Global Trade and Investment Environment - Chapter 6

Chapter 6: Global Trade and Investment Environment

• This chapter discusses global trade and investment.
• Key figures/people mentioned include Magdagaong, Lazaro, Malavega, Jumawan, Jimenez, and more.

The Benefits of Trade

• Access to Products: Countries gain access to products they can't efficiently produce domestically (e.g., Iceland trading fish for oranges).
• Specialization: Countries focus on producing and exporting goods they are best at, increasing overall efficiency.
• Lower Costs: Imports provide access to cheaper products, benefiting consumers.
• Global Resources: Nations utilize their unique resources efficiently (e.g., U.S. aircraft, Bangladesh textiles).
• Overall Economic Gains: Trade boosts the entire economy, even if some specific industries face challenges.

Trade Theory and Policy

• There's a lack of consensus on government policy recommendations regarding trade.
• Classical Trade Theories (Smith, Ricardo, Heckscher-Ohlin): Advocate for unrestricted free trade; import controls and subsidies are deemed inefficient.
• New Trade Theory and Porter's Theory: Support limited government intervention to foster export-oriented industries.
• Strategic Trade Policy: Examines the trade-off between government intervention and free market efficiency. (Chapter 7).
• Unrestricted trade has both pros and cons. (Chapter 7).

Political Arguments for Intervention

• Governments intervene for political, economic, and social reasons.
• Key motivations include protecting jobs, national security, consumer safety, and human rights.
• Tools for intervention: Tariffs, sanctions, and preferential trade agreements.

Protecting Jobs and Industries

• Governments shield domestic jobs and industries from foreign competition.
• Examples: U.S. steel tariffs (2002), EU's common agricultural policy (CAP).
• Potential consequences: Higher consumer prices, less competitive industries.

National Security

• Governments protect industries crucial to national security from dependence on other countries.
• Example: U.S. support for the semiconductor industry & reducing foreign dependency.
• Benefits: Reducing foreign dependency can lead to high costs.

Advancing Human Rights

• Promoting human rights internationally.
• Example: U.S. sanctions on Myanmar illustrates a push for human rights in trade.
• Trade interventions can encourage reform, although limited by other nations' trade policies (complex).

Economic Arguments for Intervention

• Historically, most economists favor free trade, but recent developments have sparked new perspectives on government intervention.

The Infant Industry Argument

• Supporting new industries until they can compete globally.
• Example: Brazil's auto industry protection through tariffs.
• Criticism: Risk of fostering inefficient industries; access to global capital may reduce the need for intervention.

Strategic Trade Policy

• Helping domestic firms gain first-mover advantages.
• Examples: U.S. support for Boeing, Japan's LCD industry.
• Possible outcomes: Creating dominant global firms, boosting national income.

Implications of Strategic Trade Policy

• Enhancing national competitiveness in key industries.
• Tools: Export subsidies, research & development (R&D) support, market protection.
• Potential Risks: High costs and risks of choosing uncompetitive industries.

Revised Case for Free Trade

• Offers challenges to previous strategic trade policies (by Adam Smith and David Ricardo, supported by Paul Krugman).
• Retaliation and trade wars can be expensive/pointless if subsidies encourage an arms race.

Domestic Policies

• Refer to government interventions within a country's economy.
• Aims: Regulating industries, protecting local interests, or promoting growth.
• Impact: Can significantly impact international trade by changing the competitive environment.

Rice Tariffication Law (Republic Act No. 11203) - Philippines

• Allows the Philippines to import more rice by taxing it instead of quotas.
• Made rice cheaper for consumers but hurt local farmers.

Common Agricultural Policy (CAP) - European Union

• Supports European farmers with subsidies and price controls.
• Makes European agriculture more competitive but distorts global agricultural trade.

Protectionist Tariffs - United States

• U.S. tariffs on imported steel and aluminum to protect domestic industries.
• Potential benefits for U.S. producers, but can lead to trade disputes and high costs for other industries.

Development of the World Trading

• The General Agreement on Tariffs and Trade (GATT) aimed to reduce trade barriers and promote free trade (established in 1948).
• From Smith to the Great Depression: Smoot-Hawley Act worsened the Great Depression globally by imposing high tariffs on imported goods.
• 1947 to 1979: GATT and Trade Liberalization: Gradual reduction of tariffs, subsidies, and quotas (8 rounds).
• 1980 to 1993: Protectionist Trends: Countries found ways around GATT regulations to support their domestic production while still benefiting from world trade.

World Trade Organization (WTO)

• Arbitration panels for trade disputes are automatically adopted unless rejected by consensus.
• WTO has 159 members, accounting for ~98% of world trade.
• The Uruguay Round and WTO's establishment: 7 years of negotiations culminating in the WTO's creation (1995).
• WTO as a global police force via dispute resolution.
• Expanding trade agreements encompassing foreign direct investment (an expansion of prior GATT agreements).

Mercantilism & Economic Advantage Theories

• Mercantilism: Encourage exports, discourage imports.
• Absolute Advantage: One country produces a product more efficiently than another.
• Comparative Advantage: Countries specialize in what they produce most efficiently, even if not the best at producing everything.
• Heckscher-Ohlin Theory: Resource availability influences international trade.