Lecture 3 - The Political Economy of International Trade PDF

THE POLITICAL ECONOMY OF INTERNATIONAL TRADE VŨ THÀNH CÔNG, MPP  THE EVOLUTION OF THE IPE: CLASHING IDEAS AND PRACTICES The era from the late Middle Ages to the end of the 18th century: Age of Discovery: new frontiers in the Americas, Asia, and Africa. The exchange of g...

THE POLITICAL ECONOMY OF INTERNATIONAL TRADE VŨ THÀNH CÔNG, MPP  THE EVOLUTION OF THE IPE: CLASHING IDEAS AND PRACTICES The era from the late Middle Ages to the end of the 18th century: Age of Discovery: new frontiers in the Americas, Asia, and Africa. The exchange of good and people tied the colonies and the home states together.  THE EVOLUTION OF THE IPE: CLASHING IDEAS AND PRACTICES Mercantilism (16th - 18th): Anarchy, Zero-sum (+relative gains), Might is right, State (key actor) > Market Dark Age and The Dominance of the Church Ownership of precious metals created power of state -> Maximize state wealth! Navigation + Caravel > Age of Discovery Colonialism + Interventions, Protectionism + Exploit from and Export to colonies Economic nationalism: boost exports by backing a powerful state protecting domestic monopolies (I.e. British East India Company). MERCANTILISM LIBERALISM (SINCE 19TH) ▪ Industrialization -> Bourgeois revolution -> The Dominance of Capitalism Economics drives politics, Markets > states, Positive sum (+absolute gains) ▪ Rational and self-interest - invisible hand -> Market development Focus: individual, households, enterprises + No gov intervention + No help for the poor Adam Smith: Absolute advantage + Specialization David Ricardo: Comparative advantage + Opportunity Cost “Malthusian Population Trap” (food - people – land) + Iron Law of Wages Capitalism: Private Ownership + Profit Motive + Market Economy ▪ Furthering global economic integration -> Free Trade -> Eco Interdependence + Peace THE EVOLUTION OF THE IPE - MARXISM  THE EVOLUTION OF THE IPE: CLASHING IDEAS AND PRACTICES MARXISM: Economics drives politics: ownership-> power All history has been a class struggle ▪ 19th to WWI: Colonialism + industrialization empowered EU states and capitalism. ▪ Socio-economic relations: conflictual and surplus value exploitation (zero-sum) ▪ Radicalism (Marxists) emerged as a response to the excesses and inequalities of the time. Competition between classes: have (bourgeoisie - MNCs/ elites) vs have-not (labor- proletariat) -> Revolution Gov is a tool for oppression. QUESTION FOR GROUPS – LECTURE 3 ▪ Why do some countries want to intervene in international trade, like the US? ▪ How do governments intervene in international trade? WHY INT’L TRADE IS IMPORTANT?  INTERNATIONAL TRADE: BASIC CONCEPTS ▪ International trade is the exchange of capital, goods, and services across international borders or territories. ▪ Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from or sell to another country ▪ The goal of economic liberal thinking was to create a free trade system. (Adam Smith, Ricardo, and Heckscher-Ohlin) To smoothen the process of trade between countries of different economic standing, some international economic organisations were formed, such as the World Trade Organization (GATT’s predecessor). ▪ For various reasons, mercantilist leaders want to protect their home markets. Although many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups  GROSS DOMESTIC PRODUCT (GDP) ▪ Gross domestic product (GDP) is the most commonly used measure for the size of an economy. ▪ GDP can be compiled for a country, a region (such as Tuscany in Italy or Burgundy in France), or for several countries csombined, as in the case of the European Union (EU). ▪ The GDP is the total of all value added created in an economy. ▪ The value added means the value of goods and services that have been produced minus the value of the goods and services needed to produce them, the so called intermediate consumption.  WHAT IS GDP? GDP = C + I + G + (X-M) GDP (Y) is made up of 5 components: ▪ Consumer Spending (C) ▪ Investment (I) ▪ Government Spending (G) ▪ Exports (X) ▪ Imports (M). Nominal GDP = 10,00,000 + 50,00,000 + 25,00,000 + 15,00,000 – 90,00,000 = 10,00,000 ▪ Are you interested in any international trade event? ▪Why does Trade Deficit happen? ▪Why is US’s trade deficit with China not a problem? ▪ Why do some countries want to intervene in international trade, like the US? ▪ Why don’t other countries follow the US? ▪How do governments intervene in international trade?  