Chapter 6: Global Trade and Investment Environment (IB)

Chapter 6: The Global Trade and Investment Environment Malavega, Christian Rafael M. Magdaong, Jacky Rose Lazaro, Alexandra Laus, Jandrei Jumawan, Kimshane Jimenez, Apriline Isabelle Javier, Evette Allana P. The Benefits of Trade Access to Products: Countries can get goods they cannot produce effic...

Chapter 6: The Global Trade and Investment Environment Malavega, Christian Rafael M. Magdaong, Jacky Rose Lazaro, Alexandra Laus, Jandrei Jumawan, Kimshane Jimenez, Apriline Isabelle Javier, Evette Allana P. The Benefits of Trade Access to Products: Countries can get goods they cannot produce efficiently (e.g., Iceland trades fish for oranges). Specialization: Countries focus on producing and exporting what they are best at, improving efficiency. Lower Costs: Imports allow access to cheaper products, benefiting consumers. Global Resources: Nations use their unique resources efficiently (e.g., U.S. excels in aircraft, Bangladesh in textiles). Overall Economic Gains: Trade boosts the entire economy, even if some industries feel threatened. Trade Theory and Policy Lacks agreement on recommendation for government policy. Smith, Ricardo, Heckscher-Ohlin Theories: Support unrestricted free trade— import controls and subsidies are inefficient. New Trade Theory & Porter's Theory: Support limited government intervention to foster certain export-oriented industries. Justifying the inadequacy in government intervention in exporting This argument is called “Strategic Trade Policy” (Chapter 7). Strategic Trade Policy: Evaluates the balance between government intervention and the efficiency of free markets. Unrestricted Trade pros and cons (Chapter 7)  Political Arguments for Intervention Governments intervene in trade for political, economic, and social reasons. Key motivations include protecting jobs, national security, consumer safety, and human rights. Trade interventions can include tariffs, sanctions, and preferential trade terms. Protecting Jobs and Advancing Human National Security Industries Rights Shield jobs and industries Protect industries critical to Promote human rights from foreign competition. national security. internationally. Example: U.S. steel tariffs Example: U.S. support for Example: U.S. sanctions on (2002), EU’s CAP for Sematech in the semiconductor Myanmar, anti-apartheid measures farmers. industry. in South Africa. Higher consumer prices, less Reduced foreign dependency, high Encourages reform, limited by other competitive industries. costs. nations’ trade.  Economic Arguments for Intervention Historically, most economists have advocated for free trade, but recent developments in trade theory have influenced new perspectives on government intervention. Implications of The Infant Industry Strategic Trade Strategic Trade Policy Argument Policy Purpose: Support new Goal: Help domestic firms secure Objective: Enhance national industries until they can first-mover advantages. competitiveness in key industries. compete globally. Examples: U.S. support for Boeing, Tools: Export subsidies, R&D Example: Brazil’s auto Japan’s LCD industry. support, market protection. industry is protected by Impact: Can create dominant Risks: High costs, risk of choosing tariffs. global firms, boosting national uncompetitive industries. Criticism: Risk of fostering income. inefficient industries; access to global capital may reduce need.  Revised Case for Free Trade - challenges the strategic trade policy - by Adam Smith and David Ricardo - supported by Paul Krugman Retaliation and Trade War - Paul Krugman says strategic policy is “beggar thy neighbor” If Boeing will get more subsidies from the U.S. government to continue competing with Airbus, European and American taxpayers will have to pay for an expensive and pointless trade war.  Domestic Policies Refer to government interventions within a country’s economy that aim to regulate industries, protect local interests, or promote growth. Domestic policies can significantly impact international trade by altering the competitive landscape. Rice Tariffication Law (Republic Act Common Agricultural No. 11203) - Policy (CAP) - European Protectionist Tariffs - Philippines Union United States This law allows the Philippines As mentioned, CAP supports farmers, The U.S. has imposed tariffs on to import more rice by taxing it particularly in France and Germany, imported steel and aluminum to protect instead of limiting how much with subsidies and price controls, its domestic industries. While this can be brought in. It made rice making European agriculture more benefits U.S. producers, it can lead to cheaper for consumers but hurt competitive domestically but raising trade disputes and higher costs for local farmers who now face food prices for consumers and industries that rely on these materials, competition from imported rice. distorting global agricultural trade. affecting global trade flows.  Development of the World Trading This led to the development of the General Agreement on Tariffs and Trade (GATT) in 1948, which aimed to reduce trade barriers and promote free trade. FROM SMITH TO 1947–1979: GATT, TRADE 1980–1993: THE GREAT LIBERALIZATION, AND PROTECTIONIST DEPRESSION ECONOMIC GROWTH TRENDS Smoot-Hawley Act was highly GATT aimed to liberalize trade by Addressing the trend toward greater influential in worsening the Great gradually reducing tariffs, subsidies, protectionism, countries found ways to Depression, both in the U.S. and and quotas through a series of eight get around GATT regulations through around the globe. rounds. bilateral voluntary export restraints (VERs), which did not require the importing country or the exporting country to make any changes. WORLD TRADE ORGANIZATION (WTO): EXPERIENCE TO DATE Arbitration panel reports on trade disputes between member countries are automatically adopted by the WTO unless there is a consensus to reject them. By 2014, the WTO had 159 members, including China, which joined at the end of 2001, and Russia, which joined in 2012. WTO members collectively account for 98 percent of world trade. The major event about WTO are the collapse of WTO talks in Seattle in late 1999 and the limited Protectionism following the global financial crisis of 2008–2009. THE URUGUAY ROUND AND THE WORLD TRADE THE FUTURE OF THE WTO: UNRESOLVED ISSUES AND ORGANIZATION - The Uruguay Round dragged on THE DOHA ROUND for seven years before an agreement was reached on December 15, 1993. It went into effect July 1, Antidumping Actions 1995. Protectionism in Agriculture Protecting Intellectual Property Market Access for Nonagricultural Goods and WTO as Global Police - The fact that countries are Services using the WTO represents an important vote of confidence in the organization’s dispute resolution A New Round of Talks: Doha procedures. TIn 2001, the WTO launched a new round of talks between member-states aimed at further liberalizing Expanding Trade Agreements - The WTO was also the global trade and investment encouraged to extend its reach to encompass framework. regulations governing foreign direct investment, something the GATT had never done. Mercantilism An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. Absolute Advantage A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it. Comparative Advantage Comparative advantage is an economic theory that explains how countries can benefit from trade by specializing in producing goods they can produce more efficiently relative to others, even if they can produce everything better than their trading partners. This specialization allows countries to trade for goods they produce less efficiently, ultimately increasing overall economic output and consumer benefits. Heckscher-Ohlin Theory The Heckscher-Ohlin theory provides a framework to understand how resource availability influences international trade. It shows that countries benefit by specializing in what they can produce most efficiently based on their unique resource endowments. Thank you for listening!