Lecture 4 - Spring 2012

							         The World Trading System
Is based on reducing or eliminating all barriers to trade
  in goods and services (i.e., protectionism) through the
  principle of free and fair trade.
Key Issues include:
   Tariffs
   Non-tariff barriers (quotas, etc)
   Subsidies
   Trade discrimination
   Belief that Trade Benefits all parties – that it is not a
    zero sum game
      The World Trade Organization
   Created January 1, 1995
   Implements the provisions of the General Agreement
    on Tariffs and Trade: the GATT (1947-48)
   Contracting parties to the GATT became members
   153 members; over 100 from developing countries
   Certain activities are not covered by the WTO:
    Shipping and air transport
   Important non-members: Russia, Iraq, Iran. Also,
    North Korea and Cuba.
              WTO BACKGROUND

   Need to rebuild international trading system after World
    War II and Great Depression

   An international trade organization was discussed during
    the Bretton Woods conference in 1944. But no trade
    organization came out of the Bretton Woods Agreement.

   Instead, the GATT was formed as a provisional agreement
    among nations based on certain principles with an
    understanding the ultimate goal was a formal organization
    – the International Trade Organization.

   ITO Never happened.
             WTO BACKGROUND

   WTO formally organized in 1995 to administer the GATT,
    the General Agreement on Trade in Services, and the
    Agreement on Intellectual Property Rights

   Located on the lake in Geneva, Switzerland. 550 staff
    members provide resources for settling disputes, etc.
          Four Principles of WTO
The WTO is a club.
Membership means you agree with these four principles:

1. Access

2. Most Favored Nation (MFN)

3. Transparency

4. National Treatment
               Goals of the WTO

   Harmonize Tariffs
   Lower tariffs and make them binding
   Negotiate from time to time
   Reduce quantitative restrictions
   Establish actual values for traded goods
   Ensure transaction prices were the same as actual
    values
         BENEFITS OF THE WTO


   Creates common interests among trading nations →
    reduces political disputes – and chances of trade and
    “hot” wars.

   Establishes “rules of the game” for all members

   Simplifies administration and negotiation of trade
    matters for all member countries
BI-LATERAL NEGOTIATIONS:
         NO WTO

              153 countries would need
              11,628 bilateral agreements
MULTI-LATERAL NEGOTIATIONS

                153 have one agreement
                with the WTO




          WTO
      Rounds of Traded Negotiations

   Kennedy Round in early to mid-1960s

   Tokyo Round

   Uraguay Round

   Doha Round Began in 2001
               Doha Round Agenda

   Agriculture Issues (EU, US subsidies, safeguards against
    surges) - Developing countries main issue

   Access (especially into developing countries) Developing
    countries main issue

   Services (express mail, movies, professional services, etc.)

   Technical negotiating and implementation assistance for
    developing countries
            Doha Round status

Doha, Qatar meeting in November 2001 was successful
in setting new agenda

July 2004 Geneva negotiations produce “breakthrough”
December 2005 Hong Kong meeting: “modest

progress”
July 2008, Dubai: impasse


World Bank: Not much obvious backsliding so far, not

much risk of more . . .
                       1. Access

   In exchange for gaining access to other members’
    markets, you are willing to give them greater access to
    your own market – has been a major impediment to
    entry over the years

   China demonstrated this in its negotiations for entry
    into the WTO: 1,000+ pages of commitments

   Fifteen year negotiating process began in mid-1980s
      2. Most Favored Nation Status

   Members of the WTO may not discriminate against
    other members in matters of tariffs and other trading
    arrangements.

   Every member receives the most favorable treatment
    extended to any another member. Equal treatment for
    all.
       Most Favored Nation Status

         United States                             United
                                                  Kingdom

                         10%
Computers
                         Orange juice

   25%                                        Computers


              Brazil                    25%
     Most Favored Nation Status 2
                                        Non-members?

