1、INTERNATIONAL AGREEMENTS: TRADE, LABOR, AND THE ENVIRONMENT,1 International Trade Agreements 2 International Agreements on Labor Issues 3 International Agreements on the Environment 4 Conclusions,11,2 of 124,Introduction,1999 WTO trade negotiations in Seattle, WA were the first to be heavily protest
2、ed, with protests sometimes turning violent. Past trade negotiations had focused on lowering tariffs in most sectors of members economies. Remaining barriers to trade, however, dealt with regulatory barriers, such as environmental regulations. The Uruguay Round (19861994) allowed for countries to br
3、ing disputes if they felt they were excluded from a market due to unreasonable environmental standards.,3 of 124,Introduction,These new rules infuriated many groups who thought the WTO might threaten their environmental interests. Additionally, many felt it undesirable for a panel in Geneva to make
4、rulings affecting domestic regulations. All these groups gathered in Seattle to voice their dissatisfaction with the WTO. The goal of this chapter is to examine why international agreements are needed, and how these agreements affect labor and environmental issues.,4 of 124,International Trade Agree
5、ments,Countries will often enter into a trade agreement to reduce trade barriers between themselves.The WTO is a multilateral trade agreement, involving many countries, all with the goal of reducing tariffs between member countries. WTO has negotiated many trade agreements. Under the most favored na
6、tion principle, the lower tariffs agreed to in these negotiations must be extended equally to all WTO members. New members get these benefits, but must also agree to lower their own tariffs.To demonstrate a multilateral trade agreement, we will assume there are only two countries.,5 of 124,Internati
7、onal Trade Agreements,The Logic of Multilateral Trade Agreements Tariffs for a large Country Figure 11.1 shows the effects of a tariff on a large country (Home). We found before that a tariff leads to a deadweight loss for Home: (b+d). We also saw a terms-of-trade gain for Home, e, which equals the
8、reduction in Foreign price due to the tariff times the Home imports with the tariff. If Home applied the optimal tariff, then the terms-of-trade gain exceeds DWL, and Home gains overall. For Foreign, a DWL, f, exists from inefficient production levels. The Home gain comes at the expense of an equal
9、terms-of-trade loss for Foreign, e, plus the DWL, f.,6 of 124,International Trade Agreements,Figure 11.1,7 of 124,The Logic of Multilateral Trade AgreementsWe stated before that it is optimal for large countries to impose small tariffs, but that did not consider strategic interactions between multip
10、le large countries.If every country imposes a small optimal tariff, is it still optimal behavior for these countries?Figure 11.2 shows the payoff matrix between Home and Foreign, both large countries deciding to impose a tariff.Assume the two countries are the same size so payoffs are symmetrical.,I
11、nternational Trade Agreements,8 of 124,International Trade Agreements,Figure 11.2,9 of 124,International Trade Agreements,Prisoners Dilemma The pattern of payoffs we just saw has a special structure called the “prisoners dilemma”.This is similar to our situation where each country acting on its own
12、has an incentive to apply the tariff, but doing so makes both worse off.Nash Equilibrium The only Nash equilibrium in figure 11.2 is the lower right quadrantboth countries apply a tariff. To move from that point unilaterally would increase a countrys loss, (e+f) (b+d+f), so the Nash equilibrium for
13、both countries is to apply the tariff. Free trade agreements can help move us away from this equilibrium.,10 of 124,International Trade Agreements,Regional Trade Agreements In this case countries eliminate tariffs among themselves, but keep tariffs against other countries.Article XIV of the GATT sta
14、tes regional trade agreements are acceptable as long as the group does not jointly increase tariffs against outside countries.Sometimes they are called preferential trade agreements. Member countries are favored over other countries.This violates the MFN principle, but RTAs are permitted because the
15、y are a positive move toward free trade with a larger group of countries.,11 of 124,International Trade Agreements,Regional Trade Agreements Free trade area A group of countries agreeing to eliminate tariffs (and other barriers to trade) between themselves, but keeping whatever tariffs they formerly
16、 had with the rest of the world. In 1989, Canada entered into a free trade agreement with the U.S. known as the Canada-U.S. Free Trade Agreement (CUSFTA). In 1994, Mexico was included to create the North American Free Trade Agreement (NAFTA). Each of these countries have their own tariffs with all o
17、ther countries of the world, but have worked to eliminate trade barriers with each other.,12 of 124,International Trade Agreements,Regional Trade Agreements Customs Union Similar to a free trade area, except that in addition to eliminating tariffs among countries in the union, the countries within a
18、 customs union also agree to a common schedule of tariffs with each country outside the union. Examples are the European Union (EU) and the signatory countries of Mercosur South America. All countries in the EU have identical tariffs with respect to each outside country, as does Mercosur.,13 of 124,
19、International Trade Agreements,Regional Trade Agreements Rules of Origin If China is looking to export a good to Canada, it will want to do so at the lowest cost. If Canada has high tariffs on that good, but Mexico has low tariffs, why not export to Mexico and then trade it freely to Canada? Free tr
20、ade areas have complex rules of origin. content requirements The good from China to Mexico would not get duty-free access to Canada in this example.So what are the economic effects of regional trade agreements, in either case?,14 of 124,International Trade Agreements,Trade Creation and Trade Diversi
21、on When trade agreements are made, the increased trade can be of two types. Trade creation occurs when a member country imports a product from another member country that it made for itself before. Gain in consumer surplus for importing country due to lower prices. Gain in producer surplus for expor
22、ting country due to increased sales. Same as opening trade effect in Ricardian or HO models. No other country is affected because the good was not traded at all beforewelfare gains for both countries.,15 of 124,International Trade Agreements,Trade Creation and Trade Diversion Trade diversion occurs
23、when one member country imports a product from another member country that it was previously importing from an outside country. Trade is taken away from one country and moved to another country. This is not always the most efficient move since the former country might have been producing at lower co
24、sts, but due to changes in tariffs, it ends up cheaper to import from the member country.,16 of 124,International Trade Agreements,Numerical Example of Trade Creation and Diversion Lets consider an example from NAFTA where an auto part is now imported by the U.S. from Mexico instead of from China.We
25、 can keep track of the gains and losses for the countries involved. Asia loses export sales, loss in producer surplus. Mexico gains producer surplus from increased sales. Since Mexico is not the most efficient producer, there is potential social loss due to the trade diversion.We can see the potenti
26、al cost amount in Table 11.1.,17 of 124,International Trade Agreements,Table 11.1 Cost of Importing an Automobile Part,18 of 124,International Trade Agreements,Trade Creation Assume there is a 20% tariff. After NAFTA, the U.S. will import from Mexico for $20, since it costs more to import from Asia
27、($22.80) or to make it themselves ($22). The U.S. clearly gains from the lower cost of the part, Mexico gains through exports to the U.S., and Asia is unaffected since it was not exporting at that tariff level anyway.Trade Diversion Now suppose the tariff was 10% instead. Before NAFTA, the U.S. impo
28、rted the part from Asia for $20.90. After NAFTA, it will import from Mexico at a price of $20. What about the U.S.? Although they gain $0.90 on each part, they lose $1.90 in tariff revenue from each import from Asia.,19 of 124,International Trade Agreements,Trade Diversion in a Graph Figure 11.3 sho
29、ws the free-trade price of the part from Asia, with the free-trade export supply curve for Asia. We assume the U.S. is a small country relative to the potential supply from Asia.Before NAFTA, both Mexico and Asia face the same tariff. Start with equilibrium at point A.Of total imports, Q2 comes from
