Introductory Trade Issues: History, Institutions, and Legal Framework
Read this chapter. While we are all a part of the economy, we can't see all parts of an economy at any one time. This chapter describes policy issues, controversies, and the history of international trade. You will learn about international economics, FTAs, GATT, WTO, anti-subsidy laws, and bound vs. applied tariffs. You will read about real-world issues such as policies restricting trade and forging agreements to reduce trade barriers. Test your knowledge by answering the exercises in each section.
The International Economy and International Economics
Learning Objectives
- Learn past trends in international trade and foreign investment.
- Learn the distinction between international trade and international finance.
International
economics is growing in importance as a field of study because of the
rapid integration of international economic markets. Increasingly,
businesses, consumers, and governments realize that their lives are
affected not only by what goes on in their own town, state, or country
but also by what is happening around the world. Consumers can walk into
their local shops today and buy goods and services from all over the
world. Local businesses must compete with these foreign products.
However, many of these same businesses also have new opportunities to
expand their markets by selling to a multitude of consumers in other
countries. The advance of telecommunications is also rapidly reducing
the cost of providing services internationally, while the Internet will
assuredly change the nature of many products and services as it expands
markets even further.
One simple way to see the rising importance
of international economics is to look at the growth of exports in the
world during the past fifty or more years. Figure 1.1 "World Exports,
1948–2008 (in Billions of U.S. Dollars)" shows the overall annual
exports measured in billions of U.S. dollars from 1948 to 2008.
Recognizing that one country's exports are another country's imports,
one can see the exponential growth in outflows and inflows during the
past fifty years.
Figure 1.1 World Exports, 1948–2008 (in Billions of U.S. Dollars)
However,
rapid growth in the value of exports does not necessarily indicate that
trade is becoming more important. A better method is to look at the
share of traded goods in relation to the size of the world economy.
Figure 1.2 "World Exports, 1970–2008 (Percentage of World GDP)" shows
world exports as a percentage of the world gross domestic product (GDP)
for the years 1970 to 2008. It shows a steady increase in trade as a
share of the size of the world economy. World exports grew from just
over 10 percent of the GDP in 1970 to over 30 percent by 2008. Thus
trade is not only rising rapidly in absolute terms; it is becoming
relatively more important too.
Figure 1.2 World Exports, 1970–2008 (Percentage of World GDP)
One
other indicator of world interconnectedness can be seen in changes in
the amount of foreign direct investment (FDI). FDI is foreign ownership
of productive activities and thus is another way in which foreign
economic influence can affect a country. Figure 1.3 "World Inward FDI
Stocks, 1980–2007 (Percentage of World GDP)" shows the stock, or the sum
total value, of FDI around the world taken as a percentage of the world
GDP between 1980 and 2007. It gives an indication of the importance of
foreign ownership and influence around the world. As can be seen, the
share of FDI has grown dramatically from around 5 percent of the world
GDP in 1980 to over 25 percent of the GDP just twenty-five years later.
Figure 1.3 World Inward FDI Stocks, 1980–2007 (Percentage of World GDP)
The
growth of international trade and investment has been stimulated partly
by the steady decline of trade barriers since the Great Depression of
the 1930s. In the post–World War II era, the General Agreement on
Tariffs and Trade, or GATT, prompted regular negotiations among a
growing body of members to reciprocally reduce tariffs (import taxes) on
imported goods. During each of these regular negotiations (eight of
these rounds were completed between 1948 and 1994), countries promised
to reduce their tariffs on imports in exchange for concessions - that
means tariffs reductions - by other GATT members. When the Uruguay
Round, the most recently completed round, was finalized in 1994, the
member countries succeeded in extending the agreement to include
liberalization promises in a much larger sphere of influence. Now
countries not only would lower tariffs on goods trade but also would
begin to liberalize the agriculture and services markets. They would
eliminate the many quota systems - like the multifiber agreement in
clothing - that had sprouted up in previous decades. And they would
agree to adhere to certain minimum standards to protect intellectual
property rights such as patents, trademarks, and copyrights. The World
Trade Organization (WTO) was created to manage this system of new
agreements, to provide a forum for regular discussion of trade matters,
and to implement a well-defined process for settling trade disputes that
might arise among countries.
