International Negotiations And Preferential Trading Agreements

Question 1

Why do we need an international organisation for trade?

Explain in terms of prisoners dilemma and the outcome

Answer 1

Prisoners dilemma: Each country has more to gain from opening the other country’s market than to lose from opening its own market.

Outcome: Each country would choose protection if it takes the other country’s policy as given.

Question 2

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

Answer 2

International coordination through agreements

Question 3

Advantages of negotiation (2)

Answer 3

Multilateral negotiation mobilises exporters to support free trade if they believe export markets will expand.

Can serve as a coordination device to avoid trade wars where each country enacts trade restrictions

Question 4

1st benefit of negotiation:
Multilateral negotiation mobilises exporters to support free trade if they believe export markets will expand.

Name example

Answer 4

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 support the deal for free trade, offsetting support for protection by import competing groups e.g the US car producers and Japanese tech producers (who will be negatively impacted by free trade)

Question 5

What is the international institution to regulate trade

Answer 5

World Trade Organisation (formally GATT)

Since then, much of reduction in tariffs and other restrictions has come through such

Question 6

Rounds of negotiations : Geneva 1955

Length of negotiation
How many countries
Value of tariff concessions

Answer 6

Largest tariff removal:
5 months, 26 countries, close to $2.5bn tariff concessions (removed)

Question 7

8th Uruguay : what happened

Answer 7

Upon all these restriction loosening, political pressure grown to again restrict trade in textiles and clothing

Led to WTO

Question 8

WTO functions (3)

Answer 8

Sets trading rules

Negotiating forum

Settles trade disputes

Question 9

WTO is based on a number of agreements (3)

Answer 9

General Agreement on Tariffs and Trade: covers trade in goods.

General Agreement on Tariffs and Services: covers trade in services

Agreement on Trade-Related Aspects of Intellectual Property: e.g patents and copyrights

Question 10

3 ways WTO addresses trade restrictions

Answer 10

Reducing 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)

Question 11

5 Key principles/values of GATT/WTO

Answer 11

Non-discrimination: any tariff cut with one partner should be extended to all partners (exceptions: FTA)

Reciprocity: concessions should be reciprocated

National treatment: imports treated same as domestic products in terms of regulation & taxes (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

Question 12

How do WTO settle trade disputes

Answer 12

Dispute settlement procedure - bring case to panel of WTO experts who decide whether agreement broken or not.

Question 13

Suspiciously timed trade disputes have occurred.

What are they lined to

Answer 13

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

Question 14

Have the trade rounds been effective

B) EU average tariff overtime

Answer 14

Yes, average tariff has dropped per round of negotiations

30.4% EU average 1931 to 4.2% in 2000

Question 15

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

Answer 15

Yes: subsidies lower world price of products; thus making it harder to compete

Question 16

Preferential trading agreements:

What is the MFN clause of WTO

Answer 16

Most favoured nation clause:
Each country in WTO promises that all countries will pay tariffs no higher than the nation that
pays the lowest

I.e no discrimination between trading partners.

Question 17

Exceptions to MFN (3)

Answer 17

Countries can setup free trade agreements that only applies to a specific group of countries (e.g many countries in the EU customs union are also in WTO)

Countries can give developing countries special access

Countries can raise barriers against products considered to be traded unfairly

Question 18

So what are preferential trading agreements

Answer 18

Trade agreements between countries where they lower tariffs for each other but not the RoW

Question 19

GATT/WTO allow for preferential trading agreements given they are:

Answer 19

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)

Question 20

2 types of PTA

Answer 20

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

Question 21

Con to FTAs

B) how to solve

Answer 21

Since no CET, non-members can bypass high tariffs by sending their goods to the country with the lowest external barrier.

B) rules of origin exist to prevent

Question 22

Con of customs union

Answer 22

Time and effort to streamline the common external trade policies.

Question 23

Trend of PTA’s overtime

Answer 23

Increased across the world
e.g EU-UK TCA (since Brexit) , USMCA, ASEAN etc.

