Understanding Trade Barriers, WTO & Comparative Advantage in International Relations, Study notes of Italian Language

Download Understanding Trade Barriers, WTO & Comparative Advantage in International Relations and more Study notes Italian Language in PDF only on Docsity! International Political Economy Politics of Trade Political Consequences of Comparative Advantage • Suppose you own a vineyard in England or sheep in Portugal • International trade is bad for you – The English winemaker goes out of business – The Portuguese shepherd may stay in business but loses market share even though he is a lower-cost producer than the English shepherd • For example, a winemaker has money to buy up his grassland and plant additional grapevines • You ask the Portuguese King or the British Prime Minister to restrain trade • If they don’t, you stage a revolution – see R. Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignments Tariffs • You might appeal to people’s desire not to see their fellow citizens go out of business • Your fellow citizens can protect your business by imposing a tariff that raises the price of Portuguese wine in England or English wool in Portugal • A tariff is a tax levied at the border on goods crossing the border • While import tariffs are more common, export tariffs also exist Non-tariff barriers • You might claim that English wool was flea-infested or that Portuguese wine contained toxins • These claims might even be true • To prevent fleas the Portuguese king might institute a health inspection at the border and require the importer to pay a fee to cover the costs of the inspection – At one time, Japan by insisting that American automobile production was inferior in quality and therefore each part of an imported Eagle must be separately inspected for safety – Japan then charged a fee for disassembly and reassembly of each imported American vehicle, doubling the price of Jeep Eagles in Japan • Advertising of health risks might decrease the demand for Portuguese wine in England and shift purchases to English wine, keeping English winemakers in business Subsidies • Government payments to English winemakers might enable them to sell their wine at Portuguese prices • Payments might be hidden • For example, California is a major rice exporter • Rice is a wetland crop • Past government investments in irrigation enable California farmers to produce rice because they are not charged the full cost of the past investments in moving water GATT and Levels of Analysis • Each state’s negotiating position at GATT was the result of a domestic deal between those who gained by trade and those who lost • Consequently no state simply favored eradicating barriers to trade • They made what deals they could while agreeing to ignore other barriers World Trade Organization • Uruguay Round culminated in the establishment of the WTO in 1995 • WTO continues the “rounds” of negotiation intended to reduce trade barriers • WTO also provided a new mechanism for enforcement of trade agreements The “Doha Round” Since 2001 • Latin American, African and Asian states generally have a comparative advantage in agricultural products • US can produce farm goods more cheaply but developing countries cannot produce industrial goods • US and Europe subsidize farm production in various ways • Developing countries asked for an end to farm subsidies • US and Europe refused, Europeans blaming US and US blaming Europe • Negotiations collapsed without an agreement Strategic Trade Theory(?) • An alternative view of international trade? • By 1990 three-quarters of all trade took place among developed countries • Earlier, in 1950, two-thirds of trade took place between developed and underdeveloped countries • Developed countries traded goods within industrial sectors: e.g., central processing units (CPU) for computer chips Inconsistency with Comparative Advantage? • I don’t see why swapping CPUs for computer chips is inconsistent with the use of comparative advantage as a theory of trade • Comparative advantage exists whenever the production cost ratio for any two goods in one country differs from the production cost ratio for the same goods in any other country • Whether the goods are “complementary” (farm versus industrial) is irrelevant; what goods are under discussion is irrelevant Sources of Comparative Advantage • Comparative advantage can have wide variety of sources • Relative cost of producing industrial goods varies with the date of construction of the factory that produces them • Older factories have usually been converted from producing earlier goods • The layout of the older factory is not optimal for production of the newer good • More recent factories can be specially designed for optimal production flow Government Subsidies • Strategic trade theory says that Honda and Toyota have taken over the US automobile market because the former Japanese Ministry of International Trade and Industry helped them raise money to build new, more efficient factories • Ergo, President Bush should have funded GM, Ford, and Daimler-Chrysler, so that US auto makers can take back the automotive market • A close election in which President Obama needs Michigan to win enables Senator Stabenow to get GM included in the bailout; Ford turns down the money Theories And Interests • Would the auto makers pay an economics PhD to invent strategic trade theory to explain why they have lost market share to the Japanese and deserve a handout? • Would some economics PhD be clever enough to invent the theory in the hope that an auto maker would hire her or him as a consultant? • Would a Democratic Senator from Michigan endorse this theory? • Strategic Trade Theory is how