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  1. Dr Sharon Loanesp.loane@ulster.ac.uk The Political Economy of International Trade

  2. The Political Economy of International Trade Global Business Environment Week 3

  3. Learning objectives: • 1. Understand key instruments of trade policy • 2. Grasp the essence of the debate for and against free trade • 3. Gain a basic understanding of the development of the world trading system • 4. Draw managerialand policy implications

  4. How important is Trade? • 1,666,753 pages containing the word trade in internet • compared with 973,007 pages containing the word God • Alan Rugman video clip – The importance of politics internationally

  5. Free Trade… • Almost universal support: • “do you believe that free trade ‘is on the whole economically more beneficial than protection.’ ?” • 95% of US economists and 88% of economists surveyed in the US/Austria/ France/Germany/Switzerland support or support with qualification • By economists, that is, what about governments?

  6. EU-US and Beef • 1989 - EU bans growth hormone treated beef. • US exports decline form $231mm in ‘88 to $98mm in ‘94. • With other countries, US files complaint to WTO. • US wins (1998) - WTO Panel declares ban to be illegal. • EU reluctant to comply and appeals, but loses the appeal. • 1999 - US threatens to raise tariffs on hundreds of EU products. 5-1

  7. Beef Pork Sausages Corned Beef Roquefort Cheese Chocolate Products Mustards Chewing Gum Soups and Broths Truffles Mineral Water Cut Flowers Yarn Electric Hair Clippers Motorcycles and Mopeds US Targets EU 5-2

  8. China ups stakes in textiles war The Bra wars…..2005 • Under the old Multi-Fibre Agreement, countries had annual limits on the amount of clothing and textiles they could sell abroad. • The origins of this trade dispute between China on the one hand and the US and EU on the other was the end of a 30-year global agreement on clothing and textile exports on 1 January. • Under World Trade Organization rules, the US and EU can limit annual imports of Chinese clothing and textiles to a maximum of 7.5% more than the levels seen between March 2004 and February 2005. • Both the US and EU can evoke this 7.5% "safeguard rule" until 2008. • The EU can now bring in the 7.5% level if no agreement can be reached with China within 90 days of the start of talks on Monday. If countries take action to limit textile product exports from China, we will exclude those products from the export tariffs Chinese commerce ministry spokesman

  9. Video Clip • http://news.bbc.co.uk/1/hi/4592671.stm# • http://news.bbc.co.uk/1/hi/4592671.stm#

  10. Trade Policy and Politics • Protecting jobs and industries: • emerging industries. • Increasing exports. • National security. • Retaliation. • International product domination: • New trade theory and subsidies. 5-3

  11. Instruments of Trade PolicyTariffs • Tariffs - oldest form of trade policy • Specific • ad valorem • Good for government • Good for producers • But reduces efficiency • Bad for consumers 5-4

  12. Instruments of Trade PolicySubsidies • A payment to a domestic producer. • Cash grants • low-interest loans • tax breaks • government equity participation in the company • Airbus • Subsidy revenues generated from taxes. 5-5

  13. Subsidies(Cash Value) 5-6

  14. Subsidies to EC Manufacturers(Percent of Value Added) % 5-7

  15. Instruments of TradePolicy Import Quotas and Voluntary Export Restraints • Import Quota: • Restriction on the quantity of some good imported into a country. • Voluntary Export Restraint (VER): • Quota on trade imposed by exporting country, typically at the request of the importing country. 5-8

  16. Results of Japanese VERs • Benefits producers by limiting import competition • Japan - limited to 1.85 mm vehicles/year • Cost to consumers - $1B/year between ‘81 - 85. • Money went to Japanese producers in the form of higher prices. 5-9

  17. Instruments of Trade PolicyLocal Content Requirements • Requires some specific fraction of a good to be produced domestically. • Percent of component parts. • Percent of the value of the good. • Initially used by developing countries to help shift from assembly to production of goods. • Developed countries (US) beginning to implement. • For component part manufacturer, LCR acts the same as an import quota. • Benefits producers, not consumers. 5-10

  18. Instruments of Trade Policy Antidumping Policies • Defined variously as: • Selling goods in a foreign market below production costs. • Selling goods in a foreign market below fair market value. • Result of: • Unloading excess production. • Predatory behavior. • Remedy: seek imposition of tariffs. 5-11

  19. Instruments of Trade PolicyAdministrative Policies • Bureaucratic rules designed to make it difficult for imports to enter a country. • Japanese ‘masters’ in imposing rules. • Tulip bulbs. • Federal Express. 5-12

