lecture 2 - WTO, barriers to trade, regional trade agreements Flashcards
3 types of trade protection
- tariffs = a tax on imported goods (e.g. importing American car -> EU charges 10% on top of te price of the car)
- quotas = limit on the amount of goods that can be imported by a nation or globally
*rare today bc WTO doesn’t allow quotas - non-tariff barriers = everything else: industry subsidies (impedes competition), safety standards, insurance programs, laws to protect regional products industrial lobbies
why does trade protection (barriers) persist?
general agreement = free trade makes us richer (on whole)
-> why trade protection?
free trade is the exception, not the rule
- economically, free trade can be a prisoner’s dilemma + countries have economic incentives to protect without coordination
-> all countries should 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
prisoners’ dilemma
trade is a prisoner’s dilemma:
gains from trade are only guaranteed if other states also liberalize
(you need at least one country to export and one to import)
(few gov liberalize unilaterally)
if you liberalize but other state doesn’t, comparatively you might be worse off
- some states may be better off imposing a tariff if liberalization is not reciprocated
sometimes it is more beneficial to exploit others’ open markets while you keep your market close
the enforcement problem as the prisoner’s dilemma
China vs EU liberalizing (L) or protecting (P)
*first letter is China, second is EU
China: P,L > L,L > P,P > L,P
EU: L,P>L,L>P,P>P,L
Nash equilibrium = Protect-Protect
Nash equilibrium = neither country can unilaterally make themselves better of by taking a diff action (defecting)
- if L,L, then one of them can chose to protect and make themselves better of
- P,P neither can make themselves better of by doing something else
refresher: prisoners’ dilemma
collectively, both would do better by staying silent (by liberalizing)
-> yet each has an incentive to rat out his accomplice
defection is the best response whether the accomplice stays quiet or defects = “dominant strategy” (defect from cooperation no matter what the other does)
both defect, although they would be much better off if they both stayed silent (if they both liberalize)
to get trade liberalization you need to figure out how to cooperate (bargaining and institutions)
to get to cooperatoin, countries need to BARGAIN
states won’t liberalize unilaterally -> seek liberalization through formalized agreements
- states can disagree over the distribution of trade’s benefitsnd want to make sure they’re not getting the “worst deal ever signed, ever”
- can an agreement be reached?
- where does it fall?
bargaining - can an agreement be reached at all?
no succesful bargaining when:
- no mutual beneficial gains to be made: status quo already at one country’s policy ideal point + preferenes incompatible (can be the case for non-tariff bariers)
- information problems: countries don’t know what the other’s ideal points are -> everyone has incentive to misrepresent
- inability to credibly commit to the agreement (who says that a country will implement the agreement?)
no trust -> why even make the agreement - outside options
bargaining - where does it fall?
bargaining power
agreement falls somewhere along the “contract curve” = 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: countries wnat to be closest to their own ideal point
states still want to maximize benefits
- e.g. EU/US agricultural markets are heavily protected, yet we can sell our manufactured goods almost anywhere
cooperation and bargaining - US and EU agriculture
group of 20 = good at agriculture production, less good at production industrial goods
G20 want to protect their goods market, but for the EU/US market for agriculture to be more open so they can export there
US/EU want tariff bariers for industrial goods in the G20 to be low (bc they export there)
US/EU would not unilaterally liberalize, bc they would move further from their ideal point
make cirkles around the ideal points to the status quo, all points on the line are equal to the status quo
within the circle = better than on the circle
where the circles overlap = potential joint gains: agreement would make both better off
need to find tangent lines where one can’t be made better of without making the other worse off
e= best for EU/US: liberalization G20 goods market without much agriculture liberalization = G20 just as happy as the status quo
g = best for G20 that EU/US could accept
if the agreement falls closer to e or g depends on bargaining power
in this case = closer to e bc EU/US have more bargaining power
what decides bargaining power?
- market size/trade volume (bigger market -> people have interests in the market -> state influential, more power)
- patience: are you willing to wait for a deal that is better? if yes you have more bargaining power
- attractiveness of outside options
e.g. Brexit: Britain can’t replace trade with EU with trade with other countries > EU lot of bargaining power
facilitating cooperation what makes cooperation/bargaining easier?
- fewer states in negotiations -> easier
one hegemon that backs the whole system = easy negotiations - information to monitor compliance (e.g. WTO)
- repeated interaction (tit for tat): ability to punish defectors, reciprocity, incorporate long-term gains into decision making
- linkage of policies: tie to compliance to other issues like security
international institutions (WTO or RTAs) can help with some of these
- RTAs = regional trade agreements
international institutions
provide mechanisms to aid trade cooperation:
- set standards of behavior
- monitor and enforce compliance
- reduce transaction costs (once you have an IO that has bargained, you don’t have to do it again and again)
often based on the principle of state reciprocity (iteration and tit for tat)
- concessions granted by one s are matched by others: i will liberalize this, if you liberalize that
can take many forms:
- global organisations (WTO)
- regional organisations (NAFTA, CARICOM, MERCOSUR, EU CU)
- bilateral
GATT/WTO
GAT = General Agreement on Tariffs and Trade = 1948-1994
- 23 members by 1948
- created with other Bretton Woods institutions (IMF, World Bank)
- lasts until 1994, replaced by the WTO
WTO = World Trade Organization = 1994-now
- includes updated GATT
- Uruguay Round Added Agreement on New Areas (Services, Non-Tariff Barriers, Intellectual Property Rights)
Uruguay Round formed the WTO - still can’t agree on trade on agricultural and other goods protected by strong interest groups in Western world
WTO three elements
- established common principles and rules
- repeated intergovernmental bargaining process (repeated bargaining rounds)
- dispute settlement mechanism (measures against violations)
common principles and rules
market liberalism - more trade is better
nondiscrimination: you can’t discriminate between 2 diff WTO members in how you treat their trade
- most favored nation (MFN) = all countries should be treated the same way as you treat your closest trading partner
art. 1: if you liberalize trade for one country, you have to liberalize it for all WTO members - national treatment: behind the border, foreign goods have to be treated the same as domestic goods
art. 3: prohibits regulations and other policies that give domestic firms an unfair advantage
