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Foreign Trade_ WTO and FDI

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					Let me introduce myself…

            • Professor Alan Matthews
            • Professor Emeritus of
              European Agricultural
              Policy in the Department
              of Economics
            • Former Director, Institute
              for International
              Integration Studies
            • Particular research
              interests in agriculture,
              trade and development
      Outline for my half course
•   Trade and protectionism
•   Regaining international competitiveness
•   Shaping the EU budget
•   EU climate change policy
•   Future issues for the global economy
Trade and Protectionism

           Session 6
Macroeconomic Concepts and Issues
  MSc Economic Policy Studies
         Alan Matthews
          The policy context
• The WTO Doha Round of multilateral trade
  negotiations
  – Completed this year?
  – Richard Baldwin’s VoxEU commentary
• New EU trade policy late 2010
  – Trade, Growth and World Affairs
• Commodity market turmoil
• Challenges/opportunities for Ireland
    The debate on protectionism
• BBC News on the dangers of trade protectionism
• Financial Times website on new protectionism
• Wall Street Journal “Nations rush to establish new
  barriers to trade” 6 Feb 2009
• David McWilliams on protectionism
   – (start at 3.30 mins)
• Paul Krugman on the second-best case for
  protectionism
           Learning objectives
• Describe some of the stylised facts about trends in
  international trade
• Review our understanding of the gains from trade
• Identify barriers to trade and trade protectionism
• Explain the role of the WTO in setting trade rules
  and encouraging further trade liberalisation
• Discuss Ireland’s trade policy objectives in the
  context of the global economic crisis
     Section 1.

Stylised facts about trade
       Ireland’s trade profile in goods




Source: WTO Trade Profile
     Ireland’s trade profile in services




Source: WTO Trade Profile
     Global trade – stylised facts
• Most trade takes place between the North America, Europe
  and East Asia
• Some developing countries now important suppliers of
  manufactured exports
• Shift in importance from commodities to goods to services
• Significance of intra-industry trade
• Success of multilateral system in liberalising trade in
  goods…
• .. But paradoxical increase in interest in RTAs
• .. And growing hostility to further trade liberalisation
           EU tariff profile
• EU tariff profile WTO source
.. But free trade is not popular
      Section 2.

Review of gains from trade
   The various gains from trade
• Traditional gains
  – Comparative advantage
  – Variety of products
• Modern extensions
  –   Competition and contestability
  –   Economies of scale and scope
  –   Innovation and R&D
  –   Product and quality improvement
      World Price and Comparative
              Advantage
If a country has a comparative advantage, then the
domestic price will be below the world price, and
the country will be an exporter of the good.
If the country does not have a comparative
advantage, then the domestic price will be higher
than the world price, and the country will be an
importer of the good.
  International Trade in an Exporting
               Country...
    Price                    Domestic
   of Steel
                              supply



 Price after                    World
      trade                     price
Price before
       trade



                          Domestic
                          demand
              0                  Quantity
                                 of Steel
How Free Trade Affects Welfare in an
       Exporting Country...
    Price                              Domestic
   of Steel
                                        supply


                  A       Exports
 Price after                              World
      trade                 D             price
                      B
Price before
       trade
                  C

                                    Domestic
                                    demand
              0                            Quantity
                                           of Steel
How Free Trade Affects Welfare in an
       Exporting Country...
    Price                                   Domestic
   of Steel
                                             supply
                      Consumer surplus
                        before trade
                  A
 Price after                                   World
      trade                                    price
                      B
Price before
       trade
                  C

                      Producer surplus   Domestic
                        before trade     demand
              0                                 Quantity
                                                of Steel
How Free Trade Affects Welfare in an
       Exporting Country...
    Price                                   Domestic
   of Steel
                      Consumer surplus       supply
                         after trade

