Part 12 - Trade policies and trade preferences

Question 1

Four different types of players might influence trade policy in a given country

Answer 1

1. Executive branch
2. Legislative branch
3. Private sector
4. Public interest

Question 2

Who is the highest U.S. authority on international trade issues?

Answer 2

The U.S Congress which represents the legislative branch

Question 3

The U.S. Congress:

Answer 3

• It represents the Legislative branch in the United States and has the power “[t]o regulate commerce with foreign nations” (see U.S. Constitution Art. 1, Section 8, Para. 3).
• It is the highest U.S. authority on international trade issues.

Question 4

Why the US Congress plays an important role?

Answer 4

• U.S Congress is the highest authority in the US for international trade issues - because of the historical background of “no taxation without representation”
• Since trade barriers (in particular tariffs) are one means to collect revenues, the U.S. Congress plays an important role.

Question 5

Can the US Congress delegate power to other players?

Answer 5

U.S. Congress can temporarily delegate trade power to the Executive, i.e., the Executive may start and conduct trade negotiations and sign trade agreements but ratification of trade agreements are still held by the U.S Congress and without its approval a new trade agreement cannot get into force.

Question 6

Trade Promotion Authority (US)

Answer 6

(so-called Fast-Track) plays an important role in this context: The U.S. Congress may only approve or reject a trade agreement in its entirety. – that means that if a congressman would not be satisfied with a specific part of the agreement he cannot ask to change only that part, he can only approve or not the overall agreement.

− Underlying logic: Trade negotiations are very complex and compromises in one area are likely connected to compromises in other areas.
− One modified issues might endanger whole deal.
− Foreign governments would anticipate this problem, being more reluctant to start negotiations with the United States in the first place.
− Fast-Track has not always been in legal force, but historically only from 1975-1994, 2002-2007 and since 2015.

Question 7

The U.S. Executive branch:

Answer 7

• Obviously, the head of the U.S. Executive branch is the President of the United States (POTUS).
• The (outgoing) 45th President of the United States: Donald J. Trump.
• For the rest of the U.S. Executive branch, we focus on the Office of the U.S. Trade Representative (USTR), the most important agency for U.S. trade policy.
• The (outgoing) head of this agency is the U.S. Trade Representative, Ambassador Robert Lighthizer.

Question 8

U.S. Trade Representative (USTR)

Answer 8

It is the most important agency for U.S. trade policy

The USTR has about 200 employees and is responsible for trade negotiations, dealing with trade disputes and interactions with international organizations, the Executive, the Legislative, the Private Sector and the Public interest.

Plays a role of a mediator many times.

Question 9

The Private Sector (US):

Answer 9

• There are various interest groups that engage in lobbying activities intended to pursuade the Legislative, the Executive or both of taking or abstaining from certain trade policy decisions.
• There are more than 11,000 registered lobbying groups in the United States (2015).
• Estimation of total U.S. lobbying expenses: USD 9 billion.

Question 10

The Public Interest (US):

Answer 10

• Fourth and final group represents mainly non-profit organizations like think tanks (e.g., the Brookings Institution, the Cato Institute), labor organizations, non-governmental organizations (aiming at human rights or the environment) and international organizations.
• Note that more organized groups are usually able to exert a stronger influence on decision makers.
• Remember that consumers are seldom politically organized due to the collective action problem. While it is in the interest of all consumers to press for lower trade barriers due to lower prices in the domestic market, it is not in any individual consumer’s interest to do so.

Question 11

Interaction of Players in U.S. Trade Policy:

Answer 11

Executive > presidente > OTMP - DoC - USTR > Other Departments - Independent Agencies

Legislative > congress < public interest - private sector

Question 12

Most important player for trading in the US nowadays:

Answer 12

According to Lima-Campos and Gaviria (2018), the Executive has been the most influential player since 2017, a role that used to be played by the Private Sector.
• The Executive > Private Sector> the Legislative > Public Interest.
• But note that the U.S. Congress has the last say, especially if the proposal relates to changes in tariffs or the ratification of a trade agreement.