And also across regions (spaghetti bowl phenomenon)

Question 24

Is joining a PTA always beneficial?

Answer 24

No, it depends

It could decrease national welfare, since rather gaining tariff revenue from inexpensive imports from WORLD markets, a country may import expensive products from MEMBER counties (tariff free) instead and thus gain no tariff revenue

Question 25

So when does PTA increase national welfare

Answer 25

When new trade is created,

But not when trade from RoW is diverted to trade with members. (As in this instance, where world imports diverted to imports from other member states)

Question 26

When does trade creation occur in a customs union or FTA

Answer 26

When inefficient high price domestic production is replaced with more efficient members (simple - as expected)

Question 27

When does trade diversion occur in a CU and FTA

Answer 27

Low cost imports from ROW are diverted to high-cost imports from members. (So decrease in national welfare since loss of import tariff revenue as now buy from members)

(As already mentioned)

Question 28

Tariff diagram surpluses and revenue diagram

B) what is national welfare overall, and how can it tell if PTA are welfare improving or not

Answer 28

Before CU represents world price with tariff
Pb+t is partner before CU (since still tariffs)
Pb is partner since tariffs removed, now cheaper than world price+tariff.

Consumer surplus is a+b+c+d (since lower prices, as switch from Pw+t to Pb)
Producer surplus = -a because domestic producers receive lower prices produce less (since more trade goes to partners)
Loss in tariff revenue -(c+e) since now imports are replaced with tariff-free imports from the partner

B) (b+d) - e
b+d is trade creation , e is trade diversion
If b+d>e TC>TD so beneficial (moving domestic production to more efficient producers)
If b+d<e TC<TD so not beneficial (moves to less efficient partners)

Question 29

When answering the question whether joining a PTA is beneficial or not, it is important to identify the effects of trade creation and trade diversion.

When is a country more likely to gain from PTA

Answer 29

If PTA members are more large, since more efficent

(Larger = more likely trade creation (b+d) outweighs trade diversion)

Question 30

Based on this notion, would we want our partners to be large or small

Answer 30

Large is more likely to be more efficient, and so we want larger partner, so TC>TD and the pTA will be beneficial and raise national welfare

Question 31

Are FTA’’s really free? Reasons for no

Answer 31

Rules of origin - E.G To qualify for zero tariffs in the EU-UK Trade agreement, goods must contain a high % of parts originating from the EU or UK

Question 32

Why do we have non-preferential rules of origin

Answer 32

Used for general trade policy purposes e.g determine country of origin for quotas, anti-dumping, labelling etc

Question 33

Long term goal of WTO

Answer 33

Common non-preferential rules of origin, since they differ country to country.

Question 34

Preferential rules of origin

Answer 34

Used in PTA to see whether goods qualify for preferential treatment (i.e no tariffs)

Question 35

Thus rules of origin can underestimate trade diversion in a FTA.

How?

Answer 35

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

Question 36

Regionalism vs multilateralism

Answer 36

Countries lower trade barriers for only a small group of partners and discriminate against the ROW

Multilateralism is non-discriminatory

Question 37

Do regional trade agreements promote or hinder multilateral free trade

Answer 37

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)

Question 38

How can a domino effect exist

Answer 38

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

Question 39

Problem to the domino effect idea

Answer 39

Members may not have incentive to continue letting new members in

Juggernaut effect - PTAs reduce number of import-competing firms (since foreign exports become stronger since tariff free) , leading to more pressure for reciprocal tariff cuts

Question 40

Number of negotiators importance

Answer 40

Fewer partners - easier agreement

Question 41

Why is this hard to reduce no of negotiators

Answer 41

Must be CUs not FTAs for number of negotiating parties to fall

Question 42

Who are trade blocs a threat to?

Answer 42

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

Question 43

Main argument against regionalism

Answer 43

Regionalism encourages TD.

Question 44

Argument for regionalism

Answer 44

Increased FDI
EOS since larger internal market
Increased competition creates efficiency gains and lower prices