Lecture 2 Flashcards
Puzzle of trade policy
Almost all economists agree that Free Trade is welfare
enhancing.
* We can make ourselves richer (on whole).
* All we have to do is eliminate barriers to trade.
* Then why does trade protection persist?
Types of trade protection tarrifs
Tariffs
A tax on imported goods
* Quotas
A limit on the amount of goods that can be imported by a
nation or globally (rare today because WTO doesn’t allow
quotas)
Why so many barriers to trade?
- Economically, free trade is a public good, and countries have economic
incentives to free-ride
All countries could be better off from coordinated liberalization - Other, non-economic concerns, especially for non-tariff barriers:
Consumer safety
Environmental protection
National Security Concerns
Not clear that liberalizing these would enhance welfare
Economic prisoners’ dilemma
- Gains from trade are only guaranteed if other states also
liberalize: - ‘If you liberalize and another state doesn’t, comparative
advantage might not be realized and one state may be worse off
Some states may be better off imposing a tariff if liberalization is not
reciprocated.
(Or at least politicians can be better off by catering to domestic interests.) - While trade is jointly beneficial, sometimes it is more
beneficial to exploit others’ open markets while you keep your
market closed.
Governments often want to protect important (non-competitive) industries
Where does an agreement fall?
An agreement will fall somewhere along the “contract
curve”, i.e. the set of “efficient” agreements acceptable to
all parties.
* A state’s bargaining power plays a role in where along the
curve it lands
* Not all about providing a public good
* States still want to maximize benefits (either economic or
political)
What is a determinant of bargaining power?
Determinants of bargaining power:
* Market size/trade volume:
* Patience:
* Attractiveness of Outside Options:
Bargaining can break down
What prevents successful bargaining?
* No mutually beneficial gains to be made:
status quo is already at one country’s policy ideal point
Preferences incompatible (can be the case for non-tariff barriers, think of
airbags and seatbelts!)
* Information problems:
Countries don’t know others’ ideal points, level of resolve or patience
Incentive to misrepresent
* Inability to credibly commit to the agreement
* Outside options
Facilitating cooperation
Several Factors make cooperation and bargaining easier:
* Small # of states, or one hegemon to back the system (more on that later)
* Information to monitor compliance
* Repeated interaction (tit for tat)
Ability to punish defectors
Reciprocity
Incorporate long-term gains into decision making
* Linkage of policies
Tie compliance to other issues like security
International institutions (WTO or RTAs) can help
International institutions in relation to trade
Provide mechanisms to aid trade cooperation
Set standards of behavior
Monitor and enforce compliance
Reduce transaction costs
* Often based upon the principle of reciprocity (iteration and tit for tat)
Concessions granted by one state are matched by others
* Can take many forms
Global Organisations (WTO)
Regional Organisations (NAFTA, CARICOM, MERCOSUR, EU CU)
Bilateral
GATT 1948-1994
General Agreement on Tariffs and Trade (GATT), 1948-1994
23 members by 1948
Created with other Bretton Woods institutions (IMF, World Bank)
Lasts until 1994, replaced by the WTO
WTO 1994-today
World Trade Organization (WTO), 1994 - today
Includes Updated General Agreement on Tariffs and Trade (GATT)
Uruguay Round Added Agreements on New Areas (Services, Non-Tariff
Barriers, Intellectual Property Rights…)
Both successful in reducing barriers to trade
Still, can’t agree on trade on agricultural and other goods protected by strong
interest groups in Western world.
3 important WTO elements
Established common principles and rules
2. Repeated intergovernmental bargaining process
3. Dispute settlement mechanism
Most favoured nation (MFN)
: All countries are treated as the closest
trading partner
Article 1: If you liberalize trade for one country, you have to
liberalize it for all WTO members (exceptions: RTAs and GSP…)
National treatment
Behind the border, foreign goods have to be
treated the same as domestic goods
Article 3: Prohibits regulations and other policies that give domestic
firms an unfair advantage
Exceptions to MFN
- Regional trade arrangements
Free-Trade Area (e.g., NAFTA)
or Customs Union (e.g., EU)
Condition: can’t raise trade barriers on others above prior
barriers - Generalized System of Preferences (from 1960s):
Developed countries can apply lower tariffs for developing
countries than for their peers
Intergovernmental bargaining process
- Changes require unanimity
All members have to agree (although in practice the
biggest countries often heavily influence the smaller
ones) - Often a “single undertaking”: Nothing is agreed
until everything is agreed
Facilitates issue-linkage and trading off concessions
Can lead to stalemates
WTO Agreements
Not just tariffs, but a lot of trade-related issues, e.g. Uruguay
Round gave us:
GATS: General Agreement on Trade in Services
TRIPS: Agreement on Trade-Related Aspects of Intellectual Property
Rights
TBT: Agreement on Technical Barriers to Trade
SPS: Agreement on Sanitary and Phyto-Sanitary Measures
Agriculture Agreement
Agreement on Subsidies and Countervailing Measures
Why did Doha fail?
