AEM 230 International T&F Flashcards

Terms Definitions
Globalization
economic view - the reduction and elimination of traditional barriers which seperate international buyers and sellers through:1. Trade policy (i.e. tariffs/quotas, since 1930 these have been going down)2. Decreasing transprtation costs (i.e. cost of air and freight, these ave been going down since 1930)3. Decreasing Transaction Costs (i.e. costs of brokers, custom fees, an communication costs have all gone down)4. Market-determined exchange rates (i.e. more countries have independently floating rates and managed floating rates)
Globalization
More than feer trade:1. Serve expanded markets, BUT experience increased competition and prssure to reduce costs2. Telecommunication is better, BUT low cost competitors face smaller barriers to entry3. Increased specialization, BUT displacement of employees and changes in traditional employment patterns4. More intl M&A allows for cst reduction and more economies of scale, BUT more competition and greater potential of gaining market power and controling prices5. Cultural convergence (aka homogenization) mean increased economies of scale when serving a global market, BUT raises questions of national identity6. Advances in communications,democratization, and "marketization," enchance individual soverginty, greater choice, lower costs, and more consumer power, BUT what is the rolr of the state?
Globalization
Summary: Globalizationhas great scope to increase economic welfare of individuals, households and nations, but also raises the potential for exacerbating economic and social problems associated with income distribution, poverty, the environment, factor migration (immigration, capital market instability), and cultural identity.
Absolute Advantage
Def: producing a product more (most) efficiently (i.e. at the lowest cost) compared to other countries or producers-Reaction to Mercalists of the 18th century in Englad-Goes back to Adam Smith's a Wealth of Nations (1776)-Protectionist/zero-sum pilosophy (if one country gains the other must lose)To figure out who has the absolute advantae find the "relative" price to produce the good per unit of labor. What does Country A have to give up to prduce on moe unit of Good B? What does Country B have to give up in Good A to produce one more unit of Good B?
Absolute Advantage
What if a country has no absolute advantage?David Ricardo says tha trade still occurs with specialization in the good whcih you have COMPARATIVE advantage.(Assuming no transportation/transaction costs)
Adam Smith's Insights
1: national price differentials in and of themselves, provide incentives to trade2: given different national prices it makes sense to specialize in production
Autarky
This is the senario where NO TRADE occurs
Opportunity Cost
Def: The number of units of one good you must sacrifice to get one additional unit of another good
Comparative Advantage
Def: Producing a good with lower or lowest opportunit costs of production
Specilization
Def: The se of resources to produce some, not all, goods required by society
Terms of Trade (TOT)
Def: Relative prices of a country's exports and importsPexports/Pimports
Production Possibilities Frontier (PPF)
Def: curve showing all the possible combinations of outputs of two products that a porducer (or economy) can produce with resources fully emplyed and the best available technology
Marginal Rate of Transformation (MRT)
the amount of one product that a producer (or economy) must sacrifice in order to produce one more unit of another commodity (aka the slope of the PPF at the point of production)
Marginal Cost of Prodction (MC)
Def: cost of producing an incremental unit of a good or service (i.e. equivalent to MRT b/w 2 goods)
Constant MC
Under Autarky: PPF is linearWith Specialization: Total specilization, producing only the good with the highest absolute advantage along the PPFSpecialization and Trade: The TOT line has a slope between the slopes of each countries individual PPF. You trade along the PPF to maximie utility
Decreasing MC
-Creates a PPF that is bowed in or towards the origin so the mouth point outward-Decreasing MC usually occurs in industries with economies of scale (i.e. utilities) because: 1. capital intensive = high FC 2. low VC for the nth transaction-This gives you TOTAL Specilization
Increasing MC
-Creates a PPF that bows out with the mouth pointing toard the origin-Increasing MC (at some point in production) is more common because: 1. training/edu for the workforce 2. physical infrastucture needs to be expanded to reduce bottlenecks 3. Marketing 4. Higher wages to induce labor supply-This gives you PARTIAL Specilization-Produce at the point where the PPF is tangent to the TOT line. This will give you the highest utility
Aggregate Supply
-Derived from PPF curve-Alter the tangent slope wrt the TOT and get many different points of (good A, good B). -These points become the supply line for Country A.-Do this again for country B. -There horizontal sum gives you aggregate supply
Determing Comparative Advantgae in the Real World
-Examine marginal opportunity costs of prodcution and compare to the international TOT (aka international prices) -Domestic ex: McDonals' labor supply is dependent on opportunity costs of low-skilled labor-Intl ex: Food security LDC's - devote scarce resources to food production vs. import foods from abroad
Marginal Rate of Substitution (MRS)
Def: the amount of one product that a consumer (nation) must sacrficie in order to consume one more unit of a second product and total utility unchanged (aka the slope of the indifference curve at the point of consumption)
Diminish Marginal Utility
Def: the substitution of one good for another in demand becomes progressivly more expsive-Alternativly, one must sacrficie less and less of one good to consume more and ore of a second good (i.e. indifferenc curves are convex to the origin, with a declinging slope as the consumer (nation) moves down the curve)
Indifference Curves (IC)
Def: curve showing all the possible points of consumption for two goods which yeild an equal level of utility or satisfaction
Properties of Indifference Curves
1. Always have a negative slope2. Always convex to origin (reflects diminishing marginal utility)...better bundles to the NE3. Always non-intersecting
Maximizing Utility
-Utility is maximized when the IC is tangent to the BC (aka Budget Constraint)-The Budget Constraint says that Income = P1X1 + P2X2 OR X2 = I/P2 - P1/P2*X1-At utility maximzation point: MUx1/MUx2 = P1/P2.
Aggregate Demand
-By decrasing P1 the BC swings out and new ICs are drawn. Thise producs points that create a demand curve-Individal demand curves are summed horizontally to get aggregate demand-
Excess Supply
Def: the horizontal difference between the supply line and demand line at any given price P, for the country with the comparative advantage (i.e. the one with lower production costs)-The ES has a y-intercept equal to the equilibrium price of Country A and follows the equation Sa - Da.
Excess Demand
Def: The horizontal difference between the demand line and the supply line at any given price P, for the country with the comparative disadvatnage (i.e. the one with higher production costs)-The ED has a y-intercept equal to the equilibrium price of country B and an equation that says ED = Db - Sb.
International Equilibrium (free-trade)
Def: The point where ED = ES. -At this point the quantity is equal to 1. Sa - Da 2. Db - Sb-Assumptions about this point: 1. no trade barriers (i.e. no tariffs or non-tariff barriers (NTBs)) 2. Both countries are large-trading countries (i.e. either can effect international price) 3. Trade is free and costless (i.e. no transportation or transaction costs) 4. Only one good (i.e. no substitution effects) 5. Trade is perfectly competetive (i.e. no monopolies or market power effects)
Consumer Surplus
Def: Differnece between what a customer is willing to pa for a good, and what they actually have to pay for that good-Represented graphically as the area to the left or below the demand curve and between the price lines-In the international market, this area is calle the "importer" gains from trade
Producer Surplus
Def: The difference between what producers are willing to accept for their good, and what they actually receive from their customers-Graphically this is represented as the area to the right or above the supply curve and between the price lines-In the international market this area is called the "exporter" gains from trade
Small Country Importer/Exporter (free trade)
Def: A country involvd in international trade, but doew not have enough market share to effect or change the international price-Importer: Faces a completely elastic (or horizontal) ES curve. A shift in demand has no effect on price, and simply cuts into importer gains. No exporter gains exist when trading with a small country importer. -Exporter: Faces a completely elastic ED and shifts in the ES can have no effect on price. There are only exporter gains which change when ES changes.
Large Country Exporter/Importer (free trade)
Def: A country who is involved with international trade, but has enough market share to change the international price-Exporter: A large country exporter faces a positive sloped ED curve. As this ED curve becomes more elastic exporter gains decrease.-Importer: A large country importer faces a positivly sloped ES curve. As this ES curve becomes more elastic importer gains decrease.