INSTRUMENTS OF TRADE POLICY ▪ There are seven main instruments of trade policy 1. Tariffs = duties 2. Subsidies 3. Import quotas 4. Voluntary export restraints (VER) 5. Local content requirements (LCR) 6. Antidumping policies 7. Administrative policies (also technical barriers)  1. TARIFFS (THUẾ QUAN) ▪ A tariff - a tax levied on imports that effectively raises the cost of imported products relative to domestic products ▪ Specific tariffs (thuế đặc định/thuế theo trọng lượng) are levied as a fixed charge for each unit of a good imported ▪ Ad valorem tariffs (thuế theo giá trị) are levied as a proportion (%) of the value of the imported good  2. SUBSIDIES ▪ A subsidy: a government payment to a domestic producer - Cash grants - Low-interest loans - Tax breaks - Government equity participation in the company (e.g. Airbus) ▪ Subsidies help domestic producers compete against low-cost foreign imports gain export markets ▪ Consumers typically absorb the costs of subsidies 3. Import Quota: ▪ Restriction on the quantity of some good imported into a country. 4. Voluntary Export Restraint (VER) ▪ Quota on trade imposed by exporting country, typically at the request of the importing country ▪.Benefits producers by limiting import competition, e.g. Japan - limited to 1.85 mm vehicles/year ▪ Cost to consumers - $1B/year between ‘81 - 85. ▪ Money went to Japanese producers in the form of higher prices.  5. LOCAL CONTENT REQUIREMENTS (LCR) ▪ Requires some specific fraction of a good to be produced domestically. ▪ Percent of component parts. ▪ Percent of the value of the good. ▪ Initially used by developing countries to help shift from assembly to production of goods. ▪ Developed countries (US, EU) beginning to implement. ▪ For component part manufacturer, LCR acts the same as an import quota. ▪ Benefits producers, not consumers.  6. ANTI-DUMPING POLICY Dumping - selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their “fair” market value ▪ a way for firms to unload excess production in foreign markets ▪ producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits Countervailing cases are when a foreign government provides enough subsidies and tax benefits for their manufacturers to sell their goods more cheaply than domestic manufacturers.  6. ANTI-DUMPING POLICY ▪ Antidumping polices - punish foreign firms that engage in dumping, where the actual duty amount makes up for the gap between foreign manufacturer pricing and fair market value. the goal is to protect domestic producers from “unfair” foreign competition ▪ Domestic firms that believe a foreign firm/industry is dumping and causing significant damage can file a complaint with the government ▪ if the complaint has merit, antidumping duties (AD) (thuế chống bán phá giá), also countervailing duties (CD) (thuế chống trợ cấp) may be imposed - an import tax imposed on certain goods in order to counter export subsidies ▪ Transshipment /re-routing  7. ADMINISTRATIVE TRADE POLICIES ▪ Administrative trade policies - bureaucratic rules that are designed to make it difficult for imports to enter a country ▪ Technical barriers - regulation, standard or procedure that could make exporting goods to another country more difficult. ▪ These policies hurt consumers by denying access to possibly superior foreign products However: ▪ It is useless unless it makes the industry more efficient ▪ If a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds ▪ Hard to determine when an industry has grown up enough to stop the government support. Protecting these industries is really no different than sponsoring the development of inefficient industries.  MERCANTILISM ECONOMIC NATIONALISM PROTECTIONISM  WHY DO GOVERNMENTS INTERVENE IN TRADE? ▪ There are two types of arguments 1. Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) 2. Economic arguments - concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)  POLITICAL ARGUMENTS FOR INTERVENTION ▪ Political arguments for government intervention include 1. Protecting jobs, firms and industries 2. Preserving national security 3. Retaliating to unfair foreign competition 4. Protecting consumers from “dangerous” products 5. Furthering the goals of foreign policy 6. Protecting the human rights of individuals in exporting countries  ECONOMIC ARGUMENTS FOR INTERVENTION 1. Generate revenue 2. Manipulate the flow of trade 3. The infant industry argument - suggests that an industry should be protected until it can develop and be viable and competitive internationally this has been accepted as a justification for temporary trade restrictions under the WTO DO YOU KNOW WHAT ECONOMIC THEORY THAT MR. TRUMP IS INFLUENCED BY?  PIONEERS OF TRADE THEORY ▪ Adam Smith, The Wealth of Nations (1776) – first defense of free market policies → Invisible hand + Absolute advantage → Specialization http://upload.wikimedia.org/wikipedia/en/8/8d/David_ricardo.jpg ▪ David Ricardo, Principals of Political Economy and Taxation (1817) -> Comparative advantage + Opportunity Cost → Specialization ABSOLUTE VS COMPARATIVE GRAPHICAL VERSION OF RICARDIAN THEORY  FROM SMITH TO THE GREAT DEPRESSION ▪ Up until the Great Depression of the 1930s, most countries had some degree of protectionism ▪ When the Great Depression hit, countries responded to the economic chaos by erecting significant trade barriers to keep imported products out, and create jobs at home The U.S. enacted the Smoot-Hawley Act (1930) - created significant import tariffs on foreign goods (raising U.S. tariffs on over 20,000 imported goods). ▪ Other nations took similar steps and as the depression deepened, world trade fell further  HECKSCHER-OHLIN (H-O)MODEL (1933, COMMON AFTER WWII) ▪ Basic model: two countries, two goods, two factors of production (labor and capital). Ricardo only had one factor (labor). ▪ Based on two different characteristics of countries and products Countries differ from each other according to the factors of production (Yếu tố sản xuất) they possess Goods differ from each other according to the factors that are required in their production ▪ Differences in factor endowments (nguồn lực sẵn có – ie: labour, agricultural land, mineral resources, capital or technology.) lead to “gains from trade”  H-O MODEL ▪ Relative Factor abundance of nations and Factor intensity of communities ▪ Factor abundance: relative endowment of capital to labor ▪ Factor intensity: relative amounts of capital and labor used in producing a good ▪ The model essentially says that countries export products that use their abundant and cheap factors of production, and import products that use the countries' scarce factors. ▪ Countries with a lot of labor relative to capital, for example, will tend to have a comparative advantage in labor-intensive goods production. ▪ For maximum benefit, the other country should have a very different factor endowment.  RICARDIAN AND HECKSCHER-OHLIN MODELS OF INTERNATIONAL TRADE ▪ Ricardian Model ▪ H-O Model - The model suggests that the - The model suggests that countries countries specialize in producing should produce and export goods goods and services that they can using the factors/resources that do best. they have in abundance. - Production is maximized when - Similarly, the countries should each country specializes in the import goods that require resources good or service that they produce that they have in short supply. at lowest cost (opportunity cost).  NEW TRADE THEORY (NTT): THE REVISED CASE FOR FREE TRADE (1970) ▪ New trade theory (Paul Krugman) explains why countries are trade partners when they are trading similar goods and services. ▪ First mover advantages Monopolistic competition: similar products/services but not perfect substitutes Economies of scale (unit cost reductions associated with a large scale of output) Network effects Barriers to entry for other firms.  IMPLICATIONS OF NEW TRADE THEORY (NTT) ▪ Nations may benefit from trade even when they do not differ in factor endowments or technology (Paul Krugman). Ex: Germany vs the US in car manufacturing industry. ▪ In every other respect, the countries are identical so there are no traditional comparative advantage reasons for trade. ▪ With trade, network effects and the scale of production/economies of scale can increase which reduces costs and price. Globalization: each consumer has increased choice. Firms are often competing on branding, quality and not just simple price.  