GATT: The Uruguay Round § Tariff levels were quite low: üAfter the Tokyo Round, the average U.S. tariff on goods was reduced to 4.3%. üOther countries appeared to have relatively similar average tariff levels (only Japan, at 2.9%, was lower). § Negotiations began in earnest in 1986 The Uruguay Round: Agenda Groups were established to seek lower restrictions in many areas, including: § Tariffs § Non-tariff barriers § Tropical and natural-resource based products § Textiles and clothing § Agriculture § Subsidies and countervailing duties § Intellectual property rights Uruguay Round: Actions § Most tariffs to be cut by 34%; others eliminated § Agricultural subsidies and tariffs to be cut by 36% § Revised rules were adopted regarding dumping and export subsidies, and VERs were to be eliminated § Patent protection to be tightened somewhat § Some trade-related investment measures (TRIMs) were to be eliminated § Very little progress was made with services The World Trade Organization (WTO) • The Uruguay round was the end of GATT • GATT’s successor, the WTO, was approved during the Uruguay round • WTO was established 1 January 1995 • WTO has 164 member countries as of July, 2016 • In theory, WTO has a stronger dispute-settling mechanism Trade Policy Issues After the Uruguay Round § Many countries wanted further relaxation of protectionism in agriculture § Developed countries wanted to discuss labor and environmental standards § Other issues being discussed included trade in services, anti-trust policy, the Multi-Fiber Agreement phase-out, and others WTO and the Doha Development Agenda § WTO trade ministers met in Seattle in 1999 to set an agenda; no agreement was reached due in part to anti-trade demonstrations § WTO members met in Doha, Qatar in November of 2001 to set an agenda § An attempt at meeting in Cancun ended with little progress in 2003 § The Doha Round was suspended in 2006, and revived in 2007, but little has been accomplished § Doha is supposed to be the round that addresses developing countries’ concerns (eg Aid for Trade) Aid for Trade • Launched at the December 2005 WTO Ministerial in Hong Kong • Consists in development assistance specifically designed to improve developing-economy access to international markets • AfT is focused on addressing specific bottlenecks to trade mostly at the national level but also at the regional level. • AfT commitments would be additive, that is, they would be additional development assistance rather than replacing existing commitments • Most AfT falls under the areas of “economic infrastructure” and “building productive capacity” • In 2019 (latest data), OECD economies disbursed $53 billion in AfT ( Recent U.S. Actions § Hormone-treated U.S. beef § Europe has objected to importation of U.S. beef on health grounds. § WTO allowed U.S. to impose tariffs on some European products. § An agreement was reached in 2009. Recent U.S. Actions § Extra-Territorial Income Exclusion § U.S. provides tax relief to exporting companies § WTO has ruled this to be illegal § U.S. has unilaterally imposed tariffs on steel and textiles § U.S. has had a long-term dispute with Canada regarding softwood lumber § U.S. has been active in negotiating bilateral free trade agreements outside of the WTO framework • US pulled out Transpacific Partnership (TPP) and the Comprehensive and Progressive Agreement on Transpacific Partnership (CPTPP) went into effect in December 2018 after the demise of TPP The Conduct of Trade Policy § Should trade policy be “rules-based” or “results-based?” § Rules-based policies follow rules embodied by the WTO and similar organizations: § most preferred nation clause § tariffs to be preferred over import quotas and VERs (more distortionary and discriminatory by country). § these follow WTO standards on anti-dumping duties, countervailing duties The Conduct of Trade Policy § Results-based policies suggest aggressive unilateral action to ensure that certain results are achieved: § for example, the U.S. may demand penetration of a particular foreign market of a certain percentage § Failure by the trading partner to comply would result in trade sanctions. § This notion is also referred to as “industrial policy” or “managed trade.” Economic Integration Barbara Luppi International Economics I Chapter 17, Appleyard The Theory of Regional Economic Integration: Trade Creation and Trade Diversion Economic Integration § Economic integration occurs when two or more countries come together for purposes of trade and/or economic coordination § Greater integration may yield additional benefits, but it may also involve giving up increasing sovereignty Four