  20. Political Arguments for Intervention • Protecting jobs and industries. • VERs. • National security. • Defense industries - semiconductors. • Retaliation. • Protecting consumers. • Furthering foreign policy objectives. • Protecting human rights. • MFN. 5-14

  21. EconomicArguments for Intervention • Infant industry. • Oldest argument - Alexander Hamilton, 1792. • Protected under the WTO. • Only good if it makes the industry efficient. • Brazil auto-makers - 10th largest - wilted when protection eliminated. • Requires government financial assistance. • If a good investment, global capital markets would invest. • Strategic trade policy. • Government helps raise national income if first-mover advantage successful. • Government intervention may help domestic firms overcome first-mover advantage of foreign firms. 5-18

  22. 5-19

  23. Development of the World Trading System • Intellectual arguments for free trade: • Adam Smith and David Ricardo. • Free trade as government policy: • Britain’s (1846) repeal of the Corn Laws. • Britain continued free trade policy. • Fear of trade war. 5-20

  24. World War I to World War II1918 - 1939 • Great Depression • US stock market collapse • Smoot-Hawley (1930) • US had positive trade balance with world • Foreign response was to impose own barriers • US exports tumbled 5-21

  25. General Agreement on Tariffs and Trade • WWII allies want international organization in trade arena similar 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 5-22

  26. GATT • Multilateral agreement: objective is to liberalize trade by eliminating tariffs, subsidies, import quotas, etc. • Used ‘rounds’ to gradually reduce trade barriers. • Generalized System of Preferences • MFN status • Products of LDCs are given duty free access to IDCs. 5-23

  27. GATT Negotiating Rounds Growth Under GATT 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 % • Geneva 947 23 • Annecy 1949 13 • Torquay 1950-51 38 • Geneva 1956 26 • Dillon 1960-62 45 • Kennedy 1964-6762 • Tokyo 1973-79 99 • Uruguay 1986-94 117 1953-63 1963-73 World Trade World Income 5-24

  28. Average Reduction in US Tariff Rates 1947 - 85 Index Pre-Geneva Tariff = 100 Figure 5.1 GATT Negotiating Rounds 5-25

  29. GATT- Disturbing Trends 1980 - 1990s • Increase power of Japan’s economic machine. • US trade deficit. • GATT circumvented by many countries. • VERs 5-26

  30. Uruguay Round • Most comprehensive trade agreement in history. • Created the World Trade Organization. • Impacted: • Agriculture subsidies (stumbling block: US/EU). • Applied GATT rules to services and intellectual property. • Strengthened GATT monitoring and enforcement. 5-27

  31. Leading Exporters of Services $Billions 5-28

  32. Impact of GATT • Currently, >120 members. • Represents 90% of world trade. • 9 of 10 disputes satisfactorily settled. • Tariff reduction from 40% to 5%. • Trade volume of manufactured goods has increased 20 times. 5-30

  33. World Trade Organization • Umbrella organization for: • GATT • Services • Intellectual property • Responsibility for trade arbitration: • Reports adopted unless specifically rejected. • After appeal, fail to comply can result in compensation to injured country or trade sanctions. 154 Rue de Lausanne, Geneva 5-31

  34. WTO -World Policeman? • 104 disputes brought to WTO in first three years. • 196 handled by GATT during its 50 year history. • US is biggest WTO user - 34 disputes. • Big wins - beef - bananas • Big loss - Kodak 5-32

  35. WTO - Leading Victories • Telecommunications • 68 countries (90%) of world telecommunications revenues • Pledged to open their markets to fair competition • Financial Services • 95% of financial services market • 102 countries will open, to varying degrees, their markets. 5-33

  36. The Internet & international trade? • Who polices internet enabled international trade? • Which national legal system? • Do we need a new global Internet system • Haven for dubious activities, gambling, porn, terrorism • related • Is this the next big challenge?

  37. Firms… • www.kompass.ie • www.sbpost.ie • www.enterprise-ireland.com • www.investni.com • www.software.ie • http://newsweaver.ie/ernst/e_article000181970.cfm • www.dhl.ie/servlet/Links?cat=5

  38. Other sources • www.google.com • Belfast telegraph archives • www.bizplus.ie High growth, SMEs, search etc • http://www.biotechnologyireland.com/ • Press, PaddyPower.com etc • www.bordbia.ie • www.irishexporters.ie (Top 250) • Deloitte ratings Ireland • www.iia.ie