Question 13

U.S President vs U.S Congress - trade negotiations

Answer 13

U.S. President can unilaterally stop trade negotiations (see for instance TPP or TTIP), but the POTUS cannot ratify a trade agreement. This means that no new trade agreement can come into force without consent of U.S. Congress.

Question 14

RTAs examples

Answer 14

• USMCA, formerly NAFTA (Canada, Mexico and United States).

* CAFTA-DR (Costa Rica, DominicanRepublic, El Salvador, Guatemala, Honduras, Nicaragua and the United States).

Question 15

Main changes relative to NAFTA:

Answer 15

− Treaty clause ensures that U.S. needs to be informed about any potential trade negotiations with China and that U.S. can leave USMCA within 6 months in case of a RTA between Mexico or Canada with China.
− Further rules aim at ensuring higher car production in the United States.
− US farmers get more access to the Canadian dairy market.
− Deal subject to review every six years and a sunset clause after 16 years, i.e., deal expires automatically after 16 years, if no new agreement is met.
− Investor-State Dispute Settlement (ISDS) provision substantially weakened.

Question 16

sunset clause NAFTA:

Answer 16

implies that if the deal is not prolonged (new agreement) the deal automatically expires.

Question 17

The Trans-Pacific Partnership (TPP)

Answer 17

was signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the U. S. in Feb. 2016 but Trump decided to withdraw in 2017 because Trump thought that U.S bargain power would be higher when negotiating based on a bilateral agreement instead of an agreement that involves many other countries.

The remaining nations signed a similar agreement called Comprehensive and Progressive Agreement for Trans-Pacific Partnership(CPTPP or TPP 11), which is in force since 2018, making it the third largest RTA by GDP (after USMCA and EU).

Question 18

The EU’s trade policy system - the European Commission:

Answer 18

It represents the Executive branch of the European Union, is independent of its 27 EU-member countries and
− Holds monopoly on drafting legislative proposals and widespread executive powers (e.g., competition law).
− Is the guardian of the EU treaties.
− Manages the EU-budget.
− Represents the EU and its members in trade negotiations.

Question 19

The European Commission is

Answer 19

the coordinator of the trade policy formulation and the only authorized negotiator in international trade on behalf of EU-member countries (after authorization by the Council).

EU Treaties foresee international trade negotiations as confidential, which has been heavily criticized during TTIP-negotiations due to a lack of transparency.

Question 20

The Legislative branch (EU):

Answer 20

It consists in the EU of the European Parliament and the Council of Ministers, who both approve or reject legislation.

− The Treaty of Lisbon (2007/2009) has increased the power of the European Parliament during trade negotiations.
− The European Parliament and the Council of Ministers must jointly agree on regulations relevant for EU’s trade policy.
− The Council of Ministers needs to adopt any trade agreement by qualified majority, i.e., representing at least 55% of EU-member countries and 65% of EU’s population.
− The European Parliament has to give its consent on a “take it or leave it” basis.

Question 21

mixed agreements:

Answer 21

trade agreements between the EU and a third country that also deal with regulatory and investment issues, have to be ratified by all EU-member state parliaments.

Question 22

Private sector (EU):

Answer 22

Prominent individuals, local groups and local associations influence state associations which, in turn, haven an impact on the decisions of national and supranational associations (which do not exist in the U.S.).

Question 23

The Public Interest:

Answer 23

Similar to the U.S., it is composed of all non-profit organizations.

Question 24

Who is the most influential player in the EU?

Answer 24

According to Lima-Campos and Gaviria (2018), in the EU, the Executive is the most influential player in the EU, since only the European Commission can propose rules and regulations on trade and is responsible for trade negotiations.
• The Executive > Legislative > Private Sector = Public Interest.

Question 25

Legislative parties in the EU:

Answer 25

European Parliament
Council of Ministers
International Trade Committee

Question 26

RTAs with several parties other than the EU (excerpt):

Answer 26

• European Economic Area (EEA): Important agreement that brings together the EU-member countries and three out of four EFTA-countries in a single market » this agreement prevents any material discrimination between these two free trade areas.
• Switzerland is not part of the EEA, but has a set of bilateral agreements with the European Union.

