Week 4: Lecture 7 - Trade with Developing Countries Flashcards
(16 cards)
How can a common trade policy help the development of poor countries?
- Preferential or reduction of import restrictions
- Less strict measures on unfair trade practices
- Trade facilitation and changing trade-related rules
Give some examples of existing common trade policies
- Cotonou Agreement: This is a treaty between the EU and the African, Caribbean and Pacific group of states
- ASEAN (Association for South East Asian Nations)
What is the Generalized system of preferences (GSP)?
The Generalized system of preferences includes two things:
1- A preferential tariff system with some countries
2- A formal system of exemption from the more general rules of the World Trade Organization (WTO) such as the most favoured nation principle
What is the most favoured nation principle of the WTO?
Most favoured nation states:
- WTO members have to treat the imports of all other WTO members no worse than they treat the imports of their ‘most favoured’ trading partner
- There must be the same tariff from imports coming from all other WTO members
What does the GSP allow in terms of tariffs?
- The Generalized System of Preferences (GSP) is a trade program where developed countries grant preferential tariff treatment to imports from developing countries
- This essentially means that developing countries can export certain goods to developed countries with reduced or zero import duties, making it easier and more cost-effective for them to participate in global trade
What are the advantages of the GSP?
1- Export productivity effects: Firms from developing countries have the opportunity to go abroad and see what other firms are doing making them successful
2- Economies of scale: EU instead of small local markets
3- Diversification of export products and markets
4- Upgrading of skills in non-exporting industries due to spill over effects
5- Infant industry argument: Emerging industries often do not have enough size (economies of scale) to compete with firms from other countries. These industries need to be protected until they reach a similar scale to their competitors which the GSP allows for
Explain the example from Mercosur in how Brazil has benefitted by lowering tariffs for Argentinean products per the GSP
- Brazil’s tariffs for Argentinean products fell from an average of 29% in 1991 to zero in 1995
- This led to exports to Brazil quadrupling, foreign firms upgrading technology and so increasing FDI for Brazil
What are the arguments against the GSP?
1- The benefit of protecting infant industries may not always hold as the industries should have potential comparative advantage in order to learn something. This may not always be the case
2- Trade diversion: GSP replaces more efficient suppliers with less efficient ones
3- Ineffective: Most EU tariffs are low so the margin of benefit is small
4- Politically motivated: President Obama suspended GSPs for Argentina because Argentina did not pay more than $300 million in compensation awards in two disputes involving American investors
Draw a graph analysing the GSP and explain the analysis across the two diagrams including all the areas of producer surplus, tariff revenue and welfare loss
See slides 15 and 16 in Lecture 7
What are the effects of trade on salaries and earnings?
International trade can tackle poverty and stimulate economic growth:
- Poor countries tend to be relatively abundant in unskilled workers so international integration leads to the specialization of unskilled labour-intensive industries. This increases relative demand for unskilled workers and so increases the earnings of unskilled workers
Why may trade not increase the earnings of unskilled workers?
- It is assumed that there is perfect mobility of workers across industries but in reality workers might not easily move across industries
- This means that the specific industry in question might influence the effect of trade on workers wages
Explain briefly the relationship between the EU and the GSP
- It started in 1971
- It was a voluntary trade agreement with developing countries to promote exports in poor countries
What are three different variants of the EU-GSP trade agreement?
Standard: This involves partial or entire removal of tariffs on two thirds of all product categories
GSP+: Full removal of tariffs for countries that implement international conventions relating to human and labour rights, environment and good performance
Everything but arms: Duty-free and quota-free access to all products except for arms and ammunition for least developing countries
Give some figures about the EU-GSP relationship
- About 5.5% of total EU imports are from GSP
- About €93bn imports in the EU receives GSP preferences
What is product graduation?
- Product graduation refers to a situation where some developing countries still have low per capita income but have some very competitive export sectors
- As a result countries lost GSP advantages for a product if they had more than 15% of EU GSP imports of that product (they don’t need the help)
What has been the effect of the EU’s GSP?
- The GSP increases trade in eligible products by about 4% (€5.5bn)
- Significant benefits to firms in developing/emerging countries such as China
- Producer surplus increased about 10% which has helped industrialisation
