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by: Oleta Friesen

IntlTrade&CommercialPolicy ECO441

Marketplace > Miami University > Economcs > ECO441 > IntlTrade CommercialPolicy
Oleta Friesen
GPA 3.79


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This 0 page Class Notes was uploaded by Oleta Friesen on Sunday November 1, 2015. The Class Notes belongs to ECO441 at Miami University taught by WilliamCraighead in Fall. Since its upload, it has received 11 views. For similar materials see /class/233361/eco441-miami-university in Economcs at Miami University.


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Date Created: 11/01/15
Regional Trade Agreements Eco 441 Taxonomy of RTAs in increasing order of integration Preferential Trading Agreement Lower barriers to trade Within group Free Trade Area Eliminate barriers to trade Within group Customs Union Eliminate barriers to trade Within group and establish common external tariff Common Market Customs union With free movement of labor and capital among members Economic Union Common market With broader economic policy coordination Rules of Origin ROOs Classify Whether goods originate Within group to prevent transshipment importing from outside group through country with lowest external tariff RTAs Violate GATTWTO principle of nondiscrimination MFN GATT allows exception for RTAs if Tariffs Within group reduced to zero eventually 39 Timetable for achieving free trade Within group 39 Does not increase protection against rest of world Preferential tariff reductions may result in decreased economic efficiency due to trade diversion Jagdish Bhagwati Spaghetti Bowl In reality FTAs have created yet further problems by having many different rules of origin varying by products as in NAFTA for instance and by FTAs when say the EU has FTAs with different rules with several different nonEU countries Indeed by making possible manipulation of rules of origin PTA countries are open to protectionist capture The problems inherently posed by PTAs in regard to the rules of origin that they require are yet further compounded since FTAs are on different schedules of tariff cutting by sector and are not synchronized having been negotiated at different at different points of time and with different schedules for reaching zero tariff outcomes so that we typically nd a large and chaotic set of applicable tariffs on the same good depending on which source the good is assigned to The result is the spaghetti bowl phenomenon of numerous and crisscrossing PTAs and innumerable applicable tariff rates depending on arbitrarilydetermined and often a multiplicity of sources of origin In short the systemic effect is to generate a world of preferences with all its wellknown consequences which increases transaction costs and facilitates protectionism In the guise of freeing trade PTAs have managed to recreate the preferencesridden world of the 193 Os as surely as protectionism did at the time Irony Indeed Bhagwati Greenaway and Panagariya Trading Preferentially Theory and Policy Economic Journal July 1998 RTAs may hinder multilateral trade negotiations because of concern about preference erosion ie multilateral liberalization reduces the value of the special treatment of RTA members Richard Baldwin Spaghetti Bowls are Building Blocs on the Path to Global Free Trade Political economy of Trade Negotiations multilateral or regional Reciprocity solves the political economy externality the government knows free trade is better but it cannot get political support for unilateral tariff reductions With reciprocal negotiations exporting industries become advocates of reducing domestic tariffs Juggernaut effect Liberalization leads to growth of exporting firms which support freer trade and shrinkage of importcompeting firms which oppose it RTAs Domino Effect raises the cost of being outside the agreement because non members face greater discrimination If a nonmember joins this raises the cost of being outside for nonmembers Example 1957 6 countries form EEC Britain Ireland Norway Denmark apply to join Domino Effect Since the US cannot join it pushes for multilateral liberalization Kennedy round of GATT The dominoes start a juggernaut Regionalism and multilateralism are complements not substitutes Wilfred Ethier The New Regionalism Characteristics of RTAs 39 Between small developing countries and large developed countries hub and spoke Tariff reductions are small 39 Onesided small countries make larger concessions 39 Deep integration beyond tariffs o fewer participants 39 easier to reach agreement 39 can reach agreement on larger number of issues Motivation Competition for Foreign Direct Investment FDI Developing countries want to increase credibility of commitment to reform Trade and Developing Countries ECO 441 Infant Industry argument for protection Temporary tariff protection can help new industries develop 9 Friederich List The National System of Political Economy 1841 Alexander Hamilton Report on Manufactures 1791 Hamilton The superiority antecedently enjoyed by nations Who have preoccupied and perfected a branch of industry constitutes a more formidable obstacle to the introduction of the same branch into a country in Which it did not before eXist To maintain between the recent establishments of one country and the long matured establishments of another country a competition upon equal terms both as to quality and price is in most cases impractible The disparity in the one or in the other or in both must necessarily be so considerable as to forbid a successful rivalship Without the extraordinary aid and protection of government But though it were true that the immediate and certain effects of regulations controuling the competition of foreign with domestic fabrics was an increase of price it is universally true that the contrary is the ultimate effect with every successful manufacture When a domestic manufacture has attained to perfection and has engaged in the prosecution of it a competent number of Persons it invariably becomes cheaper Being free om the heavy charges which attend the importation of forign commodities it can be afforded and accordingly seldom or never fails to be sold Cheaper in process of time than was the foreign Article for which it is a substitute The internal competition which takes place soon does away every thing like Monopoly and by degrees reduces the price of the Article to the minimum of a reasonable pro t on the Capital employed This accords with the reason of the thing and with experience Whence it follows that it is the interest of a community with a view to eventual and permanent oeconomy to encourage the growth of manufactures In a national view a temporary enhancement of the price must always be well compensated by a permanent reduction of it TaIiff Revenue as of ImpOIts Source Historical Statistics of the United States 10 20 30 40 50 US Tariff Rates PrebischSinger Hypothesis Declining relative commodity prices leads to worsening terms of trade over time for commodity exporters ImportSubstitution Industrialization 181 Use of tariffs to promote domestic industries to produce substitutes for imports The Washington Consensus 1 Fiscal Discipline Reduce De cits 2 Reordering Public Expenditure Priorities Shift Away om Subsidies to Basic Health and Education 3 Tax Reform Broad Tax Base With Lower Marginal Rates 4 Liberalize Interest Rates 5 Competitive Exchange Rate 6 Trade Liberalization 7 Liberalization of FDI Foreign Direct Investment 8 Privatization 9 Deregulation 10 Property Rights John Williamson Did the Washington Consensus Fail Nov 6 2002 Irwin nan p n r an r r development Recent experience has demonstrated tlnat a shift toward more liberal trade policies can bring about striking improvements in economic performance p 162 l a Rich comm inn organism u laws mus lam mus D Dollar and A Kmy Tndz Gmwlh and Pavenyquot Economic lonrml 2mm Rodrik Trade volumes are the outcome of many different things including most importantly an economy s overall performance They are not something that governments control directly They are not something that governments control directly What governments control are trade policies the level of tariff and nontariff barriers membership in the WTO compliance With its agreements and so on The relevant question is Do open trade policies reliably produce higher economic growth and greater poverty reduction p 22 No convincing evidence that trade liberalization is predictably associated With growth p 11 Rodrik ISI policies spurred growth by creating protected and therefore pro table home markets for domestic entrepreneurs to invest in Contrary to received wisdom ISIdriven growth did not produce technological lags and inef ciency on an economywide scale p 17 Irwin These 181 policies often turned out to be selfin icted wounds In many instances capitalintensive industries were unsuited for developing economies that had a comparative advantage in laborintensive industries These industries required ongoing government support to function pro tably By sheltering rms om import competition protectionist policies inhibited export growth and rms became inward looking focusing on the domestic rather than the world market This resulted in small and inef cient rms p 178 OutwardOriented IndustrializationEXportLed GrowthIndustrial Policy Rodrik Governments in the Republic of Korea and Taiwan freely resorted to unothodox strategies they protected the home markets to raise pro ts implemented generous export subsidies encouraged their rms to reverseengineer foreign patented products and imposed performance requirements such as exportimport balance requirements on foreign investors when foreign companies were allowed in All of these strategies are now severely restricted under WTO agreements p 19 Irwin It is always tempting to reach a conclusion about causality on the basis of correlation bcause Japan or Korea intervened in the economy or used protectionist trade measures the success of the economy is due to that policy One cannot rule out the possibility that government intervention actually detracted from the economic success of the country but was more than offset by the other good forces p 179180 China and India Irwin Over the past quarter century both countries have shifted from economic isolation to economic integration with the rest of the world Both countries are now growing rapidly and have made remarkable strides in reducing poverty and raising the standards of living of their citizens p 166 Rodrik Increased growth began in China and India before trade liberalization occurred Antidumping Countervailing Duties and Safeguards ECO 441 Countervailing Duties CVDs If a country subsidizes exports WTO rules allow trading partners to impose CVDs tariffs to counteract the effect of subsidy US Procedure 39 Commerce Department determines if subsidy exists International Trade Commission ITC determines Whether domestic industry is harmed Safeguard Tariffs WTO rules allow countries to impose temporary tariffs to protect domestic industries from sudden increases in imports US Procedure ITC investigates and makes policy recommendation to President Section 201 of the Trade Act of 1974 the escape clause Antidumping ITC Dumping occurs when a foreign producer sells a product in the United States at a price that is below that producer39s sales price in its home market or at a price that is lower than its cost of production US Procedure 39 Commerce Department determines whether dumping has occurred 39 ITC determines whether domestic industry is harmed 39 Commerce Department calculates dumping margin the difference between the US price and o Exporter s domestic price 0 Estimated cost Tariff equal to the dumping margin is imposed Byrd Amendment 2000 Companies initiating antidumping actions receive tariff revenue WTO ruled illegal and authorized sanctions against US Repealed in 2005 Zeroing In calculating dumping margins US treats goods with negative margins as zero GigD Price in EU Price in US Difference Model A 10 12 2 Model B 10 E 2 Total 1 no zeroing 20 20 D Total 2 with zeroing 20 m 2 source EU Ruled illegal by WTO GATT and the WTO Eco 441 Increased Tariffs may have exacerbated 1930 s depression US SmootHawley Tariff raised average tariffs 53 Reciprocal Trade Agreements Act RTAA 1934 39 Delegated authority to President to negotiate trade agreements 39 Most Favored Nation MFN principle 39 Increased bilateral trade agreements 193440 Bretton Woods Conference 1944 Proposed Multilateral Institutions International Bank for Reconstruction and Development World Bank International Monetary Fund IMF International Trade Organization ITO GATT General Agreement on Tariffs and Trade Signed by 23 countries October 1947 A treaty among contracting parties not an organization GATT Principles 39 Nondiscrimination MFN 39 National treatment 39 Reciprocity Exceptions Enabling clause allows special and differential treatment for developing countries 0 Generalized System of Preferences GSP 39 Customs Unions and Preferential Trade Agreements allowed Agriculture and Textiles left out o Multi bre Agreement MFA 1974 Other Attributes of GATT 39 Weak dispute resolution mechanism 0 Panel arbitration with no enforcement 39 Consensus decision making 0 Green Room negotiations 194761 Negotiation rounds focus solely on Tariff reduction 196467 Kennedy round and 197379 Tokyo round 39 Extend to nontariff barriers Proliferation of separate plurilateral subagreements 198694 Uruguay round establishes WTO Umbrella Agreement the Final Act of the Uruguay round la Goods GATT 1994 lb Services GATS lc Intellectual Property TRIPS 2 Dispute Settlement 3 Trade Policy Reviews The Final Act is a Single Undertaking GATT 1994 includes agreements 0n 0 Agriculture Sanitary and Phytosanitary Measures SP8 0 Textiles and Clothing MFA ended 2004 0 Technical Barriers to Trade TBT TradeRelated Investment Measures TRIMs AntiDumping Safeguards Dispute Resolution 1 Consultations 2 Panel 3 Appellate Body If a country is found to be in Violation and it does not modify its policy to comply with ruling the complaining country can be authorized to impose sanctions Trade Policy Reviews 39 US EU China Japan reviewed every 2 years 39 Next 16 countries by share of world trade reviewed every 4 years 39 Others every 16 years Joining the WTO Accession Applicants must negotiate a protocol of accession to Win approval of twothirds majority to join 153 current members 25 countries have joined since 1995 29 current applicants


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