Transportation Costs
Def: Transportation costs are equal to the difference between Pb - Pa.-As "t" increases exporter and importer gains are eaten up. Pa rises and Pb falls. In Country A Sa goes down and Da goes up. In Country B Sb rises and Db falls. -At the point where "t" = Pb at equilibrium - Pa at equilibrium, no trade will occur. The countries are better off not trading because the transportation costs eat up all of the gains
Gains From Trade
1.Net welfare “gains from trade”are created through free trade and specialization2.Price effects, and resulting quantity effects, depend on status as “small”vs. “large”trading countries.3.Incidence of welfare gains and losses is affected by the slopes (elasticities) of ES and ED, and thus by the slopes (elasticities) of domestic S and D in trading countries, which determine ES and ED. The same is true with positive transportation costs.
Tariffs (Purpose of...)
1. Raise government revenues (only really important today for developing countries, not the US)2. Protect domestic producers (when foreign competition tries to enter domestic market with substitutable goods, they face higher costs which ultimatly means higher prices for consumers)3. Alter trading patterns (i.e. Regional trade agreements like NAFTA help political friendship and stimulate trade between member nations)
Tariffs (Types of...)
1. Specific: fixed amount per unit of product2. Ad valorem: % of product value or price3. Compound: combination of (1) and (2)
US Tariff History
-Early on the US was a raw material exporter and a manufatured good importer-Alexander Hamilton was a supporter of tariffs and convince Congress to pass the Tariff Act of 1789 which gave the federal government the right to impose tariffs-Early 19th century led to increased protectionism: 1. War of 1812 2. Growth of manufacturing in US econ 3. Culminated into 45% tariff! 4. Walker Tariff of 1846-High tariffs in late 19th and early 20th centuries: 1. Civil War 2. WWI 3. The Great Depression (20s and 30s)
Smoot-Hawley Tariff
-Passed in 1932-53% average tariff which created a retaliation and a trade war with all of Europe-Drove the US into a deeper depression and made it a global problem
Reciprocal Trade Agreements Act
-Passed in 1934-Gave the president wuthority to make trade negotiations-Reciprocal tariff cuts, "I'll lower mine if you lower yours."-"Most Favored Nation" principle (aka MFN) which said that you had to extend the lowest bilateral tariff to another country if they wanted it). This was very important throughout the 90s.
US Tariff History Part II
-Post WWII: 1. General Agreement on Tariffs and Trade (1947-48) aka GATT 2. Major Negotiation Rounds include the following: a. Kennedy Round (62-67) b. Tokyo Round (74-79) c. Uruguay Round (86-93)
World Trade Organization (WTO)
-Created in January of 1995 as a product of Uruguay Round of Negotiations
Import Tariff (Small Country)
-In this case the importing country imposes a traiff to generate revenue and protect itself. It faces a perfectly elastic ES curve.-Price increase from Pintl to P'. This change in price is equal to the tariff imposed.-Demestic supply increases and domestic demand decreases. -The international quantity traded is reduced and the tariff revenue which goes to the government of the small country is equall to the (tariff) * (new Qintl)-Consumers lose and this is redistrib uted to the producers who gain. There is also a deadweight loss.
Import Tariff (Large Country)
-In this case a large importing country imposes a tariff to generate revenue and protect itself. It faces a positivly sloped ES curve.-For the importer: price goes up, supply goes up, demand goes down, and quantity traded in the intl mrkt goes down.-For the exporter: price goes down, supply goes down, demand goes up, and quantity traded goes down.-The reason price goes up and down, is due to "split incidence," some of the gain goes back to the exporter at a lower price. -Importer: consumers lose a lot, producers gain some, the government generates rev, and there is deadweight loss-Exporter: consumers gain a little, producers lose a lot, no gov't rev, and so negative welfare.-Overall, the world is worse off.
Tariff Maximization
Def: A tariff will be maiximized when the quantity traded with the tariff is exactly half of the quantity traded under free trade conditions
Tariff Incidence
Def: a measure of who in the end bears the burden of a tax-Tariff incidence is measured by the quantity g - (b+d) such that: g = tax on foregin exporters AND(b+d) = tax on domestic consumers-Depending on the elasticities of the ED and ES curves, tariff incidence can change
Optimal Tariff
Def: a large trading countyr can optimize its social welfare, recognizing that it can have an effect on world price-A tariff is optimized when the quantity of g - (b+d) is maximized i.e. the point where foreign exporters bear the burden of the tariff MORE THAN domestic consumers
Tariff Escalation
Def: increases in nominal (and effective) portection at each sucessive stage of production-traiffs on finished goods > tariffs on works in process > tariffs on raw materials-Creates incentives for the production and export of primary goods for developing nations, BUT diminishes the exportation of manufactured goods to industrial markets
Effective Tariff
Def: e = (n-ab)/(1-a) where: e: effective tariff n: nominal tariff on output a: imported imputs (% of final product value) b: nominal tariff on imported goods-The indicator of the REAL level of protection iven to industries that compete with imports
Rules of Origin
Def: You can not bypass tariffs by send goods through another country-Ex: You a producer in Japan with offices in Mexico. Due to NAFTA Mexico faces 0% tariff but you face 3% tariff. You CANNOT send goods to Mexico and then to the US to get lower rates
Heckscher-Ohlin Proposition
Def: A country will export that commodity whose production is relativly more intensive in its abundant factor of production, and will import that commodity whose production is relativly more intensive in its scare factor of production-Based on: 1. Factor intensitites...high machines/low labor or low machines/high labor 2. Factor endowment...US has little labor, China has a lot fo labor-The country will have a comparative advantage in making a good that is intensive with its cheapest factor of production
Leontief Paradox
U.S. is abundant in: 1. Land 2. Human Capital 3. Inventiveness-Ex: Since the US if more cpaital abundant its ratio of Capital (exports)/ Labor (exports) should be greater than 1 (i.e. more exports than imports) but according to the paradox this was not true-Why does it differ? 1. Limited assumptions (more than two goods exist in each country) 2.tariff structure (high tariffs on labor intensive products can distort imports toward capital-intensive goods) 3. Comes down to tastes and preferences (i.e. some people think Frecnh wine is simply better than wine from California) 4. Differences in technology and factor substitution-It was found that Hecksher-Ohlin was in fact correct with some exceptions
RYBCZYNSKI Therom
Def: In a two-good world with constant prices, growth in one factor of production causes the output of the other goods to decline-Ex: "Dutch Disease"
Stopler-Samuelson Therom
Def: In a two-good two-factor world, where the production of one good is intensive in the use of one input and the production of the other good is intensive in the use of the other input (and subject to additional simplifying assumptions), a trade-induced rise in the relative price of one good will raise the price of the other intensivly-used factor and lower the real price of the other factor-Implication: The more a factor is specialized in the production of exports, the more it will gain from trade. The mose it is concentrated in the production of imports, the more it will lose from trade.
Factor-Price Equalization
Def: Under certain restricive assumptions, free trade accross trading partners will equalize factor prices among them
Human Skills Theory
-Another explanation of comparative advantage is....Def: Differences in human capital endownments and intensities help explain trade
Product Life Cycle Theory
Another explanation for compartive advantage is....Def: Comparative advantage shifts from the country which sucessfully invented or innovated a porduct to the lower cost producer, once standarization occurs.
Intra Industry Trade
Why do countries import and export similar products?1. "Vertical Specialization" (ex: export components and then import back in the finished goods)2. Transportation costs (ex: Canadian lumber, in the west they esxport to the US and in the East they import from the US)3. Product Differentiation (ex: consumer preferences such as Fench Wine > Cali wine)4. Seasonality (ex: apples, export one season and import during the off season)5. Statistical Factors: data aggregation
Quota
Def: a physical or value limitation on imports (or exports) of a commodity
Tariff Rate Quota (TQR)
Def: Combination of a tariff and a quota where a certain amount can be imported duty-free, after which a tariff is imposed on remaining imports
Porportional Import Quota
Def:(aka "mixing regulations" or "domestic content regulations") imports limitied to a given percentage of deomestic production
Non-Tariff Barriers (NTBs)
Include all of the following:1. Quotas2. Voluntary Export Restraints aka Export Quotas or VERs 3. Export embargos and controls (ex: US to Soviet in 1970s during Cold War)4. Dumping (ex: selling the same product abroad for a cheaper price than domestically...i.e. price discrimination)5. Export/Import Subsidies6. Technical barriers to trade (ex: resticing import licences)7. Sanitray and phyto-sanitray restrictions (limit the import of pesticides...i.e. grapes)-Studies show that NTBs are being used less however, they are used more than tariffs
Small Country Import Quota
-A small country imposes a quota limiting the amount of a good that can be imported to generate a quota rent and protect domestic production-Importer: Price increases from Pintl to P*. Domestic S goes up and Domestic D goes down. -Intl/ROW: ED becomes kinked. Quota rent is created. DWL exists. Quantity traded is reduced to the point of the quota.
Large Country Import Quota
-A large country imposes a quota limiting the amount a certain commdity can be imported to create a quota rent and protect domestic producers-Importer: Price increase, domestic S goes up, domestic D goes down. Producers gain, and consumers lose.-Intl: Quantity traded is decrased, and a DWL exists.-ROW: Price decreases, Supply goes down, demand goes up. A portion of the quota rent that goes to the importers is at the cost of the foregin exporters.
Who gains from quota rents?
-Depends on the following:1. Foreign exportes v. domestic importers2. alternatives for allocating the right to the quota rent: a. first come-first serve b. political expediency c. lottery d. graft
How can the gov't gain from quota rents?
-Auction off the right to import to the highest bidder (Walmart will be willing to pay for it up until the get no gains from it). In the extreme case the price of this licence would be the difference between domestic and foregin prices, but unlike a tariff quota holders can be taxed.
Problems with quotas:
1. rigidity - non-responsiveness to price2. increase in the likelihood of price instability (i.e. changes in the ES keep the same Qd but have drastic changes in price)3. domestic monopolies will charge higher prices and produce less than with a tariff4. creation of excess profits ("quota rents")5. likelihood of rent-seeking leading to corruption
Voluntary Export Restraints (VERs)
Def: an agreement between an exporter and an importer in which the exporter "voluntarily" agrees to limit exports (typically with the implied threat of trade retaliation, on the part of the importer, if this is not done) -Some examples include toys from China to Europe, exports of computer ships from Japan to the U.S., Japanese automobiles to the U.S., etc.-Main social welfare effect is to enable exporting country, rather than the importing country, to capture quota rents created by the supply limitation-VER's have a discriminatory effect against one exporter vs. another; since they violate the non- discrimination policies of WTO, VER's were prohibited in the Uruguay Round Agreement after 2000.
Small Country Export Quota aka VER
Def: A small exporting country limits the amount that a commodity can be exported to generate quota rent and preotect domesitc -Exporter: Before hand, faces an inelastic demand curve. Price falls, domestic D increase, domestic S decrease, quota rent goes to the exporter. -Intl marker: quantity traded is reduced, price decreases, and dwl occurs.
Large Country Export Quota aka VER
Def: A large country exporter reduces the volume that can be exported by producers to generate a quota rent and protect domestic -Exporter: price falls, domestic D rises, domestic S falls, quota rent goes to the exporter-Intl market: price splits. ES becomes kinked and lowers quantity traded. Dwl occurs.-Importer (ROW): Price rises, domestic D goes down, domestic S goes up,
Dumping
Def: Based on international price discrimination, in which an exporter charges a lower international price (in one or more markets) than for an identical product in the domestic market
Dumping (types of...)
1. Preadtory dumping: temporary price discrimination in favor of foreign buyers to eliminate competitors in the short run, and in the long run, increase prices.2. Sporadic (seasonal or cyclical): the firm lowers prices temporarily in a foregin market, due to seasonal or business cycle factors, to dispose surplus production (i.e. perishables) or during periods of slack demand3. Persistent (classic method used): long-term price discrimination
How does dumping work?
