Saturday, April 08, 2017

The Scope of the Trade Regime: Protectionism vs. Trade Barriers

There are two schools of thought about the scope of the international trade

The first school believes that talking about "protectionism" is a bad idea. People of this school don't like the concept of protectionism as a basis for the trade regime, for a number of reasons. First, it is hard to define, in part because it involves determining the intent of a government, which can be difficult to discern. Second, it's a dangerous concept because it involves accusations that a country is acting in "bad faith,"and such accusations are considered inappropriate. Finally, a focus on protectionism misses a lot of other significant "trade barriers." As a result, this school tries to avoid any use of intent when interpreting non-discrimination obligations, and prefers to rely on more "objective" tests, such as evaluating the relationship between a measure and its stated objectives or looking at whether there are alternative measures that accomplish the same purpose in a less trade restrictive way.

The second school, by contrast, is concerned about the possible overbroad scope of a trade regime that does not have protectionist intent as a limiting factor. With tests such as "necessity," "reasonableness," etc., it is not clear how far beyond measures with protectionist intent the trade regime extends, and people of this view worry that it will go too far. Also, this school believes that it is hard to sell the public on a regime that is based on the undefined concept of "trade barriers." Anything could constitute a "trade barrier," and thus there is no clear way to define what policies are being targeted and what the scope is. By contrast, for this school, protectionism is a well-understood concept, and it is very clear to the public what is being targeted. Therefore, the focus of trade agreements should be on intentional discrimination against particular countries, or against foreign goods/services/investment in general.

Protectionism is an economic policy which is meant to benefit domestic producers of goods and services. In a nation with protectionist policies, domestic producers are insulated from competition against foreign firms by a series of barriers to import. They may also be supported directly by the government with the use of subsidies. The opposite of protectionism is free trade, in which goods are freely permitted to cross borders. Many nations support free trade, and would prefer to see protectionist economic policies barred altogether. Signatories to the General Agreement of Tariffs and Trade (GATT) and members of the World Trade Organization (WTO), for example, are typically proponents of free trade.

The logic behind protectionism is that domestic industries may suffer when confronted with foreign imports which are available at cheaper prices due to lower cost of labor, more readily available natural resources, or foreign government subsidies which help the producers keep their costs low. By imposing stiff import tariffs and quotas, a government can theoretically increase the market for domestic goods, by essentially closing the market to foreign producers. This in turn is designed to benefit the domestic economy.

When restrictions on imports are accompanied by government subsidies to domestic companies and government export subsidies to encourage exports of domestic products, protectionism is intended to benefit domestic companies. However, this is not always the case. Thanks to the lack of competition, companies may have less interest in developing innovative new products, sticking with old inventions and technologies. They may also face export barriers, because foreign countries often respond to protectionism with protectionist policies of their own.

Individual citizens can also suffer under protectionism, because they may find that prices for goods and services become inflated. Without low-cost foreign competition, companies can afford to charge whatever they like for their goods and services, and this means that consumers may pay prices which are much higher than those paid by people in other regions of the world. They may also chafe at the lack of innovation, or lobby for a greater freedom to choose between products.

Supporters of protectionism argue that it can help nascent industries by insulating them from the open market until they are strong enough to function independently. Protectionism also theoretically protects domestic employment, by encouraging companies to hire domestically, and it can be used to promote living wages and better benefits for employees. Proponents point out that protectionism can also be used to pressure foreign nations to improve conditions for their worker

Positive and Negative economic and social implications of globalization.

Increased integration and interdependence between countries coming together in a global economy

• Eroding national boundaries, international developments, international organizations having and increasing impact on economic performance

• Trades in G + S US$8.5 trillion to US$16.0 trillion 1990-2002. Averaging 7% growth per year.

• Financial flows reaching US$24.5 trillion in 2003. Deregulation of financial markets. Increased volatility and speculation.