Question 27

Other than the EU itself, which is a customs union, what the most important RTA agreement to the EU?

Answer 27

European Economic Area (EEA)

Question 28

Trade and investment agreements with Vietnam

Answer 28

Last RTA signed by the EU

The trade agreement will eliminate nearly all customs duties on goods traded between the two sides.

Trade agreement went into force in July 2020 after ratification by both parties

The signing of this agreement is also a strategic move by the EU that seeks to focus on new trade agreements with emerging economics, mainly in Asia. Those markets are relative poor but growing fast which suggest that the need to European goods can increase.

Question 29

Transatlantic Trade and Investment Partnership (TTIP)

Answer 29

Most important RTA that never materialized.

While the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union has not been officially called off yet, the successful conclusion of the negotiations became very unlikely after the U.S. President Trump took office.
 
• TTIP would be the largest regional trade agreement.
 
• TTIP hotly debated in the public and in academia.
 
• TTIP has started as a very ambitious trade agreement, but the realization and scope of an eventual agreement are uncertain.

Question 30

Several studies aim at quantifying economic effects of TTIP:

Answer 30

• Certain convergence in estimates, but in particular gains from the reduction in non-tariff barriers to trade hard to identify.
• Egger et al. (2015): For ambitious RTA, 80% increase in bilateral trade and estimated gains in annual consumption range between 1% and 2.25% for the United States and EU, respectively.
• Felbermayr et al. (2015): For the European Union, long-run gains in GDP per capita of about 4% are expected.
• Both studies predict negative effects for non-RTA-member countries due to trade diversion.
• Switzerland would be the country most affected negatively.

Question 31

US Individual Preferences on International Trade?

Answer 31

Historically, the American public has viewed free trade positively, but this optimism towards free trade has declined in recent years:
• In 2016, a clear majority of 60% of U.S. respondents felt that U.S. jobs are lost due to free trade.
• Out of these 60% of U.S. respondents, nearly two-thirds voted for Donald Trump during the U.S. Presidential elections in 2016.
• Furthermore, among registered Republican voters, about two-thirds of Trump supporters believe that free trade agreements have been a bad idea for the United States.

Question 32

In Germany, the support for TTIP increased sharply from 17% to 55% within two years.

TRUE OR FALSE?

Answer 32

FALSE&raquo_space; Interestingly, in Germany, the support for TTIP dropped sharply from 55% to 17% within two years.

Question 33

Public Support for Protectionism Varies over Time and Across Countries

Answer 33

International data suggests that some countries have become more supportive of protectionism like Germany or the U.S. in recent years.

or

International data suggests that some countries have become less supportive of protectionism like France or Switzerland in recent years.

Question 34

There are two main groups of determinants of Individual trade preferences:

Answer 34

1. economic determinants

2. non-economic determinants

Question 35

Economic determinants of Individual trade preferences:

Answer 35

Consistent with trade theory, for instance, more highly-educated and high-skilled workers as well as workers in export-oriented industries view free trade more favorably.

Question 36

Non-economic determinants of Individual trade preferences:

Answer 36

− Gender: Females are more likely than males to oppose free trade. Nguyen and Spilker (2019) write: “So while the jury is still out for the exact mechanism underlying the gender gap the one thing we know for sure so far is that this gender gap exists and persistently so.”
− Age, marriage and employment status: Older individuals, married individuals and unemployed individuals are more supportive of protectionism.
− Ideology: Nationalist and chauvinistic individuals are more supportive of protectionist measures.

Question 37

Importance to individual trade preferences of how individuals process information and how political campaigns

Answer 37

• Negative information exerts stronger reactions than positive information, which might be due to loss-aversion.
• Negative campaigns often target successfully non-economic determinants, leading economic winners from free trade to vote against free trade.
• Hence, arguments in favor of free trade are hard to sell.
 
To conclude, individual trade preferences are shaped not only by economic determinants but also non-economic ones and policy makers need to reconsider, how to best convey their free trade arguments.