Case for free trade
- Efficiency gain: Distortion of
production and consumption, esp. small country
-
Additional gains: scale economies, learning and innovation
- Don’t
trust the gvmt to maximize GDP: influenced by special interest groups. Olson’s asymmetry of political action.
Hidden tax through price
Tax on consumption (diminishes consumption) + subsidy on production (production distortion) = tariff
1st best
solution: correct market failure. 2nd best solution: subsidy. 3rd best solution:
tariff
Case against free trade
- TOT gain: Large country that can influence foreign export prices, TOT gain
can be bigger than distortion losses (optimal tariff). Thus: small import tariff, export tax.
Critique: Could result in trade war. Small countries marginally affect prices.
- Market failure argument. Distortions
don’t account for additional social
benefits, such as technology, etc. That is the case if the capital or labor market (e.g. inflexible wages) fail. A small country, with a small
tariff, can upset the a+b losses by c. 1st best policy: subsidize those
responsible for c. 2nd best: intervention. Problems: 1) domestic failures should be
corrected by domestic measures (tax or subsidy), but political problems (more
visible costs). 2) Hard to identify MF.
Politics
of Political Economy
- Olson: Theoretically, parties should
seek a median tariff to satisfy the
most voters. In trade policy, however, the logic of collective action comes into effect. An individual will not
organize (cost of information & of voting) when his benefit is small. A
group of individuals will organize if its benefits are big. Those are small groups, special interest groups.
They influence (money and otherwise) politicians more than big unorganized
groups.
- Political
model: auction: reducing social welfare vs. increasing campaign budget.
- Reality: Consumer goods highest
protection (clothing, food), intermediate goods lower, raw material lowest.
- International negotiations help to
create political support through the principle of reciprocity (implicit in GATT): linking
import-competing industries of several countries. Like this, export
industries within individual countries become anti-protectionists.
Liberalization occurs. As their sector grows in the phase-in period, the
pro-liberalization special interest groups gain more weight. Next round: Different political outset, easier to
liberalize, and so on. MTN is also better because it helps to avoid a trade war.
- Success: From around 40% trade-weighted
average tariff to less than 4% in OECD countries / trade grew faster than
income since 1947
- Secretariat: 1) Organizing MTN; 2)
Dispute settlement (weak)
- Principles:
Art. 1:
Non-discrimination. MFN: lowest tariff/quota given to any
country --> all countries
Art. 3: Non-discrimination national - foreign goods (taxes,
regulations)
Art. 6: Anti-dumping (not interdiction) and Countervailing Duties (tariffs)
Art 12: Restrictions to safeguard Balance of Payments: suspend GATT when
balance of payment crisis
Art. 16: Production subsidies: no export subsidies except
for agricultural products / countervailing duty. Long transition periods for
poor countries.
Art. 20: Exceptions (i.e. environment, prison labor)
Art. 24: (Territorial Application - Frontier Traffic) - Customs Unions and
Free-trade Areas: Exceptions from MFN
- Unwritten
principles:
- Reciprocity.
Justification for retaliation: „punishment of deviation“
- Predictability:
Tariff bindings: ceiling the tariff
Rounds:
- 1-5:
Parallel bilateral negotiations, focused on reducing tariffs between rich
countries
- 6: Kennedy round 67: TWA -35% tariffs down. Some industries exempted.
- 7: Tokyo Round 79: Attempted to attack non-tariff barriers (technicalities,
red tape, etc.; only some members), improve system.
- 8 Uruguay Round 94: Trade liberalization: goods, services,
intellectual property / Creation of WTO as
an Organization / Administrative
Reform: Accelerated Dispute Settlement
Mechanism
with Dispute Settlement Body (DSB)
Trade liberalization: advanced
countries -40% / Agriculture: sub -
36%, Textiles exp. sub -21%, replace quotas with
tariffs, phasing out of
MFA/ government procurement
Administrative reform: DSB. If non-compliance: retaliation allowed.
GATS established but not yet rules to liberalize services (has since changed)
TRIPS
established
Results: around 1% real income rise worldwide.
Developed countries: agr & textiles (comp. & workers) losers, pop
winners. Developing countries: textiles winners
Why Uruguay
succeeded despite enormous problems: 1) Internal political fights turned out in
favor of free trade (see above); 2) Fears of protectionism that may undo
previous progress
Art. 24:
Preferential Trading Agreement: allowed if it leads to free trade between
agreeing countries (0%). Free Trade Area:
each country sets tariffs against outside world independently. Administratively
difficult (rules of origin). Customs
Union: same tariff to outside world. Politically difficult. A member country
may win or loose from a customs union.
