Download Ch_1_PP_2014 - Youngstown State University

International Trade: Theory and Policy
ECON 5811 – Youngstown State University 1-1
Chapter 1
Introductory Trade Issues:
History, Institutions, and Legal Framework
1-2
The International Economy and International
Economics — Trend toward Globalization
• Rapid integration of international economic markets led to the
growth of international economics as an important field of study
– (a) Exponential growth in overall annual exports (in U.S. dollars)
– (b) Steady increase in world exports as a percentage of the world GDP
– (c) Growth in the share of FDI around the world taken as a percentage
of world GDP
1-3
EXPONENTIAL GROWTH IN OVERALL ANNUAL EXPORTS
(in U.S. dollars)
1-4
STEADY INCREASE IN WORLD EXPORTS
(% of the world GDP)
1-5
WORLD INWARD FDI STOCKS
(% of the world GDP)
1-6
The International Economy and International
Economics — Meaning and Objectives
•
INTERNATIONAL ECONOMICS (= trade + finance)
– Assesses the implications of international trade, international investment, and
international borrowing, spending and lending
•
INTERNATIONAL TRADE
– Applies microeconomic models to help understand the international economy
•
INTERNATIONAL FINANCE
– Applies macroeconomic models to help understand the international economy
1-7
What Keeps Trade Down?
Understanding Tariffs
•
TARIFF
– A tax or fee collected by a government on imported goods
– Represents the primary way in which countries either liberalize trade
or protect their economies
• (a) Specific tariffs (levied as a fixed charge per unit of imports)
• (b) Ad valorem tariffs (levied as a fixed percentage of the value of
the commodity imported)
1-8
Measuring protectionism: Average tariff rates
• (a) Simple average tariff method adds up all the tariff rates and
divides by the number of import categories
• (b) Trade-weighted average tariff measure weighs each tariff by
the share of total imports in that import category
• The average tariff rate on dutiable imports overstates the degree
of protection
– An increasing importance of Nontariff Trade Barriers (NTB): Quotas,
subsidies, VERs, domestic content requirements, anti-dumping laws,
government procurement policies, social and environmental regulation
1-9
The Great Depression
– (a) Began with the crash of the U.S. stock market in late 1929
– (b) Resulted in a massive reduction in GDP across countries
– (c) Lowered international trade flows
– (d) Aggravated the problem of unemployment
– (e) Led the U.S. to set higher tariffs for increasing protection to the
domestic import competing industries
1-16
The Smoot-Hawley Tariff Act (1930)
– (a) Resulted primarily from the Great Depression which called for
protection of the domestic industries
– (b) Raised average tariffs to as much as 60 percent
– (c) Led to retaliation (higher tariffs) from foreign economies
– (d) Led to a dramatic drop in international trade flows across the
world
1-11
The Reciprocal Trade Agreement Act (1934)
•
Authorized the U.S. president to negotiate bilateral tariff reduction
agreements with other countries
•
Significant for two reasons:
– (a) One of the earliest times when the U.S. Congress granted trade
policymaking authority directly to the president
– (b) Served as a model for the negotiating framework of the General Agreement
on Tariffs and Trade (GATT)
1-12
The General Agreement on Tariffs and Trade
(GATT)
•
The International Trade Organization (ITO) was:
– Intended to promote trade liberalization by establishing guidelines or rules
that member countries would agree to adopt
– Conceived during the Bretton Woods conference in 1944, along with the
International Monetary Fund and the World Bank
•
The GATT
– Designed to be a part of an agreement to establish an ITO
– Consists of a set of promises, or commitments, that countries make regarding
their own trade policies to achieve trade liberalization
1-13
The General Agreement on Tariffs and Trade
(GATT) — Eight Rounds of Discussions
•
Eight rounds of negotiation under the GATT:
– The Geneva Round (1948)
– The Annecy Round (1950)
– The Torquay Round (1951)
– The Geneva II Round (1956)
– The Dillon Round (1962)
– The Kennedy Round (1967)
– The Tokyo Round (1979)
– The Uruguay Round (1994)
1-14
Promises and Commitments made by GATT
