International Political Economy (IPE)

International Political Economy (IPE) International College KhonKaenUniversity 2012 Week 5 – International Trade The International Trading System

The International Trade System • Governments face a dilemma in trade: • They want their state to secure the benefits (efficiency, economies of scale, consumer benefits, employment) of free trade, but • They also want to protect jobs and domestic industries • Often this dilemma leads to a compromise between economic benefits and political costs

The International Trade System • Most governments see benefits for their countries in promoting international trade • In the process of economic globalization, governments are increasingly working together to reduce barriers to trade and investment • This cooperation and consultation is conducted at three levels: • Between two countries (bilateral trade) • Between a group of countries in a region (regional trade) • On a global basis (multilateral trade)

The International Trade System • The mechanisms for advancing free trade: • Bilateral: negotiating and signing trade and/or investment agreements (bilateral FTAs) • Regional: forming regional groupings and negotiating regional economic integration agreements such as the ASEAN Free Trade Agreement (AFTA), the European Union, and the North American Free Trade Agreement (NAFTA) • Global: participating in the WTO and its negotiating rounds such as the current Doha Development Round

The International Trade System • But nowhere in the world is trade truly “free” • All governments face political, and sometimes economic, pressures to protect sectors of their economy from outside competition • Governments use a variety of instruments to try to protect their states, especially if they see the outside competition as unfair

The International Trade System • The main instruments of trade policy are: • Tariffs • Subsidies • Import Quotas • Voluntary Export Restraints • Local Content Requirements • Administrative Policies • Antidumping Policies • All these issues need to be dealt with in any trade agreement (bilateral, regional or global)

Instruments of Trade Policy • Tariffs are taxes levied on imports • Tariffs: • increase government revenues • raise the cost of imported products relative to domestic products • provide protection to domestic producers against foreign competitors • force consumers to pay more for imports • So, tariffs favour producers, but are anti-consumer • Tariffs reduce the overall efficiency of the world economy

Instruments of Trade Policy • Subsidies are government payments to domestic producers • Subsidies help domestic producers in two ways: • to compete against low-cost foreign imports • to gain export markets • As with tariffs, consumers typically have to pay more when governments pay subsidies: • through higher taxes, and • the higher cost of the goods in the market

Instruments of Trade Policy • Import quotas directly restrict the quantity of some good that may be imported into a country • Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government • Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but raise the price of imported goods

Instruments of Trade Policy • A local content requirement demands that some specific proportion of a good be produced domestically • Local content requirements benefit domestic producers, but consumers face higher prices • Administrative trade policies (or non-tariff barriers) are laws or regulations which make it difficult for imports to enter a country • Often these non-tariff barriers are intended to protect health and safety of consumers, but often they hurt consumers by denying access to foreign products which may be better, or cheaper

Instruments of Trade Policy • Antidumping policies (or countervailing duties) are designed to penalize foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition • Dumping refers to selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value • Dumping enables firms to unload excess production in foreign markets

Government Intervention in Trade • Arguments for government intervention: • Political arguments are concerned with protecting the interests of certain groups within a nation (normally producers or unions), often at the expense of other groups (normally consumers) • Economic arguments are most often aimed at boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)

Government Intervention in Trade • Political arguments for government intervention include: • protecting jobs • protecting industries deemed important for national security • retaliating to unfair foreign competition • protecting consumers from “dangerous” products • furthering the goals of foreign policy • protecting the human rights of individuals in exporting countries

Government Intervention in Trade • Economic arguments for intervention include: • The infant industry argument (an industry should be protected until it is sufficiently well established to be competitive internationally) • Strategic trade policy (governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage)

The International Trade System • All the above forms of government intervention are negotiated endlessly as countries try to negotiate bilateral and regional FTAs, and in WTO meetings and negotiating rounds • In the course of trade negotiations: • Businesses (MNCs and exporters) lobby their governments for freer trade, while • Unions, NGOs, industries under threat and even consumer groups often lobby (demonstrate) for protection from competition

Who Benefits from (Free) Trade? • All countries which trade benefit from that trade – or they would not do it • But countries don’t necessarily benefit equally • And the benefits of trade are often not distributed evenly or fairly within each country • This brings us back to the politics of trade – externally (with other countries) and internally (distributing the benefits)

Who Benefits from (Free) Trade? • Externally: • A country which is able to run a surplus balance of payments can accumulate foreign reserves or pay off overseas debt • A country which is regularly spending more on imports and other foreign exchange costs than it is earning from imports must deplete its foreign reserves or increase its overseas debt

Who Benefits from (Free) Trade? • Internally: • The gainers are the consumers of imported products, the producers of exportable products and people employed in export product and services sectors • The losers are the producers of import-competing products, people employed in sectors which cannot compete with imports and the consumers of exportable products

International Political Economy (IPE)