The Political Economy of International Trade FINAL

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An Analysis of Instruments of Trade Policy,

Trade Disputes, and GovernmentIntervention



What is Free Trade?What is Free Trade?

When there are no artificial barriersno artificial barriers put in pl ace by governments to

restrict the flow of goods and restrict the flow of goods and

servicesservices between trading nations.

When there are no artificial barriersno artificial barriers put in pl ace by governments to

restrict the flow of goods and restrict the flow of goods and

servicesservices between trading nations.



Benefits of Free TradeBenefits of Free Trade

I ncreased

specializationand production

Production

efficiencies

I ncreased

consumer sovereignty

Foreign exchangegains

Employment generation

Economic growth



Case: How Free Trade HasCase: How Free Trade Has

Benefitted AustraliaBenefitted Australia Over 2000s, Australia's ratios of exports andimports to GDP have each risen every year and size of

its import and export sectors are greater thangreater than

20% of its GDP.20% of its GDP.

Demand by China for Australian raw materials such

as coal and iron ore increased rapidly; expansionexpansionin the minerals sector.in the minerals sector.

In the past decade, manufacturing output has

actually increased by 40%increased by 40% and exports haveexports haverisen by 400%risen by 400%



Case: How Free Trade HasCase: How Free Trade Has

Benefitted AustraliaBenefitted Australia

Export-oriented businesses in Australia, on average, paypaymore to workersmore to workers and sell more per worker than non-

exporters.

Export growth has lead to economicgrowth and jobeconomicgrowth and jobcreation.creation.

By 2010, one in four jobsone in four jobs in Australia were related to

exportsexports.



Disadvantages of Free TradeDisadvantages of Free Trade



Trade BlocsTrade Blocs

Agreements made between states,

regions, or countries, to reducereducebarriers to tradebarriers to trade between

partici pating regions.

There are 66 ty pes of trade bl ocs,se parated in stages of regional

integration.

Agreements made between states,

regions, or countries, to reducereducebarriers to tradebarriers to trade between

partici pating regions.

There are 66 ty pes of trade bl ocs,se parated in stages of regional

integration.



Stages of Regional IntegrationStages of Regional IntegrationStage 6

Stage 5

Stage 4

Stage 3

Stage 2

Stage 1

Economic and

Monetary Union

Economic Union

Common Market

Customs Union

Free Trade Area

Preferential Trade

Area



Stage 1:Stage 1:

PREFERENTIAL TRADE AREAPREFERENTIAL TRADE AREA

Where member countries agree to lower,lower,but NOT eliminatebut NOT eliminate, trade barriers withinthe group to levels below those put upagainst outside economies.

Can be bilateralbilateral or multilateralmultilateral

Examples: SAPTA, ASEAN-China, India-Nepal

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION



Stage 2:Stage 2:

FREE TRADE AREAFREE TRADE AREA

Where members eliminate alleliminate alltrade restrictions amongsttrade restrictions amongst

one anotherone another

Each member maintains itsmaintains itsown restrictionsown restrictions on trade with

countries outside of the bloc.

Examples: NAFTA, SAFTA,AFTA

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION



January 6, 2004- The Agreement on SAFTA signed by leaders

of South Asia at the 12th SAARC Summit in Islamabad.



Stage 3:Stage 3:

CUSTOMS UNIONCUSTOMS UNION

A free trade area whose members agreeon common external tariffscommon external tariffs againstnonmember countries.

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION EAST AFRICAN COMMUNITY

RUSSIA-BELARUS-

KAZAKHSTAN



Stage 4:Stage 4:

COMMON MARKETCOMMON MARKET

A customs union which permits the freefreemovement of factors of productionmovement of factors of productionamong members.

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION

EUROPEAN FREE

TRADE AREA



Stage 5:Stage 5:

ECONOMIC UNIONECONOMIC UNION

Has all the characteristics of a commonmarket plus members agree to a uniformuniformset of microset of micro-- and macroeconomicand macroeconomicpolicies.policies.

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION

EUROPEAN UNION

SINGLE MARKET

CARICOM

SINGLE MARKET

RUSSIA &

BELARUS



Stage 6:Stage 6:

ECONOMIC AND MONETARY UNIONECONOMIC AND MONETARY UNION

An economic union (commonmarket and customs union) witha single currencysingle currency.

PREFERENTIAL

TRADE AREA

FREE TRADE

AREA

CUSTOMS

UNION

COMMON

MARKET

ECONOMIC

UNION

ECONOMIC

MONETARY

UNION EUROZONE



Case: The

Case: The EurozoneEurozone

17 EU member states that have

adopted the Euro () as their common common

currencycurrency

Euro is also used in countries outsideoutside

the EU in Monaco, San Marino, and Monaco, San Marino, and

Vatican CityVatican City; not considered part of the

eurozone

Monetary policy of eurozone countries

is managed by the European Central

Bank (ECB) and the Eurosystem which

comprises the central banks of the EU

states who have joined the euro zone.