Countries
•
Nondiscrimination
– Countries assure that their own domestic regulations will not affect
one country’s goods more or less favorably than another country’s and
will not treat their own goods more favorably than imported goods
– Two principles:
• (a) Most-favored nation (MFN)
• (b) National treatment (NT)
1-15
The World Trade Organization (WTO)
•
Established to monitor and sustain the complete set of Uruguay Round
agreements (www.wto.org)
•
Promotes trade liberalization and fosters growth & economic development
•
Monitors each member country’s trade policies with respect to the trade
agreements that were made in the Uruguay Round
1-16
GATT Exceptions
•
Trade remedies
– Antidumping laws
– Antisubsidy laws
– Safeguard laws
•
Free Trade Areas (FTAs)
– North American Free Trade Agreement (NAFTA)
– European Economic Community
1-17
Bound versus Applied Tariffs
•
The WTO agreement includes commitments by countries to bind their
tariff rates at an agreed-upon maximum rate for each import product
category
•
The maximum tariff in a product category is called the bound tariff rate
•
The actual tariff rate set by countries at a comparatively lower level than
their bound tariff rates is called the applied tariff rate
1-18
Bound versus Applied Average Tariff Rates
1-19
Bound versus Applied Average Tariff Rates
•
More-developed countries tend to apply lower average tariffs than lessdeveloped countries (LDCs)
•
Average bound tariff rates are higher for less-developed countries
•
The less developed a country, the fewer tariff categories that are bound
•
For LDCs, applied tariffs are set much lower on average than the bound
rates
•
China has lower tariffs and greater bindings than countries of similar
wealth
•
Most developed economies have applied rates equal to bound rates
1-20
WTO — The Dispute Settlement Process
•
The Dispute Settlement Body (DSB)
– Comprises of one representative from each member country
– Resolution of a dispute follows these steps:
• Consultations
• Panel formation
• Appeals
• Resolution
1-21
WTO — Dispute Settlement History
•
Since the WTO began in 1995 there have been over five hundred disputes
brought to the DSB
•
A complete listing can be found at the WTO Web site here
(http://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm)
•
The two countries often found in dispute cases on one side or the other
are the United States and the EU
•
The DSB restricts the freedom of a country to set whatever trade policy it
deems appropriate for the moment
1-22
Doha and the WTO
– Doha Round began at the WTO ministerial meeting held in Doha,
Qatar, in November 2001
– First round of trade liberalization talks under the auspices of the WTO
– Highly complex because:
• 159 countries must reach a consensus
• Many trade-related issues are under discussion
• Insufficient commitments on agricultural liberalization, by the
developed countries
1-23
Globalization and the United States
•
The present central agency in trade negotiations in the U.S. is the United
States Trade Representative (USTR, www.ustr.gov), an executive branch
(or presidential agency)
•
Trade Promotion Authority (TPA)
– Provided to the USTR by the U.S. Congress since the 1930s facilitates expedited
procedures in the approval process by the U.S. Congress
– Expired in 2007 and has not yet been renewed by the U.S. Congress
1-24
U.S. Tariff Rates as Specified in the
Harmonized Tariff Schedule (HTS)
•
The complete U.S. HTS is available at the U.S. International Trade
Commission Web site here (http://www.usitc.gov)
•
The products presented in the HTS demonstrate the following features of
the U.S. trade policy
– The average MFN tariff in the United States in 2002 was about 5 percent,
although for agricultural goods the rate was almost twice as high
– About 7 percent of U.S. tariffs exceed 15 percent
– The trade-weighted average tariff in the United States was only about 1.5
percent in 2003
1-25
Key Features of the U.S. Trade Policy
•
Tariffs vary according to:
– Time of entry (higher tariffs are in place when U.S. output in the
product rises)
– Different components of the product
•
The special tariff rates labeled “free,” are set on goods which enter dutyfree from a specific group of countries
1-26
• End of chapter 1
1-27