Chapter%20Nine

1
Chapter Nine

• The Political Economy of Trade Policy and Borders

2
Chapter Nine Outline

1. Introduction
2. The Political Economy of National Trade Policy
3. A Brief History of International Trade Policy
4. Economic Integration and Regional Trading
5. Interregional Trade

3
Introduction

• Within each country, processes interact to
  determine that countrys stance on international
  trade.
• This has advantages and disadvantages
• Pro example U.S. constitutional prohibition
  against tariffs among states undoubtedly
  contributed to the countrys remarkable growth
  and stability over last 200 years.
• Con example National character of trade policy
  tends to perpetuate the mercantilist view of
  trade as zero-sum game one countrys gains must
  come at its trading partners expense rather than
  from improved efficiency.

4
Introduction

• Trade policy occurs at levels other than a
  national one
• Regional trade blocs EU and NAFTA
• Within different regions of countries the north
  and south of U.S. or Italy (interregional trade).

5
The Political Economy of National Trade Policy

• The costs of international trade tend to be
  concentrated on a relatively small number of
  individuals.
• Benefits, however, come primarily in the form of
  lower prices and are spread over a large group,
  with each individual capturing only a small
  portion.

6
The Political Economy of National Trade Policy

• For producers of good X, the question of tariffs
  is likely to decide which candidate gets their
  vote.
• For consumers of good X, the small effect the
  tariff would have on each individual makes the
  tariff a lower priority issue.
• As a result, a vote-maximizing candidate will
  more likely follow the wishes of X producers and
  support the tariff.
• Implies that pro-protectionist supporters will be
  more successful in organizing an effective
  lobbying force than will supporters of
  unrestricted trade.

7
The Political Economy of National Trade Policy

• This systematic pro-protection bias in the
  policy-making process carries over to laws that
  govern global trade policy.
• Example Section 201 of the 1974 Trade Act
• Escape clause that allows the U.S. to abandon
  its tariff-reduction obligations under WTO
  whenever imports cause serious injury or a threat
  to a domestic industry.
• International Trade Commission in Washington can
  recommend relief to the president in the form of
  a tariff, quota, or Trade Adjustment Assistance
  eligibility for the industry.

8
The Political Economy of National Trade Policy

• Given the pro-protection bias in the
  policy-making process, how does trade
  liberalization ever get accomplished?
• Informing voters of the often-hidden costs of
  protection.
• Reciprocity involved in international
  negotiations creates another pro-liberalization
  constituency export industries.
• A country lowers its trade barriers in exchange
  for trading partners lowering theirs.

9
Brief History of International Trade Policy

• Mercantilism was the first dominant theory of
  international trade.
• Critical weaknesses
• Not all countries could conduct successful
  mercantilist policies at the same time.
• Even when one country succeeded with mercantilist
  policies, that success could not continue in the
  long run.
• Mercantilist success caused imports to rise and
  exports to fall.
• Accumulated specie (money) was useful only if you
  could purchase goods with it.
• If you import nothing, you drastically decrease
  your choices of goods to buy.

10
Brief History of International Trade Policy

• Britain and the rise of the United States
• At the close of the 18th century, world events
  plus effects of Classical economists (Smith,
  Ricardo, Hume) work moved trade policy toward
  liberalization.
• Industrial Revolution created many new products
  for export.
• Britain adopted policies of unrestricted trade.
• American colonies used tariffs to generate
  revenues before American revolution.
• Post-revolution U.S. was protectionist
  protected infant manufacturing industries and
  retained tariffs.

11
Brief History of International Trade Policy

• Second half of the 18th century
• Germany and France provided stiff competition for
  Britain.
• Britain and U.S. used tariff protection through
  World War I.
• U.S. economy enjoyed phenomenal growth relative
  to rest of world.
• U.S. Smoot-Hawley tariff bill of 1930
• Raised tariffs an average of 53.
• Other economies retaliated world trade
  plummeted.
• Great Depression.

12
Figure 9.1 What Happened to World Trade,
1929-1933 (Millions)
April
May
March
1929
1930
February
1931
June
1932
1933
1,206
2,739
January
July
1,839
992
2,998
August
December
September
November
October
13
Brief History of International Trade Policy

• Reciprocal Trade Agreements Act of 1934 (RTAA)
• U.S. recognized the need for trade liberalization
  as a way to emerge from Great Depression.
• Reduced Smoot-Hawley-level tariffs.
• Also changed institutional arrangements for
  making U.S. trade policy
• Tariff authority switched from Congress to
  executive branch.
• Authorized trade negotiations with other
  countries.
• RTAA remained in force until the 1962 Trade
  Expansion Act.

