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Governments and

Trade

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5-2

Session FocusThe political reality offree tradeis that while nationsare nominally committed to it, they intervene and takeactions to protect the interests of politically important

groups.This session explores the political and economicreasons for intervention; to restrict imports andexpand exports, but, more recently, for socialreasons.

The session describes the range of interventioninstruments used by governments and considers thecase for free trade in light of government actions.

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5-3

The 7 Instruments of Trade Policy

AntidumpingDuties

Local

ContentRequirements

Tariffs

VoluntaryExports

Restraints

Subsidies

AdministrativePolicies

ImportQuotas

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5-5

Subsidies

Governmentpayment to a

domestic producerCash Grants

Tax Breaks

Low InterestLoans

GovernmentEquity

Participation

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5-6

Subsidies

Agriculture

1.Keeps inefficientfarmers in business.

2.Encourages productionof subsidized products.

3.Produce products grownmore cheaply elsewhere.

4.Reduces agriculturetrade.

Helps domestic

producers tocompete internationally.

Paid by taxingindividuals

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Import Quotas and Voluntary ExportRestraints

Direct restrictionon the quantity of a

good that canbe imported intoa country.

Import Quotas

Quota on trade imposed

by the exportingcountry at the request

of the importingcountrys government.

VERs

Helps

producers

Quotarent

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5-8

Local Content Requirements

A specificfraction of a

good must bedomestically

produced.

A specific

fraction of agood must bedomestically

produced.

Physicalamount

Value

Widely usedby developingcountries to

develop theirmanufacturing

base.

Used by developedcountries to

protect local jobsand industry from

foreign competition.

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5-9

Administrative PoliciesBureaucratic rules designed to make it difficult for importsto enter a country.

Japanese masters in imposing rules.

Tulip bulbs.

Federal Express.

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Antidumping Policies

Selling goods into a foreign market below productioncosts, or

Selling below fair market value.

Used to unload excess production.Or, predatory pricing.

Antidumping policies are used to punish foreign firms.Protect local industry from unfair practices.

Impose countervailing duties.

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5-11

Political Arguments for Intervention

FurtherForeign Policy

Objectives

ProtectIndustryand Jobs.

NationalSecurity

Retaliation

ProtectConsumers

ProtectHumanRights

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ProtectIndustryand Jobs.

Most common political argument.

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Retaliation

Risky strategy. If governmentfails to heed warnings and

imposes its own higher tariffs,the result is higher tariffs allaround and a correspondingeconomic loss.

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RetaliationUS Trade Sanctions

0

5

10

15

20

25

1993 95 97 99

New

Sanctions

Afghanistan Italy

Burma Libya

Canada Nigeria

China N. Korea

Cuba Pakistan

India Saudi Arabia

Iran SudanIraq Syria

Yugoslavia

Partial List

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ProtectConsumers

Battleground for biotechnologysuch as hormone-treatedbeef and genetically altered crops.

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FurtherForeign PolicyObjectives

Used to build relations with

another country or punish it(so-called rogue states). Policyis unilateral and easily defeatedby other countries ignoring it.

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ProtectHumanRights

Basis for the use of MostFavored Nation status topersuade China to change itspositions on human rights.

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Economic Arguments for Intervention

InfantIndustry

StrategicTradePolicy

Infant industry is the oldest economicargument for government intervention,dating to 1792 and Alexander Hamilton.

Protect developing countrys new industryfrom developed countries betterestablished industries. Recognized byGATT.

Strategic trade policy can help a

firm gain first mover advantagesor overcome barriers created by adifferent (foreign) first mover.

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Revised Case for Free Trade

Paul Krugman, MIT economist, argues that strategictrade policies can lead to trade wars. The best way tohandle disputes is to work to establish rules that minimizetrade-distorting subsidies - a function of the World

Trade Organization.

He also argues that government intervention usually favorsspecial interest groups that distort the subsidy to theirown ends.

Therefore, a blanket policy of free trade, with exceptionsgranted only under extreme pressure may be the bestpolicy that the country is likely to get.