As of 2009, 153 countries were
members of the WTO "trade liberalization club," and many more countries
were still negotiating entry. As the club grows to include more members -
and if the latest round of trade liberalization talks, called the Doha
Round, concludes with an agreement - world markets will become
increasingly open to trade and investment.Note that the Doha Round of
discussions was begun in 2001 and remains uncompleted as of 2009.
Another
international push for trade liberalization has come in the form of
regional free trade agreements. Over two hundred regional trade
agreements around the world have been notified, or announced, to the
WTO. Many countries have negotiated these agreements with neighboring
countries or major trading partners to promote even faster trade
liberalization. In part, these have arisen because of the slow, plodding
pace of liberalization under the GATT/WTO. In part, the regional trade
agreements have occurred because countries have wished to promote
interdependence and connectedness with important economic or strategic
trade partners. In any case, the phenomenon serves to open international
markets even further than achieved in the WTO.
These changes in
economic patterns and the trend toward ever-increasing openness are an
important aspect of the more exhaustive phenomenon known as
globalization. Globalization more formally refers to the economic,
social, cultural, or environmental changes that tend to interconnect
peoples around the world. Since the economic aspects of globalization
are certainly the most pervasive of these changes, it is increasingly
important to understand the implications of a global marketplace on
consumers, businesses, and governments. That is where the study of
international economics begins.
What Is International Economics?
International
economics is a field of study that assesses the implications of
international trade, international investment, and international
borrowing and lending. There are two broad subfields within the
discipline: international trade and international finance.
International
trade is a field in economics that applies microeconomic models to help
understand the international economy. Its content includes basic
supply-and-demand analysis of international markets; firm and consumer
behavior; perfectly competitive, oligopolistic, and monopolistic market
structures; and the effects of market distortions. The typical course
describes economic relationships among consumers, firms, factory owners,
and the government.
The objective of an international trade
course is to understand the effects of international trade on
individuals and businesses and the effects of changes in trade policies
and other economic conditions. The course develops arguments that
support a free trade policy as well as arguments that support various
types of protectionist policies. By the end of the course, students
should better understand the centuries-old controversy between free
trade and protectionism.
International finance applies
macroeconomic models to help understand the international economy. Its
focus is on the interrelationships among aggregate economic variables
such as GDP, unemployment rates, inflation rates, trade balances,
exchange rates, interest rates, and so on. This field expands basic
macroeconomics to include international exchanges. Its focus is on the
significance of trade imbalances, the determinants of exchange rates,
and the aggregate effects of government monetary and fiscal policies.
The pros and cons of fixed versus floating exchange rate systems are
among the important issues addressed.
This international trade
textbook begins in this chapter by discussing current and past issues
and controversies relating to microeconomic trends and policies. We will
highlight past trends both in implementing policies that restrict trade
and in forging agreements to reduce trade barriers. It is these
real-world issues that make the theory of international trade worth
studying.
Key Takeaways
- International trade and investment flows have grown dramatically and consistently during the past half century.
- International trade is a field in economics that applies microeconomic models to help understand the international economy.
- International finance focuses on the interrelationships among aggregate economic variables such as GDP, unemployment, inflation, trade balances, exchange rates, and so on.
Exercise
-
Jeopardy Questions. As in the popular television game show, you are
given an answer to a question and you must respond with the question.
For example, if the answer is "a tax on imports," then the correct
question is "What is a tariff?"
- The approximate share of world exports as a percentage of world GDP in 2008.
- The approximate share of world foreign direct investment as a percentage of world GDP in 1980.
- The number of countries that were members of the WTO in 2009.
- This branch of international economics applies microeconomic models to understand the international economy.
- This branch of international economics applies macroeconomic models to understand the international economy.
- The approximate share of world exports as a percentage of world GDP in 2008.