University:
California State University, Northridge
Course:
ECON 405 | International Trade
Academic year:

2024
Views:

428

Pages:

22
Author:

Hadassah Chase

Topic 5 The Political Economy of Trade Policy Part 3 A Model of Trade Policy • While politicians may win elections partly because they advocate popular policies as implied by the median voter theorem, they also require funds to run campaigns. • These funds may especially come from groups who do not have a collective action problem and are willing to advocate a special interest policy. • Models of trade restriction policy try to measure the trade off between the reduction in welfare of constituents as a whole and the increase in campaign contributions from special interests. Which Industries Are Protected? • Agriculture: in the U.S., Europe, and Japan farmers make up a small fraction of the electorate but receive generous subsidies and trade protection. ♦ E.g., European Union’s CAP; Japan’s 1,000% tariff on imported rice; and America’s sugar quota. Which Industries Are Protected? (cont.) • Clothing: textiles (fabrication of cloth) and apparel (assembly of cloth into clothing). ♦ Until 2005, quota licenses granted to textile and apparel exporters were specified in the Multi-Fiber Agreement between the U.S. and many other nations. ♦ In 2005, U.S. and China signed an MOU that established quotas on China’s exports of various types of textiles and clothing. • E.g., China agreed to limit sock exports to 772.8 million in 2006. Table 2: Welfare Costs of U.S. Protection ($ billion) In 2002, with the MFA still in effect, clothing restrictions were responsible for more than 80% of the overall welfare costs of U.S. protectionism. With the expiration of the MFA, the costs of clothing protection and hence the overall costs of U.S. protection are expected to fall sharply. The end of MFA brought a surge in Chinese clothing exports. E.g., in Jan. 2005, China shipped 27 million pairs of cotton pants to U.S. –up from 1.9 million a year earlier. There was fierce political opposition from clothing makers in the U.S. It remains to been seen whether the liberalization of clothing trade will prove politically sustainable! International Negotiations of Trade Policy • The average U.S. tariff rate on dutiable imports has decreased substantially from 1920–1993. • Since 1944, much of the reduction in tariffs and other trade restrictions came about through international negotiations. ♦ The General Agreement of Tariffs and Trade was begun in 1947 as a provisional international agreement and was replaced by a more formal international institution called the World Trade Organization in 1995. Fig. 5: The U.S. Tariff Rate The average U.S. tariff rate fell from 60% in mid-1930s to 5% in 2000. International Negotiations of Trade Policy (cont.) • Multilateral negotiations mobilize exporters to support free trade if they believe export markets will expand. ♦ This support would be lacking in a unilateral push for free trade. ♦ This support counteracts the support for restricted trade by import-competing groups. International Negotiations of Trade Policy (cont.) • Multilateral negotiations also help avoid a trade war between countries, where each country enacts trade restrictions. • A trade war could result if each country has a political interest (due to political pressure) to protect domestic producers, regardless of what other countries do. ♦ All countries could enact trade restrictions, even if it is in the interest of all countries to have free trade. • Let’s use a simple example to illustrate this point. Table 3: The Problem of Trade Warfare In game theory, this is known as a prisoner’s dilemma. Each government making the best decision for itself chooses to protect, leading to the outcome (-5,-5). Yet, both governments are better off if neither protects: (10,10) is a higher payoff. Japan and U.S. need to agree to refrain from protection. Each government is better off by limiting its own freedom of action, provided the other country does the same. International Negotiations of Trade Policy (cont.) • In this simple example, each country acting individually would be better off with protection, but both would be better off if both chose free trade. • If Japan and U.S. can establish a binding agreement to maintain free trade, both can avoid the temptation of protection and both can be made better off. World Trade Organization • WTO negotiations address trade restrictions in at least 3 ways: 1. Reduction of tariff rates through multilateral negotiations. • Multilateral negotiations are more effective than bilateral negotiations. • Benefits from a bilateral negotiation may “spill over” to countries that have not made any concessions. E.g., if U.S. ↓tariffs on coffee because of a deal with Brazil → Colombia will also gain from the ↑P of coffee. World Trade Organization (cont.) 2. Binding: a tariff is “bound” by having the imposing country agree not to raise it in the future. • A country can only raise a tariff if it gets agreement of other countries, which usually means providing compensation by reducing other tariffs. World Trade Organization (cont.) 3. Prevention of non-tariff barriers: quotas and export subsidies are not allowed. ♦ Subsidies for agricultural exports are an exception. ♦ Existing quotas were “grandfathered” in. There is an ongoing effort to remove or convert such quotas to tariffs. ♦ New quotas are forbidden. Exceptions are allowed for “market disruptions” caused by a surge in imports. World Trade Organization (cont.) • WTO was founded in 1995 on a number of agreements: ♦ General Agreement on Tariffs and Trade: covers trade in goods. ♦ General Agreement on Tariffs and Services: covers trade in services (e.g., insurance, consulting, legal services, banking). ♦ Agreement on Trade-Related Aspects of Intellectual Property: covers international property rights (e.g., patents and copyrights). World Trade Organization (cont.) ♦The dispute settlement procedure: a formal procedure where countries in a trade dispute can bring their case to a panel of WTO experts to rule upon. ♦The cases are settled fairly quickly: even with appeals, the procedure is not supposed to last more than 15 months. ♦The panel uses previous agreements by member countries to decide which ones are breaking their agreements. World Trade Organization (cont.) • A country that refuses to adhere to the panel’s decision may be punished by allowing injured countries to impose trade restrictions on its exports. World Trade Organization (cont.) • In March 2002, U.S. imposed 30% tariff on steel. • U.S. claimed it was facing a surge in imports and needed time to restructure. • In reality, steel is concentrated in “swing states” and Bush was worried about the 2004 pres. election. • Europe, Japan, China, and South Korea filed suit against the U.S. and the WTO ruled in their favor in July 2003. • Europe (with WTO approval for retaliatory action) threatened to impose tariffs on more than $2 billion in U.S. exports. World Trade Organization (cont.) • Europeans targeted their proposed tariffs on goods produced in political swing states! • U.S. complied with the WTO ruling in Dec. 2003. • Some claimed this was a test for the WTO. Would a large country, like the U.S., comply with its rulings? • Not a great test, as Europe is a large country that can effectively retaliate against the U.S. • As of June 2008, U.S. has not complied with the March 2005 WTO ruling (for Brazil) against U.S. subsidies to cotton producers. World Trade Organization (cont.) • The GATT/WTO multilateral negotiations, ratified in 1994 (called the Uruguay Round), ♦ agreed that all quantitative restrictions (e.g., quotas) on trade in textiles and clothing as previously specified in the Multi-Fiber Agreement were to be eliminated by 2005. • But as the restrictions were eliminated, China had to re-impose quotas until 2011 due to political pressure. World Trade Organization (cont.) • In 2001, the ninth round of world trade negotiations was started in Doha, Qatar, but these negotiations have failed to produce an agreement. ♦ Potential gains were modest because barriers to trade in most goods are now trivial –due to success of 8 previous rounds. ♦ Most of the remaining forms of protection are in agriculture, textiles, and clothing -industries that are politically active. Table 4: Percentage Distribution of Potential Gains from Free Trade Table 4 shows estimates of where the welfare gains from full liberalization (i.e., elimination of all trade barriers and export subsidies) would have come from and how they would be distributed across countries. Agricultural products account for less than 10% of world trade, yet liberalizing agriculture would account for 63% of the world total gains from free trade. These gains are very politically hard to get at!

The Political Economy of Trade Policy, Part 3

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