ECONOMICS 3150B Lecture 20 December 6, 2005

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ECONOMICS 3150BLecture 20December 6, 2005
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Trade barriers

• Tariffs
• Export subsidies
• Quotas
• Local content requirements
• Preferential procurement
• Red tape barriers
• Foreign investment restrictions
• Contingency protection
• Countervail
• Anti-dumping
• Safeguards
• Unfair trade

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Non-Tariff Measures (NTMs)

• Unfair Trade (S. 301)
• 3rd country and home country effects
• Definition of unfair trade wide ranging and
  ambiguous
• Harassment who pays for investigation and legal
  proceedings (asymmetric costs of fighting
  complaints)
• Ambiguous interpretation of law susceptibility
  to political pressures
• Definition of injury (threshold for injury for
  retaliation), causation (links between cause and
  effect, external variables)
• US domestic laws including trade remedy laws
  supersede international obligations of US

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Non-Tariff Measures (NTMs)

• Foreign investment restrictions
• Rights of establishment limits on foreign
  investment and control (airlines,
  telecommunications, broadcasting, cable, banks)
• Performance requirements
• National treatment

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GATT

• GATT/WTO General Agreement on Tariffs and
  Trade/World Trade Organization
• 3 basic principles
• Nondiscrimination (MFN) preferential trading
  arrangements violate this principle NAFTA an
  example of preferential trading arrangement
• Elimination of quotas (except for balance of
  payments problems) international system of
  quotas in textiles, proliferation of VERs,
  exploitation of escape clause
• Consultation to solve trade disputes weak
  enforcement mechanism US domestic laws supercede
  GATT, NAFTA
• As Tariffs ?, NTMs ? because D for protection
  constant
• NTMs higher cost form of protection
• Canada essentially bystander in MTNs EU, US and
  Japan dictate outlines of agreements
• WTO responsible for enforcement of agreement and
  dispute resolution

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GATT

• 9 Rounds of multilateral trade negotiations
  Kennedy, Tokyo, Uruguay and Doha rounds addressed
  NTMs as first 5 focused on tariffs only
• Tokyo, Uruguay and Doha also attempted to extend
  trade rules to services and establish investment
  rules
• Difficulties in reducing NTMs
• Definition of subsidies
• Escape clause provisions
• Dispute settlement mechanism with effective
  enforcement market power of different countries
• Trade-offs Problems in measuring concessions
• North-South issues need to develop economies
• Agriculture sector and political importance of
  farmers

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Economic Integration

• Varying degrees of integration
• Preferential free trade arrangements lower
  trade barriers among participating countries
• Free trade area
• All trade barriers removed among participants
• Each country retains own barriers against
  non-members
• Sources of products need to be identified
• Definition of domestic product (domestic content
  requirements)

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Economic Integration

• Customs Union
• Common trade barriers against non-members
• Trade creation vs. trade diversion
• Trade creation if tariffs blocked trade prior to
  customs union
• Trade diversion if customs union leads to
  substitution of imports from partner country from
  non-partner country (lower cost imports from
  outside union replaced by higher cost imports
  from union member)
• Gains more likely if trade creation more
  prevalent than trade diversion ? high pre-union
  tariff barriers low tariffs with ROW many
  countries part of customs union closer
  geographically are members of union
  (transportation costs, tastes less of obstacles
  to trade among members)
• Common market
• Free movement of capital and labour
• Harmonization of labour and other laws

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Economic Integration

• Economic Union
• Monetary union single currency
• Restrictions on fiscal policy
• Harmonization of monetary policy, fiscal policy,
  tax rates
• Political union
• Common perimeter for immigration purposes
  Canada and US cooperate at all entry points into
  North America same immigration rules

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FTA, NAFTA

• Phased elimination of tariffs
• Advantages/disadvantages of allowing for
  transition period
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• Trade in services subject to regulation
  (professional services) labour mobility foreign
  ownership restrictions (financial services,
  broadcasting, transportation)

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FTA, NAFTA

• Security of access not achieved trade remedy
  laws and trade disputes (S. 301 cases) dispute
  resolution enforcement mechanisms,
  effectiveness (incentives to abide by decisions)
  no list of exempt policies ? Canadian government
  policies at risk
• Ambiguous enforcement susceptible to political
  pressures ambiguous interpretation of laws
  (damage, source of damage) harassment potential
  asymmetric costs of fighting complaints
  uncertainty for customers (countervailing duties)
  
• Options for Canada
• Fight complaints in US courts and build up case
  law
• Go to WTO
• Case-by-case negotiations (example of softwood
  lumber
• Common perimeter for immigration purposes
  Canada and US cooperate at all entry points into
  North America same immigration rules

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Industrial Policy

• Comparative advantage can change over time
• Changes in relative supplies/productivities of
  factors of production
• Changes in technology
•       Country-specific
• Competitive advantage firm/ownership advantages
  to compete in foreign markets
• Technological capacity, entrepreneurial talents
• Product innovations new varieties, change in
  tastes
• First mover advantages and learning curve
• Country-specific characteristics can
  generate/sustain form-specific advantages e.g.
  government policies re. investment in RD,
  capital gains taxation, training

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Industrial Policy

• RD as factor of production
• Comparative advantage in RD-intensive products
  not pre-determined combination of following
• Firm specific advantages
• Country-specific advantages

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RD

• Growth in real GDP per capita
• Static (one-time gains) free trade gains
  including specialization, economies of scale,
  increased competition and decrease in
  X-inefficiency, increase in number of varieties
• Dynamic gains innovation, learning curves
• Growth in in real income per capita growth in
  capital per capita productivity growth
  (residual)
• Productivity growth most important
• Learning curves
• Improvements in management
• Improvements in utilization of labour and capital

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Industrial Policy

• Objective of industrial policy engineering
  competitive advantage to increase growth rate of
  real Y per capita (growth rate of productivity)
• Industrial policy must correct market failures
  otherwise, functioning of markets (continuous
  search for unexploited opportunities/economic
  rents) will maximize growth rate of real GDP per
  capita

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Market Failures

• Appropriability of technology rents
• Imitability ease, speed
• Externality to customers and relative bargaining
  power (inability to capture value)
• Imperfect competition and existence of economic
  rents
• Creation of rents via innovation
• Terms of trade effects
• First mover advantages and learning curves

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Market Failures

• Imperfect information
• Re. opportunities
• Availability of capital quality of management,
  quality of business model, herd instinct
  (prisoners dilemma, risk aversion) shortage of
  capital for high tech today
• Uncertainty regarding quality, reliability uneven
  bargaining power
• Free rider ability to protect information,
  incentive to acquire information