter must raise price of its exports
Problem: effectively a form of blackmail
Problem: prohibited by GATT in 1994
(3) Performance requirements—domestic content, export performance requirement
Problem: generally also prohibited (exemption for developing countries)
(4) Government procurement—prohibition of foreign sourcing, favour domestic bidders
Problem: impact unknown, hence few WTO countries have agreed to relevant rules
How can the restrictiveness of NTBs be measured?
- Tarriffication—converts NTB into ad valorem equivalent (AVE)
- Frequency index—measures frequency of NTBs within a given commodity category
Besides tariffs and NTBs, what are some other ways in which countries might hinder free trade? How might they be resolved?
(1) Export promotion
- Home country provides export subsidies and export support programs (subsidised export insurance, subsidised supplier / buyer credits, Official Development Assistance)
- Adversely affect output and unemployment in non-subsidised countries
- SOLUTION: countervailing duty on imports of subsidised products
(2) Dumping
- SOLUTION: multi-dumping duty (either firm or country-specific)
- SOLUTION: undertaking (either change price or quantity of offending good) by offending country
(3) Government subsidies (“picking winners”)
- Can be industry-wide or firm-specific
- Hurts non-subsidised firms at home and non-subsidised foreign firms
- Impedes exports
- SOLUTION: countervailing duties against ENTIRE country
What was the significance of the Doha Development Round?
First to involve
