Chapter%20Nine - PowerPoint PPT Presentation

View by Category
About This Presentation
Title:

Chapter%20Nine

Description:

Chapter Nine The Political Economy of Trade Policy and Borders – PowerPoint PPT presentation

Number of Views:102
Avg rating:3.0/5.0
Slides: 54
Provided by: COON150
Learn more at: http://www.swlearning.com
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: 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 Figures 9.2 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
About PowerShow.com