NEW TRADE THEORY: GOV’T INTERVENTION ▪ New trade theorists believe government intervention in promoting new industries and supporting the growth of key industries is justified ▪ However, Classic trade theorists disagree A government’s decision to intervene in a market may appease a certain group, but not necessarily the support the interests of the country as a whole The government is likely to have poor information about which industry to support and how to go about it. It creates a tendency for powerful vested business interests which rely on state support -> inefficiency in the long-term.  INTERNATIONAL TRADE: (INTERNATIONAL) SYSTEM GOVERNANCE Managing the (international) system (from the perspective of system governance) ▪ Promotion of liberalization ▪ Dispute resolution ▪ Safeguards ▪ Other current issues  THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) ▪ Established in 1947 ▪ The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade ▪ GATT’s membership grew from 19 to more than 120 nations ▪ Tariff reduction was spread over eight rounds of negotiation ▪ GATT regulations were enforced by a mutual monitoring system ▪ The final GATT round, the Uruguay Round, covered new items such as services, intellectual property, and agriculture. ▪ In 1995, GATT became a formal institution, renaming itself the World Trade Organization (WTO).  World Trade Organization ▪ Umbrella organization for: ▪ GATT (Goods) ▪ Services ▪ Intellectual property ▪ Two important procedures were initiated in WTO: The Trade Policy Review Mechanism (TPRM), which conducts periodic surveillance of trade practices of member states The Dispute Settlement Body, designed as an authoritative panel to hear and settle trade disputes. The WTO can impose sanctions against violators and is more powerful than other economic dispute resolution arrangements.  WTO -WORLD TRADE POLICEMAN? ▪ Responsibility for trade arbitration Reports adopted unless specifically rejected. After appeal, fail to comply can result in compensation to injured country or trade sanctions. ▪ 104 disputes brought to WTO in first three years. ▪ 196 handled by GATT during its 50 year history. ▪ US is biggest WTO user - 34 disputes. ▪ Big wins - beef – bananas (US vs EU over EU’s banana tariffs, 1999) ▪ Big loss – Kodak (Kodak vs. Fuji case, 1997)  SOVEREIGNTY AN ISSUE? ▪ Still protected ▪ No change to rights or obligations w/o US consent ▪ No US laws changed by WTO Global efforts for free trade WTO  MULTILATERAL TRADE NEGOTIATIONS ▪ 1947 Geneva ▪ 1949 Annecy ▪ Kennedy Round: Biggest tariff reductions ▪ 1950 Torquay ▪ Tokyo Round: began discussions of non- ▪ 1956 Geneva tariff barriers. ▪ 1960-61 Dillon ▪ Uruguay Round: established the basis for the ▪ 1962-67 Kennedy World Trade Organization. ▪ 1973-79 Tokyo ▪ 1986-93 Uruguay ▪ 2001- Doha MULTILATERAL TRADE NEGOTIATIONS: THE DOHA ROUND ▪ Begun in November, 2001 ▪ Major conferences so far: ▪ Reform of the international trading system through the introduction of lower ▪ 2001 Doha (Qatar) trade barriers and revised trade rules. ▪ 2003 Cancun ▪ 2004 Geneva ▪ 20 areas of trade. ▪ 2005 Hong Kong ▪ Doha Development Agenda (aka semi- ▪ 2006 Geneva officially): a fundamental objective is to ▪ 2007 Potsdam improve the trading prospects of developing countries. ▪ 2008 Geneva ▪ 2015 Nairobi  MAIN ISSUES IN THE DOHA ROUND Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules, including ▪ Agriculture ▪ Non-agricultural market access Trade and environment ▪ Services Trade facilitation ▪ Intellectual property WTO rules ▪ Trade and development Dispute Settlement Understanding  MAIN ISSUES IN THE DOHA ROUND The Doha Round has bought out some of the differences between the developed North and the developing South. ▪ Relatively wealthy North vs Poor and struggling South ▪ Proponents of economic liberalism point to the progress made in closing the development gap. ▪ Detractors of economic liberalism point to a different set of indicators, arguing that the gap between rich and poor is actually increasing. ▪ In liberal economic theory, trade liberalization is based on comparative advantage and is a key engine of economic growth. ▪ It is unclear whether aggregate growth leads to the economic improvement of the lives of individuals.  