A wide-ranging presentation assessing the impacts of trade liberalisation on national economies and the international trend towards greater trade in services.
17. 1944-71: Bretton Woods The 1930s demonstrated that the pursuit of nationalistic “beggar-thy-neighbour” policies can have dramatic and devastating effects (trade was approached as a zero-sum game). Post-WWII, the Bretton Woods System was created: a regulatory function by administering the rules governing currency values and convertibility; a financial function via the supply of supplementary liquidity to members facing balance of payment pressures; a consultative function by providing a forum for cooperation among governments. This liberal order was put in place to limit the propensity for war.
18. 1944-71: Bretton Woods USD was the default currency for international settlements (global GDP dominated by the US). Created IMF and International Bank for Reconstruction (World Bank). GATT which later became the WTO. A global institutional system designed to maintain foreign exchange stability and enhance international trade.
19. Acceleration of World Trade Both trade and GDP fell in the late 1920s, before bottoming out in 1932. After World War II, both have risen exponentially. Growth in trade has outstripped growth in global GDP. (1950 = 100. Trade and GDP: log scale)
20. ISI versus EOI During this period many Developing Economies followed a policy of Import Substituting Industrialisation. ISI was characterised by: high exchange rates, support for domestic industry, and high tariff and non-tariff barriers. Article XVIII of GATT was incorporated to protect the right of Developing Economies to maintain tariffs and quantitative restrictions. Countries that opted for Export Oriented Industrialisation developed rapidly (eg. Singapore).
27. What Determines Comparative Advantage? Within Country X there are the three main factors of production (or simply, inputs): LABOUR CAPITAL LAND Country X has some of these factors more abundantly than others. Developing Economies usually have more labour than capital, while Developed Economies are usually restricted by lack of labour.
28. What Determines Comparative Advantage? The Heckscher-Ohlin Theorem builds on Ricardo’s comparative advantage. Relatively abundant factors of production (land, labour and capital) determine a country’s comparative advantage and their export basket. The abundant factors are also the major beneficiaries of free trade. LeontieffParadox: The US exports labour intensive goods. Assumes free movement of capital and labour within a country, and labour immobility between countries.
33. Protection to Openness? Country X has industries producing 3 types of goods: import-competing, export-oriented, and non-traded. Tariffs exist to primarily protect and develop import-competing firms, while export-oriented firms only benefit if competitors also liberalise. QUESTION: What could make Country X unilaterally liberalise tariffs?
34. Liberalisation and the Firm Trade liberalisation exposes domestic producers to foreign competition. This may: REDUCE THEIR MARKET POWER; REALISE ECONOMIES OF SCALE: competition forces firms to expand output to reduce average cost; ABSORB AND INVEST IN FOREIGN TECHNOLOGY: to survive a firm’s productivity must be close to that of international leading firms; and UPGRADE HUMAN CAPITAL: productivity increases might involve a better educated workforce. At the micro-level, import-competing firms will expireor innovate.
35. Liberalisation and the Economy Now, lets look at the possible effects of liberalisation on the economy as a whole: REALLOCATION OF RESOURCES: removing tariffs ‘reshuffles’ capital and labour resources to more productive uses; AGGREGATE WELFARE INCREASES: consumers should benefit from lower prices and increased choice; and INCOME DIVERGENCE: producing international quality products markets may require a higher demand for skilled labour in relation to that of unskilled labour.
37. Mechanisms Within Liberalisation To understand the effects of liberalisation, we must look very closely at the mechanisms at play: Liberalisation Episodes Chile 1974-79 (Pavcnik 2002) India 1991 (Aghion et al 2005) Mexico 1994 (Verhoogen 2008) Industrial Competition China and Europe (Bloomet al2008)
38.
