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.

Explore the intricate world of global trade and investment as discussed in Chapter 6. This chapter delves into the benefits of trade, including access to products, specialization, and overall economic gains. Understand the various trade theories and the ongoing debates surrounding government policy recommendations.