Krugman, Paul and Maurice Obstfeld, International Economics: Theory and Policy, Addison-Wesley, 1997.
Markusen, Melvin, Kaempfer and Maskur, International Trade: Theory and Evidence, McGraw-Hill, 1995.
Winters, L. A., International Economics, Routledge, 1991.
Grossman, G. and Rogoff, K. (eds.) Handbook of International Trade, Vol. 3, North-Holland, 1995. For details on content and to purchase the book online go to http://www.elsevier.com/ the web site of North Holand- Elsevier Science and search for Hand Book in International Economics.
Greenaway, D.and Winters, A.. Surveys in International Trade, Blackwell, 1994.
Hoekman, Bernard M. and Michel M. Kostecki, The Political Economy of the World Trading System: From GATT to WTO, Oxford University Press, 1995. Excellent economic perspective on the WTO.
Thomas, Vinod and John Nash (1991), Best Practices in trade policy reform, Published for the World Bank [by] Oxford University Press, New York. Electronic Courses
International Economics Study Centre: http://www.internationalecon.com/ Site compiled by Steve Suranovic, Associate Professor of Economics and International Affairs, The George Washington University, Washington D.C.
Liberalization of Trade in Goods - Benefits from liberalization of trade in goods
Links to Growth
International trade economists have long established that a liberal and outward-oriented trade regime is the best strategy for a small open economy that takes international prices as given. An open trade regime increases welfare and income by leading to an optimum allocation of resources in production (reorienting resources to areas of comparative advantage) and consumption and by minimizing the incentive for engaging in income-generating but unproductive activities associated with protection, such as smuggling, lobbying, tariff evasion, and the like. As well established as these results are, they have also been troubling to economists for two reasons. First, numerical estimates of the welfare impact of allocative efficiency have traditionally been very small, a fraction of one percent of GDP. Secondly, the welfare effect of efficient resource allocation is a one time event that leads to a higher level of income but does not affect long-term growth, although growth in the short-run, whilst the economy moves to the higher income level, increases. Extensive empirical research in the past decade (see the sample bibliography below) has shown the existence of a positive and strong association between trade openness and economic growth over very long periods of time. However, this research has been criticized on several grounds (see for example the latest article by Rodrik, 1999), including
(i) lack of conclusive evidence on the direction of causality between openness and growth;
(ii) the fact that the openness measures used in the literature do not reflect purely trade phenomena but include other policy variables that are more macroeconomic in nature (this is particularly true with regard to the Sachs Warner openness measure);
(iii) the sensitivity of results to the choice of time period and/or sampled countries; (iv) other econometric shortcomings. Be that as it may, the fundamental question concerns the channels through which an outward trade policy affects growth. The literature points to the following broad types of channels:
The first channel is the channel of investment. Openness can affect both the level and efficiency of investment and growth in several ways. First, an open trade regime can increase market size and hence lead to investment in industries with increasing returns that would not have been viable in a small market. Openness can also lead to increased investment by allowing domestic agents access to capital goods that were unavailable previously or were available at too high a cost, thus removing structural constraints to investment and export. Moreover, openness can also be assumed to increase the efficiency of investment or lead to higher foreign direct investment (see GEP 97). Empirical research (see Wacziarg 1998) shows that if the effect of trade openness on growth is decomposed and attributed to the various channels of transmission, increased investment would by far be the most important channel of transmission.
The second channel is the productivity channel. To the extent that open trade regimes lead to greater exposure to a worldwide stock of productivity enhancing knowledge, then openness leads to increased growth. Ben David and Loewy (1995), for example, state that the growth impact of freer trade derives from the premise that "..(1) knowledge may be characterized as a non-rivalrous public good which in many cases is non-excludable, and (2) trade flows facilitate the diffusion of knowledge among countries. ...Heightened trade will, in general, lead to greater diffusion and faster knowledge growth and hence, faster per capita income growth."
A third channel for the impact of trade on growth is the government policy. If and to the extent that trade openness creates incentive to or obliges (through commitment at multilateral institutions) policy makers to pursue virtuous macroeconomic and regulatory policies, then it can lead to higher growth. Whatever the channel, empirical estimates of the impact of trade on growth and welfare are quite substantial. Sachs and Warner (1995) for example, maintain that the open economies have grown about 2.5 percent faster than closed economies, with even greater differences among developing countries. Wacziarg (1998) estimates that an improvement of 10 percentage point in an especially-constructed trade policy measure is associated with a 0.71 point increase in annual growth rate once all channels of influence are brought into the picture. Tarr and Rutherford (1998) use a CGE model to estimate that a 10 percent reduction in average tariff (from 20 to 10 percent) brings about a welfare gain of between 10 to 37 percent of the present value of consumption, depending on the assumption about what kind of taxes are used to replace lost tariff revenues and whether or not a country has access to international capital. This welfare gain is in line with Wacziarg's estimates since a welfare gain of 10 to 37 percent corresponds to a permanent increase in the growth rate of between 0.4 and one percent.
International Trade and the Growth of Nations, Dan Ben-David
Kala Krishna, Ataman Ozyildirim, Norman R. Swanson (1999): Trade, Investment, and Growth: Nexus, Analysis, and Prognosis; NBER Working Paper No. W6861; available online at: http://www.nber.org/papers/w6861
Robert Z. Lawrence, David E. Weinstein (1999): "Trade and Growth: Import-Led or Export-Led? Evidence From Japan and Korea", NBER Working Paper No. W7264; available online at: http://www.nber.org/papers/w7264
Francisco Rodriguez, Dani Rodrik (1999): "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence"; NBER Working Paper No. W7081, available online at: http://www.nber.org/papers/w7081
Thomas F. Rutherford and David G. Tarr (September 1998): "Trade Liberalization and Endogenous Growth in a Small Open Economy: A Quantitative Assessment" Policy Research Working Paper # 1970, World Bank
Dan Ben-David and Michael B Loewy (1995): "Free Trade and Growth", CEPR Discussion paper No. 1183 You can order a copy on line from http://www.CEPR.ORG
Krueger, Anne O. (1998): "Why trade liberlisation is good for growth", Economic Journal, September issue
Sachs, J. D. and A. Warner (1995): Economic Reform and Process of Global Integration," Brooking Papers on Economic Activity pp. 1-117.
Kim, Se-Jik (1999): "Growth Gains from Trade and Education", International Monetary Fund, Research Department, IMF Working Paper WP/99/23
Wacziarg, Romain (1998):"Measuring the Dynamic Gains from Trade," Policy Research Working Paper 2001, World Bank
Frankel, Jeffrey A. and David Romer (1995), Trade and Growth: An Empirical Investigation, mimeo, UC Berkeley, November.
Edwards, Sebastian (1992), Trade Orientation, Distortions and Growth in Developing Countries, Journal of Development Economics, vol. 39, pp. 31-57.
Edwards, Sebastian (1998), "Openness, Productivity and Growth: What do We Really Know?" Economic Journal, 1998
World Bank (1997): Global Economic Prospects and the Developing Countries (GEP 1997), chapter 3.
Thomas, Vinod and Nash, John D (1991):" Best practices in trade policy reform" Published for the World Bank [by] Oxford University Press.
OXFORD ECONOMIC PAPERS, January 1999 Symposium on trade, technology, and growth.
Fiscal Impact
The argument that trade liberalization leads to a more efficient allocation of resources, welfare gains and, possibly, higher growth, is now widely accepted. However, for many developing countries --especially the least developed countries-- the possible negative impact of a freer trade regime on government revenues and expenditures represents an important obstacle to the lowering of trade taxes or other reforms with equivalent outcome, such as revamping of the customs administration. The importance of trade taxes in budgetary revenues of developing countries is well understood and documented. According to a recent IMF survey of 36 least developed countries (mostly which in Africa), for a sample, trade taxes on average still account for 5 percent of GDP, or approximately one-third of total tax revenues (Abed, 1998, Tables 13-15). This is in sharp contrast with developed economies for which trade taxes represent a negligible fraction of total tax revenues and have been declining steadily over the past two decades (Ebrill, 1999, Fig. 1). The implications of trade liberalization for government expenditures are less well-understood and documented. It is nevertheless true that, unlike a simple reduction of tariff rates, the implementation of many broadly-defined trade reforms, such as the overhaul of customs administration or compliance with the WTO obligation, require heavy budgetary outlays. In a recent study based on World Bank project experience, for example, Finger and Schuler (1999) estimate that compliance with WTO obligations in the areas of the technical, sanitary and phytosanitary standards and intellectual property rights alone can cost some of the least developed economies an entire year's development budget. These costs are associated with the purchase of equipment, training of people, establishment of systems of checks and balances, etc.
