Trade Treaties: Theories, Types, and Impacts

1. POL 4410: Week Five • Trade Treaties

2. Structure • What is Trade Anyways? • Theories and Types of Trade Treaties • International Trade Treaties • Regional Trade Treaties

3. Trade: Definitions • Trade: The exchange of goods between two nations, using some currency. • Free Trade: unrestricted trade - no distortions on prices or quantities. • Terms of Trade: given relative prices, how much of a one state’s exports can be purchased with another state’s exports.

4. Trade Treaties • Legal agreements signed between states to alter restrictions on trade or to guarantee rights to trade. • Must be signed, ratified, and brought into force. • Enforced by who?

5. Ways to impede trade • Tariffs • Quotas • Subsidies • Non Tariff Barriers (NTBs)

6. Tariffs • A tax on imports. • A tariff of 20% on sugar increases the price of sugar to domestic consumers by 20%. • Who wins? Domestic sugar producers • Who loses? Foreign sugar producers and domestic consumers • Concept of optimal tariff

7. Optimal Tariffs • Only exist in large country that can alter terms of trade. • Offset gain from terms of trade against loss of volume of trade.

8. Quotas • Restrictions on the quantity of goods that can be imported. • Since this reduces quantity of the good sold in the market, it keeps prices high like a tariff. • Unlike a tariff the quota is less flexible - that is, if people’s demand for a good changes that cannot just suck up the tax.

9. Subsidies • A subsidy is essentially an ‘inverse tariff’. • You reduce taxes on domestic firms which means they can price their goods cheaper than foreign firms. • Winners: domestic firms, domestic consumers. • Losers: foreign firms, domestic taxpayers

10. NTBs • Regulations: environmental, labor, safety • Anti-dumping measures • Voluntary Export Restraints (VERs) • Section 301 Trade Sanctions

11. Why do States Sign Trade Treaties? • Neoclassical Economic Theory • Interest Group Theory • Hegemonic Stability Theory

12. PRODUCTIVITY FREE TRADE PROD FREE TRADE CONS AUTARKY Cloth Cloth Cloth Cloth Soap Soap Soap Soap Britain Britain Britain Britain 6 18 20 24 3 3 3 0 Italy Italy Italy Italy 0 1 1 4 9 3 12 9 TOTAL TOTAL TOTAL 24 24 19 12 12 12 Neoclassical Theory • Comparative Advantage vs. Absolute Advantage

13. Interest Groups • Losers from trade may try to block free trade and to impose tariffs. • ‘Protection for sale’ • Lobby groups both favor and disfavor trade

14. Institutional Theories • President has general interest versus congressmen having ‘special interests’ • Agency slack and ability to negotiate internationally • Treaties as commitment devices

15. Realism / Mercantilism • States sign treaties for two reasons:(1) To bully other weaker states(2) Because treaties don’t matter

16. Hegemonic Stability Theory • Soft realist idea that powerful states find it in their interest to support free trading order. Provides large market for their exports. • UK in 19C. US in post WWII. • In multipolar times, free trade is weakened

17. Krasner • Emphasizes four goals for states: national income, social stability, political power, economic growth. • World of small states or one hegemonic state leads to free trade • World of moderately sized states leads to protection • Tests on six historical periods.

18. Types of Trade Policy • Unilateral Policy • Bilateral Deals • Multilateral Treaties

19. Unilateral Policy • Countries decide unilaterally to reduce tariffs to goods on all (or most) imports. • Classic example is Britain in 19th century. • Most countries that globalize decide to do this to some extent: Chile, Singapore through to India and China.

20. Bilateral Deals • Signing a Trade Treaty between two states. • Typically (but not always) this is reciprocal. • Cobden-Chevalier Treaty 1860. • US / Canada Free Trade 1988. • Can also be used as tool of statecraft, especially when non-reciprocal. US and Philippines - Tydings Restoration Act. Nazi Germany and Eastern European states.

