Blog- 6:International Trade Agreement - European Union (EU)

European Union (EU) was created in the aftermath of the Second World War and it is a unique economic and political partnership between 27 European countries. The EU has delivered half a century of peace, stability, and prosperity and has helped raise living standards, launched a single European currency the euro, and is progressively building a single Europe-wide market in which people, goods, services, and capital move among Member States as freely as within one country. The European Union has enhanced political, economic, social co-operation and actively promotes human rights and democracy.

According to the OECD, Regional trade agreements (RTAs) cover more than half of international trade and operate alongside global multilateral agreements under the World Trade Organization (WTO). The first eleven years (1995-2005) of the WTO were paralleled by a tripling of RTAs officially notified to the WTO and in force, from 58 to 188.

Regional trade agreements however can have both positive and negative effects on trade depending on how they were designed and implemented. Hence, a policy question should be what determines RTAs success. For instance, it may be easier and attractive for a small group of neighboring countries with similar concerns and cultures to agree on market opening in a particular area than to reach agreement in a wider forum such as the WTO. These countries can also offer new approaches to rule-making and therefore using this as their stepping stones on the way to a multilateral trade agreement. However, this regional agreement also risk making it harder for countries outside the region to trade with those inside and leaves the potential to discourage further markets to open up. Ultimately, this limits the growth prospects for all and also broad-based multilateral negotiations with more players and more sectors that offer greater potential for mutual gain than limited bilateral or regional deals.

The agreements that have been designed to complement a general program of economic reform have been most effective in raising trade. The most important component for success is low trade barriers with all global partners. This is followed by nonrestrictive rules of origin were local firms must be able to effectively source materials at the lowest cost. These rules of origin are necessary and also important elements of agreement that expands both regional exports and exports to the rest of the world. Regional trade agreements help countries to integrate with global markets but do not provide a guarantee and therefore again, these agreements are crucial on how they are designed and implemented.

The EU has evolved during the process of globalization by aiming for the harmonious development of world trade and fostering fairness and sustainability. It actively encourages the opening of the markets and the development of trade in the multilateral framework of the World Trade Organization (WTO). At the same time, it supports developing countries and regions through bilateral relations with a view to involving them in world trade using preferential measures. European trade policy aims to increase the EU’s competitiveness. It offers a framework to deepen strategic economic relations and defend European interests worldwide. Its objectives must be adapted to the new global challenges and to the new strategy for the sustainable growth of the EU by 2020.

These objectives can be met by strengthening trade relations between the EU and its strategic partners.

In this context, it is particularly important to:

·         Complete the Doha Round of negotiations launched by the World Trade Organization (WTO). It is essential to improve access by developing countries to international trade, particularly in the areas of services and agriculture, but also to improve WTO surveillance capacity and strengthen its dispute settlement system.

·         Conclude the negotiation of free trade agreements between the EU and its trade partners, and strengthen relations with its strategic partners, particularly taking into account intellectual property rights and the protection of innovation, public procurement, competition rules and consumer protection; Develop a new European investment policy, create a favorable climate for enterprise, facilitate business access all over the Europe.

The Commission presents new guidelines for European trade policy. The policy must contribute to the objectives of the Europe 2020 strategy, in view of the impact of international trade on the sustainable growth of the European Union (EU).

The EU’s trade policy achievements in the last decade

Over the last decade the EU has put in place the Everything but Arms (EBA) initiative (duty free quota free access for LDCs), a new Generalized System of Preference (GSP) and reformed its rules of origin, as well as stepping up Aid for Trade (Aft). It was much less successful in its approach to Economic Partnership Agreements, other free trade agreements (FTAs) and the World Trade Organization (WTO), where progress has been slow or deadlocked.

The European Union’s communication on trade, growth and development, launched, sets the framework for its actions on trade and development in the coming decade.

Now is the right time to be launching this communication, with development taking place in a rapidly changing world. There has been rapid growth in several emerging powers and much of Africa is also continuing to grow, with openness to trade and investment playing a supporting role. But some countries have been left behind: the majority of least developed countries (LDCs) have not been able to transform their economies structurally. In addition, there are new challenges to be faced, such as threats to the climate and natural resource base.

The development of an open trade policy and international investment flows should thus:

1.       Contribute to the intelligent growth of the EU and the spread of innovation by removing barriers to international trade in goods and services and to investment. Stronger trade relations should, in particular, give European enterprises access to government procurement and research programs in third countries;

2.       Accompanied by social policies in the EU and worldwide. Open markets can lead to job losses in under-performing sectors. The Member States and the EU must therefore take the appropriate support measures, namely by extending the European Globalization Adjustment Fund (EGF). In addition, the EU is to pursue its cooperation with developing countries as regards combating poverty, defending human rights, compliance with international labor standards and good governance.

3.       Contribute to green growth in the EU and worldwide. Trade agreements should provide for the efficient use of natural resources and the protection of the environment.   

 

It then argues that domestic actions and good governance are key to trade and growth, and that trade  agreements can lock in domestic reforms. On the multilateral front, the EU proposes to support the  development dimension at the Doha round of WTO negotiations (the  LDC package), address emerging  issues (e.g. trade and food security, achieving reliable energy supply, threats to natural resource base),  and calls for emerging powers to provide more concessions to LDCs.

Trade Policies for developing Nations. Why is it so important for developing nations to be involved in trade and Import Substitution Policies

It is important for developing nations to be involved in trade to benefit a countries economy by developing exports of primary products. These developing countries often to fail short to advanced nations because of their infrastructure and economic standing compared to the rest of the world and the need to survive is dependent upon breaking into global markets. Now to have a competitive advantage over advanced nations is a tough task at hand where developing nations might only export a certain product and a disruption in the market will cripple the economy. Many of the poorest countries have not been able to make use of the opening markets or, for instance, compensate the loss of tariff revenue by means of developing taxation, because of deficiencies in their economic stability and structures, societal institutions and infrastructure. A desire to perpetuate the existing internal power structures may also have favoured the maintenance of trade barriers and other protective mechanisms.

Most developing countries are also dependent on agriculture, where the growth of productivity is slow and trade barriers are higher than in industrial goods. The emerging economies have invested in the growth of industrial production, and their exports have grown almost twice as fast as the exports of agricultural products, reaching 80 per cent of the total exports of developing countries. The special and differential treatment of developing countries enables them to have extra economic and industrial policy latitude. The developing countries are geographically dispersed and cannot be regarded as one group in the trade policy context. Differentiation among them has taken the form of extra benefits to the least developed countries.

In practice this means that developing countries are not expected full reciprocity when trade policy commitments are made. This is most visible in the WTO, but also evident in regional and bilateral arrangements and when autonomous measures are applied. There are a variety of ways in which the WTO provides assistance to build trade capacity in developing countries, but instructing developing country delegates on how their countries can gain through the trading system is the central focus of the organization's efforts.

Import substitution policies adopted by most nations in Latin America were largely attributed to the impact of the Great Depression of the 1930s. During this period, Latin American countries that exported primary products and imported almost all of the industrialized goods they consumed, were prevented from importing due to a sharp decline in their foreign sales. This served as an incentive for the domestic production of the goods they needed. They believed that their developing countries needed to create local vertical linkages, and they could only succeed by creating industries that used the primary products that were already being produced domestically. As a result, their tariffs were designed to allow domestic infant industries to prosper.

Import Substitution Policies was most successful in countries with large populations and income levels which allowed for the consumption of locally produced products. Latin American countries such as Brazil, Mexico, Chile, Uruguay and Venezuela, had the most success with import substitution policies. This is so because while the investment to produce cheap consumer products may have paid off at the time in a small consumer market, it was not the same for capital-intensive industries, such as automobiles and heavy machinery, which depended on larger consumer markets to survive.

In the past few years, attention has been given to the growth prospects of BRIC; Brazil, Russia, India and China for different reasons. With each of these nations having different strategies for growth, they also have different backgrounds, areas of advantage and growth, and challenges for each of their countries as their economies have gathered momentum in the global economy.

The  reason the trade capacity is important.

Because  many  countries  simply don't have the human, institutional and infrastructural capacity to participate effectively in international trade. Without that, these countries won't be able to expand the quantity and quality of goods and services they can supply to world markets at competitive prices.

Human capacity refers to the professionals governments rely on for advice on WTO matters: trade lawyers, economists, skilled negotiators. A country that lacks these professionals is clearly at a disadvantage when implementing existing trade agreements, when negotiating new ones, and when handling trade disputes.

Institutional capacity refers to the institutions businesses and governments rely upon for trade, such as customs, national standards authorities, and the delegation representing the country at the WTO. Trade ultimately suffers if these institutions are inadequate.

Infrastructure refers to the physical setup required for trade to happen: roads, ports, telecommunications. Again, countries lacking infrastructure will find it difficult to develop trade.

