The politics and Negotiations of trade policy Flashcards
arguments for free trade? (8)
- markets are efficient.Tariffs create deadweight losses and distorts prices
- small countries cant influence world prices. whereas large countries can, unfair
- free trade increases overall gains (especially smaller countries)
- allows firms to take advantage of EoS to produce in more than one place and report to many
- Free trade provides competition and opportunities for innovation By providing entrepreneurs with an incentive to see knew ways to export or compete with imports, free trade offers moreopportunities for learning and innovation.
- avoids the loss of resources through rent seeking
- free trade is the bestfeasible political policy, even though there may be better policies in principle. political groups can exploit any other policy leading to decreased welfare
- Subsidies lower the world price of products
arguments against free trade? (8)
- generates terms of trade for a large country this benefit may exceed the losses caused by distortions in production and consumption. a small tariff will lead to increased welfare for a large country. the national welfare will begin to decrease as the economic efficiency loss exceeds the terms of trade gain. (other large might retaliate)
-There could be domestic market failures that cause free trade to be a suboptimal policy. e.g persistently high underutilization of resources to underemployment of workers as both prices and wages do not adjust quickly
- export taxes may raise national welfare
-Government support (subsidy) of domestic producers may benefit national welfare especially if there is a large firm in the country engaged in oligopolistic competition with a foreign company, and should be able to charge a lower price. Airbus vs being
- infant industry. A temporary protection of industry may allow this industry to grow until it becomes competitive and no longer needing protection
-Ensuring local population can consume local goods. Shortage of goods in own country while firms export for better prices elsewhere. people in own country may not be able to afford the goods at the world price
- dependency. A government might not be confident to be dependent for some goods and services from elsewhere
-preffered trade partners (political)
A good recommendation is that whenever a trade policy is being proposed
reducing the freedom of international trade, compare it with a domestic
policy that addresses the same problem…
what is strategic trade policy?
A government policy to give a domestic firm a strategic advantage in production
a subsidy by the European Union can alter the outcome by making it
profitable for Airbus to produce regardless of Boeing’s action- game theory payoff matrix
what is the median voter theorum?
model of hotelling where centrists are the preferred tariff rate. Botch political parties offer the same tarriff rate to try steal from its opposition
why dosent median voter theorum hold up in reality?
Models of trade policy choice consider the incentives politicians face given their desire to be re-elected, and the tendency for groups that gain from protection to be better organized than consumers who lose.
how can collective action influence policy
While consumers as a group have an incentive to advocate free trade, each individual consumer has no incentive because his benefit is not large compared to the cost and time required to advocate free trade
when producers are organised, the govt is likely to respond to their preferences about policy to get re-elected. ‘Donations’
e.g steel in USA with bush or agriculture
sugar in USA - would impact domestic sugar companies despite being better for welfare if no sugar quota -20,000 jobs
what are the types of international trade agreements
Preferential Trading Agreements (PTA) - countries who lower tariffs specifically for them - under WTO these arent allowed Each country in the W T O promises that all countries will pay tariffs no higher than the nation that pays the lowest: called the “most favored nation” (M F N) principle.
A free trade area: an agreement that allows free trade among members,
but each member can have its own trade policy towards non-member
countries. (USMXCA)
A customs union: an agreement that allows free trade among
members and requires a common external trade policy towards nonmember countries (EU)
Advantages of Trade negotiations (3)
- Avoids trade wars between countries.
- Although consumers who benefit from cheaper imports are not strong as the
industries which wish to be protected, the industries which wish to export
would be supportive when it is cheaper for them to export to the other country. - Win-win and opens the door for other trade deals, developing reputation
what does the WTO do?
world trade organisation
- General Agreement on Tariffs and Trade: covers trade in goods.
– General Agreement on Tariffs and Services: covers trade in
services (e.g., insurance, consulting, legal services, banking).
– Agreement on Trade-Related Aspects of Intellectual Property:
covers international property rights (e.g., patents and copyrights).
Are preferential trading agreements necessarily good for national
welfare?
no. never good unless trade wasnt already flowing, never good for existing trade
how might W T O negotiations address trade restrictions
- Reducing tariff rates through multilateral negotiations.
- Binding tariff rates: a tariff is “bound” by having the imposing country
agree not to raise it in the future. (has some lee way to change if the
countries involved agree.) - Eliminating nontariff barriers: quotas and export subsidies are changed to
tariffs because the costs of tariff protection are more apparent and easier to
negotiate
