Week 4

Question 1

How do 2 countries (A has an absolute advantage) trade together ? Explain the theory

Answer 1

According to Ricardo’s theory of the comparative advantage, 2 countries would trade together because country A would invest in the field in what it does the best. B would then produce the other good.

Question 2

What supposes the model of Ricardo’s theory of the comparative advantage ?

Answer 2

There are 2 countries producing 2 goods.

The price of each good is given by the other.

Question 3

Which critics can we make against the Ricardo’s theory ?

Answer 3

His theory does not apply to the reality especially because the reality is more complex than the model: trade can collapse, trade liberalization are hard to achieve and finally there are more than 2 countries.

Question 4

Explain the liberal model of trade

Answer 4

According to the liberal, the preferences of a government are high welfare gains through greater consumption opportunities. In order to achieve this desire the game will be “harmony” (order : L/L > P/L = L/P > P/P). As a consequence the government will engage free trade and follow the Pareto optimal.

Question 5

Explain the mercantilist model of trade

Answer 5

According to the mercantilist, the preferences of a governement put significant weight on employement in import competing sectors. In order to achieve this desire the game will be “prisonner’s dilemma) (order: P/L > L/L > P/P > L/P). As a consequence the governement is protectionnist altough free trade would be Pareto superior.

Question 6

Who does/doesn’t benefit from protection ?

Answer 6

Winner = government and import competing producers
Looser = consumers

Question 7

How can we improve the mercantilist model ? Cite strategies and requirements

Answer 7

Strategies:
- repeated play
- longer time horizon shadow of the future
- reciprocity
- higher costs of defection
- change pay-off structure
Requirements:
- regular interactions/ tie countries together
- rules of appropriate behaviour
- enforcement
- information
- forum for negociation
- monitoring

Question 8

What are the 5 characteristics of the GATT system ?

Answer 8

• multilateral/ structure: global and permanent membership
• decision making by consensus (1 vote = 1 country)
• regulations on all aspects of trade (tariffs, NTBs, etc..)
• trade policy review
• dispute settlement

Question 9

What is the purpose of the GATT’s multilateral structure ?

Answer 9

promote repeated interaction; provide centralized forum; facilitate issue linkage

Question 10

What is the purpose of the GATT’s consensus ?

Answer 10

increase legitimacy; encourage broad compliance with global trading rules

Question 11

What is the purpose of the GATT’s regulation ?

Answer 11

set standards of appropriate behavior; clarify

obligations and rights to define `defections’

Question 12

What is the purpose of the GATT’s trade policy review?

Answer 12

provide information and monitor states’ behavior; detect `defections’

Question 13

What is the purpose of the GATT’s dispute settlement ?

Answer 13

clarify rules in case of disagreement; identify `defections’; enforce cooperation through blaming; authorise retaliation; institutionalise reciprocity

Question 14

What are the 4 norms of the GATT ?

Answer 14

1. market liberalism
2. non-discrimination
3. trade openness
4. transparency

Question 15

What are the 4 rules of the GATT ?

Answer 15

1. most favoured nations rule
2. national treatment rule
3. dispute settlement
4. trade policy review

Question 16

What are the 2 main organs of the WTO ?

Answer 16

1. Ministerial conference

2. General council

Question 17

What is the role of the Ministerial conference ?

Answer 17

highest authority, decides on trade agreements

Question 18

What is the role of the General council ?

Answer 18

on behalf of Ministerial Conference, as Dispute Settlement Body (DSB) or Trade Policy Review Body
(TPRB)

Question 19

How do the countries vote at the ministerial conference ?

Answer 19

equal voting power (one country, one vote); de facto veto

power

Question 20

What is the role of the DSB ?

Answer 20

oversees dispute settlement mechanism; adopts panel rulings

Question 21

What is the role of the TPRB ?

Answer 21

regular review of all members, oversees review process

Question 22

Which author is studying the power within the GATT ?

Answer 22

Steinberg

Question 23

Explain the theory of “shadow of law” by Steinberg

Answer 23

IV = norms and rules
DV = cooperation
The GATT is a big organization, thus the power of each country should not count. Every country will bargain under the shadow of the law (1 country = 1 vote –> protection of sovereign equality) and we can see this during the launch phase. In fact every country has the right to propose a new regulation and start initiatives on how trade policy should change.

Question 24

Explain the theory of “shadow of power” by Steinberg

Answer 24

IV = power // BATNA (best alternative to a negociated agreement)
DV = forced agreement
Within the GATT there is 1 source of power: the relative market size. Thus every country has a different BATNA. If you are big country (with a big market) you don’t need market access as urgently as a small country. And this power comes at play at the closure phase of a negociation round.
Formally these bigger countries does not have more power however there are informal agenda setting: the initiative proposed by a small country won’t impact like if it was proposed by a bigger country (powerful), they have a habit of dying !
Consequently the small country will desagree because they weren’t heard. Formally they would have the power to reject the new policy (veto power) however the bigger countries will coerce the small country to adopt the agreement.

Question 25

Which author studies the effects of GATT on trade ?

Answer 25

Goldstein et al.

Question 26

Explain the gravity model of trade ?

Answer 26

If 2 countries are bigger, then they are trading more.

If 2 countries are close to each other (small distance), then we expect more trade.

Question 27

Explain the theory of the effects of GATT by Goldstein et al.

Answer 27

In an Analysis, Goldstein et. Al. Try to answer the question of How does the GATT/WTO system affect trade? Notes from the tutorials explain the study in further detail. The result found in previous studies was that the GATT has a negative effect or no effect on trade.
But Goldstein’s study shows that the GATT membership has a strong effect on trade. That even non-member participants who follow the GATT rules benefit from the structure.

Question 28

Explain the theory of substantive effects by Goldstein

Answer 28

The substantive effects of GATT is significant however its effects are decreasing over time. Other agreements become increasingly important: PTA (preferential trade agreements)

Question 29

What is the role of the dispute settlement body ? From a political and legal point of view

Answer 29

the role of the dispute settlement body:
from the legal view
- rule clarification
- interpretation of law
- reduction of uncertainty
political view
- identification of defection
- implementation of reciprocity
- tool of enforcement and sanctionning > not clarification !

Question 30

What is the critique about the role of the dispute settlement body ?

Answer 30

the participation bias !
It is very costly on the economic and political point of view for poorer country.
ex. political view = retaliation in other arena > poor countries depend on other powerful countries

Question 31

Explain the participation bias in the DSB ?

Answer 31

Rich countries participate more as they are more powerful. There is an underrepresentation of developping countries and the absence of least developped countries. See: cotton case

Question 32

Explain the dispute initiation by Sattler and Bernauer

Answer 32

IV: Power Asymmetry (Variation in Trade and Market Size)
DV: probability of dispute
The high variation in trade and market size increases the probability of dispute. If 2 countries are equally powerfull, they dare to start a trade dispute (there will be not great retaliation).