Blog 4: Chinese Tire Tariff and American Chicken Feet

In 2009, the Obama Administration implemented a steep tariff on imports of Chinese-made tires. The tire tariff was structured with a 35 percent duty the first year, 30 percent the second and 25 percent the third. This is in addition to the 4% base tariff. The intent of this regulation was to protect American jobs and save the tire manufacturing industry in the US. According to Market Watch “U.S. imports of Chinese tires rose from 14.6 million in 2004 to 46 million in 2008. Accounting for about one-sixth of the U.S. market. Four U.S. tire plants have closed in the past two years (2007-2008) and more than 5,000 workers have lost their jobs. But China wouldn't be the only one affected by the tariff. It would also impact U.S. companies, such as Goodyear Tire & Rubber Co. (GT, Fortune 500) and Cooper Tire & Rubber Co., (CTB) which are both based in Ohio but have factories in China.  ” As a whole, tariff is a double-edged sword for countries, which have only few limited resources and deeply depend on import trade and export trade.

While tire imports from China have declined since 2009, tire imports from several other countries are up. This confirms that if “it doesn’t get built in China and it’s too expensive to make in the U.S., it will get made in a cheap locale somewhere else.”

Chicken feet are a caused tension between China and United States. China is the largest consumer of chicken feet and it imports chicken feet from US. Chinese consumers prefer the taste of meat on the bone. Chicken feet   is very crucial part of the trade relationship between the US and China for which U.S has advantage over exports to China. China is an important market for American poultry, particularly for portions like chicken feet, which are a delicacy in China but barely marketable in the United States China increased tariffs on the imports of chicken feet from U.S, because it affects the domestic market of China. China imposed tariff between 50% to as high as 105% on the U.S imports of chicken feet. American farmers and the Obama administration are likely to be particularly disappointed by the new poultry tariffs because China’s increasing affluence has resulted in a surging appetite for protein, one that American chicken farms hoped to satisfy. “China is viewed as a potentially hugely growing market for poultry,”

In these two cases named, Chinese tire tariff and American chicken feet are the great example to explain how important role the tariff is and how it can benefit or damage a country’s economy.

In my opinion, the developed countries such as U.S and China should balance pros and cons of tariffs so that they could protect domestic manufacturers and consumers in their country.

Week 3 Blog: Are All Barriers on Trade Intentional?

Global trade is often affected by countries policies. Trade barriers are government restrictions on International trade and it can be created  unintentionally.  Unintentional trade barriers could be Terrorism,  piracy, natural disasters, laws and regulations and  political issues. The impact that these unintentional trade barriers have on economic trade is obvious, a country in ruins form an  Earthquake may  not be able to ship its domestic-made products of some time as its ports are destroyed. Likewise One country may be reluctant to send its ships overseas if there has been recent  pirate attacks. The war on terror is no different then the  aforementioned situations. 

 In Global economy anything can be  cause for trade barriers such as war between two nations, certain government implemented programs for one nations own benefit. If we look at the Japanese Earthquake of 2011, It really hurt their economy and the cost for the abundance of resources to recover from this natural disaster is immense. Could countries have tried to take advantage of this fact and then in return have retaliation of  tariffs placed on certain goods? The Fuel price is conquering new heights everyday that which is single largest commodity affecting global economy. When it comes to international trade, Fuel price is larger impact on international trade. Due to hike of oil price, transportation costs are increasing worldwide which is causing disrupted pillar of globalization. The effects of each of these events can create a problem of comparative advantage. Comparative advantage is a great theory in order to help countries from all over the world. With these unintentional restrictions and trade barriers, it can be difficult for countries to trade the products in which they have comparative advantage because of the additional costs.

 Environmental harm as economic subsidy, new perspectives on the feasibility of trade sanctions for environmental protection. Those who are concerned about the use of trade restrictions for environmental protection often have two different types of concerns. The one that has been raised most frequently is about the compatibility of these sanctions with international trade regimes, particularly the GATT, now part of the World Trade Organization (WTO). Are these environmental measures compatible with the international trade rules, and, if not, what should be done to address this incompatibility? The second concern is about the potential unfairness of trade measures for environmental protection.
 
Non-tariff trade barriers include such as import quotas, orderly marketing agreements, domestic content requirements, subsidies, antidumping regulations, discriminatory government procurement practices, social regulations and Freight restrictions. A policy that  should enforce by World Trade Organization to set support quota like a resistance-support rubber band that certain stocks proceed to act like .This will give everyone a fair and reasonable accommodation so no one country can dominate in complete exports and imports. This will open up the concept of free trade, but like life there are those who want to remain in a state of Autarky

• GATT: General Agreement on Tariffs and Trade
• WTO:  World Trade Organization

Week Two Blog: How do nations decide what to trade? How does public policy affect comparative advantage?

