Free trade refers to a situation where a government
does not attempt to restrict what its citizens can buy from another country or what they can sell to another country.
While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups. 6/20/2014 IB, Module 4 2 6/20/2014 IB, Module 4 3 Country A Political values & legal Practices Cultural values, attitudes & beliefs Economic Forces Geographical influences Trade Enhancements
Trade Restrictions Companies Competitive Environment Country B Political values & legal Practices Cultural values, attitudes & beliefs Economic Forces Geographical influences Prevent Unemployment Import restriction leads to Retaliation by other countries Less likely Retaliated against effectively by small economics. Less likely to be met with Retaliation if implemented by small economics. May decrease export jobs because of price increases for components May decrease export jobs because of lower incomes abroad.
6/20/2014 IB, Module 4 4 Protect Infant Industries A government should shield an emerging industry from foreign competition by guaranteeing it a large share of domestic market until it is able to compete on its own. Promote Industrialization Countries with large manufacturing base generally have higher per capita incomes than those that do not.
6/20/2014 IB, Module 4 5 Maintaining essential industries Government apply trade restrictions to protect essential domestic industries during peacetime so a country is not dependent on foreign sources of supply during war. Deal with unfriendly countries Groups concerned about security often use national defense arguments to prevent the export, even to friendly countries, of strategic goods that might fall into the hands of potential enemies or that might be in short supply domestically. 6/20/2014 IB, Module 4 6 Maintaining spheres of influence Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies. Preserve national identity Countries are held together partially through a unifying sense of identity that sets their citizens apart from those in other nations. To sustain this collective identity, countries limit foreign products and services in certain sectors. 6/20/2014 IB, Module 4 7 Country quotas Testing, labeling Seasonal prohibitions Health and sanitary prohibitions Certifications Foreign exchange licensing Custom surcharges Stamp taxes Taxes on transport Anti-competitive practices Trade restrictions on e-commerce Licensing fees Excise duties Taxes on foreign exchange deals Special import authorization Restrictions on data processing Advance import deposits
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One way to understand trade control is by distinguishing between two types that differ in their effects: Those that indirectly affect the amount traded by directly influencing the prices of exports and imports. Those that directly limit the amount of a good that can be traded. 6/20/2014 IB, Module 4 9 Tariffs: oldest and simplest instrument Import, Export and Transit duty Specific duty, ad valorem duty, compound duty Tariffs are unambiguously pro-producer and anti consumer. Tariffs reduces overall efficiency of the world economy. Non Tariff Barriers: Direct price influences Subsidies: cash grant, low-interest tax, tax breaks etc. Whether subsidies generate national benefits that exceed their national cost is debatable. Aid and Loans, Customs valuation etc.
6/20/2014 IB, Module 4 10 Non Tariff Barriers: Quantity controls Import Quotas Tariff rate quota Voluntary export restraint (VER) Local Legislation Standards Specific Permission requirements Reciprocal requirements Restriction on services. Import quotas and VER always raises the domestic price of an imported good.
6/20/2014 IB, Module 4 11 The Bretton Woods Conference of 1944 It was attended only by representatives of finance ministries & not by representatives of trade ministries In December 1945, US invited its war-time allies to negotiate & conclude a multilateral agreement UNO in Feb 1946, organized a conference to draft a charter for International Trade Organization London Meet in Oct 1946, The work on setting up ITO continued till Nov 1947, Due to acceptance of GATT, the work on establishing ITO was halted.
6/20/2014 12 IB, Module 4 1946 London England: 50 countries met to discuss creating an international trade organization as a third world economic power along side IMF & World bank, but failed. 1947 Havana, Cuba 23 countries met & negotiated more than 45,000 reductions in their custom duties that affected $10B of trade, then about 1/5 th of worlds total trade. These agreements were codified into the General Agreements on Tariffs and Trade 6/20/2014 13 IB, Module 4 1947 Geneva Switzerland: The same 23 countries met for the first official meeting of founding members of GATT. 1949 Annecy France : 13 Member countries negotiated more than 5,000 tariff concessions. 1951/1956 Torquay, England and Geneva : 38 Member nations negotiated additional tariff reductions and concessions. 6/20/2014 14 IB, Module 4 1960 1961 The Dillon Round : 26 countries additional tariff reductions and concessions 1964 1967 The Kennedy Round Geneva: Membership increased to 62 countries and discussion expanded to review new trade rules and passed an anti-dumping agreement 1973 1979 The Tokyo Round : 102 member countries, reduced custom duties. Reached a series of agreements on various non tariff barriers. But these agreements were signed by only few. Failed to reform agricultural trade and emergency import measures. 6/20/2014 15 IB, Module 4 1986 1994 The Uruguay Round : 123 nations, Majority were developing nations, tariffs were reviewed, on tariff measures, trade rules, services, Intellectual property, dispute settlements, textiles and agriculture. WTO was formed on 1 st Jan 1995. 6/20/2014 16 IB, Module 4 6/20/2014 IB, Module 4 17 The process of becoming a WTO member
The process of becoming a WTO member is unique to each applicant country, and the terms of accession are dependent upon the country's stage of economic development and current trade regime. The process takes about five years, on average, but it can last more if the country is less than fully committed to the process or if political issues interfere. The shortest accession negotiation was that of the Kyrgyz Republic, while the longest was that of Russia, which, having first applied to join GATT in 1993, was approved for membership in December 2011 and became a WTO member on 22 August 2012 The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director- general. Its annual budget is roughly 160 million Swiss francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decision-making role that other international bureaucracies are given. 6/20/2014 18 IB, Module 4 The Secretariats main duties are to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and media. The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO.
