Category Archives: Globalization IV (Developing World Response)

Trade Policy for Reversing Marginalization

THE BOTTOM BILLION

P. Collier

Chapter 10: Trade Policy for Reversing Marginalization

A Summary 

In a Nutshell

Trade is not the problem for the bottom billion; indeed export diversification should be their way out of poverty. Agricultural subsidies in the developed world should be reduced to give the developing nations a chance. Protection in the developed world only fosters inefficient industries and is used as a tool for rent-seeking, so it should be dismantled as it is competition that spurs on productivity growth, although he advocates a gradualist approach rather than big bang liberalization. OECD countries should reduce tariffs on developed world goods to a level below those from Asia to allow for Africa etc. to make use of their cheap labour advantage and diversify their exports. This would be only a temporary relief as the WTO is committed to reducing tariffs with Asia.

 Rich Country Problems

  • Agricultural subsidies take away the chance of the bottom billion to export.
  • Higher tariffs on processed goods relative to raw materials mean that bottom billion countries cannot advance productivity, technology, skills etc. associated with processing goods, and condemns then to being producers of low return agricultural products. Exports cannot be diversified because of this incoherence.

 Bottom Billion Problems

  • High tariffs protect parasitic companies. Higher domestic prices for low quality goods.
  • Competition produces productivity gains.
  • Big Bang liberalization will get rid of parasites, but it will not foster a diversified export sector. For this a whole range of other policies are needed.
  • Often tariffs used as patronage/rent-seeking.

 Aid

  • Aid makes things worse. Aid flows in in $ and to buy services the $ must be changed for local currency. This pushes the value of the local currency upwards, hurting exporters. Additionally the buyers of the $ only buy so that they can import, therefore if there a high import restrictions the demand for the forex will be lower, meaning that aid will not actually buy much in terms of services. Importers who need forex can either buy it from exporters or from the aid stocks. Therefore aid is in competition with export, meaning there is less need for export so their earning fall: this happens through the exchange rate.
  • Trade liberalization can help. The way to offset this problem is to increase the supply of imports. If imports become cheaper people want more, and the increased demand can soak up both the forex earned from export and the forex from aid.

 Fair Trade

  • Fair trade is good but it keeps people in low income industries. It is a tiny % of the total trade in even coffee. There is no push for diversification.

  Regional Integration

  • For regional integration to work there must be a club of rich and poor countries so that the poor can benefit from the research base industries of the rich, and the rich can benefit from the cheap labour of the poor. If everyone in the club is poor, you just have a poor regional club.
  • In the EU the external protection kept out labour intensive goods that allowed the poorer states to use their labour advantage to converge with the rich states. In a poor club, the external walls keep out skills based products meaning those will better skills (the already relatively richer states) will do better, so instead of convergence there will be divergence.
  • Good access to local markets is of course essential, but forming customs unions will not help.

 Export Diversification

  • Exporting leads to learning in the bottom billion (not so in the advanced world) so they need to export to get productivity gains. They need to expand exports into labour intensive products and services.
  • To make the most of the competitive labour advantage (that Asia had as it was the only industrializing low wage zone at the time, whereas Africa would now be directly competing against Asia) OECD tariffs need to be lowered below the levels of those good coming in from Asia.
  • The African Growth and Opportunity Act (US) and the All But Arms (EU) programs go some way. But in the former the time limit is too restrictive (3 years) to incentivize producers in Africa to invest in productivity as they know the benefits are strictly limited. The EU program is longer term but the Rules of Origin regulations are so complex and restrictive that it is barely used by African producers to get privileged access.
  • What is needed is one simple scheme and a 2015 phase out, so that industry has an incentive to increase investment in the medium term, but knowing that their advantage will be worn out by 2015.

 Bottom Billion in the WTO

  • The economies of the bottom billion have no place in a trade organization that proceeds by negotiation. They have no stance from which to negotiate. Whether the US has subsidies on cotton produced in the south gravely hurts Chad, but if Chad were to offer to give US access to its market, the US would be supremely uninterested as the potential for generating trade is tiny with such backward economies.
  • What is needed is a transfer round to begin each round of WTO negotiation where unreciprocated openings and gestures are made to the developing world in order to get their markets going.
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NATIONAL REGULATION IN THE GLOBAL ECONOMY

NATIONAL REGULATION IN THE GLOBAL ECONOMY

D. Vogel

Trading Up: Consumer and Environmental Regulation in a Global Economy pp. 1-23

 A Summary

In a Nutshell

Regulation is shaped by forces outside the state. Alliances between protectionist producers and NGO have become commonplace and are important sources of opposition to trade liberalization.

 The WTO has played an important role in preventing the use of unilateral trade restrictions for the purpose of promoting regulation both domestically and internationally. And whilst such agreements and treaties have limited the role of national regulations, trade liberalization can just as easily be achieved by forcing national with lower standards to raise them as it can by forcing countries with higher standards to lower them. The former is the consequence of what has been called the California effect where there is one wealthy green jurisdiction which promotes a race to the top amongst their trading partners. This is because stricter standards represent a source of comparative advantage to such states in part because their producers find it easiest to comply with the regulations. Such firms can compete against foreign competitors by increasing their standards. Thus exporters to such a state need in to raise their own standards, and there is a knock-on effect of their trading partners then needing to do so as well…. and so on.

 Such an effect is likely to be confined to product standards rather than standards that affect how goods are produced. Trade liberalization is most likely to strengthen consumer and environmental protection when a group of nations has agreed to reduce the role of regulations as trade barriers and the most powerful among them has domestic constituencies that support stronger regulatory standards.

 It is only recently that non-tariff barriers such as regulations have become continuing sources of conflict. This is due to the increased drive for economic integration, the growth in the amount of regulation, and the expansion of trade itself (by bringing new consumers into contact with foreign products, as well as the negative effects of the physical act of trade itself).

 

RULING THE WORLD

RULING THE WORLD

L. Gruber

Chapter 7 NAFTA and Beyond: Is Free Trade Contagious?

A Summary 

In a Nutshell

The developing world may be ambivalent about free trade but they have little room for maneuver, in that they have to join certain institutions in order not to be excluded from certain agreements. A hegemon does not need to coerce as it has go-it-alone power. Potential partners have to on the inside of a deal in order to avoid the costs of being outside it.

 The argument is that Mexico in making overtures to the USA to sign the NAFTA was not doing so because it was clearly pursuing its own advantage. Indeed there were many opponents to the plan within Mexico, and it provoked much violent opposition. Neither was Mexico forced into the deal as they were the ones that initiated talks. Rather, Mexico saw that it was the lesser of two evils given that Canada and the US had signed the FTA a few years previously. Mexico saw that if it was not included in the process it would become economically marginalized, and this would have had severe consequences as the US was by far and away its largest trading partner. This then was a “scramble for inclusion”. The cost of mitigating this economic marginalization was that they were forced to liberalize much more rapidly than they might otherwise have done meaning that structural adjustment repercussions were much more severe than had they pursued the process of gradual liberalization that had begun in the 80s.

 Likewise Canada had no real interest in signing NAFTA as the liberal government of the time (successors to the conservative government that signed the FTA) were not pro-fee traders and were critics of the FTA. Rather they saw that the US would use its “go-it-alone” power to make a bilateral agreement with Mexico which would threaten their economic position in the region.

 Thus a cooperative agreement signed between A and B alters the strategic calculus of player C in deciding whether he wants to be part of the union. Likewise the decision of C to enter into A and B’s union alters the strategic calculus of D, another natural trading partner. This is why we have seen in recent history the formation of the American, EU and Asian trading blocs. Gruber particularly draws attention to the subsequent calls by LA states for trade integration: MERCOSUR etc. As painful as the deepening of north south integration will be for the LA economies, the alternative marginalization would be even worse.

 Background to NAFTA

  • PRI had been slowly liberalizing since mid-1980s, lowering tariffs and import licenses etc. Domestic response was ambivalent: ISI industries depended on protection, and agriculture was fragile. To remove agro support was to risk a mass migration from countryside to city. Inequality was serious and growing and trade liberalization was blamed.
  • The PRI was losing its grip on power, so increased liberalization was not predicted given the domestic climate and lack of strong government.
  • However, in 1990 the NAFTA was agreed and it went way beyond previous liberalizations. Why did this happen?

 Decision to implement NAFTA

  • An agreement with the US would mitigate the negative trade and investment discrimination that Mexico might otherwise experience as a result of its exclusion from the trading blocs. A desire “not to be shut out”. Mexico’s ties to US and Canada were very important – over 50% FDI came from US and profitability of export business dependent on US customers
  • The FTA agreement reduced Mexico’s access to the US market. Head to head competition with Canadian imports to the US was strong so they would lose from lowered tariffs between Canada and US.
  • The agreement was voluntary – no US coercion. It wasn’t needed. Although trade with US very important to Mex, trade with Mex accounted for 1% GDP for the US
  • The consideration were thus more defensive – the desire to mitigate losses from the FTA – rather than proactive on the part of the US (as suggested by realist interpretations).

 Assessing the Effects of NAFTA

  • Tariff removal increases trade – consumers benefit from lower priced goods, and comparative advantage generates productivity and efficiency gains.
  • There could be costs as consumers in Mex switch to low cost US/Canadian goods which they previously got from Japan, thus reducing revenues of government which would be made up by direct taxes on citizens. The overall effect depends on sign of TRADE CREATION – ADJUSTMENT COSTS – TRADE DIVERSION.
  • This was overwhelmingly +ve for Mex. Mex concentrates on labour intensive, US/Canada on research intensive. Mex already getting over 50% imports from US/Canada. Mex as smallest economy stood to gain the most.
  • However, side agreements such as harmonized labour and environmental standards could hurt Mex’s comparative advantage in the long run. Businesses may now set up in US to service larger US domestic market.
  • All else equal there would have been less political and economic upheaval had Mexico not been forced into NAFTA. A gradual transition as it was already doing would have been possible.

 Negatives

  • Strong response from fragile industries (textiles, trucking, procurement).
  • FDI did not increase due to continued domestic instability (Zapatista uprising in Chiapas).
  • Little protection for Mexico against US reneging (small opportunity cost of reneging for the US, whereas huge for Mex).
  • Much more aggressive liberalization.
  • Nearly all tariffs to be reduced in 10 years.
  • US showed little regard in helping to minimize transition costs which it knew would be huge as Mex was a developing county – higher initial barriers so more radical adjustment; low factor mobility; poor infrastructure; people living on subsistence cannot bear even small disruptions.

 Canada

  • Political climate not favourable to more free trade.
  • US would have signed anyway regardless of Canadian involvement. Canada would have been worse off had it not signed so it was effectively forced to do so.
  • Mex would have got same special treatment and access to US markets and this would dilute the Canadian advantage. The US would have been a hub of trade, and Canada merely a spoke so Canadian exports would have become less competitive and capital would flow to the US. Mex industry would have been able to get parts duty free from US and this could have made Canadian exports less competitive. So it would have all the disadvantages and no access to Mexican consumers.