Trade AgreementsTrade Agreements Association of South East Asian Nations

(ASEAN)

Agreement on South Asia Free Trade Area(SAFTA)

Asia-Pacific Trade Agreement (APTA)

BIMSTEC (Bay of Bengal Initiative for Multi-SectoralTechnical and EconomicCooperation)



Case:

SAFTA

Case:

SAFTA

One of the leastleast integratedintegrated regional trade blocs

Low cooperation and tradeLow cooperation and trade

Ineffective and slow tariff reductionslow tariff reduction

Long lists of exported items out of the negativethe negative

listlist

Regional politicsRegional politics affect the agreements



Benefits of Regional IntegrationBenefits of Regional Integration



Instruments of Trade PolicyInstruments of Trade Policy

TariffsTariffsNonNon--tariff tariff

BarriersBarriers



Instruments of Trade PolicyInstruments of Trade Policy

Tariff

A tax tax which add to the cost of a

im ported good

A tax tax which add to the cost of a

im ported good



Types of TariffTypes of Tariff

A f ixed tariff f ixed tariff levied

on one unit of an

imported good

A f ixed tariff f ixed tariff levied

on one unit of an

imported good

A tariff placed as a

percentage of thepercentage of the

valuevalue of the good

A tariff placed as a

percentage of thepercentage of the

valuevalue of the good

SpecificSpecific AdAdValoremValorem

* Bangladesh imposes a 300% ad valorem tax

on the import of automobiles



NonNon-- Tariff BarriersTariff Barriers

Import Q uotas

A restriction pl aced on the physical physical

amount amount of a particul ar good that

can be im ported.

A restriction pl aced on the physical physical

amount amount of a particul ar good that

can be im ported.

* In 2011, Indian government increased duty-free import

quota f or garments from Bangladesh by two million

pieces to 10 million.




Subsidies

Government payments to domestic Government payments to domestic

producers producers to red uce costs of

prod uction

Government payments to domestic Government payments to domestic

producers producers to red uce costs of

prod uction

* Between 2004-06, the Bangladeshi government

provided more than BDT 500BDT 500 crorescrores of subsidies f or

fertilizers




LicensesLicenses

Granted to a business by the

government which all ows the

business to im port a certain type of certain type of

good good into the country.

Granted to a business by the

government which all ows the

business to im port a certain type of certain type of

good good into the country.




Voluntary Export RestrictionsVoluntary Export Restrictions

A voluntary trade barrier created by

an exporting country to restrict the

amount of goods being ex ported.

A voluntary trade barrier created by

an exporting country to restrict the

amount of goods being ex ported.

* In 1971, the US negotiated voluntary export

restraints on wool and human-made f ibers with

Asian suppliers.




Local Content RequirementsLocal Content Requirements

A government requirement that a

certain percentage of a good certain percentage of a good be

prod uced domesticall y.

A government requirement that a

certain percentage of a good certain percentage of a good be

prod uced domesticall y.




Administrative PoliciesAdministrative Policies

Formal, bureaucratic rulesFormal, bureaucratic rules designed

to make it difficul t for im ports to

enter a country.

Formal, bureaucratic rulesFormal, bureaucratic rules designed

to make it difficul t for im ports to

enter a country.




AntiAnti--Dumping PoliciesDumping Policies

Dum ping is sell ing good in a foreign market below their fair market valuebelow their fair market value , or bel ow their

costs of prod uction.

Antid um ping pol icies of a country are designed to punish foreign firms punish foreign firms that engage in

d um ping.

Dum ping is sell ing good in a foreign market below their fair market valuebelow their fair market value , or bel ow their

costs of prod uction.

Antid um ping pol icies of a country are designed to punish foreign firms punish foreign firms that engage in

d um ping.

* In Bangladesh, the volume of dumped imports is

regarded as negligible if it is less than 3% of imports.



Political ArgumentsPolitical Arguments In 2002, steel imports in the USProtecting Domestic

Employment and

Industries

In 1986, the US federal governmentprotected domestic semiconductor

companies

Supporting National

Security

US threatened to impose 100% tariff oncertain Chinese products because of lenient implementation of intellectualproperty regulations

Retaliation



Political ArgumentsPolitical Arguments Several countries in 2003 (including Japan

and South Korea) banned imports of American beef after a single case of mad

cow disease in Washington State

Protecting

Consumers

The US has maintained trade

sanctions against CubaFurthering Foreign

Policy Objectives

US did not grant the status of most

favored nation (MFN) to China becauseof Chinas disregard for human rightsand its poor record

Protecting Human

Rights



Economic ArgumentsEconomic Arguments

Several Taiwanese and South Korean firms

have levied tariffs in industries likesemiconductors, textiles, and shipping

Protecting

InfantIndustries

The Japanese government provided

subsidies and research support for theliquid crystal display (LCD) screens industry

Strategic Trade Policy



What is a Trade Dispute?What is a Trade Dispute?

Any disagreement between nationsdisagreement between nations

involving their international trade ortrade policies is known as a trade

dispute.



Case: BangladeshCase: Bangladesh--IndiaIndia

Bangladesh's export to India hasincreased six times in the lastfew years.

The Indo-Bangladesh bilateralrelations suffered a lot in thepast, due to mistrust and lack of political will.



