The Political Economy of Trade Policy With Answers
The Political Economy of Trade Policy With Answers
The Political Economy of Trade Policy With Answers
International Economics
TLFBB4A
DIVISION OF GLOBAL COMMERCE,
DEPARTMENT OF INTERNATIONAL
BUSINESS
2022
Please off to
bed earlier.
Don't stay
up at will
just because
you think
you're ugly.
1
The Political Economy of Trade Policy
2
The Cases for Free Trade
➢Efficiency argument
➢Additional gains from free trade
➢Political argument for free trade
3
Efficiency argument
4
World 0.93
Source: Krugman, P., Melitz, M., & Obstfeld, M. (2018).International Economics: Theory and Policy, 11th Edition,
Global Edition. Pearson, p.270.
9
Additional gains from free trade
10
Economies and Diseconomies of Scale
Increasing Returns to Scale: Output more than doubles when the quantities of all
input are doubled.
Economies of Scale: A doubling of output requires less than a doubling of cost.
11
The Relationship between Short-Run and
Long-Run Cost
12
Additional gains from free trade
15
The terms of trade argument for a tariff
For a large country, a tariff lowers the price of imports in
world markets and generates a terms of trade gain.
This benefit may exceed the losses caused by distortions in production and
consumption.
17
19
For a large country, there
is an optimum tariff to at
which the marginal gain
from improved terms of
trade just equals the
marginal efficiency loss
from production and
consumption distortion.
21
Exercise
24
Types of market failures
➢ Persistently high underemployment of workers
➢ Persistently high underutilization of structures,
equipment, and other forms of capital
➢ Property rights not well defined or well enforced
➢ Technological benefits for society discovered through
private production, but from which private firms cannot
fully profit
Types of market failures
➢ Environmental costs for society caused by private
production, but for which private firms do not fully
pay
➢ Sellers that are not well informed about the
(opportunity) cost of production or buyers that are
not well informed about value from consumption
The Domestic Market Failure
Argument for a Tariff
29
The Cases against Free Trade
33
Models of governments
maximizing political success
rather than national welfare:
Political ➢ Median voter theorem
Models of ➢ Collective action
Trade Policy ➢ A model that combines
aspects of collective
action and the median
voter theorem
34
Suppose the level of a tariff rate is
the policy issue.
Assumptions of the model:
✓There are two competing political
parties. Median Voter
✓The objective of each party is to
get elected by majority vote.
45
Agriculture: In the U.S., Europe, and
Japan, farmers make up a small fraction
of the electorate but receive generous
Which subsidies and trade protection.
Industries • European Union’s Common
Are Agricultural Policy
Protected? • Japan’s 1000% tariff on imported
rice(in 1998)
• America’s sugar quota.
46
International negotiations of
trade policy
(World Trade Organization)
47
The Multilateral Trading System
The Bretton Woods conference in 1944
The General
Agreement on
Tariffs and Trade
The Multilateral (GATT)
Agreement 1951
1956
Torquay
Geneva
Tariffs
Tariffs
38
26
Source: https://www.wto.org/english/res_e/webcas_e/ltt_e/ltt3_e.htm
The
WTO’s
members
Source: https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr_e.htm
The vast majority of WTO
member are states.
Transparency
How does
the WTO
work?
WTO
organization
chart
Source: https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr_e.htm
Developing countries comprise a majority
of the WTO membership.
Definition of a “developing country”
Who are the
developing ➢ There are no WTO definitions of
“developed” and “developing” countries.
countries in
➢Members announce for themselves
the WTO? whether they are “developed” or
“developing” countries.
➢Other members can challenge the
decision of a member to make use of
provisions available to developing
countries.
The exceptions provide flexibility for the members
to meet their policy objectives.
Main
exceptions to
the Basic
Principles
WTO Members have the right to grant
preferential treatment to their
Regional Trade trading partners within a customs
Agreements
(RTAs): Customs unions or a free trade area, without
Unions and Free having to extend such better
Trade Areas
treatment to all WTO members,
subject to certain conditions.
The EU is a
group of 27
countries in
Europe.
The European Union
These countries
came together
to make things
better, easier
and safer for
people.
A future EU-UK
partnership
North American Free
Trade Agreement
(NAFTA)
The United States commenced bilateral trade negotiations with Canada more than 30
years ago, resulting in the U.S.-Canada Free Trade Agreement, which entered into force
on January 1, 1989. In 1991, bilateral talks began with Mexico, which Canada joined. The
NAFTA followed, entering into force on January 1, 1994.
The Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP) is a free trade
agreement (FTA) between Australia, Brunei Darussalam,
Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand,
Singapore, and Vietnam.
The Association of Southeast
Asian Nations (ASEAN) was
established on 8 August 1967 in Bangkok,
Thailand by Indonesia, Malaysia, Philippines,
Singapore, and Thailand.
Brunei Darussalam then joined on 7 January
1984, Viet Nam on 28 July 1995, Lao and
Myanmar on 23 July 1997, and Cambodia on
30 April 1999, making up what is today the
ten members of ASEAN.
The Southern Common Market (MERCOSUR for
its Spanish initials) is a regional integration process.
SADC-EAC-COMESA Tripartite Free Trade
The Heads of State and Government of the
Common Market for Eastern and Southern Africa
(COMESA), East African Community (EAC) and
Southern African Development Community
(SADC) met on 10 June, 2015 in Sharm El Sheikh,
Egypt at the Third Tripartite Summit to officially
launch the COMESA-EAC-SADC Tripartite Free
Trade Area (TFTA). The Agreement initially
covered 26 member states across the three RECs,
but with the expansion of the EAC to include
South Sudan in April 2016, the total number of
participating member states has risen to 27.
Case Study