According to the theory of David Ricardo that specialization and trade are mutually beneficial even if a county finds it is more efficient at producing everything than its trading partners. If one country produces a given good at a lower resource cost than another country, it has an absolute advantage in its production. ( the other country has an absolute disadvantage in its production.) If all productive resources were highly mobile between countries, absolute advantage would be the criterion governing what a country  produces  and the pattern of any trade between countries.  Demonstrated by Ricardo resources, particularly labor and the skills and knowledge it immobile, a comparison of a good’s absolute cost of production in each country is not relevant for determining whether specialization and trade should occur. Rather, the critical comparison within each country is the opportunity cost of producing any good. How much output of good Y must be forgone to produce one more unit of good X .  The opportunity costs of producing X and Y are different in each economy, then each country has a comparative advantage in the production of one of the goods. In this circumstance, each country can realize gains from trade by specializing in producing what it does relatively well and in which it has comparative advantage and trading. The Nations trade will be decided by its Absolute Advantage, Comparative Advantage, Economies of Scale, Natural Resource, Technology and Infrastructure.

Reference to article “ Detroit’s Big Three Face  Obstacles in Restructuring” it is clearly indicated that American car manufacturers are currently facing difficult times in competing with foreign automakers because of the newly introduced healthcare costs. It is true that if American had a national healthcare policy in place U.S.carmaker would benefit the best comparative advantage. Healthcare cost is among the small cost that the US companies are facing in comparison to their foreign competitors. In addition to healthcare costs, there are differences in wages, retirement benefits, vacation pay, and other employee perks. For a U.S.Company to recruit and retain good talent these programs must be in place. Another Object to America’s comparative advantage is the government policies and regulations. It is evident that many regulations have been put in place to assure worker and consumer safety and security, not forgetting that they come by at a cost. For this reason, the tax weight is extremely high for U.S.Companies to afford.

 

I believe policies that could be enacted to improve the comparative advantage of US car manufactures is to through stabilizing economy overall which would stimulate dollar and the exchange rate will increase for profits and then perhaps increasing the tax on foreign import automobiles in the United States or stricter regulation of foreign automobile imports on safety standards that must be met to allow consumers in the US to operate a car legal in the United States.

There are current issues such as global financial crisis, global warming, environmental issues, racism and China’s currency policy etc, was affecting on the global economy

There is policy’s to remedy  in the wake of the current financial crisis which has spilled across markets and borders, the report calls for urgent regulatory reform. The availability of better data on commodities futures trading would provide regulators with early warning signals and allow them to recognize emerging commodity price bubbles. Related stepped-up regulatory authority would allow them to prevent bubble-creating trading behavior from having adverse consequences for the functioning of commodity futures trading.

Using  fundamental tools of economic reasoning like comparative advantage, opportunity cost, and market analysis to clarify issues that arise from the increasingly global nature of trade.

Week One Blog: How open to openness you are?

Openness to trade refers to nations permitting trade with other nations or economies. Openness consists of exports and imports of goods and services as a percentage of Gross Domestic Product. This is a measure of the value a nation places upon trade. Open economies tend to have greater market opportunities and greater competition from other countries. In the twenty first century, with the increase in globalization, it is necessary for countries to be more open to trade, have open economy with less trade restrictions, which would increase competition among the businesses based in different countries. With the increase in competition, the prices of commodities will be lower in the consumer market. It is important for a country to be open because of economic interdependence and stimulate economies which will be mutually beneficial as it will provide comparative advantages, increase efficiency, develop innovation, technology and supply chain relations. The traditional barriers, domestic regulations should be adjusted or lifted to enhance market openness through regulatory reform in international trade. As an example, small country like Greece has implemented “Macroeconomic Reform" to improve the country's economical performance.

Figure: Advantages of Openness in different branches.

A country with trade restrictions cannot prosper and hence end up having inflation and poor economic conditions. Therefore, it is very essential for countries to be open, allowing other countries to make FDI and expand the market with increase in completion, providing better choices of goods at lower prices to the consumer. Having opportunity for FDI and trading products with other countries would be a great benefit.

I strongly believe openness would help the entire global economy. More products would be bought and sold and more jobs will be available for the people living in the countries. Nations become more open, relationships between countries get stable, residents are able to work for their country, consumers get great deals on products, and as a result the country's GDP increases.

•  FDI: Foreign Direct Investment
•  GDP: Gross Domestic Product
•  Macro-economics: Macro-economics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy.