Trade Policy III - WTO and Case Studies International Trade Theory ITAM Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 1 / 19
Objective Discuss the evolution of the World Trade Organization. Discuss some case studies of trade policy implementaion through tariffs, non-tariff barriers, and export subsidies. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 2 / 19
A Brief History of the World Trade Organization After World War II, representatives of the Allied countries met on several occasions to discuss issues such as high trade barriers and unstable exchange rates. In 1947 the General Agreement on Tariffs and Trade (GATT) was established. The purpose of which was to reduce barriers to international trade between nations. Countries met periodically for negotiations (called rounds) to lower trade barriers. Each round is named for the country in which the meeting took place. Uruguay round of negotiations, which lasted from 1986 to 1994, established the World Trade Organization (WTO) on January 1, 1995. WTO is an expanded version of GATT. It keeps most of GATT s provisions but adds rules for an expanded set of global transactions, such as trade in services and intellectual property. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 3 / 19
Main Provisions of GATT 1 A nation must extend the same tariffs to all trading partners that are WTO members. 2 Tariffs may be imposed in response to unfair trade practices such as dumping. Dumping - sale of export goods in another country at a price less than that charged at home, or at a price less than costs of production and shipping. 3 Countries should not limit the quantity of goods and services that they import. 4 Countries should declare export subsidies provided to particular firms, sectors, or industries. Article XVI - countries should notify each other of the extent of subsidies and discuss the possibility of eliminating them. 5 Countries can temporarily raise tariffs for certain products - Article XIX, called the safeguard provision or the escape clause. The importing country can temporarily raise the tariff when domestic producers are suffering due to import competition. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 4 / 19
Regional Trade Agreements Under GATT Regional trade agreements are permitted under Article XXIV of the GATT. The GATT recognizes the ability of blocs of countries to form two types of regional trade agreements: 1 Free-trade Areas: in which a group of countries voluntarily agree to remove trade barriers between themselves. 2 Customs Unions: which are free-trade areas in which the countries also adopt identical tariffs between themselves and the rest of the world. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 5 / 19
Case Study I: U.S. Tariffs on Steel and Tires On September 11, 2009 President Barack Obama announced a tariff of 35% on imports of tires made in China. It was implemented due to the strong lobbying by the Utnited Steelworkers of America (union of american tire workers.) During the 2000 presidential election campaign, George W. Bush promised to implement tariffs on import of steel, It helped Bush secure votes in steel produing states - West Virginia, Pennsylvania and Ohio. After election, U.S. tariffs on steel were raised in March 2002, though they were remove less than two years later. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 6 / 19
Case Study I: U.S. Tariffs on Steel and Tires Shown here are the tariffs recommended by the U.S. International Trade Commission for steel imports, and the actual tariffs that were applied in the first year. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 7 / 19
Case Study I: U.S. Tariffs on Steel and Tires Response of the European Countries The WTO has a formal dispute settlement procedure under which countries that believe that the WTO rules have not been followed can bring their complaint and have it evaluated. The countries in the European Union (EU) took action by bringing the case to the WTO. The WTO ruling entitled the European Union and other countries to retaliate against the United States by imposing tariffs of their own against U.S. exports. The use of tariffs by an importer can easily lead to a response by exporters and a tariff war. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 8 / 19
Case Study II: China and the Multifibre Arrangement One of the founding principles of GATT was that countries should not use quotas to restrict imports. The Multifibre Arrangement (MFA), organized under the auspices of the GATT in 1974, was a major exception to that principle and allowed the industrial countries to restrict imports of textile and apparel products from the developing countries. Importing countries could join the MFA and arrange quotas bilaterally (i.e., after negotiating with exporters) or unilaterally (on their own). The MFA expired on January 1, 2005. The biggest potential supplier of textile and apparel products was China. Immediately after January 1, 2005, exports of textiles and apparel from China grew rapidly. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 9 / 19
Case Study II: China and the Multifibre Arrangement Effect on Import Quality The prices of textile and apparel products dropped the most (in percentage terms) for the lower-priced items. So an inexpensive T-shirt coming from China and priced at $1 had a price drop of more than 38% (more than 38 cents), whereas a more expensive item priced at $10 experienced a price drop of less than 38% (less than 3.80). As a result, U.S. demand shifted toward the lower-priced items imported from China: there was quality downgrading in the exports from China. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 10 / 19