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Development of the World Trading

System

Intellectual arguments for free trade:

Adam Smithand David Ricardo.Free trade as government policy:

Britains (1846) repeal of the Corn Laws.

Britain continued free trade policy.Fear of trade war.

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World War I to World War II

1918 - 1939

Great Depression

US stock market collapseSmoot-Hawley Act (1930)

US had positive trade balance with world

Act imposes tariffs to protect U.S. firms.

Foreign response was to impose own barriersUS exports tumbled

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General Agreement on Tariffs and

Trade

WWII allies wanted international organization in trade arenasimilar to UN in political arena.

GATT proposed by US in 1947 as step toward ITO.1948: Havana Conference.

Failed charter for the International Trade Organization.

GATT

19 original members grew to 120 nations by the time it wassuperceded by the WTO.

GATT members agreed not to raise tariffs above negotiatedrates.

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GATT Negotiating Rounds

Geneva 1947 23

Annecy 1949 13

Torquay 1950-51 38

Geneva 1956 26Dillon 1960-62 45

Kennedy 1964-67 62

Tokyo 1973-79 99

Uruguay 1986-94 117

9.08.58.07.5

7.06.56.05.55.0

4.54.0

World Trade

World Income

1953-63 1963-73

Annual Growth UnderGATT

%

5-24

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Average Reduction in US Tariff Rates1947 - 85

0

20

40

60

80

100

120

Pre-G

eneva

Geneva

Anne

cy

Torquay

Geneva

Dillo

n

Kennedy

Toky

o

IndexPre-GenevaTariff = 100

GATT Negotiating Rounds

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1980-1993: Disturbing Trends

Pressures for greater protectionism:

Japans economic success.Worlds second largest economy.

Worlds largest exporter.

The U.S.s persistent trade deficit.

Many countries had found ways to avoid GATTrestrictions.

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Most comprehensive trade agreement in history.Created the World Trade Organization.

Impacted:

Agriculture subsidies (stumbling block:US/EU).

Applied GATT rules to services andintellectual property.

Strengthened GATT monitoring andenforcement.

Uruguay Round

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Umbrella organization for:

GATT

ServicesIntellectual property

Responsibility for trade arbitration:

Reports adopted unless specifically rejected.

After appeal, fail to comply can result in compensation toinjured country or trade sanctions.

World Trade Organization

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WTO

145 members.Between 1995 and 2000, 213 disputes brought beforethe WTO.Significant victories:

Telecommunications

68 countries (90%) of worldtelecommunications revenuesPledged to open their marketsto fair competition

Financial Services

95% of financial services market102 countries will open, to varyingdegrees, their markets.

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WTO Cancun

Failure of Countries to Agree on Goals

Private Groups & Unions Oppose faceless Organization

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STRUCTURE OF WTOThe MinisterialConference

The General CouncilThe DisputeSettlement BodyThe Trade Policy

Review BodyCouncils for Trade inGoods,Services &TRIPS

Subsidiary Bodies

Committees on

Trade andDevelopment, BOPrestrictions,Budge

t, Finance &Administration

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THE SECRETARIATHeaded by Director General

D-G to be appointed by Ministerial Conference

Other appointments by D-G in accordance withrules framed by Ministerial Conference

Responsibility of the Secretariat to beInternational in character.No authority external

to WTO to direct the activities of the staffincluding Governments of the nations they arecitizens of.

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Salient Features of Uruguay RoundFormation of WTO

IndustrialProducts(Market access)

Agricultural ProductsServices

Textiles & Clothing

Intellectual Property

SubsidiesTechnical Barriers

Anti-Dumping rules

Trade Related InvestmentMeasures

Government Procurement

Safeguard ActionsBalance of PaymentsProvisions

Dispute Settlement

Coherence in Global PolicyMaking

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SubsidiesProhibited-Contingent upon export performance

Actionable-Adverse effect on other countries

Non actionable-Industrial research, Pre-competitive development

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Intellectual PropertyTo grant national treatment

To provide certain minimum standards of

protectionInstitute procedures and remedies under nationallaws