                  A         Exports
 Price after                                   World
      trade                   D                price
                      B
Price before
       trade
                  C
                      Producer surplus
                         after trade     Domestic
                                         demand
              0                                 Quantity
                                                of Steel
 How Free Trade Affects Welfare in an
         Exporting Country
The analysis of an exporting country yields
two conclusions:
  Domestic producers of the good are better off,
  and domestic consumers of the good are worse
  off.
  Trade raises the economic well-being of the
  nation as a whole, i.e., the potential size of the
  cake for redistribution.
International Trade and the Importing
              Country...
      Price
    of Steel
                           Domestic
                            supply




Price before
       trade
                                 World
 Price after
                                 Price
      trade
                           Domestic
                           demand
           0                      Quantity
                                  of Steel
How Free Trade Affects Welfare in an
       Importing Country...
      Price
    of Steel
                                 Domestic
                                  supply


                   A

Price before
       trade
                   B     D             World
 Price after
                                       Price
      trade    C       Imports
                                 Domestic
                                 demand
           0                            Quantity
                                        of Steel
How Free Trade Affects Welfare in an
       Importing Country...
      Price
    of Steel
                                          Domestic
                       Consumer surplus    supply
                         before trade

                   A

Price before
       trade
                   B                            World
 Price after
                                                Price
      trade    C
                       Producer surplus   Domestic
                         before trade     demand
           0                                     Quantity
                                                 of Steel
How Free Trade Affects Welfare in an
       Importing Country...
      Price
    of Steel
                                          Domestic
                                           supply
                       Consumer surplus
                          after trade
                   A

Price before
       trade
                   B         D                  World
 Price after
                                                Price
      trade    C          Imports
                   Producer surplus       Domestic
                      after trade         demand
           0                                     Quantity
                                                 of Steel
 How Free Trade Affects Welfare in an
         Importing Country
The analysis of an importing country yields
 two conclusions:
  – Domestic producers of the good are worse off,
    and domestic consumers of the good are better
    off.
  – But N.B.
  – trade raises the economic well-being of the
    nation as a whole because the gains of
    consumers exceed the losses of producers.
      The Gains and Losses from
       Free International Trade
• The gains of the winners exceed the losses
  of the losers.
• The net change in total surplus is positive.
• This is the basis for the pro-trade stance of
  economists
• So… trade is beneficial, but what is the
  basis for trade?
    Efficiency gains from trade
                     Absolute advantage
               Production per person per working day
                       Portugal England
              Wine        6        3
              Clothing    4        7
         UK more efficient in clothing, Portugal in wine
                     Comparative advantage
                        Portugal England
               Wine        6        3
               Clothing    4        3

  Portugal more efficient producer of both clothing and wine – but trade
still mutually beneficial because of differences in relative costs. Wine is
     more expensive in the UK, clothing is more expensive in Portugal
Comparative advantage in action

• England
   –   Two workers reallocated from wine to clothing implies
   –   -6W + 6C
   –   Clothing is exported to Portugal in exchange for wine
   –   -6C + 9W
   –   Net result: -6W + 9W = +3W
• Portugal
   –   Exports 9W in exchange for 6C from England:
   –   -9W + 6C
   –   To produce 9W it must give up 6C in domestic product
   –   +9W – 6C
   –   Net result: 0
 Comparative cost trade theories

• Differences in technology (labour productivity -
  Ricardo)
• Differences in domestic endowments (Heckscher-
  Ohlin)
   – factor price equalisation
   – remuneration increases for the factor that is employed
     most intensively in the commodity whose price
     increases
   – empirical performance in explaining trade flows?
   Further sources of trade gains
• Gains from enhanced competition and contestability
  of markets
   – reduced X-inefficiency (‘cold shower’ effect)
• Gains from exploiting economies of scale (“Smithian
  gains”)
• Gains from greater product variety
   – Intra-industry trade
• Growth effects
   – Gains from the stimulus to investment and thus economic
     growth
   – Technological spillovers and productivity effects
• Political arguments for free trade (avoidance of ‘rent-
  seeking’)
     Empirical evidence on trade
      gains/costs of protection
• Empirical estimates of the classical gains from
  trade (and thus the cost of limiting trade) are quite
  limited, rarely more than 0.5% of GNP
• Much greater welfare effects arise if account is
  taken of modern sources of gains from trade
• The costs of trade policy intervention can be quite
  high if political economy considerations are
  factored in.
     Section 3.
Trade policy instruments
   Arguments for protectionist trade
               policy

