Y376 International Political Economy

January 25, 2012

Pioneers of Trade Theory

• Adam Smith, The Wealth of Nations (1776) – first defense of free market policies

• David Ricardo, Principals of Political Economy and Taxation (1817) - introduced theory of comparative advantage

Graphical Version of Ricardian Theory

Heckscher-Ohlin Model• Basic model: two countries, two goods, two factors

of production (Ricardo only had one)

• Differences in factor endowments lead to “gains from trade”

• Both countries will be better off if they specialize in producing goods which require a relatively abundant factor and then trade with another country

• For maximum benefit, the other country should have a very different factor endowment

Let’s Play the Trade Ruler Game!

• http://nobelprize.org/educational_games/economics/trade/game/ruler.html

History of U.S. Trade Policy

• Smoot-Hawley Tariff of 1930

• Depression High Tariffs

• FDR (espec. Cordell Hull) favors free trade for post WW2 period

• 1947 -- Congress rejects International Trade Organization treaty proposed initially at Bretton Woods

• The GATT becomes the main trade regime

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10

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1821 1841 1861 1881 1901 1921 1941 1961 1981

Source: U.S. International Trade Commission; U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States; and Statistical Abstract of the United States, various years.

Figure 3-1. Average U.S. Tariff Rates on Dutiable Imports, 1821-2000, in Percentages

Overall Tariff Levels and Trade/GNP, 1850-1990

Source: International Monetary Fund, Direction of Trade Statistics Yearbook (various years).

Figure 3-2. Growth in World Exports, 1958-2006, in Billions of Current Dollars

Figure 3-3. Trade/GDP in the US, Britain, Germany, France, and Japan, 1960-2006, in Percentages

Sources: World Bank, World Development Indicators 2001 CD-ROM (Washington,D.C.: World Bank, 2001): OECD.Stat, http://stats.oecd.org/.

Interregional Trade Flows, 1990

Main Rules of the GATT

• Nondiscrimination among members of the GATT– most favored nation (MFN) principle– tariffs must be adjusted to reflect MFN levels

• Participation in multilateral trade negotiations to lower tariffs and nontariff barriers

A tariff is a tax that is charged on thevalue of imported goods.

Multilateral Trade Negotiations

• 1947 Geneva

• 1949 Annecy

• 1950 Torquay

• 1956 Geneva

• 1960-61 Dillon

• 1962-67 Kennedy

• 1973-79 Tokyo

• 1986-93 Uruguay

• 2000- Doha

Biggest tariff reductions occurred in the Kennedy Round.Tokyo Round began discussions of non-tariff barriers.Uruguay Round established the basis for the World Trade Organization.

Main Issues in the Tokyo Round

• Tariffs

• Conflict resolution; dispute settlement

• Nontariff barriers:– subsidies– government procurement– standards– custom valuation– licensing

Example of a Subsidies Dispute: Airbus vs. Boeing

This isa Boeing777

This is an Airbus 300

Latest WTO ruling (video)

Main Issues in the Uruguay Round

• Agriculture (mainly subsidies)

• Trade in Services

• Trade-related Intellectual Property (TRIPs)

• Trade-related Investment Measures (TRIMs)

French farmers protesting the Maastricht Treaty inEurope.

Multilateral Trade Negotiations: The Doha Round

• Begun in early 2000

• Major conferences so far:– 2001 Doha (Qatar)

– 2003 Cancun

– 2004 Geneva

– 2005 Hong Kong

– 2006 Geneva

– 2007 Potsdam

– 2008 Geneva Pascal Lamy calls time outon Doha Round in 2006

Main Issues in the Doha Round

• Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs

• Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries

Main Issues in the Doha Round

• Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs

• Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries