COMMERCIAL POLICY THEORY AND PRACTICE
Topic 8.1
Figure 8.1 depicts levels of tariffs for the U.S.. It has fluctuated between 60 percent and 5 percent.
The last general tariff bill was the Smoot-Harley tariff in 1930. This general tariff contributed to the Great Depression.
The General Agreement on Tariffs and Trade (GATT) was instituted after WWII. It served as a mechanism for setting rules of conduct in international commerce and an arena to resolve international commercial disputes.
Key GATT principles:
- trade barriers should be lowered in general and quotas eliminated
- trade barriers should be non-discriminatory
- no trade concession shouldbe rescinded without compensation
- trade disputes should be settled by consultation
GATT provided a forum for talks to lower protection.
There have been 9 rounds. The current Doha round has been inclusive.
The U.S. President has authority to negotiate trade agreements, which have to be ratified by Congress.
The World Trade Organization (WTO) is the successor to the GATT. The WTP has enforcement authority. Cases are brought to the WTO which can render decisions.
Currently the WTO rules prohibit trade restrictions aimed at changing another countries’ domestic policies (on the environment for example). For example U.S. prohibition of tuna imports to protect dolphins was disputed.
PREFERENTIAL TRADE ARRANGEMENTS
Topic 9.1
Free trade areas (FTA) are agreements to eliminate trade barriers between the members.
A customs union (CU) eliminates trade barriers between members and creates a common barrier against non members.
The European Union (EU) is a CU Founded in 1957. The EU has expanded its charter to become more like a United States of Europe.
The North American Free Trade Agreement links the U.S. Canada and Mexico. It is an FTA created in 1994.
Other trade agreements exist in Africa, Asia, Europe and Latin Europe.
There is a tension between “regionalism” and “multilateralism”. To the extent that trade agreements increase total world trade, this “trade creation” increases world welfare. Agreements that only divert trade from one nation to another - “trade diversion” - are actually distorting the natural pattern of trade and lowering world welfare.
There is an argument that trade diversion effects are small because trade agreements tend to follow the natural direction of trade - they tend to be “natural” trading areas.
Measuring the benefits of free trade areas is difficult because it involves calculating “what if” the agreement had not occurred. These agreements may generate dynamic benefits from technology diffusion and international movement of skilled people to where they are most productive.
At this point we have not addressed the free low of assets – international financial liberalization.
