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ECONOMICS 3150M

ECONOMICS 3150M. Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068. Lecture 22: April 2 Ch. 9, 10, 12. Non-Tariff Measures (NTMs). Procurement Preferences

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ECONOMICS 3150M

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  1. ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

  2. Lecture 22: April 2Ch. 9, 10, 12

  3. Non-Tariff Measures (NTMs) • Procurement Preferences • Preferential price advantage given to domestic suppliers – government will buy from domestic supplier as long as price is no more than X% greater than that of foreign supplier  similar to tariff • Similar to restrictive quota or tariff when foreign suppliers prevented from bidding • Red Tape Barriers • Health and safety standards – infected cattle, SARs • Customs classifications • Harassment potential

  4. Non-Tariff Measures (NTMs) • Domestic taxes and terms of trade • Carbon taxes in US and world price of oil • Changing environmental rules to allow the use of fracking technologies for oil and gas

  5. Non-Tariff Measures (NTMs) • Contingency Protection • Security of access issue related to FTA • Countervailing duties – in case of subsidies; definition of subsidies • Anti-dumping – predatory, sporadic, persistent (price discrimination) • Balance of payments, employment safeguards

  6. Non-Tariff Measures (NTMs) • Countervailing duties • Definition of subsidies – health care system, education, etc. • Value of subsidies • Terms of trade • Costs to domestic industry – distinct from economic shocks, competition • Magnitude of tariff to level playing field • Duration of protection

  7. Non-Tariff Measures (NTMs) • Anti-dumping • Distinguish among predatory, sporadic, persistent • Does nature of dumping matter? • Degree of dumping – price differential • Costs to domestic industry – distinct from economic shocks, competition • Magnitude of tariff to level playing field • Duration of protection

  8. Non-Tariff Measures (NTMs) • Safeguards • Flexible exchange rates as shock absorber • Global shock or country-specific shock • Herd effect – pace of outsourcing accelerates • Costs to domestic industry – labor adjustment policies, unemployment insurance, training programs • Magnitude of tariff • Duration of protection

  9. 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

  10. 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

  11. Canada-US FTA • Gains from trade • Traditional: comparative advantage, new products • Larger markets: economies of scale, plant economies (specialization), learning curves • Increased competition: new products, higher quality, lower prices (border shopping) , efficiency • Minimize trade disputes – less likely to be side-swiped when trading partner initiates trade dispute against other countries; dispute resolution mechanism fairer and quicker in resolving trade disputes • Consider softwood lumber under NAFTA, subsidies for regional jets

  12. Canada-US FTA • Losses • Income losses for owners of relatively abundant resources • Implications for income inequality – skilled vs. unskilled workers; owners of capital vs. workers • Adjustment to new trade patterns – unemployment during transition • Race to the bottom – “Right to work” laws in the US; lower minimum wage rates

  13. Canada-US FTA • Argument in favor of FTA with US based on Canada exploiting economies of scale and gaining secure access to US market (required to encourage investment in Canada and restructuring) • Productivity levels in Canada 25% below US because Canadian branch plant replica of US • Same number of varieties and shorter production runs; • Less competition thus X-inefficiency and less incentive to innovate • Plant economies of scale • Standard internal economies of scale and per unit costs decrease with reduction in number of products produced in each plant

  14. Canada-US FTA • Problems with argument: • If economies of scale so important why did some firms not specialize and drive competitors out of the market? • Tariff barriers had been declining since 1947 – what if management a problem? • Security of access limited incentives to restructure

  15. FTA, NAFTA • Objectives • Eliminate barriers to trade in goods and services • Expand liberalization of conditions for cross-border investments • Dispute resolutions – more binding, more effective enforcement • Facilitate conditions for fair competition (labor and environment codes) • Rules of origin: 50% of value added (62.5% for autos) must originate in free trade area • Eliminates import and export restrictions on energy products, no price discrimination between domestic and foreign consumers of energy products • National treatment • Trade in services – subject to regulation (professional services); labor mobility; foreign ownership restrictions (financial services, broadcasting, transportation)

  16. NAFTA • Ch. 11 • Allows companies to sue any of the NAFTA governments for violation of that government’s commitments under the agreement • Allows company to sue if it believes it has experienced either expropriation or government conduct tantamount to nationalization or expropriation – any regulation or policy change that reduces a firm’s profits and value

  17. 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 supersede 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 dictated outlines of agreements

  18. 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 • WTO created to replace GATT secretariat • Responsible for enforcement of agreement and dispute resolution • More formal procedures with tighter deadlines • GATS (General Agreement on Trade in Services) • TRIPS (Agreement on Trade-Related Aspects of Intellectual Property

  19. GATT • 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 • Major problem for Doha Round

  20. Agriculture Support Government support, 2008: % of gross farm receipts • Canada: 13.0% • Australia: 5.9% • Brazil: 5.0% • China: 8.6% • EU27: 24.9% • Japan: 47.8% • Russia: 10.8% • S. Korea: 51.7% • Mexico: 13.1% • Turkey: 24.5% • US: 6.8%

  21. GATT • GATT includes articles on anti-dumping (Article 6), countervail (Article 16) and escape clause (Article 19) • Dumping: export price below domestic market price (below cost of production or normal home market price) • Escape clause: temporary protection to limit imports causing serious injury to domestic producers • Countervail: tariffs to offset effects of subsidies • Problems: defining subsidies, determining existence of dumping, measuring degree of dumping, measuring injury, determining causation

  22. GATT and US Trade Laws • US contingency protection legislation – countervail, anti-dumping, escape clause and unfair trade (S. 301) • First three deal with imports, unfair trade deals with exports as well • US definitions of injury and causation differ from spirit and letter of GATT • Unfair trade not part of GATT – trade panel has found S. 301 to violate GATT • Issue of sovereignty for US

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