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The Political Economy of International Trade Chapter 6

The Political Economy of International Trade Chapter 6

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The Political Economy of International Trade Chapter 6

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  1. The Political Economy of International TradeChapter 6

  2. Why Do Governments Intervene in International Trade? To some extent, every country intervenes in the flow of goods and services across its borders • Enhancing Employment: • Imports compete with local firms • Retaliation: • Comparable or fair access to other country’s market • Price Control Objectives: • Dumping restrictions

  3. Reasons for Intervention in International Trade • Industrialization argument: • Agrarian economies need protection to industrialize (faster growth, more value-added) • Essential Industry argument: • Protecting important national industries • Infant-industry argument: • Need to protect industry for a period of time until it becomes more competitive over time • Political objectives: • Economic relationships with other countries (friendly or unfriendly)

  4. Reasons for Intervention in International Trade • Promoting Investment Inflows • If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area • Balance-of-Payments related objectives: • Import Substitution: policies emphasizing products to sell domestically • Export Promotion: policies emphasizing products to export

  5. Forms of Trade Control • Different instruments to control trade • Quantity of goods (non-tariff barriers) • Price of goods (tariffs) • Tariffs (duties) may be levied • On goods entering, leaving, or passing through a country • For protection or revenue • On a per unit or a value basis (ad valorem) • Many more types of non-tariff barriers than types of tariffs

  6. Forms of Trade Control • Non-tariff barriers • import quotas to limit amount, VERs • embargo: to eliminate export of item • subsidies or assistance to local firms • customs delays • paperwork or red tape • Imposition of “higher” standards • “Buy Local” laws in favor of domestically produced goods, local content laws • Reciprocal requirements for trade

  7. The World Trading System • GATT was the world’s major trade-liberalization organization after WWII • Multilateral negotiations with 120 countries • Eight rounds of negotiations • Monitored enforcement • Most-Favored-Nation Clause (MFN): if a tariff reduction granted to one MFN country, must be granted to all other MFN countries • Most countries still made exceptions to MFN, due to trade alliances or other reasons

  8. From GATT to WTO WTO created by the Uruguay Round 1986-1993, taking effect in 1995 • Trade in services, not just goods • Telecommunications and financial services • Intellectual property rights • Better settlement of disputes • Reduced agricultural subsidies, textiles protection • Criticisms: Labor, the environment, national sovereignty