14
Brief History of International Trade Policy

• Post-Second World War Trade Policy
• The United States pushed hard for global postwar
  trade liberalization.
• U.S. had great industrial strengthexport
  opportunities could be exploited only in a
  relatively open environment.
• Strong international economic ties lessened risk
  of war.
• Desire to rebuild Europe and limit spread of
  Soviet influence.

15
Brief History of International Trade Policy

• U.S. also instrumental in establishment of
  multilateral financial institutions
• International Monetary Fund (IMF)
• World Bank
• General Agreement on Tariffs and Trade (GATT)
• Predecessor to WTO
• Congress attempted to reclaim trade authority it
  previously ceded to president.
• 1947 insisted that Escape Clause be included in
  all tariff reductions.
• Escape clause permitted cancellation of tariff
  reductions shown to cause injury to domestic
  industries.

16
Brief History of International Trade Policy

• Escape clause, if carried to logical extreme,
  would eliminate trade trade always injures some
  industry while helping others.
• Escape clause is an example of Safeguards imposed
  in an effort to avoid adjustment costs involved
  in trades reallocation of resources.
• Main U.S. Trade Acts since 1950
• Trade Expansion Act of 1962
• Trade Act of 1974
• Trade Agreements Act of 1979
• Trade and Tariff Act of 1984
• Omnibus and Competitiveness Act of 1988
• Uruguay Round Agreements Act of 1994

17
Brief History of International Trade Policy

• Trade policy in the 1960s and 1970s
• Trade Expansion Act of 1962 replaced the RTAA.
• Kennedy sought to regain momentum in trade
  liberalization.
• Granted president authority to negotiate 50
  reductions in tariffs.
• Contained 3 items important to world trade
• Multifiber Agreement (MFA) president agreed to
  impose quotas on cotton textile imports and to
  partially exempt textiles from tariff reductions.
• Negotiations shifted from product-by-product to
  across-the-board format.
• Trade Adjustment Assistance (TAA) added to U.S.
  safeguard provisions.

18
Brief History of International Trade Policy

• Trade Adjustment Assistance
• Instead of levying tariffs against imports that
  resulted in injury to a specific industry, the
  TAA was an alternate way to deal with the injury
• Directly compensate injured firms and workers for
  their losses.
• Extended unemployment benefits
• Retraining
• Relocation assistance
• Low-interest loans
• Even restitution to whole communities harmed by
  an industrys decline.

19
Brief History of International Trade Policy

• Trade Act of 1974
• Granted president 60 tariff-reduction authority.
• Extended existing set of import quotas from
  cotton textiles to cover wool and synthetics.
• Strengthened role of International Trade
  Commission.
• Loosened eligibility requirements for
  compensation under TAA
• Injury to domestic industry no longer had to be
  linked directly to government policy, but only to
  increased imports.
• Competition from imports now only had to
  constitute an important cause of the injury.

20
Brief History of International Trade Policy

• Trade Act of 1974 also laid the groundwork for
  the Tokyo Round of GATT talks (1974 1979).
• Resulted in 30 reduction in tariffs of major
  industrialized economies.
• New policy U.S. (and others) could reach
  agreements (called Codes) accepted by only a
  subset of GATT countries.
• Tokyo Round left several unresolved issues
• Developed-country barriers against
  developing-country exports.
• Mutually acceptable interpretations of safeguard
  provisions.
• Conflict resolution mechanisms.

21
Brief History of International Trade Policy

• Trade Policy in 1980s and 1990s
• Trade and Tariff Act of 1984
• Gave the president authority to negotiate
  bilateral trade treaties.
• Uruguay Round Agreements Act (GATT talks)
• Began 1986approved 1994
• Major results
• Agricultural reduced export subsidies required
  tariffication of existing nontariff barriers
  reduced existing tariffs an average of 36
  provided for minimum access for new entrants into
  previously-closed foreign markets.

22
Brief History of International Trade Policy

• More results of GATT
• Textiles bilateral quotas of MFA must be
  removed at end of 10 years quotas probably will
  be replaced by high tariffs.
• Complete elimination of tariffs in several
  important sectors by industrial countries.
• Clarified distinction between acceptable and
  unacceptable subsidies.
• Strengthened enforcement of intellectual property
  rights.
• Established WTO
• Member countries must now subscribe to all rules
  and responsibilities.

23
Economic Integration

• Formation of countries into groups (EU, NAFTA)
• Preferential trading arrangement (PTA)
• Member countries agree to erect lower barriers to
  trade within the group than to trade with
  nonmember countries (Figure 9.3).
• Free trade area
• Involves eliminating barriers to intra-group
  trade while allowing each country to maintain its
  own nationally determined barriers to trade with
  nonmembers.

