Let me introduce myself

1
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

2
Outline for my course contribution

• Trade and protectionism
• Balance of payments and exchange rates
• Green growth growth and environment
• Addressing imbalances Future issues for the
  global economy
• Role of the financial system
• Rafique Mottiar

3
Trade and Protectionism

• Session 4
• Macroeconomics and the International Economy
• MSc Economic Policy Studies
• Alan Matthews

4
The policy context

• The WTO Doha Round of multilateral trade
  negotiations
• New EU trade policy late 2010
• Focus now on bilaterals and megaregionals
• Commodity market turmoil
• Challenges/opportunities for Ireland?

5
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
• Describe significance of new generation of
  regional trade agreements
• Discuss Irelands trade policy objectives in the
  context of the global economic crisis

6
Section 1.

• Stylised facts about trade

7
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

8
Source WTO International Trade Statistics 2012
9
Irelands export profile
10
Structure of Irish merchandise trade
Source WTO Trade Profiles
11
Structure of Irish services trade
Source WTO Trade Profiles
12
.. But free trade is not popular
13
Section 2.

• Review of gains from trade

14
The various gains from trade

• Traditional gains
• Comparative advantage
• Variety of products
• Modern extensions
• Competition and contestability
• Economies of scale and scope
• Innovation and RD
• Product and quality improvement

15
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.

16
International Trade in an Exporting Country...
Domestic supply
Domestic demand
0
Quantity
of Steel
17
How Free Trade Affects Welfare in an Exporting
Country...
Domestic supply
A
Exports
Price after trade
World price
D
B
Price before trade
C
Domestic demand
0
Quantity
of Steel
18
How Free Trade Affects Welfare in an Exporting
Country...
Domestic supply
Price after trade
World price
Price before trade
Domestic demand
0
Quantity
of Steel
19
How Free Trade Affects Welfare in an Exporting
Country...
Domestic supply
Price after trade
World price
Price before trade
Domestic demand
0
Quantity
of Steel
20
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.

21
International Trade and the Importing Country...
Domestic supply
Domestic demand
0
Quantity
of Steel
22
How Free Trade Affects Welfare in an Importing
Country...
Domestic supply
A
Price before trade
B
D
World Price
Price after trade
C
Imports
Domestic demand
0
Quantity
of Steel
23
How Free Trade Affects Welfare in an Importing
Country...
Domestic supply
Price before trade
World Price
Price after trade
Domestic demand
0
Quantity
of Steel
24
How Free Trade Affects Welfare in an Importing
Country...
Domestic supply
Price before trade
World Price
Price after trade
Domestic demand
0
Quantity
of Steel
25
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.

26
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?

27
Efficiency gains from trade
Absolute advantage
Production per person per working day
UK more efficient in clothing, Portugal in wine
Comparative advantage
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
28
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

29
Gains from trade again
30
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?

31
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)

32
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.

33
Section 3.

• Trade policy instruments

34
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 theory (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
• http//economics.about.com/od/international- trad
  e/a/The-Arguments-Against-Free-Trade.htm

35
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

36
Partial equilibrium analysis of tariffs
Price
SH
DH
Pw'
A
B
C
D
Pw
Q2
Q4
Q3
Q1
Quantity
.. lower tariffs improve welfare
37
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)

38
More reasons why trade policy is controversial

• Trade and consumer non-trade concerns
• Trade and public services
• Debates about trade rules
• Multilateral versus regional approaches
• Governance arrangements for trade policy-making
  and role of the WTO
• Unfair rules for developing countries.

39
Section 4.

• Trade policy rules

40
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

41
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

42
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

43
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)

44
WTO dispute settlement

• Binding arbitration
• Possibility of retaliation
• Key US EU trade disputes

45
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

46
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

47
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

48
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

49
Section 5

• Trade policy issues

50
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

51
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

52
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

53
Whats 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

54
Regionalism

• Appears to liberalise trade, so what is the
  problem?
• Inherently discriminatory, and therefore
  inefficient due to trade diversion costs
• Role of rules of origin
• But when tariffs are low, trade diversion costs
  insignificant
• Reduced regulatory barriers are inherently
  non-discriminatory

55
Illustrating Viner's trade creation and trade
diversion effects
Trade creation the welfare change due to the
replacement of (higher-cost) domestic production
of import goods by (lower-cost) imports Trade
diversion the welfare change due to the
replacement of imports from a low cost source by
imports from a high cost source
56
Trade creation and diversion - small country in a
small union
Price
SH
DH
PU(1t)PU'
SU'
PW(1t)PW'
SW'
y
x
a
b
SU
PU
z
PW
SW
Quantity
B
C
E
D
57
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

58
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

59
Trade policy today

• Can creeping protectionism be avoided?
• The role of China
• What to do about the Doha Round?
• Agricultural protectionism
• The EUs strategy of bilateral RTAs
• Addressing governance deficiencies in the WTO
• The developing country agenda

60
Reading

• McAleese Chapter 17
• Supplementary references
• Brulhart, M and Matthews, A., EU external trade
  policy, in El-Agraa, A. ed., The European Union
  Politics and Economics, Cambridge University
  Press
• Policy documents on WTO, EU and Irish trade
  policy on course website