• Tariffs as a source of revenue
• Optimum tariff argument (for large countries)
• Industrial policy considerations
   – infant industry argument (learning economies)
   – external benefits: the strategic industry argument
• 'Strategic trade' (profit-shifting) argument
• Non-trade concerns (e.g. food security, rural environment)
• Protection against ‘unfair’ competition due to lower costs or
  standards
• Concerns over unemployment and adjustment costs
        Trade policy instruments
•   Tariffs (specific, ad valorem and variable)
•   Quotas (what happens to rents)
•   Voluntary export restraints
•   Contingent protection (anti-dumping)
•   Beyond-the-border barriers (regulatory
    regimes)
    – (evidence from the EU single market)
• Trade facilitation measures
Partial equilibrium analysis of
             tariffs
    Price
                          SH       DH




    Pw'
            A        B         C         D
     Pw




                Q2   Q4                 Q3   Q1   Quantity


   .. lower tariffs improve welfare
         Why is trade policy
          controversial?
• Trade and unemployment (trade costs jobs)
• Trade and income distribution (distribution
  within countries)
• Trade and convergence (distribution of
  income between countries)
• Trade and environment (pollution haven
  hypothesis)
• Trade and labour standards (race to the
  bottom)
More reasons why trade policy is
         controversial
•   Trade and consumer non-trade concerns
•   Trade and public services
•   Unfair rules for developing countries.
•   Multilateral versus regional approaches
•   Governance arrangements for trade policy-
    making and role of the WTO
  Section 4.

Trade policy rules
         EU trade policy making
• Common Commercial Policy
   – Qualified majority voting..except when unanimity required in
     internal decisions, plus cultural and audiovisual services [social,
     education, health services]
• Council – approves mandate for trade negotiations and
  outcome
• Article 133 Committee
• European Parliament – following Lisbon Treaty must be
  consulted on progress of negotiations and has power of
  assent on ‘take it or leave it’ basis. Decides trade
  regulations using Ordinary Legislative Procedure.
• Commission – conducts negotiations under the Council
  mandate
        World Trade Organisation
• Established 1995
• One member, one vote – principle of consensus
• Sets rules, monitors rules and acts as forum for further trade
  liberalisation
• General Agreement on Tariffs and Trade (GATT 1994)
   – Multilateral Trade Agreements, including
         •   Agreement on Technical Barriers to Trade
         •   Agreement on Agriculture
         •   Agreement on Sanitary and Phytosanitary Standards
         •   Agreement on Textiles and Clothing
         •   Agreements on Subsidies and Anti-Dumping (measures against unfair
             trade)
   – Plurilateral Trade Agreements
• General Agreement on Trade and Services (GATS)
• Trade-Related Aspects of Intellectual Property Rights
      WTO general norms (1)
• Non-discrimination
  – Most Favoured Nation (MFN) treatment of like
    products (BUT exceptions for free trade
    arrangements)
  – National treatment
• Reciprocity
  – the political economy justification for
    multilateral trade negotiations
        WTO general norms (2)
• Enforced commitments
   – tariff bindings and Schedules
• Transparency
   – Trade Policy Review Mechanism
• Safety valves
   – restrictions in the case of serious balance-of-payments
     difficulties or to support infant industries
   – Article XX - general exceptions allowing trade
     restrictions
• Disciplines on unfair trade practices (subsidies)
• Disciplines on technical barriers to trade
  (standards, food safety)
      WTO dispute settlement
• Binding arbitration
• Possibility of retaliation
• Key US – EU trade disputes
  Achievements of the Uruguay Round

