International Economics: Trade And Tariffs

INTRODUCTION:

International economics is becoming a major part of existing societies because of the rapid changes occurring in economic markets. As days are passing by, governments, consumers, business etc have started realizing that this economic change from their own group, society, city or country is not the only region it’s the effect of the dynamic world which is taking part as well. Consumers walk in the local shops and buy products grown in their own country as well as products grown in other countries. Local businesses have to compete with international markets and similarly they can bolster their fair share by selling their home grown products internationally as well in this Global time. Advancement of Telecommunications is becoming a key factor in this global world as it eases the cost of delivering products internationally. Internet is playing its part as it increases the wide view of markets even more.

Easiest way to understand the rising of international economic growth is to consider the growth of exports in the past 50 years or so, assuming that one country’s export would definitely be another country’s import; one can easily tell the significant amount of rise in the exports and imports in the past 50 years.

World Exports, 1948-2008 (in Billions of U.S. Dollars)

On the other hand, growth in the value of exports, itself, doesn’t show the importance of trade. A better method is to look at the share of traded goods in relation to the size of the world economy shows world exports as a percentage of the world gross domestic product (GDP) for the years 1970 to 2008. World exports which were just 10 percent in 1970 took its time till 2008 but the percentage grew from 10% to 30%.

World Exports, 1970-2008 (Percentage of World GDP)

However, as the growth in International trade and investment became more significant, trade barriers started moving steadily downwards. Just after the World War era, GATT (General Agreement on Tariffs and Trade) constantly tried to convince the member countries to reduce tariffs (import tax) on imported goods. Countries kept on reducing the tax on imports asking for concession in import tax for their products among the member countries until the final round of meeting which is known as Uruguay Round held recently in 1994 where Global Trade Liberalization extended its sphere even more. After that round countries would now not only lower their tariff rates but would liberalize agricultural and services sectors alongside setting up a quota system for the multifibre agreement in clothing sector which was one of the hottest issue in the earlier era. WTO (World Trade Organization) was established in order to keep these agreements improving on regular terms and to keep discussing on further development in Trade sector and to settle down the disputes among the countries on trade.

By the end of 2009, there were 153 member countries of WTO ‘Trade Liberalization Club’, and many others are pushing to become a part of WTO. This willingness of other countries to join the liberalization club is only making Free Trade phenomena easier.

Another good result has come from the regional free trade agreements. Neighbouring countries or close trade partners have taken a step further and started free trading which indicates a better future for WTO and even though it is done on the grounds of trade it still resembles the basic ideology of WTO.

These changes in economic patterns and a new way towards free trading is becoming a fundamental bridge for Globalization. Globalization means social, economic, cultural and environmental changes which are connecting people all over the world. Since the growing economics aspects of globalization, it is really important to understand the affects of global market over business, consumers and governments. This leads us to study International Economics.

LITERATURE REVIEW:

What is International Economics?

International Economics is the study that assesses the propositions of International Trade, International Finance and International Lending and Borrowing. It has two major subfields, International Trade and International Finance. Our main focus in this research is over International Trade.

What is International Trade?

International Trade is a field in economics which implements certain economic models in order to assess international economy. It basically works on understanding supply and demand breakdown of International Markets; firm and consumer relation; oligopolistic and monopolistic market structures; and the effects of market distortions.

What is Tariff?

Tariff is the tax on import that a government imposes on imported goods. It is the most common way to protect one’s economy is to introduce tariffs on imports. Sometimes this term tariff is used in different contexts as well for example rail road tariffs but generally more significantly used in tax on imports.

Tariffs are the most common way to generate revenue for the government for centuries. It is the case because it is relatively easy to put custom duty on goods coming from other countries and administratively it is one of the easiest ways to collect tax. Countries simply place their officials at their borders and apply custom duty over the trading goods. High value of tariffs may give birth to smuggling and people finding ways to get their goods without paying taxes but even ignoring the fact that smuggling does take place, countries generate enough revenue for their governments through tariffs.

Every business man wants the trade to be liberalized, by this trade liberalization they mean to reduce the tariffs which will make them bring international goods in a cheaper price. Governments resist reducing the tariffs to protect their home grown goods, if international products would come cheap, businesses would have option to get imported products resulting in deduction in home grown products which leads to job hazard or unemployment.