Ability to price discriminate is based on the producer's monopolistic power to charge high prices in the domestic market, where deman is relativly inelastic, while charging lower prices in the international market, where demand is more elastic and consumers can choose from alternative suppliers-Ex: domestic market is inelastic, while foreign market is elastic. P' is equal to MC and people want it where MR = MC. Take that line up to the deman curve. Price domestic will be greater than price foreignn
Anti-Dumping
-If dumping is demonstrated to exist and to have injured the importing country’s industry, the WTO permits the importing country to charge an anti-dumping duty, up to the amountof the price differential between the two countries (the “dumping margin”).-
Determining Dumping
1. Has dumping occurered? (U.S. Commerce Dept)2. If yes, has the domestic industry been injured? (U.S. International Trade Commission)3. If yes, what is the amount of the anti-dumping duty? (U.S. Commerce Dept.) -The number of anti-dumping filings to the WTO has increased by 50% or more since 1990.
Export subsidies
Def: used to increase a nation's exports and support domestic exporters by effectivly decreasing the price to importers-Used only in selective industries such as agriculture or aircraft manufacturing
Small Country Export Subsidy
Def: A small exporting government pays out a subsidy to domestic producers to help reduce the cost of the export in the international market-Exporter: domestic price increases, reducing domestic D and increasing domestic supply. Producers gain, and the gov't and consumers lose. -International market: price stays the same. quantity traded increase, and a deadweight loss occurs.
Large Country Export Subsidy
Def: A large country's governemtn pays domestic producers, which effectivly reduces the price to importers. -Exporter: price increases reducing domestic D and increasing domestic S. The gov't losses and the consumers lose, only the producers gain.-Intl: price splits, quantity traded increases, and their is a dwl.-Importer: price falls, demand rises, supply falls, consumers gain, producers lose, nothing happens to their government. overall, the importer is better off.
Effects of Export Subsidies
-Decreases price in importing country, increases price in exporting country, increases exports.-Redistributes income and welfare away fromdomestic consumers, taxpayers and foreign producers (via price increase at home and price decrease abroad), and towarddomestic producers and foreign consumers.-Ironically, worsens terms of trade (PE/PI) in the subsidizingcountry by increasing price at home and decreasing price abroad.-Importers permitted under WTO to impose countervailing duties to offset effects of subsidies.-Uruguay Round of GATT/WTO agreement imposed greater limits on export subsidies but did not eliminate them.
Other NTBs
-State trading –government acts as monopolist or monopsonist-National procurement policies-Technical barriers to trade –rules, regulations, and standards that limit imports for reasons beyond public health and welfare requirements-Sanitary and phyto-sanitary restrictions-Domestic taxes, subsidies, infrastructure support and other assistance-Bureaucratic barriers –exchange rate controls, import licences, etc.
Trade and Reduction of Barriers Permit....
-Expansion of demand and widening of markets-Realization of scale economies and cost savings-Reduction of organizational inefficiency and inefficient production arrangements (“X-inefficiency”)-Reduction of potential for monopoly losses-“Factor accumulation”accompanying economic growth: growth of employment, savings, capital investment, foreign capital investment, etc.-Increased productivity in export sector-Increased innovation and technological change-Avoidance of “rent-seeking”
Genral Agreements on Tariff and Trade (GATT)
Def: Multilateral agreement to decrease trade barriers and assure equal treatment among member countries-Eight rounds of negotiations between 1947 and 1995
GATT (key Principles of...)
1. Non-discrimination: acceptance of most favored nation (MFN) principle; extension to all member nations the most favorable treatment givne to any single member. Regional trade agreements are an exception2. Elimination of NTBs: such as import quotas, export subsidies, etc., which are more trade-distorting and can be used to discriminate against specific countries (exceptions: agricultural products, nationsin balance of payment difficulties)3. Encourahe resolution of trade disputes: through consultation, complaint procedures, and consiliation panels (but no authority to enforce dispute panel's recomendation until the formation of the WTO)
GATT (Key Rounds...)