importers answer the exporters’ tactics of Ricardian comparative advantage, GATT and WTO Government Intervention • Of course government action can create comparative advantage • Air Force bought large bombers and transports from Boeing Corporation • One of the these, the KC-135 air tanker, was also the first commercial jet airliner, the 707 • By lengthening production runs, government purchases of the KC-135 reduced the unit cost of the 707, giving Boeing a lasting advantage in the international commercial airliner and transport market • But this was not a strategic goal of the US government, simply a side effect of military procurement policy exploited by Boeing Regional Integration • Most trade is regional • Largest trading partners of United States are Canada and Mexico • Largest trading partners of EU countries are other EU countries • If transaction costs increase with distance, comparative advantage will favor regional trade – Transportation – Finding buyers – Finding sellers Justification of EU • After WWII two Frenchmen (Jean Monnet and Robert Schuman) promoted European integration on the ground that it would prevent a fourth Franco-German war • In fact Soviet consolidation of Eastern Europe, division of Germany, stationing of US troops in West, and possession of nuclear weapons guaranteed postwar armed standoff; Franco- German conflict had become irrelevant • Traumatized by the war, European public was in no shape for critical evaluation of claims about benefits to peace French Motives for Integration • In fact the two Frenchman were worried about comparative advantage • Competition from efficient German producers putting the French coal and steel industries out of business • They proposed the European Coal and Steel Community ECSC (Treaty of Paris 1952) as the first step in a plan to preserve inefficient French producers From ECSC to Common Market • Treaty of Rome in 1958 converted added the European Economic Community to the ECSC • EEC or “Common Market” represented agreement to lower tariffs and remove non-tariff barriers among the ECSC six • Logic of the Common Market: – France and Italy were large agricultural producers – Germany, Netherlands and Luxembourg were food-deficit countries, especially because division of Germany had removed the food- producing northeast under Soviet control – France and Italy could swap food for German and Dutch industrial goods – French and Italian industry would be protected against German and Dutch rivals by so-called “competition policy,” really a policy allocating market share to prevent German industries from out-competing other countries Five Enlargements • 1973, Denmark, Ireland and the United Kingdom • 1981, Greece • 1986, Spain and Portugal • 1995, Austria, Finland and Sweden . • 2004: Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and Slovenia. – EU: “It was a unique, historic enlargement which signified the re- unification of Europe after decades of division by an Iron Curtain.” • 2007 planned: Romania and Bulgaria, to complete the fifth enlargement • Six countries negotiating admission including Turkey European Union Today | “Hegemonic Stability Theory” • Answers the question when free trade will prevail and encourage globalization • Begins with observation of two periods of trade “liberalization” (removal of barriers) – From 1815 to approximately 1900 – From 1945 to present • During these periods, first Britain and then the US were “hegemons” or dominant world military and economic powers – US in “free world” until 1989 – Throughout the world since 1989 Roles of the Hegemon (1) • Wealthy hegemon can afford to patrol the global marketplace on behalf of other states – British suppression of piracy – US Navy’s operations against Somali pirates – NATO and Russia together have sent three ships • Hegemon has incentive to patrol, since its economy benefits from international trade Roles of the Hegemon (2) • Wealth of the hegemon enables it to buy goods produced in other countries, spurring realization of comparative advantage • Suppose England is too poor to buy sheep and therefore cannot realize its comparative advantage in wool production relative to Portugal • Then Portugal cannot sell wine to England and cannot expand its wine production beyond domestic demand • Large scale of the hegemon’s economy provides opportunities for other countries to increase production, thereby enabling themselves to import its products Are Hegemons Necessary? • Realists might say yes • Liberals would claim that whatever a hegemon does could also be achieved by negotiation and establishment of a world institution • Identity theorists would argue that it can depend on – (a) whether states are realists or liberals; or – (b) whether states seek their own economic interest or the interest of the global community of states Information and Transportation Cost • Note that even in the simple goods described by Ricardo, wool and wine, information has been added to materials – Wool has been distinguished from sheep fur by shearing – Grapes have been pressed to yield juice that has been skillfully processed to yield wine • Information can be thought of as reorganizing – A shirt is a reorganization of cloth that is a reorganization of thread that is a reorganization of fiber – Information has been added at each stage • The proportion of the information component in different products can vary and therefore can increase • If the information component can be separated from the material component, it might be moved very cheaply, since it is insubstantial • In the contemporary world, the internet moves information at remarkably low cost relative to the value of the information component in products