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
exceptions to MFN
- regional trade agreements
Free-Trade Area or Customs Union
rule = if you treat everyone else the same, you can treat your regional trade agremeent partners diff
- generalized system of preferences (from 1960s)
developed countries can apply lower tariffs for developing countries than for their peers - general exceptions: e.g. if you need to protect health or morals (religious countries: no porn) or import gold or silver
legal or illegal?
- NL lowers tariffs on cheese imports from Switzerland, but not from America = illegal bc MFN
- NL lowers tariffs on cheese imports from Switzerland as part of a free trade agreement with Switzerland, but not from America = legal bc MFN exception free trade agreements
- NL mandates that all American cheese has to be stacked on the bottom shelves at supermarkets = illegal bc national treatment
Intergov bargaining process WTO
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
rounds of bargaining WTO/GATT
- 1947 Geneva
- 1949 Annecy
- 1951 Torquay
- 1956 Geneva
- 1960-61 Dillon Round
- 1964-67 Kennedy Round
- 1973–79 Tokyo Round
- 1986-93 Uruguay Round (led to WTO creation)
- 2002-…? The Doha Round (unsuccessful)
!no names and years on the exam, just how often they bargain for an idea
we should now the Doha round and the uruguay round
WTO agreements
not just tariffs, 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 = controversial: you’re only helping the big agriculture and medical companies
- TBT + SPS: non-tariff barriers (SPS sanitary, TBT the rest)
- Agriculture Agreement = relatively weak: doesn’t liberalize agriculture to a great extent
- Agreement on Subsidies and Countervailing Measures: when China e.g. subsidizes, the US and EU will countervail, there’s rules for how
won’t be quizzed on the names etc.
just know there’s more types of agreements, some more controversial than others
why did Doha fail?
goal Doha = eco dev.: liberalize agriculture
Doha = 2002 - now
ambitious agenda:
- all WTO members participated + nothing is agreed until everything is agreed + required for completion
- most controversial = agriculture and removal of dev. countries agriculture subsidies
- also on the agenda = tightened anti-dumping rules (cheap products), intellectual property rights, environmental protections, trade facilitation, “special and differentiated treatment” (bc dev. reasons)
fail bc:
- US/EU/Japan wouldn’t support agriculture
- pitted developed vs developing countries against each other
- too many cooks spoiling the broth many countries willing to derail negotiations if they didn’t get what they wanted
bc they needed agreement on everything, they didn’t agree on anything
dispute settlement mechanism GATT vs WTO
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)
complex system (don’t need to know all details), main diff GATT and WTO
- GATT: defendant could block actions
request for consultation -> request for panel (defendant could block this step) -> panel ruling (defendant could block this step) -> retaliation (defendant could block this step)
bc defendant could continuously block, no punishment - WTO: actions can only be blocked with unanimity
WTO =
- Request for Consultations
- Request for Panel
- Panel Ruling
- Appellate Body
- Compliance Panel (check if the defendant has changed behavior)
- Arbitration Panel
- Retaliation
dispute settlement can work: Costa Rican Underwear
1995 Costa Rica sued the US bc of an import restriction on underwear
Costa Rica won, US complied with the ruling bc:
- Costa Rica is tiny and has no army
- who cares if they don’t like US policy?
short term incentives to disobey rules can be outweighted by the long-term benefits provided by an institution
dispute settlement unresolved: US-EU Airbus-Boeing Dispute
rewatch
both airbus and boeing receive subsidies from their govs
disputes at the WTO for 16y and counting
both have launched numerous cases against the other, with a lot of retaliation and subsidies still in place
WTO retaliation process ineffective: Antigua vs US
2003: Antigua and Barbuda dispute US measures relating to gambling and betting services
2004 panel reports find US is violating WTO law on trade in services
Appellate Body largely upheld panel decision in 2005
Antigua and Barbuda won right to $21 million annually in compensation until US laws are changed
US refuses to pay
Antigua got right to use trade sanctions to recoup losses
it would hurt Antiguan econ more than it would hurt the US -> Antigua didn’t retaliate
why states (sometimes) like the WTO
- WTO lets you lose (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
- WTO makes exceptions, if it requires too much, states can defect
= rational design of international institutions (you need some flexibility so that states comply)
does the WTO work?
did it increase trade? we don’t know how it would be in a world without WTO
members do engage in more international trade
states bring relatively few cases to the WTO -> maybe not that important? or deterrent effect and countries abide the rules?
