International Cooperation Among Nations

1
Chapter 10

• International Cooperation Among Nations

2
Background Why International Institutions to
Promote Free Trade?

• Incentives for trade wars without such
  institutions
  
• Recall the breakdown in internatl. trade that
  occurred in the 1930s
  
• Countries engaged in competitive currency
  devaluations
  
• Countries developed restrictive trade policies
• Bretton Woods establishment of a stable monetary
  environment was only part of the solution in
  facilitating world trade
  
• The other was the removal of tariffs and quotas

3
General Agreement on Tariffs and Trade (GATT)

• 8 negotiating rounds beginning in 1947 and ending
  in 1994
  
• Goal to promote a free and competitive
  international trading environment, benefiting
  efficient producers
  
• First 7 rounds (1947-1979) focused primarily on
  reducing tariffs
  
• For developed countries, average tariffs on mfgd.
  products was over 40 in 1947
  
• Dropped to 4.7 before the Uruguay round (1986)

4
GATT (continued)

• Why the initial focus on Tariffs?
• An important inhibitor to trade (40)
• Most transparent form of protectionism
• Easiest to deal with
• In addition to reducing the size of overall
  average tariffs, GATT included a provision to
  ensure that tariffs were uniformly applied
  
• Most Favored Nation (MFN) Principle
• Any tariff reduction given to one country on a
  particular good must be given to all GATT
  countries

5
GATT (cont.)

• Two Exceptions to the MFN Principle
• Developing countries (Generalized System of
  Preferences GSP in the United States)
  
• Regional Agreements
• While GATT recognized the political necessity of
  some protectionism, protection was supposed to be
  limited to tariffs not non-tariff barriers
  
• However, there were many loopholes that allowed
  countries to use quotas and other non-tariff
  barriers to restrict imports

6
GATT (cont.)

• Reasons for Loopholes
• Countries could erect NTBs for reasons of
  national security or to solve BOP problems
  
• Many non-tariff barriers are justified based on
  reasons other than international trade (also less
  transparent)
  
• Industrial standards safe and environmental
  friendly
  
• Government procurement natl. security grounds
• Subsides adequate food supply
• Countervailing duties
• Licensing
• Customs valuation
• Because of loopholes, the Uruguay Round
  (1986-1994) addressed NTBs much more heavily

7
Major Accomplishments of the Uruguay Round

• 1. Created the World Trade Organization (WTO)
• Enforcement power
• 2. Further reductions in tariffs on goods
• 4.7 avg. to 3 avg.
• 3. Agriculture
• Reduced subsidies, converted quotas to tariffs,
  cut ag tariffs
  
• 4. Set principles for trade in services
• No discrim. against foreign service firms
• At beginning stages

8
Major Accomplishments of the Uruguay Round (cont.)

• 5. Development of uniform protection of
  intellectual property
  
• Uniform standards, enforcement reqs.
• Phased in for developing countries
• 6. Reduced tariffs and quota elim. for textiles
• 7. Developed clear rules for dealing with
  dumping
  
• 8. Definition of which subsidies are legal
• 9. Development of international product
  standards and rules regarding product testing

9
The World Trade Organization

• 1995 as a result of the Uruguay Round
• 148 member countries, 32 observer countries
• Goals of the WTO
• Promote trade flows
• Predictable, nondiscrim. trade policies
• Provide a forum for further reductions in trade
  barriers like GATT rounds
  
• Enforcement mechanism for resolving trade
  disputes
  

10
WTO (cont.)

• WTO focuses on much more than import tariffs on
  goods
  
• Focus on NTBs
• Trade in services
• Intellectual property protection
• FDI
• Get rid of trade balancing rules
• Get rid of restrictions on access to foreign
  exch.
  
• get ride of domestic sales requirements

11
How Does WTO Enforcement Work?

• Under GATT, enforcement was voluntary
• Under WTO, a country not living up to a WTO
  agreement can have a complaint filed against it
  
• Arbitration panel reviews the complaint
• If in violation, complaining country can impose
  trade barriers on offending country
  
• No counter-retaliation allowed

12
Why is the WTO so Controversial?

• Arguments against the WTO by opponents
• 1. The WTO threatens the environment and
  consumer health/safety
  
• What is viewed as a NTB by one person can be
  viewed as an environmental or consumer safety law
  by another
  
• European objections to U.S. hormone fed beef
• U.S. Clean Air Act required stricter pollution
  standards for companies without reliable data
  
• European Banana Quotas
• U.S. laws requiring shrimp boats to use nets that
  dont entangle sea turtles

13
Why is the WTO so Controversial?

• Arguments against the WTO by opponents
• 2. Labor and Human Rights
• A government cannot ban a product based on the
  way it is produced e.g. child labor
  
• A government cannot ban a product based on the
  dealings of the company
  
• 3. Developing Countries
• Before trade agreements, developed countries
  protected infant industries
  
• Same protection not afforded to developing
  countries

14
Why is the WTO so Controversial?

• 4. Arguments against the WTO by opponents
• National Sovereignty
• Some argue undermined by WTO
• Cant have your own environmental and health
  regulations

15
Why is the WTO So Controversial? The Rest of the
Story

• 1. Environment and Health/Human Safety
• WTO recognizes legitimate import restrictions
  based on environmental or health/safety
  
• European objections to U.S. hormone fed beef
• Oil from Brazil and Venezuala
• Shrimping with sea turtle friendly nets
• 2. Labor and human rights
• The International Labor Organization oversees
  labor standards
  
• Can penalize with economic and political sanctions

16
Why is the WTO So Controversial? The Rest of the
Story

• 3. Developing Countries
• Developing countries can be given trade
  concessions that do not have to be given to other
  WTO countries (GSP)
  
• 4. National Sovereignty
• Still an opportunity to have environmental and
  safety regs. on products
  
• WTO has the difficult task of deciding which
  standards/regs. are for legitimate reasons and
  which are used as barriers to trade

17
Regional Economic Integration

• Why do trading groups tend to be among
  neighboring countries?
  
• 1. Distances goods need to travel is short
• 2. Consumers tastes more likely to be similar
  and easier to establish distrib. channels
  
• 3. Common history and interests more willing to
  coordinate policies

18
Types of Economic Integration

• 1. Free Trade Area
• Tariffs, quotas, other NTBs eliminated or reduced
  among members
  
• Each member country maintains its own tariff and
  NTBs to non-member countries
  
• Can result in trade deflection
• Because of this problem, most free trade
  agreements specify rules of origin

19
Types of Economic Integration

• 2. Customs Union
• International trade barriers are eliminated or
  reduced like a Free Trade Area
  
• In addition, each member has the same trade
  policies towards non-members
  
• 3. Common Market
• Like the customs union, elim or reduced trade
  barriers and the same policies toward
  non-members
  
• In addition, barriers to the movement of factors
  of production are eliminated

20
Types of Economic Integration

• 4. Economic Union
• Full economic integration of member countries
• Elim. trade barriers, common external trade
  policies, free mobility of factors of prod.
  
• Also, coordination of economic policies
• Coordinated monetary and fiscal policies
• 5. Political Union
• Complete political and economic integration
• One country

21
How Does Regional Economic Integration Affect
Firms and Efficiency?

• Individual firms in the trading bloc can benefit
  or lose from economic integration
  
• More efficient firms can gain market share in a
  regional trading bloc
  
• Less efficient firms can lose market share from
  competing firms within the trading block or
  through FDI of foreign firms
  
• Can provide profitable opportunities for firms
  not in the trading bloc
  
• Increased benefits from FDI

22
How Does Regional Economic Integration Affect
Firms and Efficiency?

• Efficiency of the global economy can be enhanced
  or hurt by regional economic integration
  
• Within the trading bloc, prod. shifts to the
  low-cost producers enhancing efficiency
  
• Shift can occur at the expense of more efficient
  firms outside the trading block