Case: BangladeshCase: Bangladesh--IndiaIndia Non-tariff barriersNon-tariff barriers are emerging as major

concerns for Bangladesh in terms of realizingexport potentials in the Indian market.

India's import market now exceeds $300 billion

and is being accessed by China, Vietnam,

Thailand and Indonesia withoutwithout the benefit of

any tariff concessions.

The size of India's negative or sensitive listdeniesdenies tariff concessions for a variety of goods

of export interest to Bangladesh.



Case: BangladeshCase: Bangladesh--ChinaChina Indian exports to Bangladesh

have registered a continuouscontinuous

decline.decline.

Given the similarity in the

export baskets of China andIndia to Bangladesh, ChineseChinese

exports are seen to beexports are seen to bereplacing Indian exports.replacing Indian exports.



Case: BangladeshCase: Bangladesh--ChinaChina China has captured Bangladeshs market

in industries such as textiles, footweartextiles, footwearand head wear, and machineryand head wear, and machinery and

mechanical appliances,mechanical appliances, where India alsoenjoys comparative advantage.

India has negligible investmentnegligible investmentpresencepresence in Bangladesh.

Like India, Chinas investment inBangladesh is also low, but it is givingdevelopment assistance and projectdevelopment assistance and projectloansloans, which fosters goodwill.



CASE:US

A-C

hina The renminbirenminbi--dollar exchange ratedollar exchange rate is the

largest and most important of theeconomic disputes between the UnitedStates and China.

Disagreements over Chinese tax and tariff discrimination exist against importedsemiconductors, automobile parts, andsemiconductors, automobile parts, andotherother productsproducts

Chinese violation of intellectual propertyviolation of intellectual propertyrightsrights (IPRs); US antidumping duties onbedroom furniture, color television sets,and other products add to the litany of

commercial disputes.



The WTOThe WTO The only global international

organization dealing with the rulesrules

of tradeof trade between nations

153 153 member countries

Established January 1, 1995

Replaced GATTGATT (1948-1994)



Functions of the WTOFunctions of the WTO AdministeringWTO tradeAdministeringWTO trade

agreementsagreements

Forum for tradeForum for tradenegotiationsnegotiations

Handling trade disputesHandling trade disputes



The Role of the WTOThe Role of the WTO Monitoring national trade policiesMonitoring national trade policies

Technical assistance and training for developing Technical assistance and training for developing countriescountries

Cooperation with other international organizationsCooperation with other international organizations



Dispute ResolutionDispute Resolution Between 1995 and 2007, more than 360 trade disputesmore than 360 trade disputes

between member countries were brought to theWTO.

Of these, threethree--fourthsfourths had been solved through informalinformalconsultationsconsultations between the disputing countries. Remainingresolved through formal procedures

.

The operation of the WTO dispute settlement processWTO dispute settlement processinvolves the DSB panels, the Appellate Body, theWTOSecretariat, arbitrators, independent experts and severalspecialized institutions.



SectoralSectoral ReformsReformsGlobal TelecommunicationsGlobal Telecommunications

In February 1997, member countries agreed to open this

sector to foreign competitionforeign competition.

Entire industry was revolutionized as all forms of telephone

services such as voice telephony, data and fax transmission,satellite and fax transmission were improved in quality andimproved in quality andlowered in costs.lowered in costs.



SectoralSectoral ReformsReformsGlobal Financial ServicesGlobal Financial Services

The deal covers more than 95 percent of the worlds financialservices market.

In March 1999, 102 countries pledged to open to varyingdegrees their banking, securities, and insurance sectors to

foreign competition.

Seventy countries agreed to dramatically lower or eradicatebarriers to foreign direct investment in their financial services

sector.



Doha Round

Doha Round

The current tradecurrent trade--negotiationnegotiationroundround of theWTO; commenced in

November 2001.

Objective:Objective:

to lower trade barriers around the world, which will help facilitate the increase of global trade.



Doha Round

Doha Round

Currently a divide on major issuesdivide on major issues

agriculture, tariffs and non-tariff barriers, services,and trade remedies.

Most significant differencessignificant differences are between developed

nations (the EU, USA, and Japan) and themajor developing countries (Brazil, China, India, andSouth Africa)



PostPost-- Doha NegotiationsDoha Negotiations

2001

Doha

2003

Cancún

2004

Geneva

2005

Paris

Hong

Kong

2006

Geneva

2007

Potsdam

2008

Geneva



Criticisms of the WTOCriticisms of the WTO Rich countries are able to

maintain high importmaintain high import

duties and quotasduties and quotas in certainproducts, blocking importsfrom developing countries(e.g. clothing);

The increase in nonincrease in non--tariff tariff barriersbarriers such as anti-

dumping measures allowedagainst developing countries



Criticisms of the WTOCriticisms of the WTO The maintenance of highhigh

protection of agricultureprotection of agriculture in

developed countries whiledeveloping ones are pressed toopen their market

Many developing countries dodonot have capacity to follownot have capacity to follownegotiationsnegotiations and participateactively in Doha Round

The Political Economy of International Trade FINAL

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