See Figures9.2 and 9.3
24
Economic Integration

• Customs union
• Intra-group trade faces no barriers and members
  maintain a common external tariff (CET) on trade
  with nonmembers.
• Common market
• Extends free trade among members to factors of
  production (labor migration and capital flows),
  as well as to goods and services.
• Economic union
• Most extensive form of economic integration.
• Means common, group-determined economic policies,
  as well as a common currency.

25
Figure 9.2 Levels of Economic Integration
Preferential trading
arrangement
Free-trade area
Customs union
Common market
Economic union
Common economic policies and common currency
Intra-group capital and labor mobility
Reduction of intra-group tariffs
Removal of intra-group tariffs
Common external tariff
26
Figure 9.3a Tariffs Under Different Stages of
Integration
t 10
t 10
A
B
C
t 5
t 20
(a) Preferential Trade Arrangement
27
Figure 9.3b Tariffs Under Different Stages of
Integration
t 10
t 0
A
B
C
t 0
t 20
(b) Free-trade Area
28
Figure 9.3c Tariffs Under Different Stages of
Integration
CET 15
t 0
A
C
B
t 0
CET 15
(c) Customs Union
29
Economic Integration

• Protectionist element of integration is called
  Trade Diversion.
• Diversion of trade from nonmembers to members
  caused by discrimination inherent in integration.
• Trade-liberalization element of integration is
  called Trade Creation.
• Integration eliminates protection among member
  countries and allows them to specialize and trade
  according to comparative advantage and to exploit
  potential economies of scale.
• If trade diversion dominates trade creation,
  welfare falls.

30
Economic Integration

• Figure 9.4 illustrates integrations
  trade-creating and trade-diverting effects.
• SM denotes supply of good X by member countries.
• SNM is the supply by nonmember countries.
• Formation of a free-trade area causes a move from
  C to H.
• Trade increases as imports rise from X0-X1 to
  X2-X3.
• Trade also is diverted from nonmember countries
  toward member countries, causing an efficiency
  loss represented by area of triangle e.

31
Figure 9.4 Welfare Effects on a Free-Trade Area
in Good X
P
X
S
E
M
S
t
G
C
0
NM
P
S
t
X
a
b
c
d
H
1
M
P
S
X
J
e
NM
S
R
T
D
F
0
X
0
X
2
X
X
3
X
1
32
Economic Integration

• Additional considerations
• Integration may have dynamic effects i.e., may
  cause member economies to evolve differently over
  time.
• Integration increases size of domestic market.
• May allow firms to achieve economies necessary to
  become competitive in export markets.
• May allow group of countries to exercise some
  monopoly power in world markets.
• May cause increased competitive pressures on
  industries within integrated group.

33
Economic Integration

• Two waves of economic integration
• 1960s
• Most were modeled after European Community.
• Attempts among developing countries met only with
  partial success.
• Some African and Latin American plans failed.
• Mid-1980s
• European Union (EU)
• North American Free Trade Agreement (NAFTA)
• Association of South East Asian Nations (ASEAN)
• Southern Common Market (MERCOSUR)

34
Economic Integration

• Figure 9.5 indicates that among the EU, NAFTA,
  ASEAN, and MERCOSUR, the EU has the highest share
  of intra-group trade.
• The European Union
• 1957 Treaty of Rome created European Commission.
• Belgium, Luxembourg, Netherlands, France,
  Germany, and Italy.
• 1971 agreed to 10-year plan to achieve full
  economic union.

35
Figure 9.5 Intra-Group Trade as Percent of
Total Merchandise Trade, 2000
70
Percent
Intra-Group Exports as Percent of Total Exports
Intra-Group Imports as Percent of Total Imports
60
50
40
30
20
10
0
EU
NAFTA
ASEAN
MERCOSUR
36
Economic Integration

• 1986 added Spain and Portugal.
• 1987 passed Single Europe Act
• Expanded policy making to include areas of
  environment, monetary policy, health and safety,
  and foreign policy.
• 1991 changed name to European Union.
• Outlined plan to move to common currency (the
  euro) and central bank.
• Figure 9.6 shows the current 15 EU members.

37
Figure 9.6 European Union Members and
Applicants, 2001
Sweden
Finland
Estonia
Members
Latvia
Lithuania
Denmark
Applicants
Ireland
United
Kingdom
Poland
Netherlands
Germany
Belgium
Czech Rep.
Luxembourg
Slovakia
Austria
Hungary
France
Romania
Slovenia
Bulgaria
Italy
Portugal
Turkey
Spain
Greece
Malta
38
Economic Integration

• NAFTA
• U.S., Canada and Mexico
• Several unique characteristics
• Mexico asked to join U.S. in free trade area
  Canada later asked to join them took effect
  1994.
• Composition of member countries was very
  different from most trade blocs.
• Very different levels of economic development
  existed. Most trade bloc members are fairly
  similar in economic development.

