E Iit Ti Economic Integration: Short Practical Introduction
E Iit Ti Economic Integration: Short Practical Introduction
Teacher
My background
Position PhD since March 2009 Assistant professor Previous teaching introductory international economics, economic integration, microeconomic theory Research interests international trade, economic integration and development economics Research projects on: the duration of trade, trade facilitation and trade preferences
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Live@Lund
Student portal where all information and material can be found Log in at http://liveatlund.lu.se/ http://liveatlund lu se/
Literature
Baldwin and Wyplosz (2009): The Economics of European Integration. Third edition. Recent update: Fourth edition now available. OK to use. Hoekman and Kostecki (2009): The Political Economy of the World Trading System. The WTO and Beyond. Third edition. Supplementary articles Freely downloadable through Live@Lund
Teaching
15 lectures Presentation will be available in Live@Lund My aim is to publish it there no later than the night before the lecture 2 seminars 2 written assignments
Examination
Mandatory written exam Maximum 80 points Two voluntary seminars Being (actively) present gives 5 points for each seminar to add to exam results Two voluntary written assignments Each gives 5 points to add to exam results Altogether: Maximum 100 points
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Grades
A (Excellent): B (Very Good): C (Good): D (Satisfactory): E (Sufficient): 85 points 75 points 65 points 55 points 50 points
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Course Contents
Part 1: Background: Economic Effects of Trade and Trade Policy Part 2: Multilateral Economic Integration Part 3: Preferential/Regional Economic Integration Part 4: Agricultural and Regional Policy from an EU Perspective (guest lecturer: Joakim Gullstrand)
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Interesting Themes
Focus on trade Multilateral integration vs. vs regional integration How do they fit together? How do they affect each other? European Union Lots of empirical examples from the EU! p g countries Developing Does the WTO work well for low- and middle-income countries? Which rules govern their trade with the EU?
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Agenda
Theoretical gains from trade Welfare analysis of trade restrictions Tariffs Quantitative restrictions Reasons for limiting trade
Why trade?
Welfare gains according to... Traditional theory New trade theory New new trade theory
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Summary of Part 1
Conclusions to bring with you to the rest of the course: In most (though not all) circumstances circumstances, trade leads to higher long-term national welfare than restricted trade Consequently, trade restrictions typically lowers national welfare Reasons why countries nevertheless restrict trade are sometimes economically sound, but just as often they do not have a basis in economic theory or empirics
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Why trade negotiations rather than each country unilaterally setting its own trade policy?
1. Large countries can increase welfare through optimal tariff, but run the risk of retaliation Can get situation with bad welfare outcomes for all (Prisoners dilemma) Can be solved through repeated games, i.e. trade negotiations 2. Lock-in mechanism Easier E i to t not t reintroduce i t d trade t d barriers b i after ft commitment it t through international agreement 3. Political economy
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Prisoners Dilemma
US
Free trade Protectionism
EU
Free trade
(10, 10)
(-10, 20)
Protectionism
(20, -10)
(-5, -5)
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Nondiscrimination
Two components: Most Favored Nation (MFN) ( ) National treatment Implications: Efficiency; sourcing from the lowest cost suppliers Support for smaller countries who cannot threaten with retaliation Lowers transaction costs and negotiation costs Makes it harder to break a commitment Exceptions: regional integration and non-reciprocal trade preferences for developing countries
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Reciprocity
Paying for increased market access in other countries by own liberalization N.B. Underlying mercantilist mindset! Reasons: Reduce free-riding Political economy: export industry gets involved Exports as well as imports increase less need for exchange rate adjustments and smaller risk for negative terms of trade effects Regional integration with important trade partners may weaken this principle
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WTO as an Organization
Hoekman and Kostecki, Ch Chapter 1 4 (details 1.4 (d il not relevant), l ) chapter 2
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43 Source: www.wto.org
Source: www.wto.org 44
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Decision-Making
Decision by consensus is most common Consensus: no country (which is present) objects One country, one vote Compare this with e.g. the IMF and the World Bank where votes are weighted by economic size, and whose boards are based on just a few members This favors small countries, but... It is also difficult for them to have representation in all bodies How do you reach consensus with 157 members?
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Purpose
Multilateral trade negotiations are used to Agree on rules and procedures Reduce trade barriers Decide if new members can join Solve conflicts To some extent, negotiations take place continuously, but the reoccurring trade rounds are important to understand the system
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Source: www.wto.org
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Source: www.wto.org
Trade Negotiations
Government II
Industry a Industry b Industry c Ministry A Ministry B Ministry C
NGOs
Government
Industry ... Ministry
Internal Negotiation
External Negotiation 56
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GATT
GATT: set of rules about trade in goods, regulating the use of trade policy among WTO members Contains rules about 1. Nondiscrimination Most Favored Nation (MFN) National treatment 2. Tariffs as the (in principle) only allowed instrument 3. Tariff bindings 4. Other policies cannot go against the principle of nondiscrimination or agreements about market access
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Nondiscrimination: MFN
GATT Article 1 A product d t made d i in one member b country t cannot t be b treated t t d any less favorably than a like product originating in any other country Exceptions: Regional integration (GATT Article XXIV) Non Non-reciprocal reciprocal preferences for developing countries (GATT Part IV)
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Tariffs
In principle the only trade policy instrument allowed by GATT (for non non-agricultural agricultural goods) Quantitative restrictions (QRs) are banned National policies are covered by National Treatment Motive: Tariffs are preferable to QRs because: Tariffs are more transparent No allocation problems No quota rent which may create rent-seeking More effective in a dynamic environment
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Subsidies
Can affect trade by benefiting import-competing or exporting industries, and hence offset agreement about market access... but can also be economically justified by counteracting market failures Less distortive than border measures More visible Analyze in diagram! WTO Agreement on Subsidies and Countervailing Measures (SCM)
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Rules on SPS
SPS measures should Not discriminate Not constitute a disguised restriction on trade Be based on international standards (if they exist) If tougher standards, must be justified by scientific evidence The precautionary principle can only be invoked if there is no relevant scientific evidence Lex specialis to the TBT agreement Many disputes, particularly regarding GMO
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Summary
Hoekman and Kostecki (2009, pp. 264-265): Despite the complexities of the various agreements, the GATT is basically a simple agreement. The key disciplines are nondiscrimination (national treatment and MFN), tariff bindings, the prohibition on QRs, and a variety of disciplines that aim to prevent circumvention of the nondiscrimination principle and negotiated market access commitments.
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