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MGT520 - International Business - Lecture Handout 28

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THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

The Revised Case for Free Trade:

  1. While strategic trade policy identifies conditions where restrictions on trade may provide economic benefits, there are two problems that may make restrictions inappropriate: retaliation and politics.
  2. Intervening to aid domestic firms will only be successful if other countries do not take similar actions that offset the effects.
  3. While it could be very difficult to identify situations where strategic intervention in trade is economically appropriate, various interest groups will be certain to lobby that particular firms should be aided. Given the ease with which special interest groups seem to be able to capture the attention of the government, it is more likely that consumers will be harmed more needlessly than producers. It is unreasonable to expect the government to be completely fair and objective in “targeting” industries, when different industries, lobbies, and politicians all have there own
    objectives for “getting their paws in the honey pot” of governmental funds.

The Development of the World Trading System:

  1. Up until the Great Depression of the 1930s, most countries had some degree of protectionism.
    Great Britain, as a major trading nation, was one of the strongest supporters of free trade.
  2. Although the world was already in a depression, in 1930 the US enacted the Smoot-Hawley tariff, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further.
  3. After WWII, the US and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). [Referred to sometimes as the General Agreement to Talk and Talk.]
  4. The approach of GATT was to gradually eliminate barriers to trade. Over 100 countries became members of GATT, and worked together to further liberalize trade. Figure 5.1 shows the different rounds of GATT negotiations and the resulting reductions in tariffs.

  5. During the 1980s and early 1990s the world trading system as “managed” by GATT underwent strains. First, Japan’s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries. Second, the persistent trade deficits by the US, the world’s largest economy, caused significant economic problems for some industries and political problems for the government. Thirdly, many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT (e.g. VERs).
  6. Against the background of rising protectionist pressures, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the most ambitious round to date, as the goal was to expand beyond the regulation of manufactured goods and address trade issues related to intellectual property, agriculture, services, and enforcement mechanism. Table 5.1 illustrates the main features of the agreement that was finally reached in 1993.
  7. The agreement, however, left several important matters unaddressed: financial services, broadcast entertainment, environmental matters, worker’s rights, and foreign direct investment. Those items were left to further negotiations under the auspices of the World Trade Organization.
  8. When the WTO was established, its creators hoped the WTO’s enforcement mechanisms would make it a more effective policeman of the global trade rules than the GATT had been. The WTO has handed down a number of rulings that have led to changes in governmental policies that restricted trade; in other cases governments had made changes in advance of WTO rulings.
  9. Under the WTO, 68 countries that account for more than 90% of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. The WTO has also made headway in liberalizing trade in financial services, although the current agreement still includes a number of exceptions.
  10. Substantial work still remains to be done on the international trade front. Environmental policies are one area of concern, as are regulations regarding foreign direct investment.

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