39. Mexico 1994 In the years following the North American Free Trade Agreement, Mexico’s infamous “Peso Crisis” was a currency shock that dramatically opened export opportunities to the American market. MECHANISMS: Quality Upgrading: assumes manufactures for export (particularly those for Developed Countries) must be of greater quality and meet higher standards. An increase in exports compared with the overall manufacturing base, will increase the relative demand for highly skilled workers. “Only the most productive plants enter the export market, and Southern exporters produce higher-quality goods for export than for the domestic market, to appeal to richer Northern consumers. An exchange-rate devaluation leads more-productive Southern plants to increase exports, upgrade quality, and raise wages relative to less-productive plants within the same industry, increasing within-industry wage dispersion.” - Verhoogen 2008
40. China and Europe A rigorous debate is going on in Developed Economies about the extent to which trade with China is causing increased wage inequality. MECHANISMS: European industries exposed to Chinese imports adopt more advanced technology and engage in greater innovation than those lacking Chinese competition. This differential effect of trade could be a case of wage inequality. “We find that Chinese import competition is associated with a significant increase in the adoption of new technology (measured by usage of information technology) and the generation of innovation (measured by patenting intensity). We also find that exposure to trade with China significantly increases the probability of establishment exit and reduces employment growth, but this effect is significant only for low-tech firms.” - Bloom 2008
43. Trade in Services Since 1980, the acceleration in globalisation has been driven by growth of trade in services. Developed Economies presumed they had a comparative advantage in human-capital intensive services, compared with manufacturing. From a negligible base, trade in services now account for 20% of global trade.
44. GATS The General Agreement on Trade in Services came into force in 1995 during the Uruguay Round. It applies to 4 modes of supply:
46. GATS’s Coverage All services except: “services supplied in the exercise of governmental authority”. For example, social security schemes, health and education services. Air Transport Services. Covers virtually all capital and labour movements in services.
47. Advocates of GATS Effectively deals with incorporating this rapidly growing trade sector into the global multilateral trade framework. Supports the diffusion of advanced technology and knowledge, including organisational capacity, across borders. Greater transparency and predictability in commercial activity and financial transactions. Welfare gains and enhanced economic growth. Developing Economies are able to make fewer specific commitments than Developed Economies (Article XIX).
49. Critics of GATS Opposed strongly in 1995 by Developing Economies led by Brazil and India. Movement of capital and labour across borders goes beyond the mandate of trade agreements. Capital and labour regulations should be considered a matter of national sovereignty. Mode 4 (presence of natural persons) has been almost exclusively applied to high-level personnel, leading to the charge from discrimination against Developing Economies (Winters 2003). Discriminatory policies on services are a lot more difficult to identify than tariff barriers (eg. labour legislation, tax regimes, and licensing).
51. Key Take-Aways Trade historically has been driven by the interplay of technology, institutions and policies. While trade in goods and services has grown dramatically, obstacles still exist to a perfectly integrated market. Liberalising trade generally has a positive effect on aggregate economic growth after the initial shock. The effect of trade liberalisation on inequality is ambiguous and depends primarily on a number of domestic characteristics, such as institutionsand abundant factors. The high percentage of trade between Developed Economies is an overhang of the anti-trade policies enacted by Developing Economies and their permissiveness under GATT (Article XVIII). GATS goes radically beyond the traditional notion of trade, to allow a large degree of free movement in labour and capital.
53. Bibliography Aghion, P., R. Burgess, S. Redding and F. Zilibotti 2005. “The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India”. (http://www.economics.harvard.edu/faculty/agh ion/fi les/Unequal_Effects.pdf). Bloom, N., M. Draca, and J. Van Reenen. 2009. “Trade Induced Technical Change: The Impact of Chinese Imports on Innovation, Diffusion and Productivity”, mimeo, Stanford University. Irwin, D. A. 2005. Free Trade Under Fire. Princeton: Princeton University Press.
54. Bibliography Krugman, P. R. and M. Obstfeld 2006. International Economics: Theory and Policy. Pearson International: Boston. Pavcnik, N. 2002. “Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants”. Review of Economic Studies69(1): 245-76. Srinivasan, T.N. 2005. "Nondiscriminationin GATT/WTO: Was There Anything to Begin with and Is There Anything Left?" World Trade Review 4(1).
55. Bibliography Rogowski, R. 1991. Commerce and Coalitions: How Trade Affects Domestic Political Alignments. Verhoogen, E. A. 2008. “Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector”. Quarterly Journal of Economics 123(2): 489-530. Winters, L. A. 2003. “GATS Mode 4: The Temporary Movement of Natural Persons”. WTO 2008. World Trade Report 2008: Trade in a Globalizing World. Geneva.