Protectionism?

Protectionism simply means protecting home grown goods against imported goods. High tariffs indicates the protection towards home grown products as if the tariffs would be low, businesses would be encouraged to get more goods from international markets rather than home grown goods. There was a time in mid 20th century when countries used to generate funds for governments by keeping high tariffs on imports. However as trade liberalization took place, other types of non-tariff barriers came into existence as well.

RECENT TRADE CONTROVERSIES:

In the middle of 2009, world was down to the biggest economic down pull since the early 1980’s. Economic growth was going down and the unemployment all over was rising. International trade fell down all over the world and the investment both domestically and internationally took a downturn. As the economic condition unfolded, there was a similarity between this recession and the Great Depression of 1930’s. One of the biggest concerns was that countries might turn back to protectionism to raise job opportunities for domestic workers. That is exactly what countries did during the period of Great Depression and it came up as a negative effect for many of them. This amplitude of negative feeling is nothing new in this current era as it has been coming since the Great Depression between the supporters and opponents of the trade liberalization on Policymaking. Even though trade advocates have successfully opened free trade markets, trade opponents have also been successful in shutting down trade markets. It’s like going three steps forward and coming back 2 steps.

AMBIVILENCE ABOUT GLOBALIZATION:

Realistically speaking, ambivalence about trade and globalization occurred in decade of 1990’s and 2000’s. Even though in this period there was a buzz of protests and opposition about free trade theories and going global, this was the time when remarkable movements of freer trade occurred. Trade Liberalization was at its peak in 1980’s. Major success of some of the countries that had outward-economies like South Korea, Hong Kong, Singapore, Taiwan etc… linked with the countries which were having inward-economies such as Latin America, Africa, India, and elsewhere led to a resurgence of support for trade.

Future of trade liberalization is in the hands of time for now, it seems like if this crises is to be ended soon then we might see trade liberalization going to its peak again, but if it continued for a longer period of time, then countries might adopt protectionism in order to raise work for domestic worker which would be a killer for trade liberalization for some time to come. Economic crises have led in favor of protectionism in the past but that protectionism didn’t bolster the economies, it rather did little good and worst the effect of depression as can be understood by the period of Great Depression. Current scenario may have little hopes for trade liberalization as history is opting to repeat itself.

DISCUSSION:

The Great Depression, Smoot-Hawley, and the Reciprocal Trade Agreements Act (RTAA):

The greatest historical motivator for trade liberalization since the World War II was the period of Great Depression. The disaster apparently began with crash of US Stock Market in late 1929. It imminently pulled the world economy in an extremely rapid pace. By 1930, the US economy had shrink by 8.6 percent and the unemployment rate jumped to 8.9 percent. With this contraction, came an alarming call for protectionism for domestic goods against the internationally bought imported goods.

In May 1930, almost 1028 economists signed a petition against the rising tariff and marched a campaign towards President Hoover of that time. Despite of this petition signed by so many economists, in June 1930 came the Smooth-Hawley Act (tariff Act of 1930) which almost rose up to 60 percent of import duties. Due to the fact that not only US was suffering from the economic crises, international exporters who were doing business with US were also suffering from economic crises chose to introduced their own increase in tariffs to save their own domestic economy in retaliation. It effected in a dramatic drop in trade among the countries and added even worst effect to the ongoing depression.

In following years, economic crises grew even worst. The US economy continued to contract at double digits and by the year 1933 the unemployment rate raised up to 24.9 percent. In 1932, Franklyn Roosevelt ran for the President and spoke against the high tariffs. By the year 1934 a new scheme accepting the advantages of trade liberalization was introduced. It was Congress that passed the Reciprocal Trade Agreement Acts (RTAA) which allowed the president to negotiate bilateral tariff reduction agreements over different products.

It worked as President of US would send his agents to say Mexico and introduce a reduced tariff rates to the products brought in US and in place ask them to reduce tariffs on different set of products that could be taken from US. Once the agreement is done by the government trade could get started. That’s exactly what happened, and it pushed the wheel for trade again. Over 60 bilateral deals were placed and accepted among different countries under RTAA which set the platform for trade liberalization for decades to come.