• Investment growth. FDI grew seven fold between 1990-2000. Fell to US$560 billion in 2003 due to economic slowdown. Reflecting interdependence between developing and developed.

• TNC’s doubled from 37,000 to 60,000. Expansion of other features extending beyond national boundaries.

• Advocates – best opportunity for growth, specialization, allocative efficiency, greater access to technology, labour and increased living standards

• Critics – Widening gap between rich and poor, distorts distribution of income and wealth, environmental costs, richer nations and NIC’s are favored, while developing and transition economies are neglected

• Increased trade flows with growth in trading blocs and agreements. Increased specialization and efficiency. Increase growth and GWP. Growth in global trade expected to remain over 7%.

• FTA with China in July 2005 TFC industry. Lift tariffs, may cause structural unemployment, benefit specialist/brand name textile market

• If trade growth in Africa, Asia and Latin America is lifted by 1%, it will lift 128 million out of poverty

• WTO Doha November 2001 – cut protection US$700 billion, raise GWP by US$2.8 trillion by 2015 – failed to meet January 1 2005 deadline. WTO Hong Kong November 2005.

• Poorer nations’ share of world trade has declined

Financial and investment flows

• Deregulation, improve access to overseas finance to fund domestic investment, negative effect on CAD, increased volatility and speculation

• Increased FDI – six times greater than levels in 1980’s, 77% of flows received by developed nations in 2002. Accelerates growth and innovation.

• Growth of capital flows, increased speculation and volatility, Asian financial crisis in late 1990’s, short term financial flow increased with exchange traded derivatives reaching US$24.5 trillion in 2003. Negative impact on CAD and growth.

Economic Performance and Living Standards

• Increased competition, technology, innovation, specialization in efficient industries, increased global growth

• Sub-Saharan African transition economies experiencing stagnant/negative rates of growth. NIC’s in Asia Pacific average growth of 7.3% 1990-2002.

• Absolute poverty is decreased with increased growth and better living standards

• Countries unable to attract FDI are worse off as the income gap widens. Emergence of the “global elite” with majority of poorer nations left behind as resources and labour are directed to the richer productive nations. 2.8 billion living on less than US$2 a day.

Government Policies
• Economic management – market oriented economic policy to increase international competitiveness. Australian economy adopting floating exchange rate in December 1983 as a shift towards market forces. Less Government intervention opening up economy. Implementing of macroeconomic policy for the long term supply rather than macro short term demand which will effect inflation and markets.

• Transition economies adopting these policies have suffered from severe economic problems

Environmental Problems

• Greater global environmental awareness – global policies conventions to enforce environmental compliance. Ratification of the Kyoto protocol achieving multilateral progress.

• Environmental degradation through industry practices, exploitation of environment for economic growth

• WTO restricting ability of countries to put environmental protections as they are trade barriers. Doha discussing possible proposals.

The Flows of Globalization: 
In a global economy, no nation is self-sufficient. Each is involved at different levels in trade to sell what it produces, to acquire what it lacks and also to produce more efficiently in some economic sectors than its trade partners. As supported by conventional economic theory, trade promotes economic efficiency by providing a wider variety of goods, often at lower costs, notably because of specialization, economies of scale and the related comparative advantages. International trade is also subject to much contention since it can at time be a disruptive economic and social force as it changes the conditions wealth is distributed within a national economy, particularly due to changes in prices and wages.The globalization of production is concomitant to the globalization of trade as one cannot function without the other. Even if international trade has taken place centuries before the modern era, as ancient trade routes such as the Silk Road can testify, trade occurred at an ever increasing scale over the last 600 years to play an even more active part in the economic life of nations and regions. This process has been facilitated by significant technical changes in the transport sector. The scale, volume and efficiency of international trade have all continued to increase since the 1970s. As such, space / time convergence was an ongoing process that implied a more extensive market coverage that could be accessed with a lower amount of time. It has become increasingly possible to trade between parts of the world that previously had limited access to international transportation systems. Further, the division and the fragmentation of production that went along with these processes also expanded trade. Trade thus contributes to lower manufacturing costs.Without international trade, few nations could maintain an adequate standard of living. With only domestic resources being available, each country could only produce a limited number of products and shortages would be prevalent. Global trade allows for an enormous variety of resources – from Persian Gulf oil, Brazilian coffee to Chinese labor – to be made more widely accessible. It also facilitates the distribution of many different manufactured goods that are produced in different parts of the world to what can be labeled as the global market. Wealth becomes increasingly derived through the regional specialization of economic activities. This way, production costs are lowered, productivity rises and surpluses are generated, which can be transferred or traded for commodities that would be too expensive to produce domestically or would simply not be available. As a result, international trade decreases the overall costs of production worldwide. Consumers can buy more goods from the wages they earn, and standards of living should, in theory, increase.International trade consequently demonstrates the extent of globalization with increased spatial interdependencies between elements of the global economy and their level of integration. These interdependencies imply numerous relationships where flows of capital, goods, raw materials and services are established between regions of the world. At the beginning of the 21st century, the flows of globalization have been shaped by four salient trends:

• An ongoing growth of international trade, both in absolute terms and in relation to global national income. From 1970 to 2010 the value of exports has grown by a factor of 48 times if measured in current dollars, while GDP increased 22 times and population increased 1.8 times.

• A substantial level of containerization, often complete, of commercial flows. Containerization tends to grow at a rate faster than trade and GDP growth.

• A higher relative growth of trade in Pacific Asia as many economies developed an export-oriented development strategy that has been associated with imbalances in commercial relations.

• The growing role of multinational corporations as vectors for international trade, particularly in terms of the share of international trade taking place within corporations and the high level of concentration of their head offices.

Trade Facilitation
The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods. By 2007, international trade surpassed for the first time 50% of global GDP, a twofold increase in its share since 1950. The facilitation of trade involves how the procedures regulating the international movements of goods can be improved. It depends on the reduction of the general costs of trade, which considers transaction, tariff, transport and time costs, often labeled as the "Four Ts" of international trade. United Nations estimates have underlined that for developing countries a 10% reduction in transportation cost could be accompanied with a growth of about 20% in international and domestic trade. Thus, the ability to compete in a global economy is dependent on the transport system as well as a trade facilitation framework with activities including:

• Distribution-based. A multi-modal and inter-modal freight transport system composed of modes, infrastructures and terminals that spans across the globe. It insures a physical capacity to support trade and its underlying supply chains.

• Regulation-based. Customs procedures, tariffs, regulations and handling of documentation. They insure that trade flows abide to the rules and regulations of the jurisdictions they cross. Cross-border clearance, particularly in developing countries, can be a notable trade impediment with border delays, bottlenecks and long customer clearance times.

• Transaction-based. Banking, finance, legal and insurance activities where accounts can be settled and risk mitigated. They insure that the sellers of goods and services are receiving an agreed upon compensation and that the purchasers have a legal recourse if the outcome of the transaction is judged unsatisfactory or is insured if a partial or full loss incurs.

The quality, cost, and efficiency of these services influence the trading environment as well as the overall costs linked with the international trade of goods. Many factors have been conductive to trade facilitation in recent decades, including integration processes, standardization, production systems, transport efficiency and transactional efficiency:

• Integration processes, such as the emergence of economic blocks and the decrease of tariffs at a global scale through agreements, promoted trade as regulatory regimes were harmonized. One straightforward measure of integration relates to custom delays, which can be a significant trade impediment since it adds uncertainty in supply chain management. The higher the level of economic integration, the more likely the concerned elements are to trade. International trade has consequently been facilitated by a set of factors linked with growing levels of economic integration, the outcome of processes such as the European Union or the North American Free Trade Agreement. The transactional capacity is consequently facilitated with the development of transportation networks and the adjustment of trade flows that follows increased integration. Integration processes have also taken place at the local scale with the creation of free trade zones where an area is given a different governance structure in order to promote trade, particularly export oriented activities. In this case, the integration process is not uniform as only a portion of a territory is involved. China is a salient example of the far-reaching impacts of the setting of special economic zones operating under a different regulatory regime.

• Standardization concerns the setting of a common and ubiquitous frame of reference over information and physical flows. Standards facilitate trade since those abiding by them benefit from reliable, interoperable and compatible goods and services which often results in lower production, distribution and maintenance costs. Measurement units were among the first globally accepted standards (metric system) and the development of information technologies eventually led to common operating and telecommunication systems. It is however the container that is considered to be the most significant international standard for trade facilitation. By offering a load unit that can be handled by any mode and terminal with the proper equipment, access to international trade is improved.

• Production systems are more flexible and embedded. It is effectively productive to maintain a network of geographically diversified inputs, which favors exchanges of commodities, parts and services. Information technologies have played a role by facilitating transactions and the management of complex business operations. Foreign direct investments are commonly linked with the globalization of production as corporations invest abroad in search of lower production costs and new markets. China is a leading example of such a process, which went on par with a growing availability of goods and services that can be traded on the global market.

• Transport efficiency has increased significantly because of innovations and improvements in the modes and infrastructures in terms of their capacity and throughput. Ports are particularly important in such a context since they are gateways to international trade through maritime shipping networks. As a result, the transferability of commodities, parts and finished goods has improved. Decreasing transport costs does more than increasing trade; it can also help change the location of economic activities. Yet, transborder transportation issues remain to be better addressed in terms of capacity, efficiency and security.

• Transactional efficiency. The financial sector also played a significant role in integrating global trade, namely by providing investment capital and credit for international commercial transactions. For instance, a letter of credit may be issued based upon an export contract. An exporter can thus receive a payment guarantee from a bank until its customer finalizes the transaction upon delivery. This is particularly important since the delivery of international trade transactions can take several weeks due to the long distances involved. During the transfer, it is also common that the cargo is insured in the event of damage, theft or delays, a function supported by insurance companies. Also, global financial systems permit to convert currencies according to exchange rates that are commonly set by market forces, while some currencies, such as the Chinese Yuan, are set by policy. Monetary policy can thus be a tool, albeit contentious, used to influence trade.

Structure of Global Trade
International trade, both in terms of value and tonnage, has been a growing trend in the global economy. It is important to underline when looking at the structure of global trade that it is not nations that are trading, but mostly corporations with the end products mostly consumed by individuals. Inter and intra corporate trade is taking place across national jurisdictions is accounted as international trade. 

The emergence of the current structure of global trade can mainly be articulated within three major phases:

 First phase (immobile factors of production) Concerns a conventional perspective on international trade that prevailed until the 1970s where factors of production were much less mobile. Prior to the end of World War I, global trade was mainly structured by colonial relations. Particularly, there was a limited level of mobility of raw materials, parts and finished products. After World War I international trade became fairly regulated with impediments such tariffs, quotas and limitations to foreign ownership. Trade mainly concerned a range of specific products, namely commodities, (and very few services) that were not readily available in regional economies. Due to regulations, protectionism and fairly high transportation costs, trade remained limited and delayed by inefficient freight distribution. In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency.

 Second phase (mobility of factors of production). From the 1980s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place lead to a better realization of the comparative advantages of specific locations. Concomitantly, regional trade agreements emerged and the global trade framework was strengthened from a legal and transactional standpoint (GATT/WTO). In addition, containerization provided the capabilities to support more complex and long distance trade flows, as did the growing air traffic. Due to high production (legacy) costs in old industrial regions, activities that were labor intensive were gradually relocated to lower costs locations. The process began as a national one, then went to nearby countries when possible and afterwards became a truly global phenomenon. Thus, foreign direct investments surged, particularly towards new manufacturing regions as multinational corporations became increasingly flexible in the global positioning of their assets.

 Third phase (global production networks). There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production. Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution and consumption with the emergence of global production networks. Complex networks involving flows of information, commodities, parts and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution (see concept 3). In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows.

The global economic system is thus characterized by a growing level of integrated services, finance, retail, manufacturing and nonetheless distribution, which in turn is mainly the outcome of improved transport and logistics, a more efficient exploitation of regional comparative advantages and a transactional environment supportive of the legal and financial complexities of global trade.

Global Trade Flows
Global trade flows have recently shifted with many developing countries having a growing participation in international trade. The nature of what can be considered international trade has also changed, particularly with the emergence of global commodity chains. This trend obviously reflects the strategies of multinational corporations positioning their manufacturing assets in order to lower costs, maximize new market opportunities, while maintaining the cohesion of their supply chains and the freight distribution systems supporting them. In addition, another emerging trade flow concerns the imports of resources from developing countries, namely energy, commodities and agricultural products, which diverge from the conventional role of developing countries as exporters of resources. The dominant factor behind the growth in international trade has been an increasing share of manufacturing activities taking place in developing countries with manufacturers seeking low cost locations for many stages of the supply chain. The evolution of international trade thus has a concordance with the evolution of production. There are however significant fluctuations in international trade that are linked with economic cycles of growth and recession, fluctuations in the price of raw materials, as well as disruptive geopolitical and financial events. The international division of production has been accompanied by growing flows of manufactured goods, which take a growing share of international trade. There is relatively less bulk liquids (such as oil) and more dry bulk and general cargo being traded.The geography of international trade still reveals the dominance of a small number of countries, mainly in North America, Europe and Asia, which are commonly referred as the triad. Alone, the United States, Germany and Japan account for about a third of all global trade, but this supremacy is being seriously challenged by emerging economies. Further, G7 countries account for half of the global trade, a dominance which has endured for over 100 years. A growing share is being accounted by the developing countries of Asia, with China accounting for the most significant growth both in absolute and relative terms. Those geographical and economic changes are also reflected over trans-oceanic trade with Trans-Pacific trade growing faster than Trans-Atlantic trade.Neo-mercantilism is reflective of global trade flows as several countries have been actively pursuing export-oriented economic development policies using infrastructure development, subsidies, and exchange rates as tools. This strategy has been followed by developing economies, particularly in Pacific Asia, and resulted in growing physical and capital flow imbalances in international trade. This is particularly reflective in the American container trade structure, which is highly imbalanced and having acute differences in the composition of imports and exports. Still, these imbalances must be looked at with caution as products are composed of parts manufactured in several countries with assembly often taking place in a low cost location. In international trade statistics, this location assumes the full value of finished goods imported elsewhere while it may have only contributed to a small share of the total added value. Electronic devices are illustrative of this issue.Regionalization has been one of the dominant features of global trade as the bulk of international trade has a regional connotation, promoted by proximity and the establishment of economic blocs such as NAFTA and the European Union. The closer economic entities are, the more likely they are to trade, which explains that the most intense trade relations are within Western Europe and North America. A similar, but more recent trend has also emerged in Asia, particularly between Japan, China, Korea and Taiwan.5. International Transportation.The growth of the amount of freight being traded as well as a great variety of origins and destinations promotes the importance of international transportation as a fundamental element supporting the global economy. Economic development in Pacific Asia and in China in particular has been the dominant factor behind the growth of international transportation in recent years. Since the trading distances involved are often considerable, this has resulted in increasing demands on the maritime shipping industry and on port activities. As its industrial and manufacturing activities develop, China is importing growing quantities of raw materials and energy and exporting growing quantities of manufactured goods. The outcome has been a surge in demands for long distance international transportation. The ports in the Pearl River delta in Guangdong province now handle almost as many containers as all the ports in the United States combined.International transportation systems have been under increasing pressures to support additional demands in freights volume and the distance at which this freight is being carried. This could not have occurred without considerable technical improvements permitting to transport larger quantities of passengers and freight, and this more quickly and more efficiently. Few other technical improvements than containerization have contributed to this environment of growing mobility of freight. Since containers and their intermodal transport systems improve the efficiency of global distribution, a growing share of general cargo moving globally is containerized.Consequently, transportation is often referred to as an enabling factor that is not necessarily the cause of international trade, but as a condition without which globalization could not have occurred. A common development problem is the inability of international transportation infrastructures to support flows, undermining access to the global market and the benefits that can be derived from international trade. International trade also requires distribution infrastructures that can support trade between several partners. Three components of international transportation facilitate trade:

• Transportation infrastructure. Concerns physical infrastructures such as terminals, vehicles and networks. Efficiencies or deficiencies in transport infrastructures will either promote or inhibit international trade.

• Transportation services. Concerns the complex set of services involved in the international circulation of passengers and freight. It includes activities such as distribution, logistics, finance, insurance and marketing.

• Transactional environment. Concerns the complex legal, political, financial and cultural setting in which international transport systems operate. It includes aspects such as exchange rates, regulations, quotas and tariffs, but also consumer preferences.

About half of all global trade takes place between locations of more than 3,000 km apart. Because of this geography, most international freight movements involve several modes since it is impossible to have a physical continuity in freight flows. Transport chains must thus be established to service these flows which reinforce the importance of intermodal transportation modes and terminals at strategic locations. Among the numerous transport modes, two are specifically concerned with international trade:

• Ports and maritime shipping. The importance of maritime transportation in global freight trade in unmistakable, particularly in terms of tonnage as it handles about 90% of the global trade. Thus, globalization is the realm of maritime shipping, with containerized shipping at the forefront of the process. The global maritime transport system is composed of a series of major gateways granting access to major production and consumption regions. Between those gateways are major hubs acting as points of interconnection and transshipment between systems of maritime circulation.

• Airports and air transport. Although in terms tonnage air transportation carries an insignificant amount of freight (0.2% of total tonnage) compared with maritime transportation, its importance in terms of the total value is much more significant; 15% of the value of global trade. International air freight is about 70 times more valuable than its maritime counterpart and about 30 times more valuable than freight carried overland, which is linked with the types of goods it transports (e.g. electronics). The location of freight airports correspond to high technology manufacturing clusters as well as intermediary locations where freight planes are refueled and/or cargo is transshipped.

Road and railway modes tend to occupy a more marginal portion of international transportation since they are above all modes for national or regional transport services. Their importance is focused on their role in the "first and last miles" of global distribution. Freight is mainly brought to port and airport terminals by trucking or rail. There are however notable exceptions in the role of overland transportation in international trade. A substantial share of the NAFTA trade between Canada, United States and Mexico is supported by trucking, as well as large share of the Western European trade. In spite of this, these exchanges are at priori regional by definition, although intermodal transportation confers a more complex setting in the interpretation of these flows.Still, many challenges are impacting future developments in international trade and transportation, mostly in terms of demographic, energy and environmental issues. While the global population and its derived demand will continue to grow and reach around 9 billion by 2050, demographic changes such as the aging of the population, particularly in developed countries, will transform consumption patterns as a growing share of the population shifts from wealth producing (working and saving) to wealth consuming (selling saved assets).

 The demographic dividend in terms of peak share of working age population that many countries benefited from, particularly China, will recede. As both maritime and air freight transportation depend on petroleum, the expected scarcity of this fossil fuel will impose a rationalization of international trade and its underlying supply chains. Environmental issues have also become more salient with the growing tendency of the public sector to regulate components of international transportation that are judged to have negative externalities. Also, international trade enables several countries to mask their energy consumption and pollutant emissions by importing goods that are produced elsewhere and where environmental externalities are generated. Thus international trade has permitted a shift in the international division of production, but also a division between the generation of environmental externalities and the consumption of the goods related to these externalities.

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