POL 4410: Week Five

Trade Treaties

Structure

1.What is Trade Anyways?

2.Theories and Types of Trade Treaties

3.International Trade Treaties

4.Regional Trade Treaties

Trade: Definitions•Trade: The exchange of goods

between two nations, using some currency.

•Free Trade: unrestricted trade - no distortions on prices or quantities.

•Terms of Trade: given relative prices, how much of a one state’s exports can be purchased with another state’s exports.

Trade Treaties

•Legal agreements signed between states to alter restrictions on trade or to guarantee rights to trade.

•Must be signed, ratified, and brought into force.

•Enforced by who?

Ways to impede trade

1.Tariffs

2.Quotas

3.Subsidies

4.Non Tariff Barriers (NTBs)

Tariffs•A tax on imports.

•A tariff of 20% on sugar increases the price of sugar to domestic consumers by 20%.

•Who wins? Domestic sugar producers

•Who loses? Foreign sugar producers and domestic consumers

•Concept of optimal tariff

Optimal Tariffs

•Only exist in large country that can alter terms of trade.

•Offset gain from terms of trade against loss of volume of trade.

Quotas•Restrictions on the quantity of goods

that can be imported.

•Since this reduces quantity of the good sold in the market, it keeps prices high like a tariff.

•Unlike a tariff the quota is less flexible - that is, if people’s demand for a good changes that cannot just suck up the tax.

Subsidies•A subsidy is essentially an ‘inverse

tariff’.

•You reduce taxes on domestic firms which means they can price their goods cheaper than foreign firms.

•Winners: domestic firms, domestic consumers.

•Losers: foreign firms, domestic taxpayers

NTBs

•Regulations: environmental, labor, safety

•Anti-dumping measures

•Voluntary Export Restraints (VERs)

•Section 301 Trade Sanctions

Why do States Sign Trade Treaties?

1.Neoclassical Economic Theory

2.Interest Group Theory

3.Hegemonic Stability Theory

Neoclassical Theory•Comparative Advantage vs. Absolute Advantage

AUTARKY

Cloth Soap

Britain 18 3

Italy 1 9

TOTAL 19 12

FREE TRADE PROD

Cloth Soap

Britain 24 0

Italy 0 12

TOTAL 24 12

PRODUCTIVITY

Cloth Soap

Britain 6 3

Italy 1 3

FREE TRADE CONS

Cloth Soap

Britain 20 3

Italy 4 9

TOTAL 24 12

Interest Groups

•Losers from trade may try to block free trade and to impose tariffs.

•‘Protection for sale’

•Lobby groups both favor and disfavor trade

Institutional Theories

•President has general interest versus congressmen having ‘special interests’

•Agency slack and ability to negotiate internationally

•Treaties as commitment devices

Realism / Mercantilism

•States sign treaties for two reasons:

(1) To bully other weaker states

(2) Because treaties don’t matter

Hegemonic Stability Theory

•Soft realist idea that powerful states find it in their interest to support free trading order. Provides large market for their exports.

•UK in 19C. US in post WWII.

•In multipolar times, free trade is weakened

Krasner•Emphasizes four goals for states:

national income, social stability, political power, economic growth.

•World of small states or one hegemonic state leads to free trade

•World of moderately sized states leads to protection

•Tests on six historical periods.

Types of Trade Policy

1.Unilateral Policy

2.Bilateral Deals

3.Multilateral Treaties

Unilateral Policy

•Countries decide unilaterally to reduce tariffs to goods on all (or most) imports.

•Classic example is Britain in 19th century.

•Most countries that globalize decide to do this to some extent: Chile, Singapore through to India and China.

Bilateral Deals

• Signing a Trade Treaty between two states.

• Typically (but not always) this is reciprocal.

• Cobden-Chevalier Treaty 1860.

•US / Canada Free Trade 1988.

• Can also be used as tool of statecraft, especially when non-reciprocal. US and Philippines - Tydings Restoration Act. Nazi Germany and Eastern European states.

Multilateralism and MFN

•MFN = Most Favored Nation

•Preferentialism vs. MFN

•Reciprocal vs. nonreciprocal

•Binding vs. non-binding: need for international institutions?

Types of Multilateralism

1.Non-preferential, non-binding (GATT, APEC)

2.Non-preferential, binding (WTO)

3.Preferential, binding, reciprocal (EU, NAFTA)

4.Preferential, non-reciprocal (OECD and LDCs)

Preferential Trade

•Distinction between

•(a) TRADE CREATING

•(b) TRADE DIVERTING

•Building blocs or stumbling blocs?

Quick History of Trade Treaties

1.Pre WWII

2.From the GATT to the WTO

3.Regional Trade Agreements: from the EU to CAFTA

Trade Treaties pre-WWII

•Cobden Chevalier in 1860

•MFN

•Reciprocal Trade Agreements Act in 1934

GATT•Founded in 1948 with 23 members

•Based on reciprocity and MFN - many exceptions made

•Series of rounds: 1947 (Havana), 1949 (Annecy), 1951 (Torquay), 1955-6 (Geneva), 1960-62 (Dillon), 1964-7 (Kennedy), 1973-9 (Tokyo), 1986-93 (Uruguay)

GATT Progress

•From 23 to 125 countries

•From product-by-product cuts to ‘across the board’

•From tariffs to NTBs

•From goods to services and agriculture

•TRIPS and GATS

WTO•Founded in 1995 with 76

members, now 149.

•Has Dispute Settlement Body

•Consensus and negotiations ‘Green Room’

•EU / US trade disputes (steel 2003, bananas 1999, GM foods)

•Seattle 1999 Doha round from 2001

Eichengreen and Odell

•Why did US join WTO not ITO

•INSTITUTIONAL THEORY

•Exit Options

•Agency Slack

•Presidential Leadership

European Union•European Coal and Steel

Community in 1951

•European Economic Community in 1957

•European Union in 1992

•Tripartite structure: Commission, Council of Ministers, European Parliament

European Council

•Formed by heads of state of each member plus the President of the Commission

•No formal powers yet is the key player

•Sets all major policy guidelines

•Rotates every six months

Council of Ministers

•One representative per country

•Changes depending on which ministry

•Has veto over all regulations and directives

•Voting either by unanimity or QMV.

•Qualified Majority Voting

European Commission

•The executive body of the EU

•Also has sole right to initiate legislation

•Has regulatory power

•Role of surveillance of EU law

•Collectively accountable to European Parliament

•Originally the ‘think tank’ for Europe

European Parliament

•Directly elected by proportional representation in all EU countries

•Shares legislative authority with Council of Ministers

•Regarded as unimportant

European Court of Justice

•Interprets EU laws

•Court cases can be initiated by either governments or citizens

•Major role in competition policy - e.g. Microsoft

Theories of EU

•Intergovernmentalism

•Supernationalism

•Who calls the shots?

Alesina and Perotti

•Weaknesses

•1a) Lack of clarity between EU institutions

•1b) Lack of clarity between EU and members

•1c) Lack of transparency

•2) Tendency to ‘dirigiste’ rhetoric

Stability and Growth Pact

•Currency Union in 1999-2001 formed Euro

•Beforehand and during, states had to agree to limit budget deficits to less than 3% of GDP

•But no credibility in ensuring compliance. France and Germany both break rules.

NAFTA and CAFTA• 1994 NAFTA founded

• Chapter 11 (investments, Metalclad) and Chapter 19 (binational panels)

• DR-CAFTA signed 2005. Not a treaty - a ‘congressional-executive’ agreement. Followed Caribbean Basin Initiative.

• Controversies: ‘test data exclusivity’ and US ag subsidies

Other regional treaties

•Asia Pacific economic Cooperation group

•Mercosur

•Andean Pact

•Australia-New Zealand

Bergstein

1.Bicycle must keep moving

2.Big is beautiful

3.Building blocks, not stumbling blocs

4.Money is central

5.Leadership is essential