WTO: EXPERIENCE TO DATE ▪ The WTO has emerged as an effective advocate and facilitator of future trade deals, as well as dispute resolution So far, most countries have adopted WTO recommendations for trade disputes (In 2010, it had 153 members, with another 25 in the application process). The WTO has brokered negotiations to reform the global telecommunications and financial services industries The 1999 WTO Protest in Seattle (anti-globalization) demonstrated that issues surrounding free trade have become mainstream, and dependent on popular opinion  WTO - LEADINGVICTORIES  Telecommunications ◦ 68 countries – 95% of global market ◦ Pledged to liberalize their telecommunications  Financial Services ◦ 95% of financial services market ◦ 102 countries will open, to varying degrees, their markets.  THE FUTURE OF THE WTO The WTO is currently focusing on 1. Anti-dumping policies - encouraging members to strengthen the regulations governing the imposition of antidumping duties (AD) 2. Protectionism in agriculture - concerned with the high level of tariffs and subsidies in the agricultural sector of many economies 3. Protecting intellectual property (IP) - members believe that the protection of intellectual property rights is essential to the international trading system ▪ TRIPS (Trade-related Aspects of IP Rights) obliges WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years 4. Protecting nonagricultural products and services.  IMPLICATIONS FOR MANAGERS Question: Why should international managers care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism? Answer: ▪ Trade barriers impact firm strategy ▪ Firms can play a role in promoting free trade or trade barriers  TRADE BARRIERS AND FIRM STRATEGY ▪ Trade theory suggests why dispersing production activities globally can be beneficial ▪ However, trade barriers may limit a firm’s ability to do so ▪ Trade barriers raise the cost of exporting ▪ Quotas limit exports ▪ Firms may have to locate production activities within a country to meet local content regulations ▪ The threat of future trade barriers can influence firm strategy ▪ All of these can raise costs above what they may have been in a world of free trade  POLICY IMPLICATIONS ▪ International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies ▪ While there may be short run benefits to having government protection in some situations, in the long run these can backfire and other governments can retaliate making it more difficult to construct a globally dispersed production system  EU-US AND BEEF ▪ 1989 - EU bars growth hormone treated beef. ▪ US exports decline form $231mm in ‘88 to $98mm in ‘94. ▪ With other countries, US files complaint to WTO. ▪ US wins (1998) - WTO Panel declares ban to be illegal. ▪ EU reluctant to comply and appeals, but loses the appeal. ▪ 1999 - US threatens to raise tariffs on hundreds of EU products.  US TARGETS EU ▪ Beef ▪ Soups and Broths ▪ Pork ▪ Truffles ▪ Sausages ▪ Mineral Water ▪ Corned Beef (bò ngâm muối) ▪ Cut Flowers ▪ Roquefort Cheese ▪ Yarn ▪ Chocolate Products ▪ Electric Hair Clippers ▪ Mustards ▪ Motorcycles and Mopeds ▪ Chewing Gum QUESTION FOR GROUPS – LECTURE 4 ▪ What is the function of money? ▪ What is Bretton Woods system? Why did it happen? ▪ What are the roles of IMF and WB in international monetary system?  REVIEW QUESTIONS ▪ A tariff levied as a fixed charge for each unit of a good imported is a(n) a) Fixed tariff b) Specific tariff c) Ad valorem tariff d) Transit tariff ▪ A quota on trade imposed from the exporting country’s side is a(n) a) Voluntary export restraint b) Quota rent c) Local content requirement d) Administrative trade policy ▪ Dumping refers to: a) buying goods at low prices abroad and selling at higher prices locally b) expensive goods selling for low prices. c) reducing tariffs. d) sale of goods abroad at a low price, below their cost and price in home market. ▪ It is drawback of free trade: a) Prices of local goods rise. b) Government