WTO propaganda document (1995 and afterwards)
|
Goods: GATT 47 & UR =
|
Services
|
Trade-Related Intellectual Property Rights TRIPS |
Dispute Settlem.
|
Trade Policy Review Mech. |
|
Tariff
reduction (& binding) of other
trade barriers Extension
of goods to agriculture (beginning
to liberalize, bound) and textiles/clothing
(all non-tariff barriers should be gone by 2004, but some important tariffs
remain) |
MFN, NT:
only if a specific NT commitment has been made Access
Commitments in specified sectors Transparency:
Publish regulations Recognition:
if 2 countries agree, must negotiate with others Intl
payments and transfers: if agreement gvmt must not prevent money leaving the
country Commitments
bound |
MFN, NT
technology transfer Copyrights Trademarks Geographical
indications Industrial
designs Patents Layout-Designs Undisclosed
information, including trade secrets |
Effective
and fast (unlike prev.): Has been occupied with more than 150 cases since
1995 Mediation,
etc. à panel à DSB à appeals |
Transparency Improve
quality of debates Notifications
of WTO of gvmt measures WTO Trade
Policy Reviews |
|
i.e. zero
tariff on information technology products (1997) |
i.e.
branches of banks, telecommunications, tourism, individuals who travel to
provide services |
i.e.
computer programs as literary works, new medicines |
i.e.
fishing tuna, kills dolphins |
|
|
Phasing
out of MFA |
Negotiations
must go on (subs., gvmt procurement, etc.) Many
annexes Rounds completed
after 1995: Basic telecommunications, financial services, movement of natural
persons |
Developed
countries: within a y. LDC’s: 5
y. 4th
world: 11 y. |
|
Agreement
on Trade Related Investment Mechanisms |
Not
mentioned, but also after 95: Anti-Dumping Agreement;
N7on-tariff
barriers: Technical regularities and standards à not create unnecessary obstacles;
Import-licensing à procedures simple, rapid,
transparent and predictable; some licenses issued automatically;
Rules for the valuation of goods at customs;
Pre-shipment inspection;
Rules of origin: transparent, no
distortive or disrupting effect on trade, administered in a consistent,
uniform, impartial and reasonable manner;
Investment
measures: Country reports provide for transparency; NT IM leading to
restrictions in quantities prohibited; inform WTO on measures not compatible
with GATT 94
WTO: Developing countries
Ca. 100 of
135 members
Special provisions: GATT non-reciprocity (Part 4), “special and differential treatment”
(even more than MFN; also in GATS); extra time for implementing, greater market
access; legal assistance
Technical
assistance; Trade and Development committee; Subcommittee on Least developed
countries
Tariff
peaks = most tariffs quite low, but some products have high tariffs
Tariff
escalation = less tariffs for intermediate goods used to produce our final
goods; more tariffs on the final good itself. Headache for raw material
producer country to become industrial country. Exists in developing and
developed countries. Slowly being reduced
Consensus
Ministerial
Conference every two years
All WTO
members in: General Council / DSB / Trade Policy Review Body
More committees on lower levels…. on GATT, GATS and TRIPS
To become a member:
1)
Presentation of the country
2) What does it have to offer?
3) Draft membership terms
4) Decision
1945 – 1975: Import-substituting
industrialization (ISI) = watch word; late 80’s Free Trade
In order to
grow up an industry, it needs to be temporarily
protected from industrialized grown up industries: infant industry argument.
LDC’s supposed to have a potential
CA in future.
Why not
private market, why gvmt protection?
-
Market failure: capital, labor, etc. markets don’t work properly or don’t exist.
1st best solution: correct market failure; 2nd best
solution: trade policy
-
Appropriability: Create social
benefits like knowledge, technology
1st best: compensate those who make intangible contribution; 2nd
best: trade policy
-
Both
special cases of market failure argument
(Ch. 9), just that it’s a new industry
-
Who
warrants special treatment? Those who get it become special interest
anti-liberals.
ISI hurts necessarily export sector because it moves resources
away from there.
Results:
-
Encourage
manufactures: yes; promoting overall growth: no
-
If
there is no potential CA, ISI will not create one
-
Domestic
market very often too small scale
-
More inefficient, more state-owned companies (pol. force against liberalization)
-
Some
argue: ISI creates more unemployment, more inequality
Better solutions:
-
Adopt
1st best solutions above
- For small countries, ES with FT
(For some
big countries it has worked in the past (Germany, USA), where internal market
was large enough)
Coexistance of a relatively modern, capital-intensive, high wage
industrial sector with a very poor traditional
agriculture sector.
Symptoms:
-
MPLm
>> MPLf
-
Wm
> Wf
-
Returns
capital often smaller in industrial sector (capital becomes cheaper than labor)
-
m
often more c-intensive than f
-
Persistant
(especially rural) unemployment
Wage differential argument for ISI: if – for some reason – the w in m
is higher than in f, moving labor from f to m can increase total output. 1st best: target problem
domestically. 2nd best: trade policy. BIG PROBLEM: Landflucht, rise in urban unemployment.
ISI may also
re-enforce dualism: With FT, there would be complete factor-price-equalization
(also wages).
Export-Oriented Industrialization (EOI)
1960 –
2000: high performance Asian economies (HPAEs): spectacular growth, high
trade-ratios and relatively open
trade. Help from gvmt to create firms who can export. Correlation between exports and growth, but not clearly established
which is cause and which consequence.
