Lecture notes: World trade

The politics of international trade

Economists always prefer free trade

even if others are using protectionist policies
cf. Britain in the 19th century — the Corn Laws, 1846

The logic we have already discussed:

specialization in a large market
comparative advantage

Mercantilism …

the main problem was that people didn’t take advantage of cheap prices abroad
specialization always leads to improvements

But many other groups are against

free trade creates problems
this is a political question rather than an economic

This is the topic for today’s lecture

But note: this is the perspective of consumers

we gain from letting foreigners produce things cheaply for us

Often not to the advantage of producers

they will try to protect themselves

Collective action situation:

it is a lot easier for manufacturers to organize
smaller groups, more united, than all of the consumers
they can influence politics — often an important constituent

Historically speaking

protectionism is the rule, free trade is the exception
many people have reason to worry about a world where prices and products are produced internationally

Cheap competition

great for consumers
but often not for others

Turkey today:

cheap currency — great for exports, bad for consumers
cf. Turkish exporters love the cheap lira — although we all are getting poor

Cf. China and the undervalued currency

the government is making its own people poor

Great expansion of international trade

it is world trade more than anything that explains GDP growth and improvements in peoples lives (China, India, Turkey too)

Global trade has grown by 6% per year during the past 70 years

never previously grown so fast
faster than world GDP

But note the tapering off of globalization after 2010

isn’t reversed perhaps, but doesn’t grow as before

China as example

Turkey

trade as proportion of GDP

Compare

Turkish trade with the EU — proportion of Turkish exports

Turkey exports

Turkey, GDP growth

Check out

GDP growth

Trade as share of GDP

Causes of conflict

Things worth fighting about

why does there have to be these constant negotiations?

Customs, duties, tolls and taxes

a percentage of the price levied at the border
the goods come in and a tax is imposed on them

The point:

make the goods as expensive as domestic goods – they have no competitive advantage
or maybe making them more expensive — as a way to improve trade balance — save foreign currency

Or quotas:

used against Japan in the 1980s
only sell 300,000 Japanese cars in the US market this year

In addition: NTBs — “non-tarrif barriers”

anything else that makes an imported good less competitive
in order to be sold in our country a good must look a certain way

For example:

safety for consumers — toxic or otherwise
environmental concerns
if child labor has been used
even just cheaper wages
eg. fuel efficiency standards that are different for imported cars
your foreign phone stops working after one year in Turkey

But also

cultural concerns — Canadian radio stations have to have 40 percent Canadian music
many countries import certain products — beer in Qatar (a problem during football World Cup)
cars drive on the left in Japan and Britain …

Intellectual property

who is stealing stuff from whom
movies and software
“fair practices”

And also

govt procurement policies
only buy from local producers
difficult to open up to foreign competitors

For example, Turkey

providing advantages at the expense of foreigners
TOGG bought by Turkish government

Military security, often cited (also by Adam Smith):

we need to protect our own production in case of war
not least of course in defense related stuff

Trade negotiations

Sorting this out is what trade negotiations are all about

in various “rounds”
Kennedy, Tokyo, Uruguay rounds

Often takes many years

general level of tariffs
but NTBs often a bigger problem — go through product by product

Important to do it reciprocally

not let anyone have an advantage

Doha round, started in 2001 — biggest problem …

developing countries want access for their agricultural products
developed countries access for manufactured goods — competition policy, government procurement, trade facilitation
an obvious potential conflict

Krugman, The obsession with competitiveness

The rhetoric of competitiveness

“each country is like a corporation competing on the global market”
economic problems are a matter of global competition between countries

Various campaigns:

“Buy British”
“Buy Malaysian”

This is just simply not true:

countries are not in an important sense in competition with one another
the economic problems are not a matter of an inability to compete

Growth rates depend on domestic productivity

not productivity in relation to other countries
“even though world trade is larger than ever before, national living standards are overwhelmingly determined by domestic factors rather than by some competition for world markets”
although this is mainly true for very large economies — the US, China, etc

How can this be?