2002 - ?
* Main objective: economic development
* Ambitious agenda:
All WTO members participated
Required consensus for completion
“Nothing is agreed until everything is agreed”
Also on the agenda: tightened anti-dumping rules, intellectual property
rights, environmental protections, trade facilitation, “special and
differentiated treatment”…
Dispute settlement mechanism
A standard upon which to adjudicate and punish violations
of WTO agreements
* Allows for legal reciprocation of victim states
Other firms or sectors can see new restrictions
Can be good for violators (a scape goat)
Why states like the WTO
The WTO lets you lose.
This is an easy way to shift blame away from politicians onto the WTO
Lets politicians avoid scorn of special interest lobbies.
* States can get creative with retaliation
US steel tariffs, EU retaliates with tariffs on Bourbon and HarleyDavidsons
* The WTO makes exceptions. If it requires too much, states
may defect from cooperation
Does the WTO work?
Did it increase trade? Maybe, the jury is still out. WTO members do engage in
more int’l trade
It is unclear if states that
joined would have liberalized
unilaterally and traded just as
much
* States bring few cases to
the WTO Still it might act as a deterrent
to imposing trade barriers
Will the WTO last
Appellate Body necessary to conclude dispute settlement
cases
* Usually has 7 members, appointed by WTO countries, 3 per
appeal
* US has been blocking appointments since 2018, it is now
down to 0 member – essentially defunct
* Long-standing Issues between US and Appellate Body:
Especially controversial: AB’s interpretation of the
Antidumping/Countervailing Duties Agreement
Regional trade agreements
Two Types:
Free Trade Agreements (NAFTA, CPTPP)
Eliminate tariffs among members
Separate trade policies with non-members
Most RTA are Free trade agreements
Customs Unions (EU)
Eliminate tariffs among members
Common trade policy with non-members
* Can be as few as two members (bilateral), but trend towards mega-regional deals
(e.g. TPP, RCEP)
Regional trade agreements implementing
Easier to implement because they require fewer members
Remember the more actors, the harder cooperation.
Powerful states can shop around for the best deal
Makes it easier to ease into free-trade policy.
More acceptable than joining the WTO for many domestic interests
Are RTA’s a problem for global trade?
Problem: Trade Diversion
* Could shift trade away from non-RTA members, e.g. from China-US to
Mexico-US
Thereby prevent FULL realization of comparative advantage.
* Favors states with a strong bargaining position.
* Biases trade rules in favor of states with large markets (The EU/US!).
States can exercise “outside options”
Benefit: Trade Creation
* Create new trade that wouldn’t have occurred before
* Might be “stepping stones” to multilateral agreements
Nobody knows which of these effects dominates – very hard to measure
TTIP & TPP
Oatley mentions two megaregional agreements:
TTIP = Transatlantic Trade and Investment Partnership (US-EU)
TPP = Trans-Pacific Partnership (US, Australia, Brunei, Canada,
Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
Vietnam)
* Neither went into force, although TPP was eventually
turned into CPTPP without the US, UK recently joined
What happened to TTIP & TPP
Protests all across the world
* TTIP was already put on ice before
Trump entered office
* Sister Agreement CETA (EUCanada) had to be renegotiated,
because of a referendum in
Wallonia
Liberalization beyond tariffs problem
- Tariffs between many of the treaty partners already
low - Instead, agreements now often:
Try to harmonize standards and regulations
Introduce controversial rules to further investment (esp.
Investor-State-Dispute Settlement Mechanisms)
Introduce stricter intellectual property rights protections (good
for Pharmaceutical industry, but probably not for consumers)
Types of trade protection non tariffs
- Non-Tariff Barriers
Everything else
Industry subsidies
Consumer and environmental safety standards
Industry insurance programs
Laws to protect regional products
Industry lobbies and law makers can get very creative
WTO criticisms
See Dani Rodrik 2018 – What Do Trade Agreements Really
Do?
* WTO already criticized by environmentalists and
consumer groups for its rules, but RTAs often go much
further
WTO already criticized by environmentalists and
consumer groups for its rules, but RTAs often go much
further
Reasons for Doha failure
- Reasons for failure:
Unwillingness of US, EU and Japan to reduce support for agriculture
Pits developed vs developing countries for the first time
Too many cooks spoiling the broth – many countries willing to derail
negotiations
Doha controversial part
Most controversial part: agriculture and removal of developed countries’
subsidies
