Trade Policy: Topical Issues and Controversies

Question 1

In a FTA, are there customs checks on goods traded between member countries?

Answer 1

Yes, there are customs checks on goods traded between members because each member can impose different tariffs on non-members

Question 2

FTAs have a principal of rules of origin, what does this refer to?

Answer 2

They have rules of origin as goods traded between members can only benefit from preferential access if a certain amount of the value added (by the producing country) is domestic

Question 3

What is the main way in which a customs union differs from a FTA?

Answer 3

Customs union members impose a common external tariff on imports from non-members, whereas FTA members can set their own tariffs on imports from non-members

Question 4

Is there any need for customs checks on goods traded between customs union members?

Answer 4

No need for customs checks because members impose the same common external tariffs on non-members

Question 5

Example of a customs union?

Answer 5

European Union members (28 countries)

Question 6

Example(s) of a FTA?

Answer 6

NAFTA, EFTA

Question 7

If you are a FTA member, can you pursue your own trade policy? Can you do so if you are in a customs union?

Answer 7

Can pursue your own trade policy if part of a FTA, cannot do so if you are in a customs union

Question 8

The GATT Agreement requires that any preferential/regional trade agreement (i.e. FTA or customs union)…

Answer 8

Eliminate tariffs (i.e. be zero) and substantially cover all trade (not just a few sectors)

Question 9

Since the formation of the WTO in 1995, have countries multilaterally brought down tariff rates? What else have they been doing outside of the WTO?

Answer 9

Since the formation of WTO in 1995, tariffs have remained low but have not seen any significant decreases. Instead of countries multilaterally agreeing to reduce tariffs within the WTO, they have been forming FTAs and RTAs (large increase in numbers in 90s)

Question 10

A FTA is classed as a RTA/PTA, is a customs union a RTA/PTA too?

Answer 10

Yes, a customs union is a preferential/regional trade agreement but is not the same as a FTA

Question 11

The welfare of the domestic country increases when there’s trade creation, what are the 2 reasons for this?

Answer 11

The trade creation itself and the elimination of the consumption and production distortions that had been created by the imposition of the tariff previously

Question 12

Trade diversion occurs when…

Answer 12

A country switches from importing from an efficient producer outside the trading bloc to an inefficient producer within the trading bloc

Question 13

The welfare gains from trade creation and trade diversion result from…

Answer 13

The elimination of the consumption and production distortions that had been created by the tariff

Question 14

The trade diversion area (E) represents…

Answer 14

Part of the loss of government tariff revenue that would have become CS if the country were importing from efficient supplier. It also represents the greater cost that the country faces from importing from inefficient supplier.

Question 15

A real example of trade diversion was…

Answer 15

Before the UK joined the EEC, it was importing lamb from New Zealand, who was the most efficient producer. After joining the EEC, the UK began importing lamb from France, who was a less efficient producer

Question 16

To know whether a country has benefited from overall from being part of a trading bloc, you would have to…

Answer 16

Evaluate the welfare gains and losses resulting from trade creation and trade diversion

Question 17

The Kemp-Wan proposition suggested that…

Answer 17

People were missing an important implication of trading blocs. Suppose that a FTA/customs union was organised so that tariffs were adjusted to keep the amount of trade with the rest of the world the same. This would allow countries to avoid trade diversion (as same quantities are traded and TOT therefore stays same) while still enjoying the benefits of trade creation from the removal of tariffs between members of the PTA. It is a theoretical proposition stating that countries can always be made better off by joining a customs union

Question 18

An argument against the Kemp-Wan proposition is that…

Answer 18

It does not hold in practice as a customs union can be seen as a large country (as it is a group of countries, e.g. the EU28). A large country is able to affect its TOT by using tariffs, some therefore argue that tariffs are used to manipulate the TOT rather than to keep trade with the ROW the same

Question 19

The WTO was formed in… ~ …replacing the ~ that was formed in ~

Answer 19

1995, GATT, 1948

Question 20

The Uruguay Round (1986-94) got rid of…~… and set up…~

Answer 20

Voluntary Export Restraints, phasing out ones that had been in place (e.g. EU-Japan VER in 2001), and got rid of the Multifibre Agreement (liberalising trade in textiles). It set up the GATS (General Agreement on Trade and Services)

Question 21

The WTO rule/principle of non-discrimination means that…

Answer 21

WTO members cannot discriminate between other WTO members. Any nation must face the MFN (Most Favoured Nation) tariff, i.e. the lowest tariff and not pay a higher one than any other country, so all nations must face the same tariff. WTO countries cannot put lower tariffs on non-WTO countries. Furthermore, there is the principle of national treatment, which means that any good, once imported and the tariff on it has been paid, must be treated in the same way as a domestic good (e.g. you cannot set higher VAT rates on imported goods)

Question 22

The WTO rule/principle of reciprocity means that…

Answer 22

When a WTO member makes a concession to another (e.g. reduction of tariffs on cars), the other member is expected to make a concession (e.g. reduction of tariffs on steel) of equal value

Question 23

The WTO rule/principle of market access means that…

Answer 23

There should be an open trading system, binding of tariffs (i.e. setting of an upper bound so they cannot be increased suddenly to high levels), and an elimination of quotas (Uruguay Round reduced them)

Question 24

The WTO rule/principle of fair competition means that…

Answer 24

Countries can use countervailing measures to ensure fair competition, e.g. if a country dumps goods on your market, you can impose anti-dumping duties to offset the effects

Question 25

What are the 4 WTO principles?

Answer 25

Non-discrimination, Reciprocity, Market Access, Fair Competition

Question 26

The exception of safeguard measures to the WTO principles means that…

Answer 26

Countries can impose/increase tariffs in response to certain circumstances, e.g. if there is a sudden surge in imports a country can impose tariffs to protect domestic industry like the US did on steel in 2002 (removed a year later)

Question 27

The exception of countervailing measures and anti-dumping duties to the WTO principles means that…

Answer 27

Countries can implement countervailing measures and anti-dumping duties to ensure fair competition and protect domestic industry

Question 28

The exception of agricultural products (not generated by WTO) to the WTO principles means that…

Answer 28

Countries have continued to protect their agricultural industries (e.g. Common Agricultural Policy) despite the principles of the WTO - sector has escaped liberalization

Question 29

The exception of FTAs/PTAs to the WTO principles means that…

Answer 29

WTO members are able to discriminate against other WTO members as members of the FTA benefit from the elimination of tariffs whereas other WTO members not part of the FTA do not benefit. Example: EU common external tariff

Question 30

Some exceptions to the WTO principles are…

Answer 30

Safeguard measures, Countervailing measures/anti-dumping duties, Agricultural products, FTAs/PTAs