loses income from custom duties. c) National resources are underutilized. d) (a) and (b) of above. ▪ Which argument for government intervention suggests that an industry should be protected until it can develop and be viable and competitive internationally? a) Strategic trade policy b) National security c) Retaliation d) Infant industry ▪ Who benefits from tariff protection? a) Domestic consumers on the good produced b) Domestic producers of the good produced c) Foreign producers of the good produced d) Foreign consumers of the good produced. ▪ A country’s workers union attempted to win the approval of legislation that would moderate the practice of foreign sourcing on the part of auto manufacturers. Which of the following best represents this legislation? a) Voluntary export quotas b) Export subsidies c) Tariff quotas d) Local content requirement ▪ A tariff is: a) A restriction on the number of export firms b) Limit on the amount of exported goods c) Tax on imports d) (b) and (c) of above ▪ Which of the following was a key opponent of mercantilism? a) David Rizzio. b) David Bacardi. c) Adam Smith. d) John M. Keynes. ▪ Which of the following trade policies limits specified quantity of goods to be imported at one tariff rate. a) Quota b) Import tariff c) Specific tariff d) All of the above ▪ A tariff: a) increases the volume of trade b) reduces the volume of trade c) has no effect on volume of trade d) (a) and (c) of above ▪ According to the Ricardo's principle, specialisation and trade increase a nation's total output since: a) Resources are directed to their highest productivity b) The output of the nation's trading partner declines c) The nation can produce outside of its production possibilities curve. d) The problem of unemployment is eliminated. ▪ Which of the following is a reason for recent governmental decreases in restrictions on cross-border trade or resource movements? a) Most countries face shortages of workers, thus by allowing entry of foreign workers they can produce more. b) Governments hope to induce other nations to reduce their barriers in return. c) Consumers increasingly want to buy goods and services produced in their own countries, thus making restrictions less necessary. d) Governments believe that domestic producers will become more efficient as a result of foreign competition. ▪ Regional trade agreements are NOT a. an obstacle to trade liberalization b. forbidden by GATT c. against National Treatment and Most Favored Nations d. a and b are correct ▪ The Theory of Relative Factor Endowments is given by A. David Ricardo B. Adam Smith C. Paul Krugman D. Heckscher and Ohlin ▪ The theory of Comparative Cost advantage is given by a) David Ricardo b) Adam Smith c) Paul Krugman d) Heckscher and Ohlin ▪ In a world of two countries (Brazil and Chile), two goods can be produced (timber and computers) with two production factors (capital and natural resources). Suppose that Brazil is relatively capital abundant and Chile is relatively natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then following the Heckscher-Ohlin Theory A. Chile will produce more computers after trade begins with Brazil B. Brazil will produce more timber after trade begins with Chile C. Chile will produce more timber after trade begins with Brazil D. Brazil will completely specialize in computers and Chile in timber after trade ▪ In the 2-factor, 2-good Heckscher-Ohlin model, the two countries differ in a) military capabilities b) labour productivities c) relative abundance of factors of production d) tastes ▪ Which of the following is one of the implications of New Trade Theory (NTT)? a) Countries as a whole must gain from trade. b) A country can only hurt itself by using government policies to promote exports. c) Consumers gain from the increased variety of goods that trade makes available d) A country may export a good or import it, but not both. ▪ The Asia-Pacific Economic Cooperation (APEC) forum... a) is part of a more general trend towards regional blocs. b) accounts for over half of the world's GDP. c) has member states which include authoritarian regimes as well as democracies. d) All of the above are true.  ▪ Thank you very much! ▪ Email: [email protected]