International Trade

1. International Trade Mgmt. 418 Assoc. Prof. Dr. Şule Lokmanoğlu Aker

2. Chapter 17 Political Economy and Recent US Trade Policy

3. The political economy of trade policy Although the trade theories preach that free trade is good, countries try to restrict most of the imports coming into their countries. When one trade-restricting instrument fails, new instruments usually put into practice. The contradictions are explained in the “political economy of the trade policy”. Generally, some individuals and groups feel that they will be better off with restricted trade. Policy makers are influenced by these groups. So political environment is important in developing the trade policies.

4. 1) The self-interest approach to trade policy Public-choice economics – In this approach, government decision-makers are utility maximizers whose level of satisfaction is dependent upon being reelected and who act in a manner to maximize that outcome. So the policy maker takes these decisions that would satisfy the median-voter.

5. Median-voter will support the politician if; • Majority expects a benefit from a particular policy • Majority feel that they will not be harmed by a particular action

6. Two assumptions of the median-voter model • The voters have full information regarding any gains or losses resulting from a particular policy • The voters will vote consistently with their preferences Neither of these assumptions necessarily holds. For example, a tariff benefiting only a small group of individuals may end up being supported by a voting majority (advocacy becomes very important).

7. Interest groups may influence political outcomes in various ways: • Because the costs of the decision is great for these groups, they have an incentive to influence the decision. The small group of individuals who gain from the intervention obtain a group solidarity. • They participate in the political process and support the political figure who support their position. • The uninterested majority do not participate in the debate. • There is a small voter turnout and the candidate espousing the views of the solid minority block wins. So the minority interest groups get what they want.

8. Interest groups They tend to be more successful if; • they are large enough to be visible, • but small enough to control the free-riding of their members, • there is well-defined commonality of interest, • and per-capita organizational and information-gathering costs are relatively low.

9. Interest groups They can influence the political outcomes through the funding of the political campaign, called rent-seeking activity, because the group is committing resources to the pursuit of benefits. Rent-seeking activity can extend beyond simple campaign contributions to the use of corruptive practices such as bribes to political decision-makers. Because resources used in this type of activity are not producing any good or service, they are referred to directly unproductive activity.

10. Case study – Politics puts the squeeze on tomato imports This example illustrates how a small number of Florida tomato growers managed that the administration put a floor price on tomato imports from Mexico. Led by tomato producer Paul J. DiMare, a group of wealthy, large tomato growers have argued that “the cheap imports from Mexico are driving Florida farmers out of business”, and endangering thousands of US jobs. However, there were only four large tomato growers in Florida. A minimum price was set by the Clinton Administration, because Florida was considered essential in November elections. The fear of the Administration was that Florida tomato growers could hit the election campaign with “negative advertising campaign”. As a result, consumers ended up as eating tastless, expensive Florida tomatoes.

11. 2) The Social Objectives Approach This approach stresses that trade policy is conducted taking into account the well-being of different groups in the society along with various national and international objectives. Trade policy is promoted in terms of broader social goals such as income distribution, increased productivity, economic growth, national defense, global power and leadership, and international equity.

12. Domestic social objectives include; • Avoiding real income losses in a particular segment of the economy rather than the real income of a particular group • Minimizing consumer loss • Improving the real income of the lowest-income groups • Minimizing or delaying adjustment costs for particular industries • Protecting the relative income level of specific socio-economic groups This approach is challenged by interest groups and classical market economists.

13. Liberalization of trade • GATT (General Agreement on Tariffs and Trade) took effect in 1947. Under GATT member countries committed themselves to multilateral bargaining for the purpose of easing trade restrictions. From 1947 to 1962, five rounds of trade negotiations were held. (1947, 1949, 1951, 1956, 1962)

14. Liberalization of trade • Kennedy Round of Trade Negotiations – US, to avoid being shut out by newly forming European Economic Community, started a new set of trade negotiations from 1962 to 1967. Trade Expansion Act (1962) authorized the President of the US to negotiate tariff reductions up tp 50%, and these reductions could be decided through across-the-board approach rather than item-by-item approach. Broad categories of goods could be discussed all at once and given rate reduction could be applied to the whole group. With the passage of the trade expansion Act, US started the multilateral negotiations in Geneva in Kennedy Round of Trade negotiations. 70 countries participated and tariffs on manufactured products were reduced by an average of 35%. Kennedy Round achieved little success in reducing barriers on agricultural trade. It did not ease non-tariff barriers, either.

15. Trade adjustment assistance (TAA) If tariff reductions injures workers or industries by causing an inflow of imports, displaced workers can, for example, ask for additional unemployment compensation or for help in retraining for other types of jobs. Thus TAA tried to promote internal adjustment to changing international conditions and reduction in production.