Case Study II: China and the Multifibre Arrangement Reaction of the United States and Europe The European Union threatened to impose new quotas on Chinese exports, and in response, China agreed on June 11, 2005, to voluntary export restraints. Due to the worldwide recession, Chinese exports in this industry were much lower in 2009 than they had been in earlier years. China indicated that it would not accept any further limitation on its ability to export textile and apparel products to the United States and to Europe, and both these quotas expired. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 11 / 19
Case Study II: China and the Multifibre Arrangement Changes in Clothing and Textiles Exports to U.S. after MFA(2004-2005) There is a surge in exports of countries that were formerly constrained under MFA as well as a shift to Chinese exports from other, higher-cost producers such as Hong Kong, Taiwan, and South Korea. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 12 / 19
Case Study II: China and the Multifibre Arrangement Changes in Price of Clothing and Textiles Exports to U.S. after MFA(2004-2005) Consistent with theory: removal of quotas lowers import prices for consumers. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 13 / 19
Case Study III: Infant Industry Protection There are two cases in which infant industry protection is potentially justified. 1 Protection may be justified if a tariff today leads to an increase in Home output that, in turn, helps the firm learn better production techniques and reduce costs in the future. 2 When a tariff in one period leads to an increase in output and reductions in future costs for other firms in the industry, or even for firms in other industries. This type of externality occurs when firms learn from each other s successes. As both of these cases show, the infant industry argument supporting tariffs or quotas depends on the existence of some form of market failure. In the semiconductor industry, it is not unusual for firms to mimic the successful innovations of other firms, and benefit from a knowledge spillover. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 14 / 19
Case Study III: Infant Industry Protection U.S. Tariff on Heavyweight Motorcycles In 1983 Harley-Davidson, the legendary U.S. based motorcycle manufacturer, was in trouble. Facing intense import competition, Harley-Davidson applied to the International Trade Commission (ITC) for Section 201 protection. To evaluate the future gains in producer surplus, we can examine the stock market value of the firm around the time that the tariff was removed. By this calculation, the future gain in producer surplus from tariff protection to Harley-Davidson (131 million) exceeds the loss of the tariff. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 15 / 19
Case Study III: Infant Industry Protection Computers in Brazil Computer Prices in United States and Brazil Persistent gap between the prices in Brazil and the United States means that Brazil was never able to produce computers at competitive prices without tariff protection - infant industry protection was not successful. Higher prices in Brazil imposed costs on Brazilian industries that relied on computers in manufacturing, as well as on individual users. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 16 / 19
Case Study III: Infant Industry Protection Protecting the Automobile Industry in China In 2009 China overtook the United States as the largest automobile market in the world. Strong competition among foreign firms located in China, local producers, and import sales have resulted in new models and falling prices. Beginning in the early 1980s, China permitted a number of joint ventures between foreign firms and local Chinese partners. Various regulations, combined with high tariff duties, helped at least some of the new joint ventures achieve success. Cost to Consumers: Quotas have a particularly large impact on domestic prices when the Home firm is a monopoly. That situation applied to the sales of Volkswagen s joint venture, in Shanghai, which enjoyed a local monopoly on the sales of its vehicles. Gains to Producers: For the tariffs and quotas used in China to be justified as infant industry protection, they should lead to a large enough drop in future costs so that the protection is no longer needed. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 17 / 19
Case Study III: Infant Industry Protection Protecting the Automobile Industry in China Automobile Markups by Firms in China, 1995-2001 The highest markup was charged by Shanghai Volkswagen, which had a local monopoly in Shanghai. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 18 / 19
Case Study III: Infant Industry Protection Protecting the Automobile Industry in China China Is Poised to Lead Volkswagen and other carmakers used to prosper by sending outdated factory equipment to China to produce older models no longer salable in the West. Competition has become so fierce that Honda is about to introduce its latest version of the Civic in China only several months after it went on sale in Europe, Japan and the United States. American and European carmakers are introducing their best technology to their plants in China, and not only to compete against one another. They also face rapidly growing competition in the Chinese market from purely local companies. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 19 / 19
Case Study III: Infant Industry Protection Protecting the Automobile Industry in China China Is Poised to Lead One in four GM cars is now made in China. Even those cars made in Detroit were partly designed in Shanghai. In exchange for a deal to sell Chinese minicommercial vehicles in India, GM agreed to give up the 50-50 ownership of its leading mainland joint venture, Shanghai General Motors. Will observers one day look back at that deal and say that was the day GM signed over its future to the Chinese? Without China, GM probably cannot be saved at all, which is a remarkable reversal from a decade ago, when the Chinese auto industry was just getting on its feet and desperately needed GM investment. Rahul Giri (ITAM) Trade Policy III - WTO and Case Studies 20 / 19