Despite any possible negative impact of trade reform on government revenues and/or expenditures, it is clear that such reforms are needed and must be undertaken if countries are to obtain the static and dynamic benefits associated with reform, which are often several times greater than their immediate costs. What is needed is for trade reforms to be carefully designed, sequenced and embedded in a larger reform package designed simultaneously to boost domestic taxes. The IMF studies quoted above address the latter point. Ebrill's (op. cit.) paper in particular, examines how countries have balanced these various constraints in practice and suggests a set of best practices for domestic tax reform which would over time offset revenue losses from reductions in trade taxes.
Abed, George et al. (1998): Fiscal reform in Low Income Countries, IMF Occasional Paper No. 160, Washington DC. To obtain this publication, go to www.imf.org, Publications, and search under the name of the author(s). You can obtain an abstract on line.
Ebrill, Liam, Stotsky, Janet; Gropp, Reint (1999): Revenue Implications of Trade Liberalization, IMF Occasional Paper No. 180, Washington DC. To obtain this publication, go to www.imf.org, Publications, and search under the name of the author(s). You can obtain an abstract on line.
Finger, J. Michael and Philip Schuler (1999): "Implementation of Uruguay Round Commitments: The Development Challenge", mimeo, World Bank, Washington DC.
Links to Foreign Direct Investment
Since the early 1980s, world FDI flows have grown faster than either world trade or world output. Notwithstanding the financial turmoil in east Asia, in 1998, global FDI inflows increased for the seventh consecutive year to reach $430-440 billion (see IMF Survey below), becoming an important source of private external finance for developing countries. What are the factors that determine the inflow of FDI into a country? What policies are most conducive to an inflow of FDI? Does FDI benefit the host country and if so, what are the mechanisms through which such benefits are propagated to the rest of the economy? How does FDI interact with trade flows? Does FDI substitute or complement trade flows? These are some the most important, but by no means comprehensive, issues addressed in the literature.
FDI Determinants
The features that traditionally made a country a desirable destination for FDI include political and economic stability, the market size, availability of natural resources and human capital, growth prospects, the existence of a favorable investment and tax regimes, and so forth. A recent UNCTAD report (see UNCTAD and IMF Survey below) concludes that such traditional features, although still important, they no longer constitute a significant point of differentiation. In a world increasingly characterized by liberalization and globalization, firms look for places to invest that offer specific advantages or "created assets," including good communications infrastructure and intangibles such as attitude to wealth creation and business culture. The importance of such non-traditional factors are, for example, aptly highlighted in the context of three Eastern European countries --the Czech Republic, Hungary and Slovenia. Recent research (see Kaminski below) reveals that the choice of the method of privatizing large state-owned enterprises as well as government willingness to open the ‘strategic’ sectors to foreign investors have had a profound impact on the flow of FDI to these countries as well as on the growth and composition of their exports. Effects of FDI There are two approaches to studying these effects the effects of FDI on the host country. One approach, rooted in the standard trade theory, is more concerned with the direct effect of FDI (or portfolio investment) on the host country's factor endowments and rewards. The main prediction of this type of model is that FDI raises the marginal product of labor and reduces the marginal product of capital. The other approach, stemming from the theory of industrial organization, puts more emphasis on the indirect effects or externalities of FDI. The starting point for this approach is to ask why firms undertake investment abroad to produce the same goods they produce at home (for an excellent overview of this approach see Caves, 1996). Several recent research works employing this approach, conclude that FDI can promote economic development of the host country by helping to improve productivity growth and exports, but that the exact relationship between foreign multinational corporations and their host economies varies quite a bit between industries and countries. Blomström, and Kokko (1997a, see below) conclude that the characteristics of the host country and the policy environment are important determinants of the net benefits of the FDI (see also Djankov and Hoekman, 1999 and Kaminski 1999, see below)
Relation Between FDI and Trade Flows
Many theories of the multinational firms are based on the notion that foreign production and trade are substitutes, several empirical studies of foreign investment and trade uncover a complementary relationship. In a recent empirical analysis of foreign investment in the U.S. between 1974 and 1994, Swenson (1999, see below) finds that the questions of substitutability/complementarity between FDI and trade flows is closely related to the aggregation level of data. Disaggregation reveals that substitution effects are present at the product level, while complementary effects are identified at higher levels of aggregation.
Magnus and Ari Kokko (March 1997a): "How Foreign Investment Affects Host Countries?" Policy Research Working Paper 1745, World Bank. Available at: http://www.worldbank.org Select publications, then working papers.
Magnus and Ari Kokko (April 1997b): "Regional Integration and Foreign Direct Investment: A Conceptual Framework and Three Cases"; Policy Research Working Paper 1750, World Bank. Available at: http://www.worldbank.org Select publications, then working papers.
Caves, Richard E. (1996): Multinational Enterprise and Economic Analysis; Cambridge University Press, Cambridge
Djankov, Simeon and Bernard Hoekman (1999): "Foreign Investment and Productivity Growth in Czech Enterprises", World Bank; Forthcoming in the World Bank Economic Review.
Hoekman, Bernard and Kamal Saggi (1999) "Multilateral Disciplines for Investment-Related Policies?" mimeo, World Bank. (View/download Acrobat format of document)
IMF Survey, November 16, 1998: Worldwide foreign direct investment reaches record levels in 1997 and 1998. On-line copies of the Survey are available at the IMF site: http://www.imf.org. Select publications then Survey
Kaminski, Bartek (1999): "Privatization, Foreign Direct Investment and Export Performance: Evidence from Transition Economies"; Mimeo, World Bank. (View/download Acrobat format of document)
-- and Michelle Riboud (1999): "Foreign Investment and Restructuring: The Evidence from Hungary" (View/download Acrobat format of document)
Mallampally P. and K.P. Sauvant: (March 1999): Foreign Direct Investment in Developing Countries," Finance and Development, Volume 36, Number 1 available on line at: http://www.imf.org/external/pubs/ft/fandd/1999/03/index.htm
Razin, Assaf, Efraim Sadka, Chi-Wa Yuen (January 1999): An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited, NBER Working Paper No. W6884, online copy available at: http://nberws.nber.org/papers/w6884
Saggi, Kamal and Amy J. Glass (1999): Multinational Firms, Technology Transfer, and Welfare," World Bank (View/download Acrobat format of document)
Swenson, Deborah L. (May 1999): "Foreign Investment and the Mediation of Trade Flows" (View/download Acrobat format of document)
UNCTAD (1998): World Investment Report 1998: Trends and Determinants, available from http://www.unctad.org/. Go to publications for a summary and details.
Venables, Anthony and Niko Matouschek (1999): "Evaluating Investment Projects In The Presence Of Sectoral Linkages: Theory And Application To Transition Economies", Draft paper presented at PREM Week '99, World Bank.(View/download Acrobat format of document)
World Trade Organization, WTO (1988): REPORT OF THE WORKING GROUP ON THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT TO THE GENERAL COUNCIL. (View/download Acrobat format of document)
Fernandez, Tax Competition (View/download Acrobat format of document)
Beata K. Smarzynska, Shang-Jin Wei (2000), Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence (View/download Acrobat format of document)
Impact on Industry, Employment and Poverty
Both theory and empirical analysis have well documented the long-term benefits from improved resource allocation and efficiency that follow from trade reform. And, although causation remains an issue, research has also shown strong and consistent correlation between trade reform and growth. In comparison, much less is written and known on the subject of the nature, magnitude, and duration of adjustment costs associated with trade reform. What is the expected impact of trade reform on employment, wages, industry or poverty? Would reform lead to a massive layoff of workers from industries that shut down? Would it lead to large re-adjustment in wages? Would it lead to disappearance of manufacturing in developing countries? The answers to these and other questions are subject to several recent research which are briefly summarized below. Impact on Labor In a recent paper, Steven Matusz and David Tarr (1999 see below) surveys more than 50 studies that address the issue of the adjustment costs of trade liberalization, comparing estimates of adjustment with gains from trade liberalization. Adjustment costs are defined to encompass a wide variety of potentially disadvantageous short-run outcomes that might result from trade liberalization. These outcomes may include a reduction in employment and output, the loss of industry-specific and firm-specific human capital, and macroeconomic instability resulting from balance of payments difficulties or reductions in government revenue. The authors also distinguish between social and private costs. This distinction is important for while the social costs of adjustment are relevant for considering the aggregate welfare effects of trade reform, it is the distribution of private costs within society that form the basis of political opposition to reform. Knowledge of the distribution of private costs is also useful because of genuine concerns for an equitable distribution of income. Among the more that fifty studies that the authors survey, three, examine empirically the employment effects from thirty separate economy-wide episodes of trade liberalization in developing and transition countries; two studies of small and medium size enterprises in eight African economies; two economy-wide studies of adjustment cost in Australia, Uruguay and the US as well as studies by several authors of trade liberalization in 22 industries in the U.S. and the U.K. In the last empirical section the authors also discuss the impact of trade reform on macro-economic stability drawing on two studies that examined the impact on the fiscal deficit in 15 and 9 countries, respectively. What does this extensive survey indicate? On the whole, and albeit with some caveats, virtually all the studies find that adjustment costs are very small in relation to the benefits of trade liberalization. This is true both in terms of the impact of trade reform on employment and its impact on government revenues and macro stability And those studies that focused on manufacturing employment in developing countries found that it did not decline one year after the episode of trade liberalization. The explanation for the low adjustment costs in relation to the benefits is as follows: (1) most importantly, adjustment costs are typically short term and terminate when workers find a job, while the benefits of trade reform can be expected to grow with the economy; (2) estimates of the duration of unemployment for most industries are not high, especially where workers were not earning substantial rents in the original job; (3) in many industries normal labor turnover exceeds dislocation from trade liberalization, so that downsizing where necessary could be accomplished without much forced unemployment; and (4) it has been observed that a great deal of inter-industry shifts occurred after trade liberalization, which minimized the dislocation of factors of production. In addition, developing countries would be expected to have comparative advantage in labor intensive industries, so trade liberalization should favor labor. This may explain why manufacturing employment has typically increased after trade liberalization. Th finding by Matuzs and Tarr are similar to those by Hanson and Harrison (1998), who analyze in detail the reasons for the small impact of trade reform on employment in three developing countries, namely Mexico, Morocco and Uruguay.
Impact on Industry
One of the main concerns related to import is that opening up to cheaper imports may lead to "deindustrialization." This fear is not unique to developing countries. In the past two decades advanced economies have witnessed a continuous decline in the share of manufacturing employment for which freer trade with the South has sometimes been blamed. This phenomenon of deindustrialization in the context of developed economies is not discussed here and the interested reader is referred to Rowthorn and Ramaswamy (1998) and Silimbergo (1998). In the context of developing countries, deindustrialization refers to the fear that an open trade policy may lead to the contraction and eventual disappearance of the few manufacturing industries which had often grown behind protective barriers. Although highly protected, import-substituting sectors or at least some firms within the sector may indeed be forced to live up to foreign competition or shut down, which is precisely what trade reform is supposed to do, the experience of trade reformer as a group does not support such fears. On the contrary, countries that have engaged in reform reducing the anti-export bias of their trade regimes and have also provided a business-friendly macro and regulatory environment, have seen their industrial sector and exports expand. Several East Asian and Latin American countries and some African economies, foremost among them Mauritius, are good examples of this trend. Trade policy reforms influences the manufacturing sector and employment in many other ways, including its impact on productivity, efficiency, labor turnover and so on. These influences are carefully examined in a recent review article by Tybout (1999).
Impact on Poverty
Studies on the direct impact of trade reform on poverty are not many. To the extent that trade reform improves efficiency and leads to a higher level of income or growth, it is expected to be beneficial to poverty reduction. Also, to the extent that trade reform (broadly defined) reduces anti-export bias and to the extent that exports are intensive in the use of unskilled or rural labor, trade reform is expected to increase real wage reducing both poverty and inequality. An example of such trends is provided by Mauritius (see English, 1998), where trade and other reforms during 1980s led to increased income and a sharp reduction of unemployment, poverty and inequality.
Hanson, Gordon and Ann Harrison (1998): "Who Gains from Trade Reform? Some Remaining Puzzles; National Bureau of Economic Research Working Paper 6915. To obtain an electronic copy, click on http://www.nber.org/index.html then go to working papers, select by number.
Matusz, Steven J. and David Tarr: (1999) Adjusting to Trade Policy Reform", Policy Research Paper 2142, World Bank, Washington DC.
Spilimbergo, Antonio (1998): "Deindustrialization and trade" REVIEW OF INTERNATIONAL ECONOMICS (U.K.); 6:450-60, August 1998
Robert Rowthorn and Ramana Ramaswamy (1998): "Growth, trade, and deindustrialization", IMF working paper, WP/98/60, International Monetary Fund, Research Dept. April 1998.
Tybout, James (1998): Manufacturing firms in developing countries: How well do they do and why? (View/download Acrobat version of document)
English, Philip (1998): Mauritius: Re-igniting the Engines of Growth, Economic Development Institute, World Bank, Washington DC. [View/download in pdf format in English / in French]
For a more in depth analysis of poverty and its relation to trade reform, visit the Poverty Website of the World Bank at http://www.worldbank.org/poverty/
Trade and Industrial Policy (Taxes and Subsidies)
Contingent Protection (Anti-Dumping, Countervailing Duties, Safeguards) Contingent protection is a term used to indicate that a country may temporarily break away with its normal course of import policy (in case the country is a WTO member, break away from its obligation arising from tariff binding and MFN treatment), imposing higher protection against importation of one or more goods from one or more countries. Three types of action fall under contingent protection: Antidumping, countervailing duties, and emergency safeguard protection. Definitions vary, but commonly a company is said to engage in dumping if it exports a product at a price lower than the price it charges in its home market or the market of another country. Action against dumping is allowed under Article VI of the GATT in the form of antidumping duties (AD). Antidumping has been a major bone of contention in international trade relations. Perspectives on this issue vary widely, ranging from the perception that antidumping is an appropriate response to an activity that is condemned by the GATT to the view that antidumping is straightforward protectionism without any economic justification. One reason behind the controversy is that predation, which is the standard economic rationale for antidumping, has rarely anything to do with antidumping as it is practiced today. Although antidumping action has always been allowed by the GATT, the WTO has moved to discourage arbitrary and protections use of antidumping by establishing an Agreement on the Implementation of Article VI of the GATT. The agreement, among other things, clarifies the circumstance under which AD is allowed (proof of material injury to the importing country) and establishes the rules for calculating the amount of dumping and the duration of AD measures. Countervailing duties (CDs) are those duties that a country may impose against imports of a certain goods from a specific country if the exporting country has been directly or indirectly subsiding its exports. CDs are justified on the economic ground that subsidies that affect trade are a source of distortion of world trade. The GATT disallows the use of subsidies and allows countervailing action. However, in order to reduce the possibility of abuse of the system by charging extra duties, the new WTO Agreement on Subsidies and Countervailing Measures provides a more precise definition of subsidy and distinguishes between various types of subsidies. In particular, the Agreement introduces the notion of "specific" subsidy (as opposed to general subsidy) which is the kind of subsidy subject to WTO discipline. Least-developed countries and developing countries with less than $1,000 per capita GNP are exempted from the discipline on prohibited export subsidies. Other developing countries are given until 2003 to get rid of their export subsidies. Least-developed countries must eliminate import-substitution subsidies (i.e. subsidies designed to help domestic production and avoid importing) by 2003 - for other developing countries the deadline is 2000. Developing countries also receive preferential treatment if their exports are subject to countervailing duty investigations. For transition economies, prohibited subsidies must be phased out by 2002 Safeguard measures are referred to those measures that a country may adopt to restrict imports of a product temporarily if its domestic industry is injured or threatened with injury caused by a surge in imports. The very vagueness of the terms "surge in imports," "injury," or "threat of injury" implies that safeguard measures can and have easily become instruments of protection. In the past, moreover, countries resorted to other "gray area" means of protection such as "voluntary export restraints" or other means of sharing the market. Compared to its predecessor, namely Article 19 of the GATT, the new WTO Agreement on Safeguards breaks new grounds by further curtailing the protectionist use of safeguard measures. It prohibits "gray area" measures, and sets time limits (a "sunset clause") on all safeguard actions. It requires that safeguard measures already taken before the WTO came into being - under Article 19 of GATT 1947 -end eight years after the date on which they were first applied or by the end of 1999, whichever comes later. The WTO agreement also sets out requirements for safeguard investigations by national authorities, the emphasis being on transparency and on following established rules and practices. It also sets out criteria for assessing whether "serious injury" is being caused or threatened, and the factors which must be considered in determining the impact of imports on the domestic industry. A safeguard measure should not last more than four years, although this can be extended up to eight years, subject to a determination by competent national authorities. When a country restricts imports in order to safeguard its domestic producers, the exporting country (or exporting countries) can seek compensation through consultations. If no agreement is reached the exporting country can retaliate. Finally, as with other WTO agreements, its shield to some extent developing countries' exports from safeguard actions. The WTO's Safeguards Committee oversees the operation of the agreement and is responsible for the surveillance of members' commitments. Governments have to report each phase of a safeguard investigation and related decision-making to the Committee for review.