Since the formation of GATT the most important rounds hhave been Geneva, Tokyo, Kennedy, and Uruguay because these have had the largest decreases in tariff rates than any off the other rounds
Preferential Trading Arangements
1. Free Trade Area: Reduced trade barriers among members, but each member maintains it own tariffs and other trade barriers with respect to other nations (ex: NAFTA)2. Customes Unions: No trade barriers among members, and common external tariffs and NTBs with respect to other nations (ex: Mercosur b/w Argentina, Brazil, and Uruguay)3. Common Market: Customs Unions plus haromonization of national tax systems, social insurance, agricultural policies, labor and capital migrations, and fixed exchange rates with respt to e/a other (ex: European Monetary System)4. Economic Union: Common Market plus harmonization of all economic policies, common currecy, common foregin policy (ex: the purpose of the EU...hasn't quite gotten there yet)-These get less resticitive as you move down the list
Most Favored Nation (MFN) aka Generalized System of Preferences (GSP)
-Special trade agreement benefiting only one country-THis is usually extended to developing countries from developed countries. They tend to be very complex and often have humanitarian purposes or political undertones
Trade Creation
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Trade Diversion
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Small CountryImport Subsidy
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Large Country Import Subsidy
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Small Country Export Tariff
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Large Country Export Tariff
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North American Free Trade Agreement (NAFTA) (originated with...)
1. Mexican domestic ecoonomic reforms 1980s, cut tariffs and NTBs; reduced import licenses, eliminated restrictions on cross-border financial transactions, began program of privitizationa dn deregulation. Joined GATT in 19862. Canada-US Free Trade Agreement in 1989, establishing free trade area over 10 years3. One of over 50 regional trade agreements in the Western hemisphere since late 1980s; FTAA effective 2005 (FTAA=Free trade Among the Americas, 34 countries...was supposed to absorb NAFTA, but it was difficult to implement and failed to reach all objectives)
NAFTA (Objectives of...)
Effective on Jan 1, 19941. Increasing trade within region relative to that with external trading nations2. Increase competitiveness3. Increase exports to other trading blocs besides North America4. Enhance industrial complements such as Canadas raw materials and US factories
NAFTA (Main Provisions...)
-Elimination of import tariffs over 15 years, including in controversial sectors such as agriculture, automobiles, and textiles (only for North American-produced fibers and yarn).-Elimination of many non-tariff barriers, including restrictions in petrochemical industry investment, transportation (esp. trucking), and investment in financial services.-Intellectual property protection.-Establishment of dispute settlement procedures
NAFTA (Slide agreements in enviroment and labor...)
-Investigate abuses in either area.-Impose fines or trade sanctions if countries fail to enforce environmental laws or labor standards
NAFTA (Effects...)
-US workers lost of 300,000 jobs due to increased importing from Mex and Can-Immense increase trade, and after NAFTA a larger portion of trade for Mex and Can was with the US...by 1998: 86% of CAN exports went to US 68% of imports came from US 81% of Mex exports came to US 74% of imports came from US-tariffs went down-4/6 times there was more trade creation than diversion-Had all good effects on Mexican econ
Arguments FOR Preferential Trade Agreements
1.Trade creation > trade diversion (under certain circumstances)2. To supplement and accelerate multilateral liberalization, both as a “threat” and as a precursor, easing adjustment costs and lessening political opposition.3. Can reflect characteristics of heterogeneous countries and areas.4. Foster growth of “countervailing blocs”5. Creates long-term economic benefits: economies of scale, increase in investment and competition, etc.6. Encourage economic, social and political reforms of member nations.7. Popularity of regional trade agreements, including 55+ agreements in the Western Hemisphere.8. Quicker and more efficient to reach agreement.