16. The Tokyo Round of Trade Negotiations While Kennedy Round reduced tariff barriers on manufactured goods, non-tariff barriers had been rising and offsetting the benefits of the tariff reductions. The Trade Act of 1974 enabled US to participate in new round; Tokyo Round of trade negotiations. This was allowing the President to participate in the negotiations to reduce tariff and non-tariff barriers. Reductions up to 60% on existing duties greater than 5%, and total elimination on goods whose existing duties were less than 5% were authorized. Also authorization was granted for individual sector negotiations to reduce NTBs. The Bill also introduced US Generalized System of Preferences for the products of the developing countries.

17. Trade Act of 1974 Section 201 – The US International Trade Commission would investigate whether the rapid increase in imports are causing “substantial injury” to the US industry, and if so, makes a recommendation for protection to the President. The import-competing firms than apply for a relief fund. Section 232 – The President is authorized to restrict any good that “is being imported into the US in such quantities or under such circumstances as to threaten to impair the national security.” Section 301 – This permits the President to take retaliary action in response to unjustifiable, unreasonable, or discriminatory restrictions on US exports by foreign countries.

18. The Tokyo Round of Trade Negotiations (1974-1979) Results of the Agreement: • Tariff rates on manufactured goods were to be reduced by an average of about one-third in a “phase-in” process over eight years. • NTBs would be reduced. For example, government procurement procedures, subsidies and countervailing duties, and valuation of goods for customs duties should not be in the form of restricting imports. • For the exports of manufactured goods from the developing countries, nonreciprocity principle should apply (even though developed countries may reduce barriers on exports from developing countries, no corresponding behaviour is required by developing countries on exports from developed countries). This way, the world basically affirmed the judgement that developing countries needed support in international economics. After the implementation of the results, the tariff rates on manufactures goods went down to 4.3% in the US, 5.2% in Canada, 6.0% in France, 2.9% in Japan, 5.2% in UK, 6.3% in W. Germany.

19. The Uruguay Round of Trade Negotiations – The first four years (1986-1990) Major objective of this new round was to reduce NTBs, and enlargement of the negotiations to embrace trade in services, and to liberalize trade of agricultural goods. More specifically, 15 groups were established to reduce trade restrictions in; (1) tariffs, (2) NTBs, (3) tropical products, (4) natural resource-based products, (5) textiles and clothing, (6) agriculture, (7) safeguards against “sudden” surges in imports, (8) subsidies and countervailing duties, (9) trade-related intellectual property restrcitions, (10) trade-related investment restrictions, (11) services Major controversy arised in agriculture where agricultural products were subsidized, protected, supported by many countries. No agreement was signed at the end of 4 years.

20. Continued negotiations lead to success, 1993 New problems in international trade appeared. For example, because of the European Community agricultural support program, US exports of oilseeds (like soybeans) were harmed. As retaliation for the EC subsidy, US threatened to impose 200% on EC exports to the US valued at $300 million. If the EC in turn retaliated against this tariff, the US was ready to impose a second round of tariffs on $700 million of manufactured exports from the EC. An accord was reached and export subsidies on oilseeds were reduced by 36% by value and 21% by quantity over the six-year period.

21. Provisions of the Uruguay Round agreement In Marrakech, Morocco, in 1994, an agreement was signed by 117 participating countries. • Tariffs on the average was cut by 34% (39% by the developed countries). Tariffs on pharmaceuticals, construction and and agricultural equipment, furniture, paper, and scientific instruments were dropped altogether. • Value of agricultural export subsidies is to be cut by 36% and most domestic support for agriculture by 20%, and average developed-country agricultural tariffs will be reduced by 36% over a six-year period. • Tariffs will be faced out in 10 years. • Japan and S. Korea will open their markets for rice imports. • Voluntary export restraints (VERs) are to be eliminated. • Trade-related intellectual property rights (TRIPs) will be in force for 20 years. • Some trade-related investment measures (TRIMs), such as local content requirements for foreign investors were to be eliminated within 2 years by developed countries, 5 years by developing countries, and 7 years by “least developed” countries.

22. Implementation • France’s refusal to permit the import of US motion pictures • General Agreement on Trade for Services calls for “national treatment” in services, meaning countries should treat foreign service providers as domestic service providers. • GATT was replaced by WTO.

23. Other trade policy actions (1980-1990) • US signed a VER agreement with Japan in 1981 to limit the export of Japanese cars to the US. Initially, it was 1.68 million Japanese cars annually, but the permitted volume increased to 2.3 million, then reduced to 1.65 million in the 1990’s. At the end, Japan started producing in the US, to by-pass quotas (Honda, Toyota, Nissan, Mazda) • Super 301 – It required the US trade representative to send the Congress “unfair” trading partners. US trade representative then would negotiate bilaterally to eliminate these restrictions. If they are not eliminated, then US could take a retaliatary action on the country’s exports to the US.