39
Figure 9.7 Where Do They Go? U.S., Canadian, and
Mexican Exports, 2000
Percent
100
80
Share of U.S. exports
60
Non-NAFTA
Share of Canadian exports
Share of Mexican exports
countries
40
Mexico
Canada
U.S.
20
0
40
Economic Integration

• NAFTA (continued)
• Tariffs on about half of members trade were
  removed immediately.
• Remaining tariffs will be phased out by 2010.
• Rules-of-origin rules dictated that in order to
  qualify for duty-free treatment, a product must
  divulge its quantity of North American content
  (different thresholds for each industry).
• Many Asian firms produce goods in Mexico as a
  back door path to the U.S. market.

41
Economic Integration

• NAFTA (continued)
• Conflict resolution mechanism
• North American Trade Commission (3 people)
  created to hear disputes and levy any penalties.
• Opposition to NAFTA from pro-protection forces
• Agreements environmental impact
• Effects of differences between labor standards
  and wages in U.S. and Mexico.
• Possibility of sudden large import surges from
  Mexico.

42
Economic Integration

• NAFTA (continued)
• Since NAFTA began, imports from Mexico have risen
  and those from Asia have decreased.
• Chile is on the waiting list to join.
• Free Trade Area of the Americas due to be
  completed no later than 2005.
• 34 countries

43
Economic Integration

• MERCOSUR
• Formed in 1991
• Includes Brazil, Argentina, Paraguay, and
  Uruguay.
• 1994 became a customs union with average CET of
  14.
• Intra-MERCOSUR trade increased 400 in first 4
  years.

44
Interregional Trade

• Sometimes interregional trade becomes
  international trade
• Breakup of Soviet Union.
• Reacquisition of Hong Kong by China.
• Role of factor mobility
• Labor and capital move more easily within than
  between countries due to both natural and
  policy-induced barriers to intercountry mobility.
• Role of economic policy
• At times, governments show their ambivalent
  feelings toward trade by applying different trade
  rules in different regions of a country.

45
Interregional Trade

• Role of economic policy (cont.)
• Most common form of subnational trade policy
• Special Economic Zones (SEZs)
• Allow more generous rules for trade and for
  inward foreign direct investment than apply in
  rest of country.
• Example China
• Export-Processing Zones
• Concentrate on attracting firms that assemble
  products for export.
• Example Mexicos maquiladora program.

46
Notes for Case Two

• Do Political/Economics Boundaries Really Matter?
• An economic map of China (Figure 9.8) shows that
  costal provinces have higher per capita income
  levels than interior provinces.
• Beginning in 1978, China opened up special
  economic zones (SEZs), which were located
  primarily in costal provinces such as Guangdong
  and Fujian.
• In 1999 all provinces were allowed to create SEZs.

47
Figure 9.8 Chinese Per-Capita by Province, 1999
48
Notes for Case Three

• Life before the NAFTA
• Figure 9.9 depicts the maquiladora establishments
  in Mexico in 1996.
• The region along the southern side of the
  U.S.-Mexican border is a major center of
  electronic assembly operations.

49
Figure 9.9 Maquiladora Establishments, 1996
Mexicali (Daewoo, LG Electronics, Matsushita,
Mitsubishi, Sony, JVC)
Tijuana
San Luis Rio Colorado (Daewoo)
(Canon, Casio,
Ciudad Juarez (Canon, Mizumo,
Hitachi, Hyundai, Iwai,
TDK, Toshiba, Yozaki, Zenith)
Matsushita,
Pioneer, Samsung,
Sanshi,
Sanyo, Toshiba)
Mexico
Mexico City
50
Key Terms in Chapter 9

• Section 201
• Mercantilism
• Smoot-Hawley tariff bill of 1930
• Reciprocal Trade Agreements Act (RTAA)
• International Monetary Fund (IMF)
• World Bank
• General Agreement on Tariffs and Trade (GATT)

51
Key Terms in Chapter 9

• Escape clause
• Safeguards
• Multifiber Agreement (MFA)
• Trade Adjustment Assistance
• Codes
• Uruguay Round
• Fast Track
• Integration

52
Key Terms in Chapter 9

• Preferential trading arrangements (PTA)
• Free-trade area
• Customs union
• Common external tariff (CET)
• Common market
• Economic union
• Trade diversion
• Trade creation

53
Key Terms in Chapter 9

• Special economic zone (SEZ)
• Export-processing zone