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 (Trump), now has 0 members -> essentially defunct
long standing issues between US and Appellate Body: AB’s interpretation of the antidumping/countervailing duties agreement
WTO take away
- cooperation is hard bc anarchy of the international system
- the WTO aids trade cooperation by providing a forum for bargaining, monitoring behavior and an enforcement mechanism through institutional reciprocity
- WTO progress has been stalled because of diverse interests and domestic politics
regional trade agreements
global bodies are limited and require cooperation and consent of many members
-> states may seek regional trade agreements with more important trade partners instead
- most trade is concentrated with a few partners
past two decades (late 1990s,2000s) = explosion of regional trade agreements
two types:
- Free Trade Agreement = most common
e.g. NAFTA (US, Canada, Mexico), CPTPP (pacific countries)
eliminate tariffs among members, separate trade policies with non members - Customs Unions = EU
eliminate tariffs among members PLUS agree on common trade policies with countries not part of the costum union (common external tariff)
-> EU negotiates free trade agreements with other regions, not individual countries
regional trade agreements can be bilateral, but trend towards more mega-regional deals (TPP,RCEP)
easier to implement because they require fewer members
-> more members is harder to negotiate
-> powerful states have a lot of say, can shop around for the best deal (if state doesn’t get what it wants in the WTO, it can get RTAs to get better deal with smaller nr of states)
benefit RTA = easier to ease into free trade policy (opening up to a limited amount of states) + sometimes more acceptable than joining WTO for domestic reasons that were first protected
are RTAs a problem for global trade?
does global trade increase or decrease as RTAs increase?
we don’t know: both positive and negative:
problem = trade diversion:
- could shift trade away from non-RTA members (e.g. from China-US to Mexico-US) -> prevents full realization of comparative advantage (maybe China had the comparative advantage)
- favors states with strong bargaining position
- biases trade rules in favor of states with large markets (EU, US)
states can exercise “outside options” -> perhaps played role in failure Doha round (why would they compromise if they had outside option)
benefit = trade creation
- create new trade that wouldn’t have occurred before
- might be stepping stones to multilateral agreements (megaregional agreements -> network that covers a lot of the coutries -> smaller step to go to the WTO bc you already have so many tariffs and combined rules)
we don’t know which effect dominates, we don’t know what the world would look like without the WTO
what happened to TTIP and TTP
mega-regional agreements mentioned frequently in the textbook
TTIP (Transatlantic Trade and Investment Partnership) was meant to be between US and EU
TTP (Trans-Pacific Partnership) was meant to be between US and bunch of other pacific countries (Asia, Oceania, American continent)
negotiations 2013, would be completed in 2016
neither of them went into force, although TPP was turned into CPTPP without the US (UK recently joined)
what happened?
TRUMP didn’t like the agreements, came up in the 2016 campaign
+ also:
- protests all across the world
- TTIP already put on ice before Trump entered into office
- Sister Agreement CETA (EU-Canada) had to be renegotiated bc of a referendum in Wallonia (Belgium)
problem: liberalization would go beyond tariffs (tariffs were already low: around 5%)
agreements meant to:
- harmonize standards and regulations
- introduce controversial rules to further investment (could sue countries for expropriation: new regulations, taking investments away)
- introduce stricter intellectual property rights protections (good for pharmaceutical industry, but probably not for consumers)
WTO also critized by environmentalists and consumer groups for its rules, but RTAs often go much further
example of controversies: who’s afraid of chlorine chicken and hormone beef
EU afraid of same rules for food as the US had: opposed to potential harmonization with US standards on food safety
might have been protectionist, but also legitimate concern about standards we want in our own jurisdiction
hegemonic stability theory
= cooperation bc one dominant actor can shoulder the burden of enforcement for all
- benovelently: they think it is the right thing to do for the world
- selfishly: serves the interest of the hegemon to set the rules and to enforce them
most recent case hegemon = US, before it was the UK empire
US benefits from trade liberalization after WW1
-> willing to incur the costs of mobilizing and monitoring enforcement of the rules
now: US power declines -> no one state that is willing to provide the public good of trade liberalization
-> suggests we are entering a period of less free trade (seems to be the case: more tariff wars)
bc: collective action problem: countries have to coordinate
how can we test hegemonic stability theory?
is hard: only two periods with hegemony (UK and US)
we should see that with relative hegemony (one dominant actor), trade and other eco flows should be freer than during times without one clear dominant power
is this the case?
C19 UK dominant power
-> much trade by the end of C19, end it declined despite the fact that the US was then the dominant power
C20 before + after WW2 dominant power until 70s-80s
-> after WW2 rise in trade (GATT negotiations), no decline in trade as the US relative power declines (rise of China doesn’t seem to have a clear effect on trade volumes)
- visible decline is bc eco crisis
look at policies: early C19 (no hegemon) openness, interwar (US dominant) less openness, as US is dominant openness increase, but openness policies does not decline as US power declines
SO: evidence is not that consistent with hegemonic stability theory (HST) -> too few data points to properly test the theory -> it is plausible, but not sure
2000s onwards = no clear hegemon
main take-away
- cooperation and bargaining problems can prevent trade cooperation even if states want to cooperate,
+ even though economists agree that trade is better for everyone - international institutions can help alleviate some of these problems
- global institutions are limited, states are seeking more regional agreements (less efficient and controversial)
- not clear whether hegemonic stability theory is correct, but trade may increasingly fragment/become regionalized in a multipolar world (breakdown in current relative openness)