         United States                       United
                                            Kingdom

                         3%
Computers
                         Orange juice

   10%                                  Computers

                                          25%?
              Brazil
     Most Favored Nation Status and
             non-members

   Members may treat them as they wish, so long as they
    do not receive lower tariffs, etc

   Example: Russia

   U.S. treated China “as if” it were a WTO member for
    many years, in contrast to the European Union
Most Favored Nation - Exceptions


   Grandfather clause for certain trading practices at
    beginning

   May be made for poorer member developing
    countries, who then can face lower tariffs against
    their exports

   Does not apply in the case of recognized free trade
    areas (e.g. in which “substantially all trade”
    between parties is “free”)
Most Favored Nation - Exceptions

GATT envisioned a number of free trade area
  exceptions:
 Free trade area where members are free to make

  arrangement with others (NAFTA)
 Customs unions with harmonized trade rules (early

  EEC)
 Economic union that allows free movement of

  workers, services and monetary union (EU)
 Federal unions (eg, US) where economic powers

  are divided between a central and local
  governments
             3. Transparency
   A country’s rules and regulations governing
    trade should be published and accessible to
    everyone. No “hidden” regulations or barriers

   Needs to use WTO classification systems to
    describe the tariff schedule

   Member countries must notify WTO of significant
    changes in rules, regulations
Transparency/Facilitation Issues
           4. National Treatment

   Imported and locally-produced goods should be
    treated equally after customs cleared

   Addresses non-tariff barriers that are designed to
    protect domestic industries –

   Tech standards

   Exceptions for government procurement
       Emergency Safeguards

 Emergency tariff protection for industries seriously
  threatened by a “surge” in imports
 Normally, importing country must give

  compensation to injured countries
 Measures must be gradually relaxed and can last

  no more than 4 years, possible extension to 8.
 Used by US in 2002 to protect steel industry (lifted

  in 2003)
 Used by US against surge of Chinese apparel

  imports into U.S. in 2005 following removal of MFA
  global quotas.
    How Disputes are Settled by the
                WTO
 Key principle is: WTO members agree to use this
  process and not adopt unilateral measures: Rule of
  Law
 Fixed time limit to resolve


 Retaliation can be authorized if no agreement

  between parties following ruling by WTO
 Example: US tax treatment of U.S. corporations’

  foreign subsidiaries resulted in $2.4 billion potential
  EU penalty tariffs; US law changed in 2006.
                          Dumping

   WTO/GATT agreements permit governments to take
    action against sales of imports if
     sold   below “the normal value“ or “the cost of
      production” in the exporting country and,
     If such sales create “material” injury to the importing
      country’s domestic industry


   Original rationale: “predatory pricing” will drive out
    domestic producers so foreign producers can
    monopolize market
                       Dumping

   WTO rules permit importing country to levy duties
    equal to the difference between the export price and
    "normal value“ or “cost of production” in the exporting
    country

 Problem #1: How to determine “normal value”?
 Problem #2: How to determine “cost of production”?
Winners and Losers from Dumping
            Duties?
Winners:

Producers of the affected products
   Domestic producers in the import market

   Certain other foreign producer/exporter of affected
   product
Losers:

         Importers – especially in domestic market
         Intermediate users of the imported goods
         Buyers of the final goods, i.e., domestic
          consumers?
         Why it is hard to argue for free trade...
When Trade Rules Work
       Importance of
“Trade Facilitation” Measures
Trade, the global supply chain and
             the iPod

 Materials, subcomponents suppliers
                             ↓
 Manufacturing/assembly (contract and original design

  manufacturers)
                             ↓
  Patents, trade marks, design, marketing (Apple)
                             ↓
  Distribution, Online & retail sales, service
  (Apple and others)
              30 GB $299 iPod
                Value Added
 Suppliers: Toshiba (Japan), Matushita (Japan),
  Broadcom (Taiwan/Singapore), Samsung (Korea),
  Inventec (Taiwan/China), Renanas (Japan)
 Suppliers’ suppliers: in US, Great Britain, Taiwan, etc.