Types of Integration Ordered for increasing integration level § Free Trade Areas (FTAs) § Customs Unions (CUs) § Common Markets § Economic and/or Monetary Union Free Trade Areas § Members remove tariffs and other trade barriers on each other § Each member maintains its own tariff structure for non-members § Possible problem: transshipment (rule of origin to be kept) § Example: NAFTA Customs Unions § Similar to FTA: üTariffs between members are eliminated § Plus: ümembers agree to a common set of external tariffs and other trade barriers, and ümembers speak with one voice in external trade negotiations § Example: Southern African Customs Union (SACU) Common Markets § Similar to Custom Unions: üTariffs between members are eliminated üA common external tariff is established § Plus: Labor and Capital can move freely between member countries § Members give up sovereignty in immigration and capital flows § Example: European Economic Community (1957 – 1993) Economic Union § Similar to a common market: üTariffs between members are eliminated üA common external tariff is established üFactors can move freely between member countries § Economic policy is coordinated by one or more supranational institutions § When an economic union adopts a common currency, it has become a monetary union as well § Example: European Union, euro zone, 2002 - nowdays Static Effects of Integration Jacob Viner (1957) identified two welfare effects produced by integration: § trade creation üwhen inefficient domestic production is shifted to a more efficient member country; ücountry’s welfare increases § trade diversion üwhen efficient production in a non-member country is shifted to a less efficient member country ücountry’s welfare decreases Static Effects of Integration § According to Trade Theories, first-best (highest total welfare produced) is attained under free trade § Economic integration (in any type) allows to reach second-best allocation, because it represents only a partial movement to free trade, so it may create distortions with respect to first best allocation § Economic integration is üwelfare-enhancing when trade creation is larger than trade diversion üwelfare-decreasing when trade creation is smaller than trade diversion Trade Creation and Trade Diversion: An Example § Three countries: Uganda, Sudan, and Kenya § Initially, Uganda imports textiles and applies a 50% tariff to textiles from both Sudan and Kenya § Sudan is able to produce a unit of textiles for $1, whereas Kenya produce it at a cost of $1.20 per unit Trade Creation and Trade Diversion: An Example Textile Imports for Uganda Production Price with 50% Country Cost Tariff Sudan $1.00 $1.50 Kenya $1.20 $1.80 Trade Creation and Trade Diversion: An Example § Prior to integration, Uganda imports from the most efficient supplier, Sudan § Now Uganda enters into a free trade agreement with Kenya, but not Sudan § As a consequence, Sudanese textile imports are dutiable, but Kenya textiles can enter duty-free Trade Creation and Trade Diversion: An Example Textile Imports for Uganda Country Sudan Kenya Production Price with Price with Cost 50% Tariff FTA $1.00 $1.50 $1.50 $1.20 $1.80 $1.20 Trade Creation and Trade Diversion: An Example § As a consequence, Uganda will now import from Kenya, although Sudan is the more efficient producer § Uganda loses tariff revenue, but reverses some of the deadweight loss caused by the protectionism Trade Creation and Trade Diversion: a Graphical Analysis P PS rises as a result of initial protection S $1.50 Tariff price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P CS falls as a result of the initial protection S $1.50 Tariff price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P Revenue rises as a result of the initial protection S $1.50 Tariff price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P Welfare declines overall by the DWL triangles S $1.50 Tariff price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P With FTA, CS rises S $1.50 Tariff price $1.20 FTA price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P With FTA, PS falls S $1.50 Tariff price $1.20 FTA price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P With FTA, revenue falls S $1.50 Tariff price $1.20 FTA price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P Lost revenue transferred back S to domestic consumers Lost revenue not transferred back to domestic consumers $1.50 Tariff price $1.20 FTA price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion: a Graphical Analysis P Overall, we must compare the gain in welfare (trade creation) with the lost revenue (trade diversion) S trade creation trade diversion $1.50 Tariff price $1.20 FTA price $1.00 Free trade price D 160 200 Q Trade Creation and Trade Diversion When is it likely that trade diversion outweighs trade creation? § When the excluded countries are much more efficient than the included countries § When there are only a few members of the FTA (consider a global FTA: there would be no trade diversion because no country would be excluded) Dynamic Effects of Integration In the long run, integration may increase a country’s welfare because: § increased competition may occur, leading to lower prices § larger markets may allow economies of scale to be realized § more investment (FDI flows) and associated technology transfer may be attracted § adoption of more efficient management techniques accounting practices, and other improvements in efficiency (known as “Xefficiency”) § increased factor mobility may lead to greater efficiency The Practice of Regional Integration: European Economic Integration and the US trade Policy The European Union: History and Structure § 1951: France, Italy, West Germany, and the Benelux countries form the European Coal and Steel Community § 1958: ECSC expanded to all products; name changed to European Economic Community (EEC) The European Union: History and Structure § Other countries joined over the years: ü1973: Denmark, Ireland, U.K ü1981: Greece ü1986: Portugal and Spain ü1995: Austria, Finland, Sweden üRecent additions: Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia § Membership now stands at 28 nations EC 92 § During the 1980s, there were still various and sundry barriers to trade between member countries § 1985: Single European Act (commonly called EC 92): elimination of all barriers to the flow of goods, services, people, and capital by 1992 § It wasn’t 1992, but it eventually happened Further Integration: Monetary Union Starting in 1999 § Accounts could be stated in terms of euros, but member countries’ currencies remained legal tender § The exchange rates of the participating currencies were fixed § Monetary policy was made by the ECB; each member no longer controlled its own money supply Further Integration: Monetary Union In 2002 § In January, euro notes and coins were issued by the ECB § In July, national currencies were withdrawn § 19 countries currently use the euro European Union: Prospects § The EU continues to struggle with the fallout from the global financial crisis that began in 2008 § Several countries, due to massive budget deficits, are struggling § Some question whether Greece (and perhaps also Portugal, Spain, and Ireland) will be able to remain members NAFTA § On January 1, 1994 the North American Free Trade Agreement came into being § It allows for a dismantling of trade barriers between Canada, Mexico, and the U.S. § It created a market comparable in size to the EU and EFTA combined NAFTA: Some Provisions § Eliminated tariffs among the member countries over a 15 year period § Restrictions on trade in services (esp. banking) phased out § All barriers to the movement of capital were immediately dropped § Contained side agreements pertaining to labor laws and environmental concerns Effects of NAFTA § The absolute volume of trade among the partners dramatically increased after NAFTA went into effect § As an example, merchandise exports from the United States to Mexico and Canada combined almost quadrupled § The accumulated amount of foreign direct investment (FDI) into the three countries has increased substantially since NAFTA became operational Effects of NAFTA § GDP § Most studies estimate a sizeable increase in Mexican GDP, with more modest (but positive) effects on Canadian and U.S. GDP § Employment § There were some dire forecasts of job loss, but U.S. employment has risen § Wages § NAFTA has shifted low-skill jobs to Mexico § U.S. wages have continued to grow Worries Over NAFTA § There have also been concerns about üenvironmental degradation, üMexico’s lower labor standards, and ümaquiladoras § With respect to maquiladoras, recent research says NAFTA did not make them grow faster § Generally speaking, many of the predicted impacts of NAFTA have not occurred or were greatly overstated Recent Discussions of NAFTA § In the 2008 presidential campaign, both Hillary Clinton and Barack Obama called for revisions to NAFTA § However, it appears the Obama administration plans to move forward with new free trade agreements Other Major Economic Integration Efforts § MERCOSUR § U.S.-Central America Free Trade Agreement – Dominican Republic (CAFTA-DR) § Free Trade Area for the Americas (FTAA) § Chilean trade agreements § Asia-Pacific Economic Cooperation (APEC)