To find out more about WTO agreements on contingent protection and the text of the agreements, go to http://www.wto.org/about/agmnts7.htm
J. Michael Finger "GATT Experience with Safeguards: Making Economic and Political Sense of the Possibilities That the GATT Allows to Restrict Imports" (View/download Acrobat version of document)
J. Michael Finger (1996): Legalized backsliding: Safeguards provisions in GATT, chapter 11 in The Uruguay Round and the developing countries, edited by Will Martin and L. Alan Winters; Cambridge; Cambridge University Press, 1996.
J. Michael Finger (editor, 1993): Antidumping : How it works and who gets hurt ,University of Michigan Press, Ann Arbor
Bernard Hoekman: "Free Trade and Deep Integration, Antidumping and Antitrust in Regional Agreements", Policy Research Working Paper #1950 , the world Bank, July 1998. · Hoekman, Bernard and Petros C. Mavroidis. 1996. "Dumping, Antidumping and Antitrust" Journal of World Trade, 30:27-52. toptop
Tariff vs. Non Tariff Barriers toptop
Uniform vs. Non Uniform Tariffs An effective trade policy is central to the integration of developing countries in the international economic system and their growth. Tariff policy is the centerpiece of trade policy in a market system. Tariffs are, with very few exceptions, the only acceptable policy tool for protection under the GATT/WTO; and they are superior to alternative instruments of protection, such as quotas, licenses and technical barriers to trade. Although many developing countries have reformed and generally lowered their levels of protection during the past decade or so, many, especially among the least developed countries, are still far from having completed this process. Tariffs in these countries remain on average at moderate to high levels and are often highly dispersed, creating a skewed structure of effective protection. Many trade economist tend to advise developing countries to adopt a less differentiated, and possibly uniform tariff. What are the underpinnings of such advice? Is this advice based on theory or simply on practical considerations? These and other related questions are eloquently analyzed in a recent paper by David Tarr in the context of trade reform in Russia. The case made, however, is of general applicability to all developing and transition economies. The paper also includes a comprehensive bibliographic section on this topic. (View/download Acrobat version of the paper) toptop
Trade and Imperfect Competition
As early as 1936, Haberler noted that the theory of international trade needed further development to incorporate imperfectly competitive markets. Greater realism of the assumptions underlying trade theory was one of the main reasons behind Haberler's argument. Indeed, a casual observation of international and domestic markets would lead one to conclude that perfect competition is the exception rather than the norm. Similarly, the importance of intra-industry trade (trade in similar goods) in world markets remained unexplained within the classic trade framework, where the rationale for trade is based on either technological or endowment differences. In such a setting, producers specialize in the production of goods for which the countries where they are based have a comparative advantage (in either technological or endowment terms). Obviously, this can only generate inter-industry trade (trade in different goods). The growing share of intra-industry trade in world markets was calling for an explanation. The introduction of the assumptions of product differentiation and economies of scale into trade models provided an answer. The presence of economies of scale creates incentives for countries to specialize in the production of a small number of differentiated products and therefore naturally leads towards intra-industry trade. But economies of scale are also at the root of imperfectly competitive markets. Trade models based on imperfectly competitive markets began to be fully formalized in the late 1970s. The “new” trade theory starts from these new assumptions (imperfect competition, economies of scale and differentiated goods), and identifies new gains from international trade. The intuition is simple: by creating larger and more competitive markets, trade reduces the distortions that are associated with imperfect competition in a closed economy. As a result, trade protection is associated with greater losses. However, in the case of imperfectly competitive international markets, the literature has identified “strategic” gains from protection. That is, the use of sophisticated government intervention, known as “strategic trade policy”, can led to better outcomes than free trade. These however have been quickly dismissed on empirical grounds, especially in the case of developing countries.
1. Gains from trade under imperfect competition
In addition to the traditional gains from trade linked to a more efficient allocation of resources, the existence of imperfectly competitive markets generates four additional gains: i) pro-competitive gains, ii) gains from economies of scale, iii) gains from rationalization and iv) gains from variety.
i) Pro-competitive gains: Pro-competitive gains refer to the effects of increased imports on the competitive behavior of firms in the domestic market. It is also known as the “import discipline hypothesis”, as imports can discipline the monopolistic or oligopolistic behavior of firms, forcing them to behave in a more competitive way. To illustrate this, think of the extreme case where under autarky there is only one firm serving the domestic market. This firm behaves as a monopolist and determines its monopolistic price and quantities sold in the domestic market where its marginal cost equals the marginal revenue of domestic demand. This equilibrium implies a much higher price (and smaller quantities) than at the socially optimal equilibrium where the marginal cost equals the marginal benefit (i.e., the demand function). Assume that this country opens up to trade and faces a perfectly elastic world supply at a price below the monopolistic price. Consumers in this country will not buy from the domestic firm unless it sells at the world price level. Thus, by opening up to trade, the domestic firm is forced to charge a price closer to the social optimal price.
ii) Gains from economies of scale: Gain from economies of scale are associated with the idea that as the quantity produced by one firm increases its average cost decreases. This may be due to economies of specialization (firms operating on a larger scale can match inputs more closely to tasks), to indivisibilities in production (firms can only produce 100 or 200 units) or to the fact that for technological reasons large machines are more efficient than small machines. This decline in average costs leads to lower prices. To understand how trade and (internal) economies of scale interact, it is useful to think of a market where firms produce a differentiated product. Under autarky each firm faces the domestic demand for the differentiated product it produces. As the economy opens up to trade the demand faced by each firm increases, as each firm is now facing world demand for that product. Quantities produced are therefore larger and due to economies of scale average cost declines. As a result, prices are lower and trade generates an additional gain from economies of scale.
iii) Gains from rationalization: The gains from rationalization are also linked to the existence of economies of scale. As imports enter the domestic market, firms with the least productive technology may see their profits become negative. Import competition forces them to exit the market. As a result the number of domestic firms in the market declines, which in turn implies that the demand for each of the remaining firms in the market increases. This leads to a higher level of production by the remaining and more efficient domestic firms. In the presence of economies of scale, this leads to lower prices and therefore further gains from trade associated with rationalization.
iv) Gains from variety: The assumption here is that a larger variety of products implies a higher level of consumer satisfaction. This could be due to the fact that variety per se is important for consumers or to the fact that variety allows heterogeneous consumers to purchase the product that matches their most desired characteristics. Thus, models where variety matters are inherently models of product differentiation. The literature generally distinguishes between vertical differentiation (e.g., shirts of different quality) and horizontal differentiation (e.g., shirts of different color). How does trade fit into the picture? When a country opens up to trade, a larger variety of products becomes available through imports from foreign firms. This, by the mechanisms described above, leads to a gain from trade associated with product variety.
2. Trade policy under imperfect competition
As a result of these new gains from trade linked to the existence of imperfect competition, the welfare losses associated with tariffs should be much higher than under perfect competition. Moving from free-trade to a tariff-ridden equilibrium will lead to: a) pro-competitive losses as firms can now behave in a less competitive way since the demand curve they face is now less elastic. This gives more market power to domestic firms, which in turn yields higher prices; b) inefficient entry as protection increases profits which leads to the entry of less productive firms which will in turn yield loss of scale efficiency; c) loss of variety of products available in the domestic market as some foreign firms will not be able to sell in the domestic market given the high tariff. Thus, the presence of increasing returns and product differentiation seem to increase the gains from trade liberalization.
