Trade policy reform and the role of institutions

1
Trade policy reform and the role of institutions

• What Vietnam needs to know
• Overview and schedule

2
Why do countries trade?

• Access to goods and services that are not
  produced at home
• Access to cheaper goods and services
• Static gainsEconomies of scale
• Dynamic gains faster growth

3
Gains from trade the simple view

• Obvious gains at the macro level if countries
  excel in different areas absolute advantages
• Less obvious - but undisputed - gains even if one
  country is better in all areas comparative
  advantages

4
Optimal policy the simple view

• Free trade and specialization is optimal if the
  pattern of comparative advantages is given by
  nature
• technology differences (Ricardo)
• differences in factor endowments (Heckscher-Ohlin)

5
Interventions (protectionism) reduce national
welfare

• Higher prices, lower consumption, and lower
  welfare both at home and abroad as a result of
  protectionism...
• so why is there still a lot of protectionism?

6
Unequal gains from trade at the micro level

• Interest groups matter trade benefits some
  groups but hurts others groups
• the groups that lose may oppose free trade
• the effects of free trade may have troublesome
  social consequences

7
Policy and institutions the simple view

• Unilateral trade liberalization is difficult for
  political reasons
• Multilateral trade liberalization is easier
• may help reduce the power of domestic interest
  groups
• will typically guarantee some reciprocity
• ITO, GATT, WTO

8
Optimal policy the more complicated view

• Free trade is perhaps not be the best policy
  option if
• comparative advantages can be created
• economies of scale
• agglomeration economies
• all industries are not equally valuable
• externalities (high-tech, RD)

9
Why strategic trade policy may be useful in
theory

• Strategic policy intervention may decide where
  the next cluster of industries with economies of
  scale is located important to attract foreign
  direct investment
• It is better to be an exporter than an importer
  in industries with externalities, because future
  growth may be higher

10
Instruments of strategic trade policy

• Tariffs and quotas
• Domestic product standards, product regulations,
  and other NTBs
• Export subsidies
• Support for RD, investments, production, labor
  training, education, etc - what we often call
  industrial policy

11
Problems with strategic trade policy

• Will hurt other industries
• Trade partners may retaliate.
• Domestic interest groups will spend lots of money
  to be next in line for protection and support.
• Free trade may still be best rule of thumb
• industrial policy to strengthen competitiveness
• regional integration to create larger home market

12
Institutions for modern trade policy

• GATT / WTO
• Regional integration
• FDI policy
• Industrial policy

13
Institutions Bretton-Woods solutions

• Four cornerstones of international economy
• International Bank for Reconstruction and
  Development
• International Monetary Fund
• International Trade Organization
• Price stabilization fund

14
International Trade Organization

• ITO established in Havana 1948. Agreement signed
  by 53 members
• US Congress did not ratify ITO Charter. ITO
  collapsed 1950
• Only surviving component
• GATT General Agreement on Tariffs and Trade

15
GATTs three functions

• Defines mutually accepted rules of conduct for
  international trade.
• Acts as an international court for dispute
  settlement.
• Provides a forum for trade negotiations in order
  to liberalize world trade.

16
GATT principles - rules of conduct for
international trade

• Non-discrimination MFN and national treatment
• Transparent protection only
• Tariff reductions
• Reciprocity
• Fair trade

17
Exceptions from GATT principles

• Safeguards
• Right to introduce temporary trade restrictions
  in certain situations
• Developing countries
• Special treatment
• Regional integration
• Article XXIV

18
GATT results before Uruguay

• Large reduction in developed country tariffs for
  industrial products
• average tariff reduced from over 80 to around
  5
• Higher average tariffs in developing countries
• Special treatment
• Only manufacturing
• Agriculture, textiles, services excluded
• Weak dispute resolution mechanism

19
Results of the Uruguay Round

• World Trade Organization
• Further tariff reductions
• Agriculture
• Textiles and Clothing
• Services
• TRIPS and TRIMS
• Dispute resolution

20
Other institutions IMF and World Bank

• Many developing countries have undertaken
  unilateral trade liberalization after pressure
  from IMF / World Bank
• Credits for structural adjustment and poverty
  reduction often conditional on trade reform

21
Other institutions UNCTAD

• United Nations Conference on Trade and
  Development (1964)
• To promote views of developing countries
• No executive power
• New International Economic Order
• reform of international monetary system
• cancellation of developing country debt
• code of conduct for technology transfer
• regulation of MNC activities
• Commodity arrangements and Common Fund

22
Other institutions OECD

• Organisation for Economic Cooperation and
  Development, established 1961
• Successor to Organisation for European Economic
  Cooperation (1948), which managed post-war
  liberalization of trade in Europe
• Gateway to GATT/WTO
• forum for consultations on trade policy issues
• increasing concern for competitiveness,
  technology, and innovation policy
• Development Assistance Committee, DAC
• coordination of development assistance policy

23
Other institutions Commodity trade

• Organization of Petroleum Exporting Countries,
  OPEC 1960
• 11 member countries Algeria, Indonesia, Iran,
  Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi
  Arabia, the United Arab Emirates and Venezuela.
• initial objective to stabilize international oil
  prices, subsequent attempts to raise price of oil
• Other commodity agreements not as prominent

24
Other institutions regional integration
agreements

• ECSC, EEC, EC, EU, EFTA, EEA, Euro-Mahgreb,
  Visegrad, US-Canada Auto Pact, CUSFTA, NAFTA,
  LAFTA, CACM, Andean Pact, CARICOM, LAIA,
  MERCOSUR, G3, COMECON, CBI, EAC, CEMAC, COMESA,
  IOC, SADC, SACU, UEMOA, WAEMU, CEAO, ECOWAS, PTA,
  UDEAC, CEPGL, ACM, ECO, GCC, ASEAN, AFTA, APEC,
  and many more