Chronology of 1st wave of globalization
(1820 – 1914)
|
1500 –
1776 |
Mercantilism,
ancient protectionism. Strictly pro-export philosophy |
|
1776 |
Smith, The Wealth of Nations. Ideas change: trade not only for export. |
|
1846 |
Repeal of UK corn
laws: complete liberalization (removal of all tariffs) |
|
1848 |
Mill, Principles of Political economy:
Infant-industry argument |
|
1860 –
1880 |
Europe,
envious of UK's success, adopts free trade: radical liberalization |
|
1880 –
1914 |
Recession
in 90's.
Europe restores protectionism (but liberalized
internal markets and still trades with colonies). Philosophy of infant industry born (Hamilton, List). UK:
remains open. US: very protected until post-1945. Political nationalism. Trade
pattern: UK imports raw materials & manufactures, exports manufactures Massive migration: 10% of UK population left in 30 years Deindustrializing
the South |
|
1820 –
1914 |
Trade, investment
& migration rise rapidly due to
the same factors like during the second
wave: -
Transport
costs -
Communication
costs -
Liberalization
(UK) |
|
1870 /
1989 |
1870: UK, 4.6% GDP lending to others,
especially colonies |
Chronology of 2nd wave of globalization
(1950 – to date)
|
1947 |
GATT
signed |
|
1947 –
1979 |
Industrialized
countries progressively liberalize trade on industrial goods, except textiles & agriculture. LDC’s play minor role, keep high barriers on industrial products and export agriculture products. |
|
1979 – to
date |
S exports
to N: LDC’s become exporters of manufacturers. |
|
1950 – 75 |
Unemployment
increase for unskilled workers |
|
1975 – 80 |
Narrowing
of gap within industrialized countries due to rapid integration within the
group of industrialized nations |
|
1980 – to
date |
Income
distribution more widely spread; trade accounts only for about 10-20% of the
change |
|
1985 – to
date |
FDI
skyrockets |
|
1997/98 |
Asian
financial crisis |
Comparison 1st - 2nd wave of
globalization
|
|
1st wave (1820 – 1914) |
2nd wave (1950 – to date) |
|
Starting point |
World = poor & agrarian. |
Sharp rich – poor divide. |
|
Trade in % of GDP |
Explosion. Cost of trade falls. |
Increase. Cost of trade falls (not as much). |
|
Nature of trade (changes) |
Trade rich – poor. UK: export manufactures and
services to periphery, import raw
material[1].
Eu: Export manufactures, import raw materials & fruits. |
Trade rich – rich. N – N in manufactures (intra-industry trade; imports and exports) and
services. LDC’s vastly less important. |
|
Transp. costs |
Falls
sharply. |
Falls
(not as much) |
|
Communication costs |
Falls. Cost of trading ideas drops not as much
like in 2nd wave, so more long-term
investment |
Falls sharply, more than transp. Cost of trading ideas
decline brings more short-term investment. |
|
Capital flows in % of GDP |
Sharp
rise.
Capital market integration: gold
standard & City |
Rise
(not
as much). FDI rises from mid-80’s CM integration not more than 1900.
Probably less than 1914. |
|
Nature of capital flows |
FDI/MNC:
From developed to colonies’ primary
sector. Long-term. |
FDI/MNC:
From developed to developed countries for 3rd sector (and 2nd). MNC spread; MNC >
trade (value of products). FDI sharp rise mid-80’s Short-term. |
|
Income (changes) |
Produces
large income differences (landowners – workers). Change in land-labor ratio in favor of labor. |
Narrows
the gap between certain countries (N-N, N-NICs). Trade only responsible for
10-20% of N-S gap. |
|
Migration |
Massive
Europe to colonies labor migration |
Only US
high immigration rates. |
|
Industrializing / De-industrializing |
De-industrializing
the South |
De-industrializing
the North (NICs apart) |
Liberalization |
Radical
liberalization, followed by protectionism |
Gradual
liberalization through GATT and regional FTA / CU |
|
Economic Beliefs and Institutions |
Gold standard = fixed exchange rate Perfect capital mobilityIndependent monetary policy by Britain’s
central bank;
until 1914 stability |
Wanted:
1) Fixed exchange rates; 2) perfect capital mobility (not the case); 3) independent monetary policy Self-fulfilling
speculative attacks Choice:
Managed floats or membership in monetary union Nowadays
independent central banks a must |
|
Policy-Making environment |
17th/18th:
Mercantilism Smith,
Ricardo: Free trade, CA. UK becomes leader in promoting FT. Modern protectionism, also IIA (Bismarck) |
Economic
nationalism Free
Trade (IMF, WB, GATT). US becomes leader in promoting FT. Within EU
complete FT Institutionalization
& powerful pro-trade lobby make collapse unlikely today |
© 2000 Marcel Stoessel
(comments
(at) stoessel (dot) ch). All Rights Reserved.
Reproduction of this
document or parts of it may be done only after a long evening full of beers
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[1] Import manufactures little importance