SIGNIFICANCE OF RTAA:

RTAA is considered significant for two reasons. First one has to be that it was the first time US Congress granted access of Trade Authorities directly to the President for the Trade Policymaking. Secondly it served as the basis for the foundation of GATT (General Agreement on Tariffs and Trade). Under GATT countries would also discuss about getting concession in tariffs rather than only doing bilateral trade among the members of GATT. That was the main difference in GATT and RTAA that RTAA only worked in a bilateral Trade form while GATT worked in a multilateral trade form.

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT):

What is GATT?

General Agreement for Tariffs and Trade (GATT) provided the basic trade rules and solution in dispute over trades among the members from 1948 to 1994. It was one of the three Breton Woods Organizations came into existence after the World War II. Its goal was to promote trade liberalization by reducing high tariffs.

In reality, General Agreement for Tariffs and Trade (GATT) wasn’t meant to be organized as a standalone body. It was a part of a much wider agreement to establish International Trade Organization (ITO). Intentions of ITO were to assign trade rules and supportive guidelines that would help member countries to do trade. The ITO was conceived during the Breton Woods conference attended by the main allied countries in New Hampshire in 1944 and was seen as complementary to two other organizations also conceived there: the International Monetary Fund (IMF) and the World Bank. The IMF would monitor and regulate the international fixed exchange rate system, the World Bank would assist with loans for reconstruction and development, and the ITO would regulate international trade.

What was the Goal of GATT?

General Agreement on Tariffs and Trade (GATT) as the name suggests consists of the clauses which makes members agree on a similar set of trade policies that suits the trading parties. Basic goal was to introduce some set of rules for trade, that would be helpful in bringing up trade liberalization and thus end up in reducing trade barriers. Countries that make these commitments and sign on to the agreement are called signatory countries. All the discussions that take place before the agreement are referred to as rounds. Each round is given a name according to the location it takes place or to a prominent figure taking place in that round. There were eight rounds of negotiation under the GATT:

Geneva Round (1948),

Annecy Round (1950),

Torque Round (1951),

Geneva II Round (1956),

Dillon Round (1962),

Kennedy Round (1967),

Tokyo Round (1979), and

Uruguay Round (1994)

The most important note was that agreements were made by mutual consent. A round finishes only when every negotiating country is satisfied with the promises it and all of its negotiating partners are making. The slogan sometimes used is ‘Nothing Is Agreed until Everything Is Agreed.’

WORLD TRADE ORGANIZATION (WTO):

World Trade Organization (WTO) was established to Liberalize International Trade and supervises some set rules. It actually replaced the work done by General Agreement on Tariffs and Trade (GATT). WTO was established in January 1 1995 under the Marrakech Agreement. Its goals are exactly the same as of (GATT) to promote trade liberalization. It is relatively a small body based in Geneva having a director general and a small staff of economists, lawyers and others.

WTO is sometimes taken as a Trade Law making body, and that is wrong, because it doesn’t make any trade laws. It follows the set of rules described in Uruguay Round and each country has to decide their own trade rules. What it does is, it settles down the negotiations between the member countries and solves the disputes as it may require. Besides monitoring each member country’s trade policies, which the WTO fulfils by conducting periodic trade policy reviews of the member countries, the WTO club was also created to deal with disputes. This is surely the most important ‘power’ of the WTO.

CONCLUSION:

Since the WTO began in 1995 there have been over four hundred disputes brought to the DSB. Large number countries have been complainants and defendants although the two countries most often on one side or the other are the United States and the EU. Some of the most well-known disputes have involved bananas, steel, hormone-treated beef, and commercial aircraft. Lesser-known cases have involved narrow product groups such as Circular Welded Carbon Quality Line Pipe, Canned Tuna with Soybean Oil, Combed Cotton Yarn, and Retreaded Tires.

Traders know better what to expect from their trading partners because their partners have committed themselves to particular trade policies and to a resolution mechanism in the event of noncompliance. In a sense, then, it is true that the WTO agreements restrict the freedom of a country to set whatever trade policy it deems appropriate for the moment. That loss of sovereignty, though, is designed to prevent countries from choosing more destructive protectionist policies—policies that are very seductive to voters, especially in an economic crisis. If successful, the WTO could prevent a reoccurrence of Smoot-Hawley and its aftermath both now and in the future.