International Trade in the 1970s: The US, the EC and the Growing Pressure of Protectionism

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They rely on a number of measures of depth, such as a simple additive index on commitments related to trade in goods, services, investment, public procurement, etc. As the US and the EU have generated an enormous quantity of regulations and other instruments intended to implement their international trade law obligations, it is very difficult to meaningfully compare measures of internalization between the US and EU. The Uruguay Round Agreements alone consist of more than 20, pages of treaty text.

In addition, WTO dispute settlement panels and the Appellate Body have to date generated more than 50, pages of jurisprudence. When one also wishes to address all the obligations that result from PTAs, which are also part of international trade law, the story becomes even more complex. However, scholars have looked at certain aspects of the internalization of international trade law in quite some detail. One key point that this literature has put forward is that if one wants to get an idea of the domestic impact of WTO rules or international trade rules more broadly , one should make a distinction between the direct and indirect effect of international law.

In the case of the US, direct effect of WTO law is actually denied explicitly through statutory legislation. In the Uruguay Round Agreements Act of , 42 it is clearly stated that a US domestic law will prevail in the case of a conflict with its WTO obligations; b adverse dispute settlement body reports do not automatically change domestic law or practices; and c private parties cannot use WTO dispute reports in domestic litigation to challenge actions by the US government. After all, it would be easier for the executive to act on its own than to get legislation through the two legislative chambers.

In , the Council, following a European Commission proposal, stated in the preamble to its decision on the conclusion of the Uruguay Round Agreements, that WTO rules are not susceptible to being invoked in EU community or member state courts. It was argued that, as the US and other major EU trading partners had already indicated they would explicitly deny direct effect, the EU had no other choice than to also rule out the option of the invocability of WTO rules in EU courts.

The literature does not provide a clear definition of indirect effect of international law in domestic court proceedings. Some studies of individual cases show that at times, both in the US and in the EU, courts have given a form of indirect effect to WTO rules and provisions. One example, in the US context, which is mentioned as a potential case of indirect internalization of WTO law, is the US practice of zeroing.

Zeroing is a controversial US methodology to calculate anti-dumping duties, 51 which has been challenged by several countries at the WTO. After multiple WTO disputes, domestic court proceedings and fierce political bickering between many institutional actors in particular Congress and the executive , the US has, over time, agreed to comply with the main elements of WTO law by opting toward removing zeroing.

The most interesting element in this case, in light of the potential indirect effect of international law, is that US courts, in a series of zeroing related cases, permitted private parties mainly foreign exporters and importers hurt by the practice of zeroing , to rely upon international trade law. The WTO panels and Appellate Body reports ruled against the EU in most of these cases and every time this led to heated political debate and court proceedings within the EU on whether or not to change the regulation.

In the section above we have compared EU and US support for international trade law, by looking at four dimensions of support: leadership, consent, compliance, and internalization. We have highlighted that there are strong commonalities between the EU and the US in terms of leadership and internalization, but we also observed some subtle variation in behavior when it comes to consent and compliance.

Two of these differences are particularly noteworthy. That is, we found that the US is targeted more than the EU and, even more interesting, there are clear differences in the specific issue areas where claims have been brought against both trading blocs. A second empirical landscape in which we studied consent and compliance, and found notable variation, relates to PTAs. We noticed that US agreements tend to be deeper, whereas the PTAs the EU signs with its trading partners are more comprehensive and wider in scope.

In this section we attempt to offer an explanation for these observed differences in outcomes. Given that we do not see much variation in leadership and internalization, we abstain from discussing explanatory variables in this respect. Societal explanations focus on the crucial role played by domestic economic interest groups. Policy-makers, who want to enter or remain in office, need the support of interest groups, which in turn makes them sensitive to the demands of these groups. It is argued that trade policy outcomes are, in particular, influenced by corporate interests who either benefit or lose from international trade.

On the other side of the spectrum we find export-oriented sectors; the winners of increased trade. This latter group defends anti-protectionist interests, as they gain from lower foreign trade barriers. State-centered explanations stress that trade policy dynamics can be explained mainly by changes in the institutional set-up of trade-policy making and preferences of policy-makers, rather than interest group pressure. A particularly noteworthy state-centered explanation is the so-called collusive delegation argument.

Given this protectionist bias, decision-makers have an incentive to restrict the influence of pro-protectionist firms and lobby groups in case they are concerned with the negative welfare consequences of trade restrictive measures. When relying on these two explanations to assess differences in EU and US support for international trade law, we consider a pluralist explanation to account best for US behavior. In terms of preferentialism, the US approach is very much driven by market access interests pushed by exporting firms and more recently supported by import-dependent firms.

It has been argued, for instance, that exporters have an incentive to lobby in favor of PTAs, in particular when in need of larger-than-national markets, as this enables them to take advantage of economies of scale or to develop production-sharing networks. However, as multilateral trade negotiations have reached an impasse in recent years, US industry has been pushing for the exploration of other venues.

Research has also shown that exporting firms directly affect the depth of trade agreements both multilaterally as well as bilaterally , whereas import-competing firms will focus their lobby efforts on flexibilities in relation to trade liberalization. One other important policy instrument, through which import-competing firms demand protection, is the use of trade remedies.

In terms of multilateralism, we see some differences in relation to implementing trade agreements first-order compliance. The data above suggests that, particularly in the US, import-competing industries are more successful in capturing the regulators 66 and, as a result, the US is more likely to accept domestic policies that are WTO-inconsistent. As discussed above, the national application of trade remedy instruments anti-dumping, countervailing duties and safeguards , demanded by domestic industries, stands out in this regard.

That is, research on the ITC and DOC shows that—although Congress has delegated decision making to these two agencies and clearly defined specific criteria that are to impact their decisions—Congress maintains strong influence over final trade remedy decisions, which in turn makes it vulnerable to political pressure from organized interests. One example is the heavy criticism from US importers on the US practice of zeroing, which seems to have played a role in pushing the US Government to reconsider its zeroing policy and bring it in further compliance with WTO law.

Another example of the impact of import-dependent firms is a recent safeguard case launched by the US against tires from China. If we turn to the EU, interest group pressure can also serve as a baseline explanation for the behavior we observe. Research shows that in the EU context, mobilization and influence of economic interests plays an important role in the formation of PTAs.

Import-competing firms, for instance, successfully blocked a recent attempt by the European Commission to reform its Trade Defense Instruments TDI policy, 74 while also in individual TDI cases we witness the influence of both import-competitors and import-dependent firms.

However, interest group influence and changing lobby constellations tell only part of the story. First, we posit that the institutional set-up of the EU buffers decision-makers against direct influence by lobby groups more than is the case in the US. Given the European Commission is instrumental in running trade policy and the directly elected members of the European Parliament for many years have lacked influence over EU trade policy, this has allowed the EU institutions to be less vulnerable to direct outside lobbying and offered the European Commission opportunities to influence the direction of trade policy.

In this sense trade policy has also been an important part of EU foreign policy. The decisions by the EU to opt for PTAs early on were a reaction to two major challenges that the integrating European states have faced since the s: decolonization and accession to the EU. Scope captures the fact that the EU aims to embed trade relations within a broader set of objectives to manage political and economic relations with these states.

Not surprisingly, we observe that the EU has been at the forefront of negotiating comprehensive trade agreements, which include many non-trade issues. EU PTAs serve many objectives other than solely reciprocal tariff concessions. They are seen as a privileged diplomatic tool to broaden and deepen economic ties. Yet far from representing altruistic tools, agreements reflect attempts by the EU to export EU regulation to its economic and political partners. This has to do with the relative autonomy of those who implement the national policies. Drawing from principal—agent theory, 81 we submit that the EU bureaucracy enjoys more autonomy than its US counterpart in trade-policy making to react to industry demands.

Whereas in the US case the agent ITC and DOC is severely restricted, the institutional design of EU trade remedy legislation grants more discretion to the European Commission and the competent services to impose unilateral action. Now, if agent discretion is an explanatory variable, then the preferences of agents become more important. They affect and condition overall preference aggregation. Most of the EU Directorate General DG for Trade Commissioners in recent years have shown willingness to constrain the influence of import-competing groups.

In this article we have compared EU and US support for international trade law. We analyzed four dimensions. Regarding leadership, the US played a prominent role in the first three decades after World War II in creating international trade law. Only at the end of the s was the EU able and willing to take up its role as joint leader. In recent years, support by both for the multilateral system has waned. Here the EU led the way and has been very active ever since the s, while the US turned to preferentialism only in the course of the s. Today, the US and the EU are engaged in concluding a transatlantic trade and investment partnership agreement while they continue to negotiate PTAs to export their domestic rules.

When it comes to consent and compliance we witnessed differences between the EU and the US. There are more cases brought against the US, particularly many trade remedy claims. However, the EU is relatively less compliant when it comes to rules on non-discrimination against foreign goods. When looking at internalization of international trade law, we find no fundamental differences based on the limited empirical evidence available.

Both deny direct effect of WTO provisions, while they do give indirect effect to it in individual cases. As to internalization it also needs to be stressed that international trade law is shaped predominantly by the US and the EU through WTO law, and templates in PTAs , so there is limited internalization of externally designed obligations to be expected. It is much more a process of externalization.

Turning to how we can explain subtle differences in their attitudes towards trade law, we argued that outcomes in US trade policy can best be explained by looking at interest group pressure. If changes can be observed, then this is related to changes how US industries and firms are involved in global value chains, and therefore firms exporting and firms dependent on imports become more important over time. Although interest groups also play a key role in EU trade policy, they are only part of the story.

The U.S. Trade Deficit: How Much Does It Matter? | Council on Foreign Relations

In the EU case one needs to add institutional features and foreign policy considerations to the equation in order to fully understand its support for international trade law. How future support for international trade law will evolve will most likely be influenced by the outcomes of the TTIP negotiations. The question is not only whether there will be a successful outcome, but in which areas and to what extent the US and the EU achieve regulatory harmonization or equivalence.

Based on experience with earlier landmark agreements e. The outcomes of these trade talks will therefore also redefine the relationship between multilateralism and preferential trade agreements. Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide.

Sign In or Create an Account. Sign In. In the interest of long-run partnership, it would be prudent to occasionally accommodate such behaviors. That in turn created political pressure to safeguard the interests of local small traders, who form a key constituency of the present government. New Delhi responded by reversing some of the original liberalization, but the net outcome remains an e-commerce sector that is more open to foreign investors.

From a long-term perspective, the two nations must keep in mind the vast potential for cooperation not just defense, but also in trade. The United States remains the richest and most robust economy in the world. India is predicted to grow 7 to 8 percent annually on its path to becoming the third largest economy in a decade. There is vast scope for win-win bargains between the two countries.

With some patience, both can benefit as much from cooperation in trade in coming years as they have in defense and related areas in the recent past. Some experts figure Beijing might risk further driving down the renminbi against the dollar. Arvind Panagariya is a professor of economics and the Jagdish Bhagwati professor of Indian political economy at Columbia University. Trending Now Sponsored Links by Taboola. Sign up for free access to 1 article per month and weekly email updates from expert policy analysts. Create a Foreign Policy account to access 1 article per month and free newsletters developed by policy experts.

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View Comments. Tags: India , protectionism , Trade , Trump. Many products will have parts and materials from many countries; for example, a new suit may have cotton from West Africa that has been processed into fabric in Bangladesh, and sewn into a suit in China, with buttons imported from India. And then the suit may be exported to the United States. Another example is the first Airbus jumbo jet , which had parts and components from more than 1, suppliers in twenty seven countries. Many companies today have global supply chains, procuring parts and materials worldwide.

Each specific part or material in the value chain is sourced from the country that can produce the part most cheaply, whether because of its endowment of factors of production or because of special incentives, such as tax holidays. Kei-Mu Yi of the World Bank notes that standard economic models account very well for the increase in world trade through the mids but cannot explain the growth of trade since then.

Yi notes that tariff reductions have a far greater impact on these global supply chains than they do on traditional trade. To take the suit example, assume that China, Bangladesh, and the United States each reduces its tariffs by 1 percent and that imported fabric and buttons account for half the cost of the suit made in China; then the cost of producing the suit in China will be reduced by 0.

How Canada’s International Trade is Changing with the Times

Coupled with the 1 percent U. If the suit had been wholly produced in China, the cost to the consumer would have been reduced by just the U. The emergence of these extensive supply chains has enormous implications. This in turn means that standard trade statistics have limitations in how useful they are for understanding what is really happening in world trade. Traditional economic theory assumed that goods are traded between countries, but that factors of production e.

However, recently capital, technology, and services have been increasingly flowing easily over national borders, and even labor is moving from country to country more frequently. Accordingly, in recent rounds of multilateral negotiations and in U.

Globalization's effects on world agricultural trade, –

In economic theory, if factors of production are fully mobile, the costs of all factors of production that could move across borders would result in equal costs in all trading countries. This would mean that the basis of comparative advantage for trade between countries would diminish and there would ultimately be less international trade. In reality, of course, there are reasons other than trade barriers why factors of production such as capital or labor may not move across borders, even when there are no barriers and higher returns could be gained in other markets.

Workers, for example, are reluctant to leave their homelands and family and friends, and investors are reluctant to invest in other markets where they have less familiarity. As a result, even eliminating all governmentally imposed barriers to trade in capital and labor would not lead to the complete equalization of costs between counties. Like trade in investment and capital, post—World War II economists did not conceive of trade in services.

In fact, trade in services was almost considered an oxymoron by early economists, such as Adam Smith and David Ricardo, who assumed that services are not tradable. This was also the view of trade negotiators for three or more decades after the GATT was launched. Geza Feketukuty, the lead U. The chairman of the committee. Not surprisingly, economic theory as it applies to services trade is still being developed. In general, economists today assume that the basic theory of comparative advantage as it applies to goods applies equally well to cross-border trade in services.

Many types of services, such as telecommunications, are intimately interconnected to other economic activity. Trade liberalization in these areas can have far-reaching economic effects. For example, lowering the costs and increasing the availability of telecommunications services can help manufacturers compete in global markets, it can enable farmers to learn the latest techniques, and it can help other services sectors, such as tourism, that can now reach the world market through the Internet.

In contrast, liberalizing restrictions in some other sectors, such as tourism, may affect revenues and employment for the providers and the country but will have only a minimal impact on the competitiveness of other sectors within the country. In other words, the liberalization of some services may have multiplier effects throughout the economy, whereas in other sectors the benefits will largely flow only to the affected sector.

The classic Western model of trade was based on eighteenth-century economic realities. Factors of production were relatively fixed: Land was immobile although its fertility or usage might change , and labor mobility was highly restricted by political constraints. For most of the century, the movement of capital across borders was limited by political barriers and a lack of knowledge of other markets.

However, by the middle of the nineteenth century both capital and labor were flowing more freely between Europe and the Americas. Additionally, the production of most products at that time was subject to diminishing returns, which meant that as production increased, the costs of producing each additional unit increased. In this world, the classic Ricardian model of trade provided a good explanation for trade patterns, such as which countries would produce what products. England would produce textiles based on its wool production and capital availability, and Portugal would produce wine based on its sunshine and fertile soil.

However, the world economy began to change in the twentieth century, as some products could be produced under conditions of increasing returns to scale. As a company produced more steel, production could be automated and the costs of each additional unit could be significantly reduced.

And the same was true for automobiles and a growing number of other more sophisticated products. By the last twenty-five years of the twentieth century, the global economy was significantly different. Land and labor were still relatively fixed, although capital could again move more freely around the world. However, technology was highly differentiated among countries, with the United States leading in many areas. An established company in an industry that required extensive capital investment and knowledge had an enormous advantage over potential competitors. Its production runs were large, enabling it to produce product at low marginal cost. And the capital investment for a new competitor would be large.

In this new world, the economic policies pursued by a nation could create a new comparative advantage. A country could promote education and change its labor force from unskilled to semiskilled or even highly skilled. Or it could provide subsidies for research and development to create new technologies. Or it could take policy actions to force transfer of technology or capital from another country, such as allowing its companies to pirate technology from competitors or imposing a requirement that foreign investors transfer technology.

The underlying reason for these significant departures from the original model is that the modern free-trade world is so different from the original historical setting of the free trade models. Today there is no one uniquely determined best economic outcome based on natural national advantages. Rather, there are many possible outcomes that depend on what countries actually choose to do, what capabilities, natural or human-made, they actually develop.

In the world of the late twentieth century, a country might be dominant in an industry because of its innate comparative advantage, or it might be dominant because of a strong boost from government policy, or it might be dominant because of historical accident. For example, the U. The capital costs of entry may be very large, and it is difficult for a new entrant to master the technology. Additionally, the industry normally has a web of suppliers that are critical to competitiveness, such as steel companies and tire manufacturers.

However, if such an industry losses its dominance, it is equally difficult for it to reenter the market. A country with such a dominant industry benefits enormously economically. Because of its dominant position, such an industry may pay high wages and provide a stable base of employment.

How to Enrich a Country: Free Trade or Protectionism?

Access to other markets plays an important role in this economic model where comparative advantage can be created. Without free trade, it becomes extremely costly for a government to subsidize a new entrant because the subsidy must be large enough both to overcome foreign trade barriers and to jump-start the domestic producer. Some of these outcomes are good for one country, some are good for the other, some are good for both. But it often is true that the outcomes that are the very best for one country tend to be poor outcomes for its trading partner.

Although country policies can lead to creation of a dominant industry, such an industry may not be as efficient as if it had occurred in another country. This example is less valid today, as China has become a major steel producer. Although there are many areas where government policies can create comparative advantage, there are still many areas where the classic assumptions of an inherent comparative advantage still hold.

The key is whether the industry is subject to constant or increasing costs, such as wheat, or decreasing costs, such as autos, aircraft, or semiconductors. The doctrine of mercantilism, which dominated thinking up to the end of the eighteenth century, is generally rejected by Western economists today. However, a number of countries—including Japan, South Korea, China, and some other countries in the Far East—have pursued a neomercantilism model in which they seek to grow through an aggressive expansion of exports, coupled with a very measured reduction of import barriers.

These countries seek to develop powerful export industries by initially protecting their domestic industry from foreign competition and providing subsidies and other support to stimulate growth, often including currency manipulation. The success of some countries pursuing a neomercantilist strategy does not refute the law of comparative advantage. In fact, the reason these countries are successful is that they focus on industries where they have or can create a comparative advantage.


Thus Japan first focused on industries such as steel and autos, and later on electronics, where a policy of import protection and domestic subsidies could enable their domestic firms to compete in world markets, and particularly the U. Neomercantilists generally focus on key industries selected by government, a strategy known as industrial policy. A successful industrial policy requires a farsighted government. Japan had an extremely competent group of government officials in the Ministry of Industry and Trade MITI , which oversaw its industrial policy and was basically immune from political pressures.

Although MITI had many successes, it also made some missteps. For example, in their planning to develop a world-class auto industry in the s, MITI officials initially believed they had too many auto companies, and urged Honda to merge with another company. Instead, Honda elected to invest in the United States and went on to become a leading auto producer. Countries pursuing the neomercantilist model have also generally promoted education and high domestic savings to finance their growing export industries.

By contrast, the U. Many economists argue that a neomercantilist strategy may be successful for a while but that over time such a strategy will not be effective. Basically this argument is that the complexities for governments in picking potential winners and identifying how to promote those industries are too great.

For example, Japan was very successful with its neomercantilist strategy until the mids. However, since then the Japanese economy has been stagnating, and many economists believe that Japan will need to change its approach to stimulating domestic demand rather than focusing on export markets. During the past ten years, South Korea and China have also pursued neomercantilist policies, and it remains to be seen if these are effective over the long term. Additionally, a number of economists argue that government intervention can be effective in promoting a specific sector but that industrial policies are not effective at the macro level of benefiting the economy as a whole.

In any case, Western economists and policymakers today almost universally reject the idea that the United States should adopt an industrial policy that picks winners and losers. Opponents of a possible U. Instead, the real debate among economists and policymakers is whether the United States should respond to foreign neomercantilist practices, and if so, how. Stephen Cohen and his colleagues say:. Free trade advocates argue that imposing import barriers, even if other countries do so, is tantamount to shooting oneself in the foot.

Carried to its logical conclusion, this strategy recommends that the U. Others argue that the objective of free trade is to promote competition based on comparative advantage, which maximizes global efficiency. Practices such as subsidies or currency manipulation are a movement away from such competition and can produce a result where the less efficient producer dominates trade, thereby reducing total welfare.

The theory of comparative advantage assumes a world where trade between countries is in balance or at least where countries have a trade surplus or deficit that it is cyclical and temporary. Except for unilateral transfers, all these elements are covered in our trade agreements. To give a real picture of how the nation is doing, the current account is often measured as a percentage of GDP; as a country grows, a larger surplus or deficit in the current account is not a source of concern because the economy can more readily absorb the impact.

A surplus or deficit in the current account can be affected by the business cycle. Thus, if our economy grows rapidly, the demand for imports will expand as consumers can afford to buy more and businesses need parts and supplies for expansion. If it grows more rapidly than its trade partners, in short, that will have a negative impact on the U.

Economists are not concerned with such cyclical trade deficits or surpluses. Additionally, they are not concerned if a deficit occurs because the country is borrowing heavily from abroad to finance investment that will be paid back later. During the nineteenth century, in fact, the United States was in exactly this position when it borrowed heavily to build railroads across the continent, steel mills, and other long-term investments.

Today, it is borrowing heavily from other countries to finance short-term consumption, such as the newest and largest HDTVs from Japan or South Korea, and these purchases do not generate income to repay its debt in the future. The capital account consists of purchases or sales of foreign exchange by the central bank or by private citizens. This fundamental accounting principal can be seen as:. If borrowing from abroad goes up, so too will the trade deficit.

This means that if government borrowing goes up, unless private savings goes up commensurately or private investment decreases commensurately , the country will have to borrow more abroad, and the trade deficit will increase.