Trade Policy: Topical Issues and Controversies (2)

Question 1

The Doha (Development) Round has been active since 2001, but there have not been any successful trade negotiations. Several possible reasons (offered by Martin and Messerlin, 2007) for this are…

Answer 1

Too many members (164), Decision making procedures (WTO works around consensus, all members have to agree), Geopolitical context (GATT formed to keep Western countries united during Cold War, argued that developing countries not prioritised, there are also other countries involved now with different interests - e.g. Brazil and Australia interested in agriculture), Little scope for further tariff reductions (already come down so much, countries may also look to liberalise services but this is much more complicated than for goods so there is also complexity of agreements), Liberalisation has been occurring through PTAs instead of through WTOs (and deeper integration seen, e.g. EU Single Market has liberalised services), Non-trade concerns (e.g. labour standards when producing these goods)

Question 2

It is argued by ___ that multilateral trade liberalisation through the WTO has been replaced by liberalisation through PTAs/FTAs. There was a large surge in the number of PTAs in the 1990s notified to the WTO and the numbers continued to rise in throughout the 2000s

Answer 2

Baldwin (2016)

Question 3

What is dumping? (In general)

Answer 3

Dumping is where a firm sells a good for a price less than its normal value in the export market. “Normal value” can have 2 definitions.

Question 4

Price definition of “normal value”

Answer 4

Firm sells the good at a price in export market lower than the price in the home market (can be seen as 3rd degree price discrimination)

Question 5

Cost definition of “normal value”

Answer 5

Firm sells the good at a price lower than the cost of production (known as “predatory dumping”)

Question 6

Under what conditions/why may a firm dump?

Answer 6

The exporting firm, if it has monopoly power, may set a higher price in its domestic market if the demand there is less elastic and set a lower price in the export market of demand is more elastic. This can also be the case if it has monopoly power in the domestic market but faces oligopolistic competition in the export market.

Question 7

What is the argument for anti-dumping duties?

Answer 7

Although the country where the dumping occurs pays a lower price for the good than it would have done, the argument is that predatory dumping (or pricing) makes competitors in the home market less profitable. In the long run, this can force them to leave the industry, allowing the foreign firm to gain monopoly power. The foreign firm can then raise its prices, making consumers worse off because they face the monopoly price rather than the competitive price. Negative consequences for welfare. Anti-dumping duties argue to be necessary in order to protect domestic consumers and prevent predatory dumping.

Question 8

The Chicago Critique of Predatory Dumping (also relevant to Predatory Pricing) says that…

Answer 8

Predatory dumping is an expensive strategy because the firm engaging in it is making a loss on each unit it sells. The firm that is victim to the predatory dumping can reduce its output (and hence losses), knowing that the firm undertaking the dumping will have to raise its prices at some point. For the predatory dumping to be successful, the monopoly profits accrued by the dumping firm after ousting its competitors must be greater than the losses sustained during the dumping phase. However, monopoly profits will attract new entrants into the market unless there are considerable barriers to entry.

Question 9

In many cases of alleged predatory dumping…

Answer 9

there has not been one single firm engaging in it, but rather several firms. For predatory dumping to be successful, there needs be collusion between firms.

Question 10

The majority of alleged predatory dumping cases have involved industries where… ____ and ____ … recent cases include ____ and ___ from China

Answer 10

there are many foreign firms (making collusion difficult) and barriers to entry. Recent cases include bicycles and footwear from China. Hence, hard to believe that there has been predatory dumping

Question 11

Anti-dumping duties are basically just… (said in lecture)

Answer 11

Tariffs

Question 12

Between 1995-2016, ____ dumping measure have been imposed

Answer 12

3,405

Question 13

In this period, _____ is the country that has had the most anti-dumping measures imposed against it

Answer 13

China

Question 14

Economists have argued that anti-dumping duties have been an ____ ____ _____ and that importing countries can abuse ___ _____ because they are the ____

Answer 14

excuse for protectionism, abuse the system, judge/prosecutor

Question 15

A number of tricks have been used to find dumping in cases where it may not have been apparent, for example: _____ countries have been used when dumping firms are from ______ economies such as China

Answer 15

Analogue, transition

Question 16

An analogue country is a country that is…

Answer 16

similar to another in question, producing the same good as that country in question

Question 17

Why else is it easy to accuse countries of dumping (going back to the Ricardian Model)?

Answer 17

As found in the Ricardian model, countries export the good that they have a comparative advantage in producing (i.e. the good that they can produce cheaper and hence sell at a lower price than firms can in the export destination)

Question 18

In a single market (e.g. EU Single Market), there is a harmonisation of ______ which means that…

Answer 18

Regulation, goods that are fit to be sold in one member country can be sold in any other member country too

Question 19

What are the 4 EFTA countries? Are they part of the Single Market? Are they part of the Customs Union? Can they pursue their own trade policies regarding non-members of EFTA and the Single Market? Are there checks on goods coming into the Customs Union from, the EFTA countries?

Answer 19

Iceland, Norway, Liechtenstein, and Switzerland. They are not part of the customs union, but are tied into the Single Market. They can therefore pursue their own trade policies, i.e. set their own tariffs on non-members of EFTA and the Single Market. There are checks on goods coming from the EFTA countries into the customs union because they are not part of the customs union.

Question 20

The EEA (European Economic Area) just simply refers to

Answer 20

The European Single Market

Question 21

What are the UK’s Brexit options with regard to trade?

Answer 21

Single Market membership + Customs Union membership (Norway+ option), Customs Union only, FTA plus Single Market membership (Norway option), FTA without Single Market membership (Canada+ option), No deal, Unilateral Free Trade

Question 22

What would a ‘No Deal’ Brexit mean?

Answer 22

Trade with the EU according to WTO rules, tariffs barriers to trade (UK would face the EU’s common external tariffs and we would set tariffs on EU goods), customs checks, non-tariff barriers to trade (as we wouldn’t be part of Single Market)

Question 23

What would the UK pursuing unilateral free trade with the EU mean?

Answer 23

The UK would trade with the EU according to WTO rules, and would reduce tariffs to zero. The optimal trade policy for a small country is free trade.

Question 24

When it comes to tariffs, what is the difference in their implications for small and large countries?

Answer 24

For a small country, free trade is the optimal policy. Those who argue that the UK is a small country argue that free trade would therefore be the UK’s optimal trade policy. Some argue that the UK is a large country and so a reduction in tariffs would have an effect of worsening the TOT, so maintaining tariffs would be the optimal policy.

Question 25

What can we say (just vaguely, and in general) about the welfare effects of Brexit?

Answer 25

Difficult to predict the welfare effects as there is no useful precedent of any country leaving the EU or any other FTA. We can also look at historical case studies of the economic consequences of joining the EU. Can have simulations of Brexit with computable general equilibrium model. We can also make estimates on how EU membership affects trade.

Question 26

Using a historical case study of the economic consequences of joining the EU, it was estimated that 10 years after joining the EC, UK GDP per capita was 8.6% higher than it would have been had it not joined the EC . Which 3 people made this estimate?

Answer 26

Campos, Coricelli, and Moretti (2014)

Question 27

However, Campos, Coricelli, and Moretti’s estimate can be challenged because…

Answer 27

We do not know exactly what UK GDP per capita would have been had it not joined the EC. Furthermore, one has to take into account that it was not solely EC membership that would have generated this increase in GDP per capita, privatisation policies also took came into place during this period that may well have contributed to the increase. It is difficult to discern how much of the increase resulted solely from EC membership

Question 28

Using a computable general equilibrium model, the effects of Brexit were estimated using 31 industries and 35 countries. The optimistic case is that the UK remains in the single market but this would still result in a permanent reduction of 1.3% in UK consumption per capita. The pessimistic case is that the UK trades with EU under WTO rules, the loss estimated to be 2.7%. Who conducted these estimates?

Answer 28

Dhingra et. al. (2017)

Question 29

Another estimate says that Brexit would result in a reduction in UK income per capita by between 6.3-9.4%. This was by who?

Answer 29

Feyrer (2009)

Question 30

What would be the economic impact of a soft Brexit and a hard Brexit on the UK and EU?

Answer 30

A soft Brexit can be seen as staying the in the Single Market. We have the prediction of Dhingra et. al (2017) of what would happen in this case. A hard Brexit can be seen as trading with the EU under WTO rules, we also have a prediction of the outcome from Dhingra et. al (2017). Important to mention why it is difficult to predict the welfare effects of Brexit. With regard to the EU27, Baier et al. (2008) estimate that the UK leaving the EU and joining EFTA would reduce UK’s trade with the EU by 25%, therefore reducing the EU’s trade with UK. Effects of Brexit in general argued to be greater on UK than EU because UK exports to EU account for 12% of UK GDP whereas EU exports to UK only account for 3% of its GDP.

Question 31

Does the increase in UK trade with the EU since 1973 imply that the UK has gained from EU membership?

Answer 31

Since joining the EC in 1973, the proportion of the UK’s exports going to EU and imports coming from EU has increased. However, when talking about ‘gained’ we must think about welfare. It is possible that the UK has gained if the increase in trade has been a result of trade creation (welfare gains). However, it may have been the result of trade diversion (implying welfare losses).

Question 32

In the recent anti-dumping case involving ring binder mechanisms from China, imposing duties of 51-78%, EC calculated normal value using costs of EU producer. Given this method, is there any evidence of dumping? What are the implications of this way of calculating normal value for trade according to comparative advantage?

Answer 32

EC did not use any data from China or Chinese firms, no price or cost data from there but from an EU producer. Did not use an analogue country either. EC used the costs of EU producer and added a profit margin of 5% because producer was making a loss, so there was no evidence of dumping. If China has comp. advantage in production of ring binders, it can produce them cheaper (lower cost than EU producers) and hence sell them for cheaper. Comparing import price with costs of EU producer is not evidence of dumping but shows China has comp. advantage. By calculating normal value this way, any country that has comp. advantage will be deemed to be dumping, and will be stopped from specialising according to comp. advantage.

Question 33

Has the lack of progress of the WTO Doha/Development Round stopped trade liberalisation?

Answer 33

No, the number of FTAs/PTAs has increased, meaning that countries have still been getting together and cutting/eliminating tariffs. They have just been doing it everywhere except through the WTO as Baldwin (2016) argues, despite there being no progress in the DOHA/Development Round.