Arguments AGAINST Preferential Trade Agreements
1.Second best, not optimal, outcome compared to multilateral liberalization.2. Increased potential for trade diversion, and associated costs.3. Fragmentation and rigidities resulting from distorted trading patterns.4. Multiplicity of “rules of origin”5. Slow responsiveness to long-term market changes6. Costs of administration
Major accomplishments of Uruguay Round of the GATT
Tariff reductions, averaging 40% for industrial countries, spread over 5-10 years, with elimination of tariffs in selected sectors (steel, pharmaceuticals, medical and construction equipment, paper, etc.) and “binding” (capping) of tariffsDecreasing/eliminating non-tariff trade barriers (VER’s, import quotas, exports subsidies) and replacing them with tariffs (“tariffication”)Extension of trade disciplines in three new areas:Intellectual property: guarantee protection of trademarks (7 years), patents (20 years), and copyrights (50 years)Services: gradual opening of domestic markets to trade in professional services (legal, accounting, etc.), communications, construction, educational services, health services, etc. “Foreign investment performance standards” to be phased out, but significant resistance post-UR in the opening of markets for financial servicesAgriculture: reduction in export subsidies; tariffication of import quotas; restrictions on domestic subsidies; gradual liberalization of agricultural trade barriers, with special treatment for developing countriesElimination of Multi-Fiber Agreement, which limited imports of textiles and apparel to industrialized countriesCreation of World Trade OrganizationPermanent organization with wider scopeUnified agreements to which all members are committedStrengthening of dispute resolution mechanismsOversight, monitoring and administration of agreements
Uruguay Round Agreement on Agriculture: Summary
Market accessNon-tariff barriers converted to tariffs (“tariffication”) and “bound” (maximum negotiated levels beyond which penalties are enforced)Reduced existing and new tariffs by 36% over six years, with minimum tariff reduction per line of 15%Minimum access established through tariff-rate quotas (TRQ’s), equal to recent import levels or minimum % of consumption (low within-quota tariff; higher tariff for over-quota imports)Minimum access quotas increased from 3% to 5% of consumptionExport subsidiesReduced by 21% (quantities) and 36% (expenditures) over six yearsIntroduction of new export subsidies prohibitedSanitary and phyto-sanitary measuresMeasures to be based on international standards wherever feasible, and may not be used arbitrarily to restrict tradeDispute settlementProvisions and enforcement strengthened Domestic supportFirst GATT agreement to incorporate reforms in domestic agricultural policiesNon-distorting domestic policies (“green box”) distinguished from trade distorting policies (“amber box”) which are reduced or eliminatedDomestic (“amber box”) subsidies reduced by 20% (ave.) from 1986-88 base period, based on new Aggregate Measure of Support
Issues Regarding the WTO
Labor and environmental regulationsWTO does not preclude national lawmaking, only the use of trade restrictions (to which governments have already agreed) to enforce them“Race to the bottom” argument vs. argument that 1) economic growth promotes conservation ethic, 2) most governments are stronger, not weaker, regulations, and 3) in most industries, savings from pollution abatement are a small % of total production costs.Dispute settlement panels and “accountability”WTO does not allow countries to enforce its laws (environmental, labor, health & safety, etc.) through trade restrictions, but does not preclude governments from sovereign lawmakingObjective of panels is to assure that governments don’t pass laws that violate international agreements with which they have already agreed.1/1995 – 1/2000: 190 cases notified to WTO (1/2 of all cases in last 50 years!)Representation, participation, and transparency
Doha Round of WTO Negotiations
WTO now has 150 members, majority are low-to-medium income countriesBegan in 1998 as the “Millenium Round”, stalled at the “Battle in Seattle”Restarted in 2001 in Doha, Qatar as “Doha Development Round”, given interests of developing countries in further trade liberalization and market accessPrincipal objectives: Continue tariff reductions, especially in developing countriesReduce tariff escalationReduce trade barriers/increase market access in agricultureClarify/strengthen trade rules in anti-dumping, safeguard provisions, intellectual property rights, investment and competition policy, health and safety standardsClarify and make consistent trade and environment regulations and policiesU.S. “fast-track authority” expires in July 2007Potential welfare gains of $250-$620 billion/year from trade liberalization
Concerns of Developing Countries
Market access, particularly in industrialized countriesTariff escalationIndustrial country (U.S., European Union) agricultural subsidies, which keep world prices lowFavorable trade in pharmaceuticals (e.g., AIDS drugs)
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