6/20/2014 19 IB, Module 4 Ministerial conferences The WTOs top decision-making body. Meets at least once every two years. General Council Top day-to-day decision-making body. Meets regularly, normally in Geneva. The WTO and other organizations Cooperation between multilateral institutions on global economic policy-making.
6/20/2014 20 IB, Module 4 1. The system helps promote peace 2. Disputes are handled constructively 3. Rules make life easier for all 4. Freer trade cuts the costs of living 5. It provides more choice of products and qualities 6. Trade raises incomes 7. Trade stimulates economic growth 8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government 6/20/2014 21 IB, Module 4 1. The WTO dictates policy 2. The WTO is for free trade at any cost 3. Commercial interests take priority over development 4. and over the environment 5. and over health and safety 6. The WTO destroys jobs, worsens poverty 7. Small countries are powerless in the WTO 8. The WTO is the tool of powerful lobbies 9. Weaker countries are forced to join the WTO 10. The WTO is undemocratic 6/20/2014 22 IB, Module 4 6/20/2014 23 IB, Module 4 To raise standards of living To ensure full employment Growing volume of real income and effective demand Expanding the production of and trade in goods & services Sustainable development and environmental protection Developing countries 6/20/2014 24 IB, Module 4 Agreements on Agriculture Agreements on Textiles & Clothing Agreements on GATS Agreements on TRIPS Agreements on TRIMS
6/20/2014 25 IB, Module 4 The objective of the Agriculture Agreement is to reform trade in the sector and to make policies more market-oriented. This would improve predictability and security for importing and exporting countries alike.
The new rules and commitments apply to: Market access Domestic support Export subsidies
6/20/2014 26 IB, Module 4 Market Access Various trade restrictions confronting imports Tariffication Special safeguards Special treatment Impact on India The Developed will have better market access in the Developing countries India would gain on enhanced market access India has removed all quantitative restrictions
lower tariff rates for specified quantities, higher (sometimes much higher) rates for quantities that exceed the quota. For products whose non-tariff restrictions have been converted to tariffs, governments are allowed to take special emergency actions (special safeguards) in order to prevent swiftly falling prices or surges in imports from hurting their farmers. special treatment provisions to restrict imports of particularly sensitive products (mainly rice) during the implementation period (2000 for developed, 2004 for developing), but subject to strictly defined conditions, including minimum access for overseas suppliers. 6/20/2014 27 IB, Module 4 Domestic Support Amber box (5%, 10%) Green box Blue box Impact on India Provides space for The Developed to subsidize heavily Indian Domestic support is less than 10%
6/20/2014 28 IB, Module 4 Export Subsidies & The Least Developed Developed countries Developing countries The least developed Depending on food Imports Impact on India Reduced tax rate on profits from exports India may face problem from heavily subsidized exports of industrialized nations Standardization of Agri. products
6/20/2014 29 IB, Module 4 Numerical targets for agriculture
Developed countries 6 years: 1995- 2000 Developing countries 10 years: 1995- 2004 Tariffs Average cut for all agricultural products -36% -24% Minimum cut per product -15% -10% Domestic support Total AMS cuts for sector (period:1986-88) -20% -13% Exports Value of subsidies -36% -24% Subsidized quantities (period:1986-90) -21% -14%
6/20/2014 30 IB, Module 4 Textiles, like agriculture, was one of the hardest-fought issues in the WTO, as it was in GATT. It completed fundamental change in a 10-years as agreed in the Uruguay Round. The system of import quotas that dominated the trade since the early 1960s have now been phased out. The Key Points : MFA 1974 To ATC 1995 Integration TMB 6/20/2014 31 IB, Module 4 Multi Fiber Agreement (MFA) 1974 Radical departure from basic GATT Selective Quantitative Restrictions Quota system became predominant Agreement on Textile & Clothing (ATC) 1995-05 Wide product coverage Progressive integration into GATT Enlarge existing quotas until they are removed Special safeguard during transition period TMB, Quota monitoring other provisions
6/20/2014 32 IB, Module 4 Four steps over 10 years back to top The schedule for freeing textiles and garments products from import quotas (and returning them to GATT rules), and how fast remaining quotas had to be expanded. The example is based on the commonly-used 6% annual expansion rate of the old Multifibre Arrangement. In practice, the rates used under the MFA varied from product to product. Step Percentage of products to be brought under GATT (including removal of any quotas) Percentage of products to be brought under GATT (including removal of any quotas) Step 1: 1 Jan 1995 (to 31 Dec 1997) 16% (minimum, taking 1990 imports as base) 6.96% per year Step 2: 1 Jan 1998 (to 31 Dec 2001) 17% 8.7% per year Step 3: 1 Jan 2002 (to 31 Dec 2004) 18% 11.05% per year Step 4: 1 Jan 2005
>Full integration into GATT (and final elimination of quotas). >Agreement on Textiles and Clothing terminates. 49% (maximum) No quotas left 6/20/2014 33 IB, Module 4 GATS is the first & only set of multilateral rules governing international trade in services. Negotiated in the Uruguay Round. It was developed in response to the huge growth of the services economy over the past 30 years. The greater potential for trading services brought about by the communications revolution. 6/20/2014 34 IB, Module 4 BASIC Principles All services are covered by GATS Most-favoured-nation treatment applies to all services, except the one-off temporary exemptions National treatment applies in the areas where commitments are made Transparency in regulations, inquiry points Regulations have to be objective and reasonable International payments: normally unrestricted Individual countries commitments: negotiated & bound Progressive liberalization: through further negotiations 6/20/2014 35 IB, Module 4 Global Obligations & Disciplines Total Coverage Most-favoured-nation (MFN) treatment Commitments on market access & national treatment Transparency Regulations Recognition International payments and transfers Progressive liberalization 6/20/2014 36 IB, Module 4 The annexes: services are not all the same Movement of natural persons Financial services Telecommunications Air transport services Current work Negotiations (Article 19) Work on GATS rules (Articles 10, 13, and 15) Work on domestic regulations (Article 4.4) MFN exemptions (Annex on Article 2) Taking account of autonomous liberalization (Art-19) Special treatment for least-developed countries (Art-19) Assessment of trade in services (Article 19) Air transport services 6/20/2014 37 IB, Module 4 The WTOs Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated in the 1986-94 Uruguay Round, introduced intellectual property rules into the multilateral trading system for the first time.
Types of intellectual property : The areas covered by the TRIPS Agreement Copyright and related rights Trademarks, including service marks Geographical indications Industrial designs Patents Layout-designs (topographies) of integrated circuits Undisclosed information, including trade secrets 6/20/2014 38 IB, Module 4 Agreements coverage: How basic principles of the trading system and other international intellectual property agreements should be applied How to give adequate protection to intellectual property rights How countries should enforce those rights adequately in their own territories How to settle disputes on intellectual property between members of the WTO Special transitional arrangements during the period when the new system is being introduced. 6/20/2014 39 IB, Module 4 National treatment MFN Balanced Protection 6/20/2014 40 IB, Module 4 World Intellectual Property Organization (WIPO) Paris Convention for the Protection of Industrial Property (patents, industrial designs, etc) Berne Convention for the Protection of Literary and Artistic Works (copyright). 6/20/2014 41 IB, Module 4 Copyrights Trademarks Geographical indicators Industrial Designs Patents Integrated circuits layout designs Undisclosed information and trade secrets Curbing anti-competitive licensing contracts Enforcement Technology transfers Transition agreements 1, 5,11 or More years
6/20/2014 42 IB, Module 4 The WTOs Agreement on Trade-Related Investment Measures (TRIMs), states that, the foreign capital would not be discriminated by the member countries, equal treatment on par with domestic capital should be the mandate. 6/20/2014 43 IB, Module 4 No Restriction on any area of investment No limitation or ceiling on quantum of investment (100%) Permission to Import Raw materials & components Exporting a Part of the product will not be mandatory Restriction on repatriation of dividend, interest & royalty should be removed 6/20/2014 44 IB, Module 4 The agreement recognizes that certain investment measures restrict and distract trade. It states that no member country shall apply any TRIM, inconsistent with the provisions of GATT WTO. They mainly include: Local content requirement ( Certain amount of local input use is insisted) Trade balancing requirements (Import shall not exceed a certain proportion of Export) Trade & foreign exchange balancing requirements Domestic sales requirements ( Company has to sell certain portion locally) 6/20/2014 45 IB, Module 4 Anti-Dumping Agreement.
Actions taken against dumping (selling at an unfairly low price) Subsidies and special countervailing duties to offset the subsidies Emergency measures to limit imports temporarily, designed to safeguard domestic industries. 6/20/2014 46 IB, Module 4 Safeguards A WTO member may restrict imports of a product temporarily (take safeguard actions) if its domestic industry is injured or threatened with injury caused by a surge in imports. Here, the injury has to be serious. Plurilaterals Trade in civil aircraft Government procurement Dairy products Bovine meat. 6/20/2014 47 IB, Module 4