The Political Economy of international Trade
CLOSING CASE
Chapter 7
245
reasons.
can't sell into Argentina, China has stopped a wide
range of imports of food and drink products from Europe,
citing safety rules and environmental concerns, while
India has banned imports of toys from China for safety
Developed nations in general did not take similar ac
tions, but they sharply increased subsidies to troubled
domestic producers, which gave them an advantage
against unsubsidized international competitors, and
therefore may have distorted trade. The key example of
This contraction is alarming because past sharp
declines in trade have been followed by calls for greater
protectionism from foreign competition as governments
The Global Financial Crisis and Protectionism
Two facts have characterized international trade be-
tween 1986 and 2007. First, the volume of world trade
global economy, and second, barriers to international
grew every year, creating an increasingly interdependent
trade were progressively reduced. Between 1990 and
2007 international trade grew by 6 percent annually
compounded, while import tariffs on goods fell from an
average of 26 percent in 1986 to 8.8 percent in 2007. In
the wake of the global financial crisis that started in the
United States in 2008 and quickly spread around the
world, this changed. As global demand slumped and
financing for international trade dried up in the wake of
this in 2008 and 2009 was the automobile industry,
tight credit conditions, so did the volume of interna-
tional trade. The volume of world trade fell by 2 percent
To protect national producers, hold on to jobs, and stave
of bankruptcies, rich countries including the United
in 2008, the first decline since 1982, and then slumped a
States, Britain, Canada, France, Germany, Italy, and
further 12 percent in 2009.
Sweden gave over $45 billion in subsidies to car compa-
nies between mid-2008 and mid-2009. The problem
with such subsidies is that they could cause production
to switch from more efficient plants to less efficient
try to protect jobs at home in the wake of declining de-
plants that have an advantage due to state support.
mand. This is what occurred in the 1930s, when
Although the WTO has rules against trade-distorting
shrinking trade was followed quickly by increases in
subsidies, its enforcement mechanisms are weaker than
trade barriers, mostly in the form of higher tariffs. This
in the case of tariffs, and so far countries that have been
increasing subsidies have not been challenged.
actually made the situation far worse and led to the
The volume of international trade has since re-
Great Depression.
bounded strongly, growing by around 14.5 percent on
Much has changed since the 1930s. Treaties now in the back of a 3.1 percent increase in the size of the
place limit the ability of national governments to raise global economy in 2010. As this happened, protection-
trade barriers. Most notably, World Trade Organization
ist pressures abated somewhat. Trade rebounded more
rules in theory constrain the ability of countries to im- strongly in developing nations than in the developed
plement significant increases in trade barriers. But WTO world. China, in particularly, saw a massive 28.5 percent
rules are not perfect and there is plenty of evidence that
leap in the volume of its exports, which created addi-
countries are finding ways to raise barriers to interna- tional trade tensions.57
tional trade. Many developing countries have latitude
Case Discussion Questions
under WTO rules to raise some tariffs, and according to
the World Bank, in 2008 and 2009 they were doing just
1. Why do you think calls for protectionism are
that. For example, Ecuador raised duties on 600 goods,
greater during sharp economic contractions than
during boom periods?
Russia increased import tariffs on used cars, while India
placed them on some sorts of steel imports.
2. Despite the sharp economic contraction during
2008-2009, the increase in protectionist mea-
According to the World Bank, however, two-thirds of
sures was fairly modest. Why do you think this
the protectionist measures taken in 2008 and 2009 were
various kinds of "non-tariff barriers that are designed to
3. During 2008-2009 many developed nations gave
get around WTO rules." Indonesia, for example, speci-
subsidies to their automobile producers. How
fied that certain kinds of goods, including clothes, shoes,
might this have distorted international trade?
and toys, can be imported only through five ports. Since
Was this a reasonable thing to do given the
these ports have limited capacity, this constrains the
4. What might occur if a renewed economic slow-
down triggered a wave of protectionist measures
was the case?
circumstances?
ability of foreign companies to sell into the Indonesian
market. Argentina has imposed discretionary licensing
requirements on a range of goods including car parts,
textiles, and televisions. If you can't get a license, you
logile
174
International Management
246
Part 3
The Global Trade and Investment Environment
around the world? Would protectionism actually
protect jobs, or would it make things worse?
5. The volume of world trade rebounded sharply in
2010 on the back of a fairly modest growth rate
in the world economy. What does this tell you
about the nature of international production in
today's global economy? What does this tell you
about the vulnerability of the world economy to
any future trade wars?
Notes
1. S. Chan, "World Trade Organization Upholds American
Tariffs on Imports of Tires from China," The New York
Times, December 14, 2010, p. B3: "WTO Rules US Tariff
on Chinese Tire Imports," China Daily, December 14,
2010; and J. M. Freedman, "WTO Rules US Tariffs on
Chinese Tire Imports Legal," Bloomberg Businessweek,
December 27, 2010.
2. For a detailed welfare analysis of the effect of a tariff, see
P. R. Krugman and M. Obstfeld, International Economics:
Theory and Policy (New York: HarperCollins, 2000),
chap. 8.
3. Y. Sazanami, S. Urata, and H. Kawai, Measuring the Costs
of Protection in Japan (Washington, DC: Institute for In-
ternational Economics, 1994).
4. J. Bhagwati, Protectionism (Cambridge, MA: MIT Press,
1988); and "Costs of Protection," Journal of Commerce,
September 25, 1991, p. 8A.
5. World Trade Organization, World Trade Report 2006
(Geneva: WTO, 2006).
6. The study was undertaken by Kym Anderson of the
University of Adelaide. See "A Not So Perfect Market,"
The Economist; Survey of Agriculture and Tobal
S. Oberbeck, "U.S. Magnesium Plans Big Utah Produc-
tion Expansion," Salt Lake Tribune, March 30, 2005.
14. Alan Goldstein, "Sematech Members Facing Dues In-
crease; 30% Jump to Make Up for Loss of Federal Fund-
ing," Dallas Morning News, July 27, 1996, p. 2F.
15. N. Dunne and R. Waters, “U.S. Waves a Big Stick at
Chinese Pirates," Financial Times, January 6, 1995, p. 4.
16. B. Tomson, "U.S. Beef Heads Back to China," Barron's,
December 26, 2005, p. M16.
17. Bill Lambrecht, "Monsanto Softens Its Stance on Label-
ing in Europe," St. Louis Post-Dispatch, March 15, 1998,
p. E1.
18. Peter S. Jordan, "Country Sanctions and the Interna-
tional Business Community," American Society of Interna-
tional Law Proceedings of the Annual Meeting 20, no. 9
(1997), pp. 333-42.
19. "Waiting for China; Human Rights and International
Trade," Commonwealth, March 11, 1994; and "China:
The Cost of Putting Business First," Human Rights Watch,
July 1996.
20. For a comprehensin
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