24. List of unfair trading partners Three of these countries reported were Japan, India, and Brazil. • Japan was cited as restricting the import of satellites, supercomputers, and wood products. Japan was removed from the list in 1990. • Brazil was removed from the list because of successful negotiation. • India remained on the list due to restrictions on US investment and insurance.

25. US – Japan negotiations There was a large US trade deficit with Japan, because Japan was more “closed” to the US. For example, Japanese retail stores could easily open in the US, but new foreign stores had to wait up to 10 years to get a permission to work. Japanese regulations made it difficult for foreign cellular telephones and radio services to be used domestically. Japan accepted to be more “open” and changed the approval time from 10 years to 12 months. Large government firms, like airports, would be more open to US construction firms. Also, a telecommunication accord was reached.

26. Trade policy under Clinton Administration • EU - In 1993, a dispute arouse in EC about procurement practices of public utilities. They were required to use EC suppliers for their input purchases unless EC prices were higher than 3% of non-EC prices. In response, although US had a lot of “buy American” provisions, US said it would retaliated and prevent EC companies from selling telecommunications and power-generating equipment to federal government agencies. After the negotiations, partial agreement was reached. • China - In 1993, US also threatened to impose protectionist measures against rapidly growing imports from China. After discussions China “voluntarily” agreed to limit its textiles to the US. China also accepted to limit its silk exports to the US. Fearing that US would end its MFN agreement with China. Ultimately, MFN was renewed.

27. Continued... • Japan – US wanted a greater access to the Japanese market. Although tariffs were low, there were informal restrictions in the Japanese market, like the Keiretsu system (Japanese firms only purchased from eachother), or government officials award contracts only to the Japanese firms, and so forth. The cost of imported goods increased through these informal measures, for example, the “invisible tariff” on clothing was 187% (official tariff 10%), on beer was 143% (official tariff 2%), and on soda ash was 162% (official tariff 0%). US asked Japan to reduce the huge trade surplus. In 1994, An agreement was reached and US autos and auto parts could enter into Japanese market. US imports into Japan increased by 34%, and auto parts by 20% in 1996.

28. Continued... Helms-Burton Law – In 1996, the Law allowed US citizens to sue any investor using Cuban property sized from US citizens whenFidel Castro came into power in 1959. The suits can also be applied to anyone trading with these firms. The Law initiated an uproar in EU countries; they claimed that the US has no right to interfere with their economic activities and they are going to retaliate, and they are going to take the case to the WTO. US President Clinton announced that he is going to soften the Law in exchange for EU postponement of its plan to take the case to the WTO.

29. Continued... US – China relations were soaring over renewal of the MFN status for China, about intellectual piracy of China (in compact discs, computer software, DVDs, etc), and China’s enterance to WTO as a member. China’s human rights violations and their illegal campaign contributions to Democratic candidated in US elections. There were pressures to restrict Chinese imports, where there was an argument that child labor was used where children were working long hours in unsafe conditions, for very long hours. In 1997, Clinton Administration backed by US labor unions and clothing industry, called for a worldwide ban on child labor, worker abuse, worker discrimination, payment by the foreign manufacturers at least the prevailing minimum wage, and recognition of the workers’ rights to join a labor union. Many countries took these suggestions as hidden protectionist measures. (US being one of the countries with lowest unionzation) Similarly US requiring restriction on imports coming from countries with low environmental standards. (US being the number one pollutant in the world)

30. Concluding observations on trade policy • International negotiations, both bilaterally and multilaterally, have reduced the trade restrictions in the world considerably. • Retaliation have been a major instrument and detante on countries intending to restrict imports coming into their countries.

31. The conduct of trade policy • Rules-based trade policy is one that adheres to commonly accepted international guidelines on international trade, embodied by WTO. • Results-based trade policy stresses that policy should seek, through aggressive, unilateral action or threat of action, to achieve carefully specified objectives. It is also called “new reciprocity” approach to trade policy. It is interventionist and sometimes called “managed trade”. It is becoming popular after 1990’s.

32. Empirical work on political economy Statistically significant positive relationship exist between the degree of industry protection and; • The number of workers in that industry, • Reflect labor intensity and also voting stregth that politicians wish to court, • The percentage of unskilled workers in an industry.

33. Empirical work on political economy Negative associations have been found between the degree of industry protection, and; • The number of firms in an industry, • The average wage in an industry (reflecting lower skills).

34. Other findings in the US: • A strong positive relationship is found between the average tariff rate and unemployment. • A positive relationship is found between the average tariff level and the ratio of the prices of US manufactured goods exports to the prices of US manufactured goods imports. • A negative association was found between the US inflation rate and the average level of tariffs. (consumers want to buy cheaper imports during the inflationary times).