3. Strategic trade policy
The new trade theory has also identified a new case for protection in the presence of “strategic” interactions among firms in domestic and international markets. Strategic interactions among firms occur when a change in the behavior of firm 1 leads to a change in the optimal behavior of firm 2 (a strategic response). By affecting the behavior of firms, “strategic trade policy” can influence domestic and international markets by altering the strategic relationship between firms. This can be used to the advantage of domestic firms, which could therefore increase domestic welfare. By choosing an optimal import tariff or subsidy the government can affect the strategic game played by firms in international markets to the advantage of domestic firms. The now classic Boeing-Airbus example of Brander and Spencer (1985) can illustrate this. Assume that there is only room for one firm in the international aircraft market. If two firms produce, then both will incur losses. But if only one firm produces, then there are important profits for the producing firm. In this scenario, if the European government can commit to subsidizing the production of aircrafts by Airbus by a larger amount than the expected loss if both firms remain in the market, then Boeing will quit and Airbus will get the whole market (and its profits). Thus there is a role for intervention when firms play strategically in international markets. However, assumptions are crucial to obtain this result. For example, if the US government can retaliate (i.e. commit to subsidize Boeing), then it is not clear that subsidizing Airbus is an optimal policy for the European government. Moreover, the amount of information needed to correctly implement these types of strategic trade policies is rarely available (e.g., if the subsidy is too small, then it is useless). The information problem is further complicated if one does not consider the industries in isolation. By subsidizing the aircraft industry in Europe, the government will be drawing resources from other industries, which will lead to increases to their costs. Also, the timing and structure of the game is crucial. If governments first decide whether to intervene or not, and then in a second stage choose the optimal level of the intervention, it is very likely that if one government chooses not to intervene in the first stage, then the optimal equilibrium will imply absence of intervention by both governments. In essence, separating the policy decision into two steps yields a very different game. Generally, the strategic trade policy literature gives rise to contradictory results depending on the type of market structure and the form of competitive rivalry. For example, an optimal tariff can become an optimal subsidy if one assumes that firms, instead of being Cournot players in the international markets, would compete on prices (see Eaton and Grossman, 1986). Due to the lack of consistent results in the new trade theory, the literature has generally been considered of very little use in the guidance of governments’ trade policy. Some authors have questioned the relevance of strategic interaction among firms. While it is certainly the right setup for the world aircraft market, it is not the case for the world wheat market. This further raises the question of their relevance for trade policy in less developed countries, which tend to be primary product exporters. The production of primary products is rarely characterized by large economies of scale. Therefore strategic trade policy is of little relevance for developing countries. Moreover, the relatively small size of developing countries home markets, makes it very unlikely that firms, subject to the type of strategic interaction illustrated with the Airbus-Boeing example, would choose them as home base. Also, when the country is small, the credibility of the government on its commitment to intervene may be relatively small. Finally, one should note that government’s intervention may be influenced by interest group pressures. In such a world, the kind of very specific interventions at the firm level which the strategic trade policy literature suggests, are very likely to be captured by interest groups. The result may be one of excessive intervention that benefits a small group of producers at the expense of a large number of non-represented agents. Thus, political economy concerns and the difficulty of formulating useful interventions create a new case for free-trade in a world of strategic trade policy. toptop
Baldwin, Richard and Paul Krugman (1988), “Market Access and International Competition: A Simulation Study of 16K Random Access Memories”, in Robert Feenstra, ed.: Empirical Methods for International Trade, Boston: MIT Press.
Brander, James and Barbara Spencer (1985), “Export subsidies and market share rivalry”, Journal of International Economics 18:83-100.
Brander, James (1995), “Strategic trade policy”, in Gene Grossman and Kenneth Rogoff, eds: Handbook of International Economics, vol. III, Amsterdam: North Holland.
Dixit, Avinash (1988), “Optimal trade and Industrial Policy for the US automobile”, in Robert Feenstra, ed.: Empirical Methods for International Trade, Boston: MIT Press.
Davis, Donald (1995), “Intra-industry trade: A Heckscher-Ohlin Ricardo approach”, Journal of International Economics 28: 1-23.
Eaton, Jonathan and Gene Grossman (1986), “Optimal trade and industrial policy under oligopoly”, Quarterly Journal of Economics 101: 383-406.
Gandolfo Giancarlo (1998), “International trade theory and policy”, ch. 11.
Helpman, Elhanan (1983), “Increasing returns, imperfect markets, and trade theory”, in: Ronald Jones and Peter Kenen, eds.: Handbook of International Economics, vol. I, Amsterdam: North Holland.
Hwang, H.-S and C. Schulman (1992), “Strategic non-intervention and the choice of trade policy for international oligopoly”, Journal of International Economics 24:373-380.
Krugman, Paul (1987), “Is free trade passe?”, Journal of Economic Perspectives 1:131-144.
Krugman, Paul and Maurice Obstfeld (1991), International Economics, chapter 6 and 11.
Krugman, Paul (1995), “Increasing returns, imperfect competition, and the positive thoery of international trade”, in: Gene Grossman and Kenneth Rogoff, eds.: Handbook of International Economics, vol. III, Amsterdam: North Holland.
Krugman, Paul (1986), “New trade theory and the less developed countries”, in: Guillermo Calvo et al., eds: Debt, Stabilization and development: essays in memory of Carlos Diaz Alejandro, London: Basil Backwell.
Mark Roberts and Jim Tybout (1996)," Industrial evolution in developing countries: micro patterns of turnover, productivity and market structure", Oxford: Oxford University Press.
Venables, Anthony and Alasdair Smith (1986), “Trade and industrial policy under imperfect competition”, Economic Policy 3: 621-72.
Political Economy of Trade Reform
Trade and Industrial Location: The New Geography of Trade A key question for the future development of the world economy is, where will economic activity locate? Trade liberalizations and technical progress -- the driving forces of globalization -- are making activity increasingly mobile, enabling firms to split their production between locations and making it easier for them to supply distant consumers. How can we explain -- and predict -- the changes in the location of production that this might bring about? Is the process beneficial for developing countries, or will it tend to reinforce the advantage of established centers of production? Will it lead to a narrowing or widening of international (and inter-regional) income inequalities? These are all questions about spatial economic organisation, and they can be addressed at different levels. In the world economy as a whole, how do we expect to see development spreading from region to region, and what are the implications of the development of new regions for the prosperity of established ones? Within countries and regions, should we expect to see activity becoming increasingly concentrated in established industrial or metropolitan areas, or will activity become more dispersed? As the spatial pattern of economic activity changes, which sectors are most likely to relocate? In answering these questions insights come from traditional trade theory, and these are now being complemented by a new line of research, sometimes referred to as ‘new economic geography’. This approach studies the forces which encourage the spatial agglomeration of economic activity, and analyses the trade-off between agglomeration forces and other determinants of industrial location (such as factor endowments and product market competition). It provides an explanation of the evident uneveness of the spatial distribution of economic activity (at urban, regional and international levels), and of the consequent spatial variations in income levels. It also demonstrates how as economic circumstances change so do the strengths of centripetal forces (binding activity in existing agglomerations) relative to centrifugal forces (encouraging dispersion of activity), and how, as a consequence, the spatial organisation of the world economy may change. This note provides an overview both of traditional approaches to trade and location (section 1) and of the new approaches (sections 2 and 3).
1. Trade and comparative advantage.
The point of departure for the study of trade and location is the classical theory of comparative advantage, and in particular the widely employed Heckscher-Ohlin model. Trade permits the separation of consumption and production, and comparative advantage shows how the location of production is determined by differences in the technology or factor endowments of regions or countries. Most of the predictions of the theory are well known. We expect that as trade barriers are reduced so production will relocate according to comparative advantage (for example, with relatively unskilled labour intensive activities moving to relatively unskilled labour abundant locations). As this occurs, the changes in demand for factors of production that follow will tend to equalise factor prices across countries. These predictions can be hedged around with many qualifications. For example, differences in institutions and infrastructures will change the absolute and relative efficiencies of factors of production across countries, and even small remaining trade barriers or transport costs can disrupt the predicted pattern of trade. But nevertheless the theory provides strong and -- in part at least -- intuitive predictions about the effects of globalization. What do we know about the empirical performance of comparative advantage models, and the Heckscher-Ohlin model in particular? The Heckscher-Ohlin model can account for some part of inter-industry trade, although exactly how much is controversial (see Leamer and Levinsohn (1995) for a recent review of empirical work in trade theory). However, the simple predictions that industries will relocate according to factor intensities and that factor prices will tend to equality do not seem adequate either as descriptions of recent changes in the world economy, or as a basis for answering the questions posed above. There are two particular points at which they seem inadequate. First, a striking feature of the spread of industry to the developing world is its geographical concentration. Some countries and regions have experienced very rapid industrial growth ? notably the Asian Tiger economies while others have been scarcely touched by industrial development. The spatial unevenness of industrial development requires an explanation beyond that offered by comparative advantage. Second, Heckscher-Ohlin theory is, unsurprisingly, not good at explaining the location of industry across areas where factor endowments are broadly similar (as in much of Western Europe) or within which factors of production are highly mobile (the US). It is certainly not the case that there is a uniform distribution of economic activity or of industrial structure across these regions, and if we are to explain these patterns of industrial location we have to look to ideas beyond those of simple comparative advantage.
2. Trade and geographical advantage:
The observation that regions which are geographically well placed -- with respect to market access and transport networks -- are good locations for economic activity verges on the tautological. Yet it is an observation that merits, and has been the focus, of interesting recent research. What aspects of geography matter for location, and how much do they matter? How do changing trade barriers affect the relative advantages of different locations? Should we expect to see integration in the world economy benefiting or damaging peripheral regions relative to the central regions?
Research on the quantitative significance of geography both for income levels and for growth rates has been undertaken by Gallup and Sachs (1998). Amongst their results, they find that both per capita income levels and growth rates are significantly higher for countries that have a high proportion of population close to the coast, and that are close to one of the existing centres of economic activity (taken to be Europe, the US, and Japan). Good market access therefore seems to matter a lot for economic performance. The new trade theory models developed during the 1980s provide an analytical framework within which we can see why market access is so important. The models are based on manufacturing firms with increasing returns to scale competing in imperfectly competitive markets, and they predict that both intra- and inter-industry trade will occur. Most interesting from our current perspective, is the prediction that large regions ? or more generally, regions with good market access ? will be net exporters of manufacturing products. The reason is that if manufacturing firms have increasing returns to scale they will tend to concentrate their production in few locations (whereas constant or decreasing returns activities can divide production between many locations). And since they concentrate their production, they will find regions with good market access particularly attractive. Thus, in equilibrium, we expect to see regions with good market access experiencing some combination of higher wages (as firms seeking to produce in the region bid up the wage rate) and net export of manufacturing products (since they have disproportionately much manufacturing). What does this approach say about the way in which falling trade barriers may change industrial location? On the one hand, a reduction in trade barriers facilitates the separation of production from consumption, so allows underlying geographical advantage to play a greater role. But on the other, if trade barriers and transport costs become trivially small then differences in these costs across locations become unimportant (geography ceases to matter). The balance between these forces usually resolves itself in an inverse U shaped relationship, saying that geographical advantage (and disadvantage) will be greatest at some intermediate level of trade costs. Thus, in moving from very high trade barriers to intermediate ones the theory predicts that activity will be drawn into regions with good market access (into the centre at the expense of the periphery). But as integration proceeds, so the process becomes reversed; at low trade costs firms are less willing to pay the higher central wages, and a reverse flow of industry to peripheral regions occurs. This theory fits well with work by Kim (1995) who looks at the location of US manufacturing from 1860 - 1987, and shows that the rapid increase in industry regional specialisation occurred before the First World War, at the same time as the US was developing its transport system and becoming an integrated national economy. Since the inter-war years regional specialization has been falling. In Europe, the recent evidence is mixed, suggesting that while income inequalities between central and peripheral countries are narrowing, regional inequalities within countries are increasing. There is some evidence that regional concentration of industries is increasing.
3. Cumulative causation and spatial agglomeration.
In the preceding section we took the relative geographical advantages of different locations as given, like characteristics of physical rather than economic geography. But the key determinant of geographical advantage is the ease of interaction with other economic agents -- consumers, suppliers, and perhaps also sources of information and technology. The location of these things is not fixed but endogenous, as new centers of economic activity can and do develop. Whereas Hong Kong or Singapore might have been peripheral regions 40 years ago, they are now well located within a new regional economic hub. Once we recognise that geographical advantage is partly endogenous, then what can we say about the location of centers of activity? This is a difficult question, because there is an inherent degree of indeterminacy in location. Firms want to locate in an economic center, but the economic center is a center only because a lot of firms are located there. This suggests a process of cumulative causation, in which successive firms entering a location make it a more attractive location for further firms, ideas which are reminiscent of old traditions in development economics (for example Hirschman (1958) and Myrdal (1958)), as well as ideas from regional economics (for example Pred (1966)). Their formal analysis is the subject matter of the ‘new economic geography’ literature. The new economic geography approach views industrial location as the outcome of the interaction between two sorts of forces. On the one hand, are forces encouraging the dispersion of activity. These include factor market supply (as emphasised in Heckscher-Ohlin) and the need to meet the consumption demands of any immobile factors of production. On the other, are forces encouraging the agglomeration of activity, and these derive from various types of geographically concentrated beneficial externalities -- pecuniary or technological – between firms. Discussion and classification of the sort of externalities that can give rise to agglomeration dates back to Marshall (1890). First, are knowledge spillovers between firms ‘..the mysteries of the trade become no mystery but are, as it were, in the air…’. Second, are benefits accruing from thick labor markets – labor market pooling effects, and externalities which might arise in labor training. And third, are the backward and forward linkage effects that firms create. Backward linkages occur as firms generate high levels of expenditure (both directly, on intermediate goods, and indirectly, via the employment they create), and forward linkages occur as firms provide a local supply of intermediate goods. It is important to note that these forward and backward linkages are not, by themselves, of any particular significance. It is when they are combined with some other market imperfection – such as imperfectly competitive firms operating under increasing returns to scale – that they can create pecuniary externalities, and hence agglomeration forces.
In such an environment each firm will have to choose to locate production either in an existing agglomeration, or elsewhere. In the agglomeration there are additional costs, (as competition between firms bids up the price of labor and land, and depresses output prices) to be weighed against the benefits of proximity to other firms -- linkages, knowledge spillovers, or thick labor market effects. The balance between these forces determines the spatial organisation of the economy, and the extent to which activity is agglomerated (with consequent factor price inequalities) or dispersed.
This structure can be applied to explain city formation, regional economic structure, and inequalities in the world economy. A comprehensive analysis is undertaken in Fujita, Krugman and Venables (1999). For present purposes, we consider just two applications of the approach. The first is a model which studies the relationship between trade costs and international inequalities, and shows how reductions in trade costs can first cause the world to split into rich and poor regions, but then at lower cost levels can cause convergence. The second studies the spread of industry from country to country as demand for manufactures increases.
Globalization and inequality: Suppose that there are two identical regions in the world economy (call them North and South) and two industries; a perfectly competitive agriculture and an increasing returns manufacturing in which firms produce (and use) intermediate goods as well as final goods. In manufacturing forward and backward linkages create agglomeration forces. If trade barriers between the two regions are very high, then both regions will have both agriculture and manufacturing – since they have to meet the final demands of their consumers. But what happens as trade barriers are reduced? It becomes possible to supply final consumers by trade, so manufacturing can agglomerate in a single region and reap the benefits of agglomeration. Not only does it become possible, but it may also be the case that having manufacturing divided equally between the two regions is unstable. If one region gets just slightly more manufacturing then, because of agglomeration benefits, it becomes the more attractive location, attracts more firms, and so by a process of cumulative advantage will attract all manufacturing. What we see then is that a reduction in trade barriers breaks the symmetry of the economies, and leads to the emergence of a dichotomous spatial structure. One of the regions (North, say), has manufacturing and consequently has higher wages and real incomes than the other region, which has become de-industrialised. This suggests that at ‘intermediate’ levels of trade costs the world is necessarily divided into rich and poor regions, with manufacturing agglomerated in the rich region. What happens as trade costs are reduced further? The effect of the the forward and backward linkages is that firms want to be close to suppliers and customers, but as trade costs fall the value of this proximity is reduced. This means that the sustainable wage gap between North and South must fall, this occuring as manufacturing starts to leave North and relocate to South. Wage gaps therefore start to narrow and, in the limiting case of perfectly free trade, there is factor price equalisation, this requiring that the two economies have the same industrial structure. Summarizing then, the model predicts that, even though regions are constructed to be identical in underlying characteristics, reducing trade barriers takes the world economy through a history in which initial symmetry evolves into a North/ South structure of income inequality, and thence through a ‘globalisation phase’ of industrial deconcentration and narrowing North/ South inequalities. The spread of industry: The second application of the approach is intended to be suggestive of the rise of the Newly Industrialised Asian economies. Suppose that the initial position is one in which all manufacturing in the Asian region is concentrated in a single location -- say Japan -- and that demand for manufactures grows. What then happens? The extra demand for manufactures is all met by Japan, increasing labor demand in Japan and causing an increase in the wage differential between Japan and other countries in the region. Firms do not choose to relocate to another country in the region because if they did, while benefiting from lower wages, they would forego the benefits of a large local market (backwards links) and a large number of local suppliers (forward linkages). But there is, of course, an upper limit on the sustainable wage difference between countries, so there comes a point at which it becomes worthwhile for some firms to move to a low wage economy. However, as this occurs, so the moving firms create their own forward and backward linkages, and this makes it more attractive for subsequent firms to move, and so on, creating a process of cumulative causation. This story has a number of implications for the development process. The first is that the spread of industry will be geographically concentrated -- instead of spreading to many countries at once, it will tend just to spread to a few. The reason for this can be seen by thinking what would happen if industry were to spread simultaneously to many countries. Such a situation is unstable, since if one of these countries gets even a small advantage over the others, it will pull further ahead. The selection of which countries get industry might be determined by small initial differences between countries -- indeed, in the theoretical limiting case where there are no initial differences between countries, it is determined by chance.