 Cost of inputs: $144.40


 U.S. Retailer and distributor margins ($75)


 Apple profit: $80
     . iPod Case Study Implications

  Cost to Apple, FOB China: $150 (used in trade
   balance with China calculations)
  Value-added via assembly in China: “a few dollars”




Globalization facilitators?
  Low transportation and communication costs
  Minimal tariff/trade restrictions: WTO 1996

   “Information Technology Agreement”
  Complete elimination of tariffs on IT products covered
When Trade Rules Don't Work (Well)
          US-China Trade Issues
China maintains a $250 to $300 billion trade surplus with
 US
China holds around $1 trilion in USG securities
US Administration announced in September 2010 that it
 was imposing anti dumping tariffs and countervailing
 duties against Chinese goods – added to previous tariff
 increases
US Congress is threatening to impose additional tariffs
 because the yuan is “undervalued”
China warns to avoid a trade war
Administration coming under increasing pressure to act
                            US Trade with China
                           1985 – 2010 (projected)
       400,000




       300,000




       200,000




       100,000




                    1986          1988          1990          1992          1994          1996          1998          2000          2002          2004          2006          2008      2010 Proj
             1985          1987          1989          1991          1993          1995          1997          1999          2001          2003          2005          2007          2009


      -100,000




      -200,000




      -300,000


                                                 US Exports to China                         US Imports from                        Trade Balance
                                                                                             China
Source: US Census Bureau
           US-China Trade Issues


    US needs China's cooperation on:
   N Korea (6 Party Talks)
   Taiwan arms sales,
   Iran and rest of Middle East,
   Russia, etc.
 Keep buying US Debt – where else are they
going to buy?
IMF staff agrees China's currency is undervalued
IMF Board not willing to take on Chinese
       Case Study: Chinese Tires
   US United Steel Workers of America filed petition
    under Section 421 of the Trade Act of 1974. No
    US producer involved.

   Section 421, (aka as the “China-Specific
    Safeguard”) is a special statute that applies only to
    imports from China. Condition to China joining
    WTO in 2001. Expires at end of 2013.

   Lower threshold for imposing restrictions than
    standard US law (Section 201). When imports
    from China cause “Market Disruption” to US
    industry. Do not have to prove unfair trade
    practices.
     Case Study: Chinese Tires
   ITC makes recommendation. In this case it
    recommended a 55% temporary tariff

   Administration has discretion to weigh the harm
    to the US economy of these imports.

   In 2009 Administration opted for a 35% tariff in
    first year, dropping to 30% in second year, then
    25% in third year.

   Previous administration denied relief in the four
    cases forwarded by the ITC (ITC had rejected 2
    more).
      Case Study: Chinese Tires
                     Who wins?

   US producers?

   US workers?

   US consumers?

   Other foreign producers?
       Case Study: Chinese Tires


    Other countries likely to pick up production at
    expense of Chinese producers and US
    consumers

   Higher prices on tires

   President's decision could encourage more such
    complaints
       Case Study: Chinese Tires

   China not happy – started to retaliate against US
    exports

   China major purchaser of US debt – could look to
    other capital markets to invest capital

   New cases from both sides leading possibly to
    “trade war”
                       G20 Issues
In April 2009, Communique included provisions on:

   Expansion of IMF resources by $750 billion
   Provide for more accountability in financial sectors –
    (update: Basle III Accord)
   Discourage “excessive risk-taking”
   Refrain from raising new barriers to trade in goods and
    services
   Countries will not retreat into financial protectionism
    particularly measures that constrain worldwide capital
    flows
   Provide aid not loans
                       G20 Issues
Back room discussions on:

   Expand China and other emerging market economies'
    influence in international financial sector commensurate to
    their role in trade

   Ongoin process of reducing dollar's role as primary world
    currency. Expansion of IMF resources by $750 billion

   Has the global economy reached and passed a high water
    mark for free trade?
                      G20 Issues
Reasons for concern:

   US position on Chinese tires, steel pipe, currency, etc
   US Buy America provisions were in stimulus package
   Prospects for carbon tariffs remain in House Cap and
    Trade bill, though greatly diminished. France also pushing
    same idea
   US Trade agreements with S Korea and other nations
    have stagnated
   Doha Round probably dead for now
   US, China, India want more stimulus spending . . .
   EU does not
   EU wants more financial regulations, US does not