International Negotiations And Preferential Trading Agreements

Question 1

Why do we need an international organisation for trade?

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 each is better off with protection when acting individually. But both better off if both free trade

Thus this example suggests need for international coordination through agreements to make both better off and avoid the temptation of protection

Question 3

Advantages of negotiation

Answer 3

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

Multilateral negotiations can serve as a coordination device and help avoid a destructive trade war where each country enacts trade restriction does

Question 4

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

Answer 4

E.g US removes import quota on Japanese cars (benefitting Japan car producers) , Japan removes import tariff on US high-tech goods.

The multilateral approach counteracts the support for protection by import competing groups e.g the US car producers

Question 5

What is the international institution to regulate trade

Answer 5

World Trade Organisation

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

Question 6

Rounds of negotiations : look at the Geneva 1955 case

Answer 6

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

Question 7

8th Uruguay

Answer 7

Political pressure grown to again restrict trade in textiles and clothing

Question 8

WTO functions

Answer 8

Sets trading rules

Acts as a negotiating forum

Settles trade disputes

Question 9

WTO is based on a number of agreements

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

Reciprocity: concessions should be reciprocated

National treatment: imports treated same as domestic products in terms of regulation & taxes (customs does not violate this since NT only applies once product has entered the market!)

Special and differential treatment (SDT): give developing countries special rights 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 exports who decide whether agreement broken or not.

Question 13

Suspiciously timed trade disputes have occurred.

What are they lined to

Answer 13

Electoral timings

Question 14

Have the trade rounds been effective

Answer 14

Yes, average tariff has dropped.

Question 15

So agricultural subsidies are the only exception as mentioned of NTBS not being swapped to tariffs.

Do the subsidies in rich countries hurt poor countries

Answer 15

Subsidies lower world price of products; since importing countries benefit from cheaper food.

Thus farmers in poor countries are negatively impacted since harder to compete

Question 16

Preferential trading agreements:

What is the MFN clause of WTO

Answer 16

Each country in
the W T O promises that all countries will pay tariffs no higher than the nation that
pays the lowest. Countries cannot normally discriminate between their trading
partners.

Question 17

Exceptions to MFN

Answer 17

Countries can setup free trade agreements that only applies to a specific group of countries

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

I.e should complement multilateral trading system and not threaten it

Question 20

2 types of PTA

Answer 20

FTA - free trade for members, but own trade policy for non members e.g ACFTA

Customs union - free trade for members but common external tariff

Question 21

Con to FTAs

Answer 21

Non members can by-pass high tariffs by sending their goods to the country with the lowest external barrier.

Hence why rules of origin

Question 22

Con of customs union

Answer 22

Time and effort to streamline external trade policies.

Question 23

Upward trend in PTA’s

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 instead and thus gain no tariff revenue

Question 25

So when does PTA increase national welfare

Answer 25

When new trade is created,

But just not when trade from RoW is diverted to trade with members.

Question 26

When does trade creation occcur

Answer 26

When high-cost domestic production is replaced with low cost imports from other members (so PTA is worth it)

Question 27

When does trade diversion occur

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)

Question 28

Tariff diagram surpluses and revenue diagram

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 gains from PTS

Answer 29

If PTA members are more efficient than non-members. So TC>TD

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

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

RULES OF ORIGIN!

Question 32

Why do we have non-preferential rules of origin

Answer 32

To 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

Question 35

Thus rules of origin can underestimate trade diversion in a FTA

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 tariffs and move away from global free trade

Others found increasing size of FTA reduces tariffs and move towards global free trade