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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