21. Multilateralism and MFN • MFN = Most Favored Nation • Preferentialism vs. MFN • Reciprocal vs. nonreciprocal • Binding vs. non-binding: need for international institutions?

22. Types of Multilateralism • Non-preferential, non-binding (GATT, APEC) • Non-preferential, binding (WTO) • Preferential, binding, reciprocal (EU, NAFTA) • Preferential, non-reciprocal (OECD and LDCs)

23. Preferential Trade • Distinction between • (a) TRADE CREATING • (b) TRADE DIVERTING • Building blocs or stumbling blocs?

24. Quick History of Trade Treaties • Pre WWII • From the GATT to the WTO • Regional Trade Agreements: from the EU to CAFTA

25. Trade Treaties pre-WWII • Cobden Chevalier in 1860 • MFN • Reciprocal Trade Agreements Act in 1934

26. GATT • Founded in 1948 with 23 members • Based on reciprocity and MFN - many exceptions made • Series of rounds: 1947 (Havana), 1949 (Annecy), 1951 (Torquay), 1955-6 (Geneva), 1960-62 (Dillon), 1964-7 (Kennedy), 1973-9 (Tokyo), 1986-93 (Uruguay)

27. GATT Progress • From 23 to 125 countries • From product-by-product cuts to ‘across the board’ • From tariffs to NTBs • From goods to services and agriculture • TRIPS and GATS

28. WTO • Founded in 1995 with 76 members, now 149. • Has Dispute Settlement Body • Consensus and negotiations ‘Green Room’ • EU / US trade disputes (steel 2003, bananas 1999, GM foods) • Seattle 1999 Doha round from 2001

29. Eichengreen and Odell • Why did US join WTO not ITO • INSTITUTIONAL THEORY • Exit Options • Agency Slack • Presidential Leadership

30. European Union • European Coal and Steel Community in 1951 • European Economic Community in 1957 • European Union in 1992 • Tripartite structure: Commission, Council of Ministers, European Parliament

31. European Council • Formed by heads of state of each member plus the President of the Commission • No formal powers yet is the key player • Sets all major policy guidelines • Rotates every six months

32. Council of Ministers • One representative per country • Changes depending on which ministry • Has veto over all regulations and directives • Voting either by unanimity or QMV. • Qualified Majority Voting

33. European Commission • The executive body of the EU • Also has sole right to initiate legislation • Has regulatory power • Role of surveillance of EU law • Collectively accountable to European Parliament • Originally the ‘think tank’ for Europe

34. European Parliament • Directly elected by proportional representation in all EU countries • Shares legislative authority with Council of Ministers • Regarded as unimportant

35. European Court of Justice • Interprets EU laws • Court cases can be initiated by either governments or citizens • Major role in competition policy - e.g. Microsoft

36. Theories of EU • Intergovernmentalism • Supernationalism • Who calls the shots?

37. Alesina and Perotti • Weaknesses • 1a) Lack of clarity between EU institutions • 1b) Lack of clarity between EU and members • 1c) Lack of transparency • 2) Tendency to ‘dirigiste’ rhetoric

38. Stability and Growth Pact • Currency Union in 1999-2001 formed Euro • Beforehand and during, states had to agree to limit budget deficits to less than 3% of GDP • But no credibility in ensuring compliance. France and Germany both break rules.

39. NAFTA and CAFTA • 1994 NAFTA founded • Chapter 11 (investments, Metalclad) and Chapter 19 (binational panels) • DR-CAFTA signed 2005. Not a treaty - a ‘congressional-executive’ agreement. Followed Caribbean Basin Initiative. • Controversies: ‘test data exclusivity’ and US ag subsidies

40. Other regional treaties • Asia Pacific economic Cooperation group • Mercosur • Andean Pact • Australia-New Zealand

41. Bergstein • Bicycle must keep moving • Big is beautiful • Building blocks, not stumbling blocs • Money is central • Leadership is essential