Y376 International Political Economy

1. Y376 International Political Economy January 25, 2012

2. Pioneers of Trade Theory • Adam Smith, The Wealth of Nations (1776) – first defense of free market policies • David Ricardo, Principals of Political Economy and Taxation (1817) - introduced theory of comparative advantage

3. Graphical Version of Ricardian Theory

4. Heckscher-Ohlin Model • Basic model: two countries, two goods, two factors of production (Ricardo only had one) • Differences in factor endowments lead to “gains from trade” • Both countries will be better off if they specialize in producing goods which require a relatively abundant factor and then trade with another country • For maximum benefit, the other country should have a very different factor endowment

5. Let’s Play the Trade Ruler Game! • http://nobelprize.org/educational_games/economics/trade/game/ruler.html

6. History of U.S. Trade Policy • Smoot-Hawley Tariff of 1930 • Depression High Tariffs • FDR (espec. Cordell Hull) favors free trade for post WW2 period • 1947 -- Congress rejects International Trade Organization treaty proposed initially at Bretton Woods • The GATT becomes the main trade regime

7. Figure 3-1. Average U.S. Tariff Rates on Dutiable Imports, 1821-2000, in Percentages Source: U.S. International Trade Commission; U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States; and Statistical Abstract of the United States, various years.

8. Overall Tariff Levels and Trade/GNP, 1850-1990

9. Figure 3-2. Growth in World Exports, 1958-2006, in Billions of Current Dollars Source: International Monetary Fund, Direction of Trade Statistics Yearbook (various years).

10. Figure 3-3. Trade/GDP in the US, Britain, Germany, France, and Japan, 1960-2006, in Percentages Sources: World Bank, World Development Indicators 2001 CD-ROM (Washington, D.C.: World Bank, 2001): OECD.Stat, http://stats.oecd.org/.

11. Interregional Trade Flows, 1990

12. Main Rules of the GATT • Nondiscrimination among members of the GATT • most favored nation (MFN) principle • tariffs must be adjusted to reflect MFN levels • Participation in multilateral trade negotiations to lower tariffs and nontariff barriers A tariff is a tax that is charged on the value of imported goods.

13. 1947 Geneva 1949 Annecy 1950 Torquay 1956 Geneva 1960-61 Dillon 1962-67 Kennedy 1973-79 Tokyo 1986-93 Uruguay 2000- Doha Multilateral Trade Negotiations Biggest tariff reductions occurred in the Kennedy Round. Tokyo Round began discussions of non-tariff barriers. Uruguay Round established the basis for the World Trade Organization.

14. Main Issues in the Tokyo Round • Tariffs • Conflict resolution; dispute settlement • Nontariff barriers: • subsidies • government procurement • standards • custom valuation • licensing

15. Example of a Subsidies Dispute: Airbus vs. Boeing This is a Boeing 777 This is an Airbus 300 Latest WTO ruling (video)

16. Main Issues in the Uruguay Round • Agriculture (mainly subsidies) • Trade in Services • Trade-related Intellectual Property (TRIPs) • Trade-related Investment Measures (TRIMs) French farmers protesting the Maastricht Treaty inEurope.

17. Multilateral Trade Negotiations: The Doha Round • Begun in early 2000 • Major conferences so far: • 2001 Doha (Qatar) • 2003 Cancun • 2004 Geneva • 2005 Hong Kong • 2006 Geneva • 2007 Potsdam • 2008 Geneva Pascal Lamy calls time out on Doha Round in 2006

18. Main Issues in the Doha Round • Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs • Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries

19. Main Issues in the Doha Round • Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs • Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries