global econ - trade policy - lecture

8/9/2019 Global Econ - Trade Policy - lecture

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Trade Policy

Dr. Katherine Sauer

Global Economic Issues

ECON 241


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Governments often manipulate trade to achieve various economic,

political, and diplomatic objectives.

Types of Trade Barriers

1) tariff : tax on importsspecific tariff = fixed tax per unit of good imported

ex: $1 per pair of sunglasses imported

ad valorem tariff = percentage tax applied to the total value

of importsex: a 5% ad valorem tax on sunglasses means

if import $1000 worth of sunglasses, then

the tariff is $50


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2) export subsidies : involves a transfer of funds from the

government to an export producer

- encourages exports- helps domestic industry (props up domestic price)

3) non-tariff measures for restricting imports

a. quantitative restrictions (quota): a limit on the quantity

of a good that can be imported- the government grants licenses to certain firms

allowing them to import a certain quantity

b. tariff rate quota: a tariff with two levels- lower tariff for imports within the quota

- higher tariff for imports that exceed the quota


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c. trigger price mechanism: the government sets a price floor

(legal minimum price) that triggers government

intervention to reduce imports if the world price falls too low- low world price hurts domestic firms because

more is imported --- a price too low may wipe out

the domestic industry

d. technical barriers: barriers imposed on imports for healthor safety reasons

e. anti-dumping duties: tariff-like charges imposed on imports

that are sold at less than fair value by the exporter

f. countervailing duties: tariff-like charges imposed on

imports that are unfairly subsidized by the exporter

government


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g. Voluntary Export Restraints (VER): an export quota

voluntarily imposed by the exporter country at the

request (threat) of the importing country

h. other: anything else that the government can think of

ex: require disassembling of an item before it can

be imported

Free Trade: goods and services can flow freely between nationswithout government imposed barriers like tariffs, quotas,

VERs, etc.

Analysis of a Tariff


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D

S

price

Pw + t

Pw

quantity

Japans domestic rice market: with imports and a tariff

consumer surplus

producer surplus

government revenue

deadweight loss

1) tariff raises the price in

Japan from Pw to

Pw + t

2) at the new higher price,

Qd falls to Qdt and Qs

rises to Qst- imports decrease

3) the government collects

revenue equal to the

tariff times the numberof imports

4) CS falls

PS risestotal surplus falls

Qs QdQst Qdt


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Example of a tariff: The Catfish Wars

Background:

For generations, the traditional means of livelihood in the Mekong

Delta of Vietnam has been raising catfish.

- catfish are the primary source of protein in diet

- catfish and catfish products are an important source of

income for rural families

- catfish farming is done on a small scale (artisan) by

each family


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Catfish farming is the sole occupation option for many in theMekong Delta.

- their land isnt suitable for other agriculture

- they dont possess the skills for other jobs

- there arent other job options

In the late 1980s / early 1990s, communist Vietnam began trying

some market-oriented reforms.

- became the 2nd largest exporter of rice

- force to reckon with in the coffee market- emerging catfish exporter


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It is relatively cheap to produce catfish in Vietnam.

- 4 major exporters own all stages of production- generally favorable supply conditions

- production is not subsidized

Quickly, Vietnamese farmers had 1/5 of the US frozen catfishmarket.

- estimated 0.5 million Vietnamese live of the catfish

trade


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The US catfish industry, was hurt by the cheap imports from

Vietnam.- roughly 13,000 employees in MS, AL, AR, LA

They lobbied Congress for protection.

Congress obliged by:

1. Renaming the good

2. Placing high tariffs on catfish imports


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1. Renaming the good (2001)

Traditionally, catfish referred to any of 1,000s of bottom-dwellingfish with whiskers.

- amendment attached to a Senate appropriations bill stated

only the US strain of catfish could be called catfish

- Vietnamese catfish would have to be labeled tra or basa

It turns out that US consumers prefer the Vietnamese varieties to the

US variety and the name change didnt stop imports.


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2. Placing high tariffs on catfish imports (2003)

By alleging that Vietnamese catfish prices were unfairly low, an

anti-dumping case was made by the US against Vietnam.

- declared Vietnam a non-market economy so by

definition it is deemed to be anti-competitive and tariffs

are justified to level the playing field

- 37% 64% tariff rates applied


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As it turns out, American consumers still prefer the Vietnamesevarieties, even with the higher prices.

AL and LA have banned Vietnamese catfish imports entirely onthe basis that they constitute a bioterrorism threat. (Aug. 2005)

US consumers are not as well off as they could be.

US producers jobs are protected.

Vietnamese catfish producers are not as well off as they could be.


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Free Trade Agreements (FTAs)

Often times countries will agree to reduce or eliminate trade barrierswith each other.

The US has bi-lateral free trade agreements with

- Australia - Bahrain - Chile

- Israel - Jordan - Morocco- Oman - Peru - Singapore

Pending bi-lateral free trade agreements:

- Colombia - Korea - Panama

http://www.trade.gov/fta/


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The US has multi-lateral FTAs:

- CAFTA-DR (Dominican Republic Central America FTA)

- US, Costa Rica, Dominican Republic, El Salvador,

Guatemala, Honduras, and Nicaragua

-NAFTA (North American FTA)

- US, Canada, Mexico


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FTAs can be trade creating or trade diverting.

Trade Creating: When trade barriers are lowered, the volume oftrade increases.

Trade Diverting: If a high cost producer is part of a FTA while a

low cost producer faces a tariff, then the high cost producer will

end up producing more for export while the low cost producerexports less. Resources will not be going to their best use

(inefficient).


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The World Trade Organization

The WTO is the global organization dealing with the rules of

trade between nations.

These rules of trade are the result of negotiations between

member countries.

- 150 member countries

- HQ in Geneva, Switzerland

- a successor to the General Agreement on Tariffs and Trade

(GATT)

- formed on January 1, 1995


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Objective

The main goal of the WTO is to help international trade to flow

smoothly, freely, fairly, and predictably.

This is accomplished by:

- administering trade agreements

- acting as a forum for trade negotiations- settling trade disputes

- reviewing national trade policies


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The Fundamental Principles of the Multi-lateral Trading System

A trading system should be

1) without discrimination

Countries cant discriminate between:

- trading partners (must treat all nations no worsethan their most-favored nation)

- domestic and foreign products (no national

treatment)

2) freer

Barriers to trade are reduced through negotiations.


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3) predictableFirms, investors, and governments should be confident

that trade barriers wont be raised suddenly.

4) more competitive

Practices like export subsidies and dumping productsat below cost to gain market share are discouraged.

5) more beneficial for less developed countries

The developing nations should be given more time toadjust, greater flexibility, and special privileges when

it comes to changes in trade barriers.


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Types of Agreements

1) Goods

From 1947-1994, GATT spelled out the rules for

trade in goods (non-discrimination in particular).

Since 1995, the updated GATT has been the WTOs

umbrella agreement for trade in goods.

2) Services

The General Agreement on Trade in Services (GATS)

spells out the rules for trade in services (1995).

Companies providing services like banks, insurance firms,

telecommunications companies, tour operators, hotel chains,

and transport companies that want to do business abroad enjoy

the same principles of freer and fairer trade that originally only

applied to trade in goods.


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3) Intellectual Property

The agreement on Trade Related Aspects of Intellectual

Property (TRIPS) is the most comprehensive multi-lateral

agreement on intellectual property.

The rules state how

- copyrights

- patents- trademarks

- industrial designs

- trade secrets

should be protected when trade is involved.


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Some Benefits of the WTO

1) It helps keep the peace.

If trade flows smoothly and both sides have an amicable

commercial relationship, political conflict is less likely.

2) It is a confidence builder.

If a government is confident that the other countrywont be raising tariffs, it is less likely to raise them itself.

Recall the nationalistic, protectionist policies of the 1930s

- Countries failed to realize that protecting the domestic

economy from imports ends up harming the export sector as

well.


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3) It allows disputes to be handled constructively.

As the volume of trade increases and more and moreproducts are being traded between more parties, the

chance for a dispute is very likely.

- over 300 disputes have been brought to the WTO

since 1995

- disputes are grounded in WTO agreements

4) It helps shield governments from narrow interests.

Once a liberalization commitment (barrier reduction) has

been made, it is very hard to reverse.

(WTO video)


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Fair Trade

Fair Trade: a social movement to ensure that producers of

exports in developing nations

- receive a fair price for their product

- have safe, healthy working conditions

- use environmentally sustainable practices

Background:

Competition in global commodity markets has decreased

prices over time.

- between 1970 and 2000, the main agricultural

exports for developing nations (sugar, cotton,

cocoa, coffee) fell in price by 30-60%

Prices for commodities are volatile in general.

- bumper crops, crop disasters, demand changes


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The rural poor are the people who suffer when commodity prices

are low/volatile.

Proponents of Fair Trade

- support the theory and principles of free trade

- claim that in many cases, there are market failureswhich prevent the benefits of free trade from working

- rural farmers dont have good information

- rural farmers are at the mercy of the middlemen

- rural farmers dont have access to credit

- argue that there should be a minimum price (price floor)

for agricultural goods.


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Critics of Fair Trade

- usually recognize the idea of Fair Trade is based on the

best of intentions

- argue that price floors cause market distortions

- a price floor holds the price artificially high

- this encourages more production

- more production can lead to excess supply

- excess supply leads to downward pressure on

price in the non Fair Trade market

- argue that Fair Trade is not a long term solution

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