• Eighth negotiating round
• Extended GATT disciplines to agriculture
  and services
• Completed as a single undertaking
• But with principle of special and differential
  treatment for developing countries
     Agreement on Agriculture
• Agriculture was previously outside GATT
  disciplines
• Introduced a three pillar structure
   – Market access
   – Export subsidies
   – Domestic support
• Included a rendez-vous clause
• Food safety and technical barriers covered by
  separate Agreements
GATS as a framework agreement
• General obligations
   – MFN treatment: applies across all sectors regardless whether
     specific commitments have been made unless specific exemptions
     notified initially
• Specific commitments related to specific sectors
   – These relate to three areas (i) market access (ii) national treatment
     and (iii) other commitments
   – Commitments only apply to sectors scheduled and may prescribe
     conditions and qualifications
• Understanding that periodic negotiations will be
  undertaken to progressively liberalise trade in services
Problems of services negotiations
• Market access barriers are entirely regulatory - not
  traditional border barriers
• Market access is not divisible (like tariffs) - all or
  nothing
• Difficult to quantify concessions for the purpose
  of determining reciprocity
• Developing countries are net importers of services
  - saw few possibilities for export gains
   Section 5

Trade policy issues
             EU trade policy
• Global Europe 2006
  – Strong commitment to multilateral WTO process
  – Marked end of de facto moratorium on
    competitiveness-oriented FTAs
  – Negotiations launched with Korea, India and ASEAN
    in 2007, with Canada 2009 and Mercosur 2010.
  – Korea FTA now approved , also Peru, Columbia,
    Central America
  – Reformulation of ‘development’ trade agreements
     • EBA, EuroMed, GSP, EPAs
    EU focus on non-tariff barriers
•   Regulatory issues
•   Intellectual property rights
•   Government procurement
•   Foreign investment protection and liberalisation
•   Services
•   Link with the Single Market
    – Implementation of the Services Directive
• Export restrictions on raw materials and energy
• Keep focus on the big trading partners without agreements
  – US, China, Russia, Japan, India, Brazil – which account
  for 50% of EU trade
          WTO Doha Round
• Unfinished business from Uruguay Round
• The Doha Development Round 2001
  – Seattle, Doha, Cancun, Hong Kong, Geneva
• Covers agriculture, manufactures, services,
  rules
• Negotiations to date – role of developing
  countries
         What’s on the table?
• Significant further reductions in
  manufacturing tariffs, but disagreement on
  the balance between developed and
  developing countries
• Ambitious cuts in agricultural tariffs and
  subsidies, but with flexibilities
• Disappointing offers in services to date
• Some progress on rules issues
EU objectives in the Doha Round of
     WTO trade negotiations
• To further liberalise access to overseas markets for EU
  goods and particularly services
• To strengthen coverage of WTO rules in areas such as
  investment, competition, transparency in government
  procurement, intellectual property and trade facilitation.
• To ensure more assistance is provided to developing
  countries to help their integration into the world economy
• To get the WTO to focus more on issues of public concern
  such as the environment, animal welfare and food safety
     EU and Irish interests in the
           Doha Round
• Market access
   – But will we gain enough on non-agriculture and services to offset
     problems for agriculture?
• Improved rules
   – What would be gains from extending rule to investment, competition,
     trade facilitation, procurement?
• The development agenda
   – Coherence with development objectives
• Addressing public concerns
   – Incorporating environmental and public health concerns into trade rules
          Trade policy today
• Can creeping protectionism be avoided?
• The role of China
• What to do about the Doha Round?
• Agricultural protectionism
• The EU’s strategy of bilateral RTAs
• Addressing governance deficiencies in the
  WTO
• The developing country agenda
                   Reading
• McAleese Chapter 17

• Supplementary references:
• Bluestein, P. 2008. How WTO’s Doha Round
  negotiations went awry in July 2008, Brookings
• Brulhart, M and Matthews, A., EU external trade
  policy, in El-Agraa, A. ed., The European Union:
  Politics and Economics, Cambridge University
  Press
           Class exercises
McAleese Chapter 17
Q.1, 5
Ex 1, 4 6.

				
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