The second implication is that industrialisation is likely to be rapid, and to proceed in a series of waves, from country to country. The speed of industrialisation follows from cumulative causation – as the linkages cut in, so the newly industrialising country will appear a very attractive investment location. The country will rapidly catch up with and become part of the established agglomeration, with wage levels to match. If demand now increases further, then the process will repeat itself; industry will again start to spread out from this agglomeration into another country. What we see then is that industry will spread out of established centers into neighboring countries in a series of waves of industrialisation.
Summarising, the model of cumulative causation and spatial agglomeration predicts that industrialisation will take the form of sequential and rapid industrialisation by countries in turn, as industry spreads from its initial location to new ones. According to this view economic development does not take the form of smooth convergence of countries, but instead the rapid but geographically concentrated industrialisation that we have observed in Asia. toptop
Fujita, M. P. Krugman and A.J. Venables, (1999) "The spatial economy; cities, regions, and international trade", MIT press; forthcoming
Gallup,J.L. and J.D.Sachs, (1998) "Geography and economic development", Harvard Institute for Economic Development.
Hirschman, A. (1958) "The Strategy of Economic Development". New Haven, Conn.: Yale University press.
Kim, S. (1995), "Expansion of markets and the geographic distribution of economic activities; the trends in US regional manufacturing structure, 1860-1987", Quarterly Journal of Economics, vol 110, no 4.
Leamer, E.E and J. Levinsohn, (1995), "International trade theory: the evidence", in G. Grossman and K.Rogoff (eds), Handbook of International Economics, vol III.
Myrdal, G. (1957). "Economic Theory and Under-developed Regions". London: Duckworth.
Pred, A. (1966), "The spatial dynamics of US urban-industrial growth", Cambridge: MIT · Krugman, P.R, "Geography and trade", MIT press 1991
Krugman, P.R, "Development, geography and economic theory", MIT press 1995.
P. Krugman, "Space: the final frontier", Journal of Economic Perspectives, 12:161-74, Spring 1998
A.J. Venables, "Economic integration and the location firms", American Economic Review, papers and proceedings, 55, (1995), 296-300.
G. Ottaviano and D. Puga "Agglomeration in the global economy: A survey of the "new economic geography", The World Economy, 21(6), August 1998: 707-731.
Intellectual Property Rights (TRIPS)
Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Intellectual property rights are customarily divided into two main areas: 1. Copyright and rights related to copyright such as the rights of authors of literary and artistic works
2. Industrial property such as industrial designs, invention and trade secrets, distinctive signs, in, particular trademarks, and geographical indications. The main social purpose of protection of intellectual property is to encourage and reward creative work; to stimulate and ensure fair competition; to protect consumers by enabling them to make informed choices between various goods and services; and to foster investment in the development of new technology by providing the incentive and means of financing research and development activities. One of the successes of the Uruguay Round of trade negotiations was the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS Agreement), which came into effect on 1 January 1995, is to date most comprehensive multilateral agreement on intellectual property. The three main features of the Agreement are:
Standards. In respect of each of the main areas of intellectual property covered by the TRIPS Agreement, the Agreement sets out the minimum standards of protection to be provided by each Member;
Enforcement. The second main set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights. The Agreement lays down certain general principles applicable to all IPR enforcement procedures.
Dispute settlement. The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO's dispute settlement procedures. The TRIPS Agreement is a minimum standards agreement, which allows Members to provide more extensive protection of intellectual property if they so wish. Members are left free to determine the appropriate method of implementing the provisions of the Agreement within their own legal system and practice Suggested readings: To find out more about the TRIPS at the WTO level click here: http://www.wto.org/wto/intellec/intellec.htm
Keith E. Maskus, "The Role of Intellectual Property Rights in Foreign Direct Investment and Technology Transfer." Prepared for Public-Private Initiatives After TRIPS: Designing a Global Agenda", Brussels July 16-19, 1997.(View/download Acrobat version of document)
Keith E. Maskus, "Implications of Regional and Multilateral Agreements on Intellectual Property Rights", Department of Economics, University of Colorado, Boulder
Keith E. Maskus, 1997. "The International Regulation of Intellectual Property" Seminar Paper 97-11. (View/download Acrobat version of document)
Braga, Carlos Alberto Primo, 1995: "Trade-related intellectual property issues : the Uruguay Round Agreement and its economic implications" Washington, D.C., World Bank.
Keith E. Maskus, 2000. "Regulatory Standards in the WTO: Comparing Intellectual Property Rights with Competition Policy, Environmental Protection and Core Labor Standards"
Trade and Investment (TRIMS)
The spectacular increase in foreign direct investment (FDI) as well as other forms of international private capital flows since the mid 1980s, is yet another manifestation of the "globalization" or integration of world economy also evident from the increasing share of trade in world output. Data and statistics on FDI are widely available from a host of sources, including UNCTAD, OECD and the IMF, and the World Bank (see below for further information). There is also a vast literature covering all aspects of international capital movements in general and of FDI in particular, including their relation with economic growth, trade, transfer of technology, and so forth (see Blomstrom and Akkoko, 1977, for a review of the literature and Hoekman and Djankov, 1998 for a case strudy). The purpose of this site is to provide the reader a link to these sources of data and information as well as briefly to highlight some important issues that pertain to the current status of foreign investment in the body of international agreements. Despite several efforts since the end of WW II, to date there does not exist a set of coherent, substantive and binding multilateral rules governing foreign investment. The first multilateral abortive effort was the International Trade Organization (ITO) which would have regulated both trade and investment, but which was instead replaced by the GATT dealing only with trade in goods but not with investment. The most recent abortive effort is represented by the suspension on December 3, 1998 of the negotiations within the OECD on the creation of the Multilateral Investment Agreement (MAI, see below). Presently, matters relating to foreign investment are regulated by a multiplicity of instruments. These include: · Bilateral Investment Agreements or BITs. According to UNCTAD, as of January 1, 1997, there existed a total of 1,330 BITs, compared to 400 at the beginning of 1990. · Regional Investment Agreements which exist either as separate instruments or are incorporated in a broader framework of a regional preferential trade agreement, such as the EU, NAFTA, and many other regional groupings. · Plurilateral Instruments, such as the APEC (non-binding) investment Principles, the Code of Capital Movements or the Declaration on Investment and the Multilateral Enterprise (OECD).
At a multilateral level, the existing instruments tend to be either binding but narrowly focused, or establish substantive norms but of a non-binding nature. Examples of the former are the Convention on the Settlement of Investment Disputes between States and Nationals of Other States through conciliation and facilitation of the International Center for the Settlement of Investment Disputes (ICSID) and the Convention Establishing the Multilateral Investment Agency (MIGA), concluded in 1965 and 1985, respectively, within the World Bank. Despite the lack of a substantive and binding multilateral accord, important progress in that direction has been achieved with the signing of the Trade Related Investment Measures (TRIMS), the General Agreement on Services (GATS), the Agreement on Subsidies and Countervailing Measures (ASCM) and the General Agreement on Government Procurement (GPA) at the conclusion of the Uruguay Round multilateral negotiations. Together, these Agreements establish important rules and obligations for governments in their treatment of foreign companies that undertake investment activities in those governments' national territories, whereas the GATT rules only dealt with the obligation of governments in their treatment of foreign goods. The importance of the TRIMS Agreement, in particular, consists in identifying explicitly, and then requiring their removal within a certain period of time, a dozen or so measures, adopted widely by governments in the past, that are in violation of GATT Articles III (National Treatment) and XI (the general rules against quantitative restrictions). The most important measures explicitly identified as being contrary to the spirit of the GATT are those that impose the use of certain local contents in the products of enterprises or require some degree of balancing between exports and imports, such as requiring the enterprises to export certain portion of their output in relation to the volume of value of their imports. However, export performance requirements are not subject to WTO discilines. Currently, the issue of investment at the WTO is being followed by the Working Group on the Relationship between Trade and Investment which was established by a decision taken at the WTO Ministerial Conference held Singapore in December 1996 to examine the relationship between trade and investment. The most recent report of the Working Group was issued in December 1998 and can be obtained free of charge directly from the WTO by following the instructions below. For further information and data see the following:
OECD
· Information and data on FDI · Full documentation and history of MAI · Survey of OECD work on international investment WTO · For information on TRIMS go to summary of legal documents available at http://www.wto.org/wto/legal/ursum_wp.htm and then scroll down to TRIMS section. · See also the WTO 1996 Annual Report, Vol. 1 which contains a special section dedicated to trade and FDI. It can be ordered on line from the WTO at http://www.wto.org/wto/publicat/publicat.htm. · WTO (1998): Report Of The Working Group On The Relationship Between Trade And Investment To The General Council To obtain a copy free of charge go to WTO site and then go to the Trade and Investment report.
UNCTAD : To obtain a copy of World Investment Report (at a fee) and for other relevant publications go to UNCTAD web site at: http://www.unctad.org/en/press/prwir98i.htm.
World Bank : Information on MIGA, see: http://www.miga.org.
ICSID http://www.icsid.org/.
Baldi, Marino. 1996. “The Multilateral Agreement on Investment: A framework for a dispute settlement system” Paris: OECD, available at: http://www.oecd.org/
Blomstrom, M. and Ari Kokko (1977): How foreign Investment affects Host Countries", Policy Research Paper 1745, World Bank.
Djankov, Simeon and Bernard Hoekman (1988): Foreign Investment and Productivity Growth in Czech Enterprises," forthcoming in World Bank Economic Review. (View/download Acrobat version of paper)
Hoekman, Bernard and Kamal Saggi (1998): " Multilateral Disciplines for Investment-Related Policies?" Mimeo, World Bank (View/download Acrobat version of paper)
Markusen, James R. (1995): "Boundaries of multinational enterprises and the theory of international trade" JOURNAL OF ECONOMIC PERSPECTIVES (U.S.); 9:169-89
Francois, Joseph F. (1999) Trade Policy Transparency and Investor Confidence -- The Implications of an Effective Trade Policy Review Mechanism (View/download Acrobat version of paper)
Beata K. Smarzynska, Shang-Jin Wei (2000), Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence (View/download Acrobat format of document)
Government Procurement Agreement (GPA)
Procurement of products and services by government agencies for their own purposes represents an important share of total government expenditure and of a country's GDP (typically 10-15% of GDP). As a result, government procurement plays a significant role in domestic economies, and restrictions imposed on government procurement can have a notable impact on international trade in goods and services. Yet, despite its importance, government procurement has been effectively omitted from the scope of the multilateral trade rules under the WTO in the areas of both goods and services. In the General Agreement on Tariffs and Trade (GATT), originally negotiated in 1947, government procurement was explicitly excluded from the key provision of national treatment. The first attempt at bringing government procurement under internationally agreed trade rules was undertaken in the Tokyo Round of Trade Negotiations. This resulted in the 1979 Agreement on Government Procurement, which was subsequently amended in 1987. In parallel with the Uruguay Round, Parties to the Agreement held negotiations to extend the scope and coverage of the Agreement. The new Agreement on Government Procurement (GPA) was signed in Marrakech on 15 April 1994 - at the same time as the Agreement Establishing the WTO- and entered into force on 1 January 1996. The GPA is one of the so-called "plurilateral" agreements included in Annex 4 to the Agreement Establishing the WTO, signifying that not all WTO Members are bound by it. The cornerstone of the GPA is non-discrimination, either with respect to domestic products, services and suppliers (National Treatment), or with respect to goods, services and suppliers of other Parties (MFN Treatment). The Agreement does not apply to all government procurement of the Parties, but excludes purchases below a certain threshold and those by certain sub-national governments or state enterprises, such as utilities. Another feature of the GPA is that it allows special and differential treatment to developing countries in recognition of their specific development objectives. Finally, the Agreement incorporates specific rules on enforcement and dispute settlement.
To find out more about GPA and its specific features click here http://www.wto.org/wto/govt/agrmnt.htm
Bernard M. Hoekman and Petros C. Mavroidis, 1995. "The World Trade Organization's Agreement on Government Procurement: Expanding Disciplines, Declining Membership?" PRE Working Paper, 1429. World Bank, Washington DC
Bernard Hoekman and Petros C. Mavroidis. (editors) 1997, Law and policy in public purchasing : the WTO agreement on government procurement, Ann Arbor, University of Michigan Press.
Competition Policy
The term competition policy is interpreted in different ways in different countries and different contexts. At its broadest, it can be defined to include all policies that affect competition , or contestability (potential competition) in a market, including trade and regulatory policies as well as competition or antitrust law. More narrowly, it refers to the set of laws and policies adopted by a country to prevent or remedy restrictive business practices by enterprises, whether private or public. Restrictive business practices are those practices that reduce the degree of contestability of a market, such as cartels or other forms of horizontal or vertical market restraints, abuse of dominant market position, monopolization, price discrimination, and the like. Over the past few years the interest in the interface between trade and competition policy has intensified. The main reasons for this interest is the growing integration of the world economy (both via trade in goods and services as well as through increasing volumes of FDI) which implies that anti-competitive business practices increasingly have trans-border dimensions. Further more, with the expansion of trade and investment, foreign companies are concerned whether national competition laws are adequate to deal with possible anti-competitive practices by such domestic companies. Finally, developing countries, a large number of which do not yet have competition laws in place, are concerned that they be able to address possible abuse of market power by multi-national corporations. At present, competition law remains primarily the domain of domestic legislation and there are no internationally enforceable rules and no supranational enforcement body. However, competition policy is dealt with indirectly in each of the main agreements that make up the WTO Agreement (the GATT, the GATS, and the TRIPS Agreement) and provisions for consultation and cooperation on anti-competitive practices are provided for. Consultation and cooperation on matters related to competition policy are also addressed through a number of other multilateral, regional and bilateral instruments and fora , such as the OECD, which since 1967 has adopted a series of recommendations and guidelines addressing anti-competitive firm behavior, and UNCTAD, which adopted in 1980 a set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices. However, compliance with many of the above rules and principles is primarily voluntary, on a "best endeavors" basis, rather than rooted in legally enforceable commitments. The issue whether internationally enforceable multilateral disciplines on private anti-competitive practices should be actively pursued in the next round of trade negotiations is subject to intensive study both by scholars and by multilateral organizations. In December 1996, the WTO itself appointed a working group to examine the issue and report back to the Council. The most recent report of the Working Group was released on December 8, 1988 and can be obtained at no charge from WTO (Go to http://www.wto.org and then go on the first page to Trade and Competition Policy Report). The 1997 WTO Annual Report also examines this topic in depth (see below). This reports together with other suggested bibliography provide a thorough examination of the various aspects of the reform of competition policy as it stands today.
WTO: Annual Report 1997, which can be directly ordered form WTO on-line bookstore at: http://www.wto.org/wto/publicat/publicat.htm.
Peter lloyd (1998): "Gobalization and Competition Policy", Welwirtschafltiches Archives, vol. 134, number, p. 161-185. The abstract is available in electronic form from Welwirtschaftliches web page at: http://www.uni-kiel.de:8080/IfW/pub/wa/wa1342ab.htm
Hoekman, Bernard (1977): Competition policy and the global trading system : a developing country perspective Report Number WPS1735, World Bank.
Hoekman, Bernard M.; Mavroidis, Petros C. (1993): Competition, competition policy, and the GATT; Report Number WPS1228, World Bank.
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