Firms and states in the world trading system

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Firms and states in the world trading system

• Benefri Lecture 1
• Simon J. Evenett
• World Trade Institute

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Outline of the Lecture

• Motivation for the lecture
• Content of these two lectures
• Defining terms the world trading system
• Factual record
• Explanations for the factual record
• How was reform accomplished?
• Implications for national sovereignty and firm
  behaviour

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Motivating questions

• What is the world trading system?
• In what ways has this system changed over the
  last ten years?
• What have been the consequences of these changes
  for
• Observed trade and investment flows?
• National sovereignty?
• Firm behaviour?

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Content of these two lectures
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Defining terms World trading system

• Misnomer
• World
• Should not connote same participation by all
  nations
• Trading
• Should not be taken to mean just trade in goods
  and services FDI and migration are important too
• System
• Should not be taken to mean that there is some
  overarching mechanism or group of people that
  control all of these commercial transactions or
  state-to-state interactions

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World trading system

• Typically refers to
• the flows of goods, services, and non-financial
  investments across national borders and
• The policy regimes that governs these economic
  activities
• Policymakers that care about their firms
  interests are concerned about the impact of
  foreign nations policies
• NGOs care about impact of these transactions and
  policies on environment, labor, etc.
• In sum multiple actors, different motives,
  different laws, and various business practices

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Why care about the international rules that
govern trade?

• Absence of rules has been historically associated
  with economic turmoil and war
• Great Depression and World War II
• Rules reduce uncertainty in planning
  international transactions and operations
• Imagine what would happen if any productivity
  increase was matched 1-for-1 by a tariff increase
• Negotiations over trade policies can result in
  greater access to foreign markets
• Rules can protect foreign investments
• Rules can improve the allocation of resources

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Trade rules the legalese

• Basic idea, fancy language
• Two fundamental rules against discrimination of
  foreign firms or investors
• National treatment provision
• Most favored nation provision (MFN)
• Commitments
• codified as bindings
• Historically specified what governments will not
  do but more recently include commitments to take
  action
• Many exceptions including regional trade
  agreements like NAFTA and sectors like agriculture

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The Factual Record
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Exports by region in 2001
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Export growth since 1990
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Export growth of selected regional trading areas
since 1990
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World export growth has been much faster than GDP
growth
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Exports of commercial services is now 20 percent
of total exports
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Parts and components trade has grown much faster
than final goods
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FDI inflows 1995-2001
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FDI stocks 1980-2001
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FDI and domestic capital formation (investment)
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Most inward FDI is MA, not Greenfield FDI
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Foreign born workers in OECD nations 1991 and 1998
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Remittances are often larger than aid receipts
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Explanations for the factual record
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Principal explanations

• Supply side factors
• Policy changes
• Interaction between these two explanations

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Growth in trade flows

• Death of Distance
• Falling international transportation costs
• Ease of communication
• Recent doubts on the importance of these factors
• Factor accumulation and changing production
  structure
• Reductions in trade barriers
• Relative importance 2/3 policy 1/3 other factors

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Growth in FDI

• Death of distance
• Rise of export platforms
• Rise of international outsourcing which, in turn,
  reflects
• Falling trade barriers
• Greater ability to enforce contracts with
  suppliers
• Changes in management thinking
• Substantial liberalisation of inward FDI regimes
• Less aversion to foreign takeovers and
  acquistions
• Privatisation and deregulation reforms

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Growth in international migration

• Greater information flows and impact on
  aspirations
• Large cohorts of younger people in the developing
  world
• Falling cost of international travel
• Increased premium on skill in industrialised
  world
• Greater education opportunities in industrialised
  world
• Aging populations in industrialised world

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How was reform accomplished?
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Types of reform

• Unilateral reforms
• Own volition
• Due to IMF or World Bank pressure
• Simultaneous reforms
• Can be regional
• Can be plurilateral (OECD)
• Can be multilateral (WTO)

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Why nations reform trade together?

• Cutting tariffs inflicts pain on domestic
  producers but helps consumers
• Sadly, consumers are less well organized than
  domestic producers stalls reform
• When many countries cut tariffs together,
  domestic exporters get a boost
• Reforming together alters the political calculus
  in favor of reform
• Same logic for cutting quotas

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Did this smart politics deliver?

• Yes
• From 1945 through to 1990 tariffs on trade
  between rich countries were cut by three quarters
• Almost all quotas were eliminated
• Not all import-competing firms succumbed to these
  pressures
• Sugar
• Textiles and apparel
• Agriculture, and
• Steel

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Until the system begins to run out of steam in
the early 1990s

• Manufacturing firms, the great supporters of the
  system, found that tariffs were already at low
  levels
• Plus most had overseas operations that supplied
  markets directly, not through trade
• What could more trade reform offer them?
• Worse, what could trade reform offer the powerful
  and growing service sector companies?