56. Bibliography WTO 2010. Understanding the WTO (http://www.wto.org/english/the_wto_e/ what_is_the_e/tif_e.htm). Zedillo, E. et al 2005. Trade for Development. New York: UNDP.
This system international monetary cooperation was for the first time attempted on a permanent and institutional basis. The system respects the principle of national sovereignty while committing members to collective responsibility. It provides a mechanism for inter-governmental consultation.
This system international monetary cooperation was for the first time attempted on a permanent and institutional basis. The system respects the principle of national sovereignty while committing members to collective responsibility. It provides a mechanism for inter-governmental consultation.
This system international monetary cooperation was for the first time attempted on a permanent and institutional basis. The system respects the principle of national sovereignty while committing members to collective responsibility. It provides a mechanism for inter-governmental consultation.
This system international monetary cooperation was for the first time attempted on a permanent and institutional basis. The system respects the principle of national sovereignty while committing members to collective responsibility. It provides a mechanism for inter-governmental consultation.
1817 book, On the Principles of Political Economy and Taxation, David Ricardo used the example of Portugal and England's trading of wine and cloth to illustrate the benefits of specialization and trade. His writing served as the basis for the principle of comparative advantage
1817 book, On the Principles of Political Economy and Taxation, David Ricardo used the example of Portugal and England's trading of wine and cloth to illustrate the benefits of specialization and trade. His writing served as the basis for the principle of comparative advantage
The Stolper-Samuelson theorem states that an increase in the relative price of one of the two goods raises the real return of the factor used intensively in producing that good and lowers the real return of the other factor.
3 main assumptions1. Beneficiaries of a change will try to continue and accelerate it, victims will endeavour to retard or stop it.2. Those who enjoy a sudden increase in income will thereby be enabled to expand their political influence as well.3. As the means for a particular political preference increase, the likelihood grows that political entrepreneurs will devise mechanisms that can surmount the obstacles to collective action.
Source: Rogowski:Commerce and Coalitions – How Trade Affects Domestic Political Alignments
Reallocation of resources assumes no barriers to firm exit (irreversibility of investment).
The critiques of the macro work by influential economists (above) combined with the new theoretical insights into micro mechanisms propelled empirical trade research away from macro studies and towards more sector, industry, and plant-level studies that investigate the effects of trade policy at a more micro-economic level of analysis. In other words, while the macro level research focused on a general ‘reduced form’ relationship between openness and growth, leaving the underlying mechanisms somewhat (or completely) vague, these micro studies specifically search for ‘smoking gun’ evidence of the actual mechanisms through which openness affects firms’ decisions and outcomes (and thus, ultimately, aggregate growth).
Eliminated most of its non-tariff barriers and reduced tariff barriers from 100% (and more) to uniform 10% ad valorem.
The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): All WTO member countries are also GATS members.All taken from: http://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm
Commitments on market access and national treatment Individual countries’ commitments to open markets in specific sectors — and how open those markets will be — are the outcome of negotiations. The commitments appear in “schedules” that list the sectors being opened, the extent of market access being given in those sectors (e.g. whether there are any restrictions on foreign ownership), and any limitations on national treatment (whether some rights granted to local companies will not be granted to foreign companies). So, for example, if a government commits itself to allow foreign banks to operate in its domestic market, that is a market-access commitment. And if the government limits the number of licences it will issue, then that is a market-access limitation. If it also says foreign banks are only allowed one branch while domestic banks are allowed numerous branches, that is an exception to the national treatment principle.Transparency GATS says governments must publish all relevant laws and regulations, and set up enquiry points within their bureaucracies. Foreign companies and governments can then use these inquiry points to obtain information about regulations in any service sector. And they have to notify the WTO of any changes in regulations that apply to the services that come under specific commitments.
Economic performanceDevelopmentConsumer savings Faster innovation Greater transparency and predictability Technology transfer
STOP the GATS attack image from http://www.citizen.org/trade/wto/gats/Tourism: http://www.equitabletourism.org/stage/tourism_details.php?AID=82