“the world is not as interdependent as you might think — countries are not at all like corporations”
the US is producing 90% of what it needs for itself

The comparison doesn’t work:

you cannot sell infrastructure abroad
services are not traded — and low productivity here is the main reason for slow growth rate

Not a zero-sum game

if the EU is doing well, this is to the benefit of the US — there are new people to sell to
there is a status aspect, to be sure, but this is different from growth rates

“A dangerous obsession”

governments waste money on the wrong things
lead to protectionism and trade wars
bad domestic policy — neglect things like health reform since it doesn’t enhance “competitiveness”

Actual international trade

Slightly weird thing that countries don’t conform to the theory

countries are trading things that are quite similar
a lot of countries make cars and sell to each other
it’s not actually that one country has an advantage in cars

Also, countries with advantages in capital are exporting primary goods

a lot of trade between countries that aren’t so different in terms of factor endowments?
the US, Australia, Sweden are exporting raw material …

How to explain this?

Krugman: “Vaccine supply“

Other reasons to trade …

advantages of large-scale production
concentrate production in a few places — and export from there

But then world trade picked up because of traditional factors

like differences in wage rates — hyperglobalization

Also a lot of trade is intra-company

different parts of a company are selling things to itself
complicated supply chains
these prices are set by the company itself
we had a question in the mid-term quiz about this ...

Strategic trade theory

Gilpin makes a big deal out of this
we discussed it briefly before …

The assumption is that all goods are substitutable for each other

it doesn’t matter what you sell — computers or rice — as long as you are making money

But some goods have “spill-over effects”

they generate knowledge — skills — experiences that can be used elsewhere
computer industry requires things that banana plantations don’t

Most countries try to support tech industry

regarded as more prestigious sector
but also knowledge intensive
and it has more spillover

Can the state pick winners?

some successful examples of this
some horrible failures — Indonesia tried to produce their own car

Institutional framework of world trade

there was supposed to be an international trade organization

The US congress votes against

they were afraid that an international organization would limits US trade

Instead the get “GATT” — General Agreement on Tariffs and Trade

between 1947 and 1994
establish the rules of the international trade system — revised ever since

In 1995 replaced by WTO

164 members
staff of only 640 people
in Geneva, Switzerland

More about her “Ngozi Okonjo-Iweala”

What the WTO does …

provides a forum for trade negotiations
administers trade agreements that governments conclude
provide a mechanism for resolving trade disputes

Core principles

market liberalism — an open, liberal, international trade system raises the world’s standard of living
non-discrimination, or “most favored nation, MFN — prohibits governments from using trade policies to provide special advantages to some countries and not to others
if you give an advantage to one country, it must be extended to all others

Exceptions …

regional trade arrangements — EU etc
generalized system of preferences, GSP — like the multifibre agreement we discussed

Outlaws “national treatment” — NTB — another kind of discrimination

Supra-national regulation

Mechanism for resolving conflicts

the WTO can actually force states to do things they might not want to do
restriction on sovereignty
cf. institutions and anarchy — the role of trade in world politics

Outcome

require that the policy be altered
pay compensation to the party harmed

G-20

“The G20 is composed of most of the world’s largest economies, including both industrialized and developing nations; it accounts for around 80% of gross world product (GWP), 59–77% of international trade, two-thirds of the global population, and 60% of the world’s land area”

Spain is permanently invited
purple countries are represented through the EU

List of G20 summits

Challenge of regionalism, RTAs

Problems of decision-making

164 WTO members are too many
will become even more difficult if NGOs are included

Alternative — Regional Trade Arrangements, RTA

currently 279 in operation

Distinction between …

free-trade area, NAFTA etc — tariffs are eliminated between members, but maintained by each country in reference to outsiders
customs union – like the EU — tariffs are eliminated between members, and there is a common tariff against outsiders

Mega-regional arrangements

Trans-Pacific Partnership, TPP
Transatlantic Trade and Investment Parnership, TTIP

Deeper economic integration

harmonization of technical barriers to trade
domestic rules, regulations
administrative procedures, procurement policies

Enhances negotiating power in WTO

you can show that you have access to alternative solutions
the US as less willing to make concessions in WTO
why trade rounds often take so long …

The role of RTAs

trade creation — encourages trade between the countries concerned
trade diversion — moves trade within the block rather than with outsiders

Can clearly have both effects

trade liberalization
increased protectionism
not so easy to study empirically — the effects may change over time

Nafta and beyond

What Trump said he was going to do

Nafta as the enemy — replace with something more advantageous to American workers

Renegotiate

in some ways better terms — the US had to be given some concessions
but otherwise more or less the same

Canadian report:

dairy farmers unhappy
car producers happy
steel tariffs remain — steel workers unhappy

EU and Brexit

The four freedoms:

capital
labor
goods
services

But also obligation to follow along with market forces

to move to where the jobs are

“Defending the national economy” also in the context of EU

EU: also trade in services

“The Polish plumber“

Philippe de Villiers:

The free trade in services “permits a Polish plumber or an Estonian architect to offer their services in France at the salary level and with the labor laws of their respective countries of origin. Of the 11 million people engaged in the service industry (in France), one million are threatened by this directive, which seeks to dismantle our economic and social model.”

An estimated two million workers from Eastern and Central Europe arrived in the United Kingdom between 2003 and 2007, half of them were Polish. The stereotype of the Polish plumber was cited as a factor in the referendum that led to the withdrawal of the United Kingdom from the European Union.

lyrics in English

also a Polish nurse

Brexit election

“80 million Turks coming to Britain”

“The Lib Dem suggests the Brexit vote was partly driven by old people obsessed with worries of 80 million Turks coming to Britain.”

Cf. Haluk Bilginer in the Eastenders

Critics of free trade

Anti-globalization

traditionally a left-wing concern
now more often right-wing

Arguments

bad for the environment — buy things from far away
general critique of consumerism

Races to the bottom

race to the bottom in labor standards
environmental protection
race to the bottom in wages

Free trade seems like the policy of the powerful

England in the 19th century
the US today

“National systems”

Alexander Hamilton in the US — the political background — keeping England out
Germans — went to the US — preserve German independence
in favor of free trade, but not free trade dominated by Britain

Successful examples today:

we have already talked about neomercantilism
protectionism in much of East Asia

“Infant industry argument”

can make a lot of sense to nurture companies as they are starting out
but, problems when to take away the protection
there was a question on the mid-term exam

Gilpin: talks a lot about a meeting in Seattle in 2001

Generalized nationalism

great vote winner

Cf. Trump: the jobs have all gone to Mexico

his support among the white working class
always easy to blame a foreigner

Neoprotectionism

European CAP

the Common Agricultural Policy

Lots of different kinds of criticism

overproduction
inefficiency
too high prices
discrimination against the developing world

Multi Fibre Agreement

lower tariffs for imports from developing countries
for example when it comes to “fibre” — Bangla Desh etc.

From 1974 through 1994

imposing quotas on the amount developing countries could export to developed countries
The Agreement on Textiles and Clothing (ATC), expired on 1 January 2005

A way for the developed world to protect itself

the system has cost the developing world 27 million jobs and $40 billion a year in lost export

but good for Bangla Desh — the EU does not apply the protection

the expiration of the ATC represented a significant step towards greater liberalization in global trade, particularly benefiting consumers and efficient producers while presenting challenges for less competitive manufacturing countries and regions. It also highlighted the ongoing tensions in global trade between liberalization and protectionism, and between developed and developing countries

A role for government

The general transformation of the economy

automation — computers
not that many people are needed to produce things
cf. move from the countryside to the city — 19th century, but also today — cf. Turkey

The role of the govt

how some industries are wiped out
this is not a numerical example only — it concerns people’s lives
a role for the govt to retrain people — help out with the transition

Remember the numerical example from Ricardo:

Before specialization:

days work/	England	Portugal
cloth	150	100
wine	200	50
total	350	150	500

After specialization:

days work/	England	Portugal
cloth	(2*150 = 300)	0
wine	0	(2*50) = 100
total	300	100	400

Dani Rodrick, The globalization trilemma

Paradox regarding the balance between globalization, national sovereignty, and democracy

according to Rodrik, the three cannot coexist perfectly, and a balance must be struck between them

Globalization

integration of markets, especially through international trade and capital flows
in a fully globalized system, there would be no barriers to trade and investment, and capital and goods could move freely across borders

National Sovereignty

the ability of a nation-state to govern itself without external interference
control over economic policies, borders, and the legal system.

Democracy

a political system in which policies and leaders are determined through processes that ensure representation and accountability to the population, typically through free and fair elections
at most, only two can be fully realized

Globalization and National Sovereignty

achieving both would require sacrificing democratic principles.
a country can fully participate in the global economy while maintaining its sovereignty, but only by limiting democratic processes
imposing economic policies that are not popularly supported or restricting democratic rights

Globalization and Democracy

a nation chooses to embrace both democracy and globalization, but this comes at the expense of national sovereignty
economic policies and decisions might be dictated more by global market forces and international agreements than by national governments

National Sovereignty and Democracy

a country maintains its democratic processes and sovereignty but does so by limiting its integration into the global economy
protectionist policies, restrictions on capital flows, and other measures that buffer the national economy from global market forces.