Free Trade
Occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country .
- Modern international trading system is based on General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).
Impact of Tariffs
- Increase government revenues
- Force consumers to pay more for certain imports.
- Are pro-producer and anti-consumer.
- Reduce the overall efficiency of the world economy.
Subsidies
Government financial assistance to a domestic producer.
- Help domestic producers compete against foreign imports and gain export markets.
They can be in the form of:
- Cash grants
- Low-interest loans
- Tax breaks
- Government equity participation in the company.
Domestic producers gain while consumers typically absorb the costs.
Instruments of Trade Policy:
- Tariffs
- Subsidies
- Import Quotas
- Tariff Rate Quotas
- Voluntary Export Restraint
- Quota Rent
- Export Tariffs and Bans
- Local Content Requirements
- Amiistrative Policies
- Antidumping Policies
Import Quotas
Usually enforced by issuing import licenses to a group of individuals or firms.
Tariff Rate Quotas
Hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota.
Voluntary Export Restraint
Can appease protectionist measures in a country.
Export Tariff
Goal is to discriminateagainstexporting in order to ensure that there is sufficient supply of a good within a country.
Export Ban
Partially or entirely restricts the export of a good.
Local Content Requirements
- Requirement expressed in physical or value terms
- Protects domestic producers
- Consumers face higher prices
Administrative Policies
Policies hurt consumers by limiting choice.
Antidumping Policies
Objective is to protect domestic producers from unfair foreign competition.
- Domestic producer can file a petition with the Commerce Department and the International Trade Commission (ITC)
Dumping
Enables firms to unload excess production in foreign markets.
- May be result of predatory behavior.
- Firms use low prices to drive competitors out and then raise prices and earn more profit.
Political Arguments for Governmental Intervention in International Trade
- Protecting jobs and industries.
- Protecting national security.
- Retaliating
- Government uses threat of intervention as bargaining tool to open foreign markets.
- May liberalize trade and result in economic gains.
(Risky strategy) - Protecting consumers
- Protect consumers from unsafe products
(Indirect effect is limit or ban of imports)
Economic Arguments for Governmental Intervention in International Trade
Infant- industry Argument: Nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale.
(Assumes firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market)
Strategic Trade Policy:
- Government can help raise national income when a domestic firm gains first-mover advantages.
- A government may intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages.
Krugman’s startegic policies aimed at…
domestic firms in a dominant position in a global industry boost national income at the expense of other countries.
- These policies will probably provoke retaliation.
- Help establish antidumping policies and rules that minimize trade-distorting subsidies.
Domestic Policies
- Governments don’t always act in the national interest
- Interest groups may influence policy
- Krugman concludes that strategic trade policy is almost certain to be captured by special-interest groups which will distort it to their own ends.
Strong economic arguments for unrestricted free trade:
- Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit.
- General Agreement on Tariffs and Trade (GATT)
- World Trade Organization (WTO)
1947-1979: GATT, Trade Liberalization, and Economic Growth:
Following the Great Depression, U.S. embraced free trade.
- GATT was designed to liberalize trade by eliminating tariffs, subsidies, import quotas, etc.
_ Tariff reduction was spread over eight rounds with great success.
1980-1993: Protectionist Trends
Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries.
Uruguay Round
Sought to:
- Extend GATT rules to cover trade in services.
- Develop rules on intellectual property.
- Reduce agricultural subsidies.
- Strengthen GATT’s monitoring and enforcement.
The World Trade Organization
- General Agreement on Trade in Services (GATS)
- Agreement on Trade-Related
- Aspects of Intellectual Property Rights (TRIPS)
WTO Experience to Date
By 2016, 164 members who account for 98% of world trade.
- Positive effect
- Countries involved have mostly adopted WTO’s recommendations.
- Expanded trade agreements.
The current agenda of WTO focuses on:
- The rise of anti-dumping policies.
- The high level of protectionism in agriculture.
- The lack of strong protection for intellectual property rights in many nations.
- Continued high tariffs on nonagricultural goods and services in many nations.
- Reflects desire to protect domestic agriculture.
- Protection of Intellectual Property
- Reduce tariff rates to 0
- Market access for nonagricultural goods and services.
- Cut tariffs on industrial goods and services.
- Phase out subsidies to agricultural producers.
- Reduce barriers to cross-border investment.
- Limit use of antidumping laws.