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A new grand bargain

• US corporations push for trade negotiations on
  services, IPRs, and investment protection
• Services firms start the pushand drugs companies
  end it
• Ideas receive a good reception in rich nations
  capitals
• Negotiations seek to expand the scope of world
  trade rules but are increasingly bilateral
  breaking the MFN principle
• Could this bargain have been forged without
  corporate leadership?

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The result The Uruguay Round and the creation of
the WTO

• Agreement signed in 1994
• WTO created on January 1st 1995
• Now has 140 members (27 waiting to join)
• Consensus rule (any one can veto)
• Trade rules now cover services, investment
  protection, and intellectual property rights, as
  well as traditional market access
• Strengthened enforcement powers

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Was this expansion in the scope of WTO rules good
economics?

• Reducing discrimination against service firms
  almost surely yes
• Enhanced protections for intellectual property
  rights probably not
• Better investor protections mixed impact
• The economic case here for trade rules is weaker
• Who cares? System relies on mutual gains not one
  sided gains

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Post-agreement euphoria

• 1995 EU already had its eye on the future
• Wants to repeat the same trick (expanding
  scope) in a future WTO round
• Wants to have negotiations on competition/antitrus
  t, investment, government procurement, and
  capacity building
• But is business behind these initiatives?
• Singapore WTO Ministerial meeting fails to launch
  negotiations in these 4 areas

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Then a growing wave of criticism

• Top 5 complaints about the WTO
• Did we really sign that? (Ignorance)
• Who do they think they are telling us what to do?
  (WTO enforcement)
• I thought the WTO was supposed to put a stop to
  this? (Loopholes)
• Guilt by association (Financial crises)
• Its all so unfair (Developing countries)

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How dare they tell us what to do? WTO dispute
settlement

• State to state disputes only
• Four step process consultation, panel, Appellate
  Body, and adoption
• Compliance or sanctions
• The system works until it doesnt
• EU-US disputes over beef hormones, FSC, and
  bananas
• No precedential value
• Business complaints
• How strong is this system really?

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WTO Dispute Settlement
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Loopholes

• Remember trade rules create stability and
  facilitate business planning
• But trade rules only apply to fair trade
• Whats unfair trade? Dumping exports and
  subsidizing exports
• Worse, trade rules can even be suspended for
  fair trade if imports cause serious injury
• Import surges can be targeted

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Does anyone use these loopholes?

• Yes
• Nearly 60 economies have antidumping and
  anti-subsidy laws
• Several hundred unfair trade cases are filed each
  year, many against US firms
• The last five years have seen a surge in the
  number of cases against import surges
• The US actions against foreign steel are a recent
  (very controversial) example

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Antidumping cases 1995-2000
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Guilt by association

• Openness to trade and FDI is not the same thing
  as openness to financial flowsbut the difference
  is lost on the critics!
• Surge in financial crises starting with those in
  Europe in 1992-3 then Mexico, East Asia, Russia,
  Brazil, Turkey, and Argentina
• Link to services reform
• Gambling for redemption

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Sleepless in Seattle

• Discontent comes to a head at the WTO Ministerial
  meeting in Seattle
• WTO members cannot launch a new round of trade
  negotiations
• Developing economy grievances aired
• But the deal breakers were US and EU
• refusal to consider agricultural reform
• plans to push trade rules on labor and the
  environment

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Muddling through at the WTO

• New countries keep joining China 2002
• Doha Ministerial Meeting in 2001
• Launch new trade round
• But only discussions on new issues and further
  reform no formal negotiations yet
• Emphasis on development issues
• Review of WTO enforcement powers
• Hard decisions have still to be taken (maybe at
  next WTO Ministerial in Cancun September 2003)

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while bilateral and regional trade agreements
spread

• Over 90 such deals signed since 1990
• Political impetus
• Deals tend to be with neighbors immigration and
  foreign policy reasons
• Competitive regionalism
• Business impetus conditional MFN
• Future US deals Chile, Singapore, FTAA?
• Dubious economics
• Breaks MFN rule reintroduces discrimination
• rules of origin and red tape

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Implications for sovereignty and firm behaviour
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Implications for national sovereignty

• Impact of WTO disciplines to be offset by
  loopholes
• Key issue to what extent is discrimination
  against foreign goods or subsidiaries essential
  for good development policy?
• Infant industry argument
• National champions

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Implications for firm power

• Open borders (trade and FDI) helps reduce the
  market power of firms within a country
• Evidence suggest these effects exist but no
  evidence that they eliminate pricing power
• Counterpoint increase in number of international
  cartels prosecuted in recent years
• Suspicion that cross-border strategic alliances
  may not be as benign or beneficial as many think
• Moves towards outsourcing have led
• vertical disintegration
• greater competition in market for parts and
  components
• Greater returns to brands
• Formation of networks of firms

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Implications for labour markets

• Real wage inequality has risen in almost every
  OECD nation
• Real wages per hour of low skilled have fallen in
  USA and UK since 1970s
• Debate over sources of this growing
  skill/education premium
• Most estimates attribute 15-20 percent of the
  increase in wage inequality to trade reforms
• Remainder is due to technological change in
  particular, skill-biased changeoften associated
  with the adoption of computers