30、 Mexico at B, since under perfect competition these imports have the same tariff-inclusive price as those from Asia. With NAFTA, imports from Mexico rise to Q3.,20 of 124,International Trade Agreements,Price,Pasia,MUS,Smex,Sasia,Import Quantity,Figure 11.3 Net Loss,The price faced by the U.S. with t
31、he tariff, before NAFTA, is Pasia+t with Asia and Mexico supply curves of Sasia+t and Smex+t,At this price, the U.S. equilibrium imports total Q1 at A. Of the total imports, Q2 will be from Mexico at B,The US gains tariff revenue of (a+b+c+d),After NAFTA, the relevant supply curve is Smex. Equilibri
32、um imports from Mexico are now Q3 at C. MC for Mexico are higher so price stays at Sasia+t,The U.S. loses tariff revenue of (a+b+c) Mexico gains producer surplus of (a+b) The combined effect of NAFTA is a net loss of c,21 of 124,International Trade Agreements,Interpretation of the Loss The combined
33、loss c can be interpreted as the average difference between Mexicos MC and Asias MC times the extra imports from Mexico.This is similar to the “production loss” or “efficiency loss” we saw with a tariff for a small country.What we have to remember is that even though we moved to free trade between M
34、exico and the U.S., the tariff with China remained. It is really only a partial step toward free trade, which can clearly be bad for countries involved.,22 of 124,International Trade Agreements,Not all trade diversion creates a loss. The previous loss is only a possible outcome, depending on Mexicos
35、 MCs.There could be a gain to the importing country.In figure 11.3, suppose that after joining NAFTA, Mexico has significant investment into the auto parts industry, and its supply curve shifts to Smex.Equilibrium is then at D at a price of Pasia and Mexico will fully replace Asia as a supplier of p
36、arts.Clearly Mexicos producer surplus still gains as well.,23 of 124,International Trade Agreements,Price,Pasia,MUS,Smex,D,Sasia,Pasia+t,Sasia+t,Smex+t,Import Quantity,Figure 11.3 Net Gain,If Mexico has significant investment in auto parts after NAFTA, supply could shift to Smex increasing equilibri
37、um imports to point D.,U.S. still loses tariff revenue of (a+b+c+d).,But gains consumer surplus of (a+b+c+d+e) for a net U.S. gain of e.,24 of 124,International Trade Agreements,Trade Diversion in a Graph It is very possible for any particular case to have elements of trade diversion and trade creat
38、ion.NAFTA and other regional trade agreements have the potential to create net gains for members.However, this is only true if the amount of trade creation exceeds the amount of trade diversion.Now we can use this information to see the effect on Canada and the U.S. of opening free trade.,25 of 124,
39、Trade Creation and Diversion for Canada,Professor Daniel Trefler has analyzed the effects of CAFTA and NAFTA on Canadian manufacturing industries. Estimates the amount of trade creation and diversion for Canada in its trade with the U.S.He finds the reduction in Canadian tariffs on U.S. goods increa
40、sed imports of those goods by 54%. Trade CreationPurchasing those goods from the U.S. decreased their imports from other countries by 40%. Trade Diversion,26 of 124,Trade Creation and Diversion for Canada,54% of the trade creation is multiplied by the 80% of Canadian imports that come from the U.S.
41、40% of lost imports from the rest of the world is multiplied by the 20% that typically comes from the rest of the world. Taking the difference between trade created and diverted, we get:,Since this number is positive, trade creation is greater than trade diversion. Canada gained.,27 of 124,Internati
42、onal Agreements on Labor Issues,Regional issues often involve issues other than tariffs. The environment and labor are the two biggest.Labor standards refer to all issues that directly affect workers, including occupational health and safely, child labor, minimum wages, etc.,28 of 124,International
43、Agreements on Labor Issues,Labor standards were included in NAFTA to satisfy two different groups. Consumers and policy makers worried about “exploitation.” Unions in the developed countries are also concerned with these issues partly due to solidarity with foreign workers and partly due to increase
44、d competition for “home” workers. Are these concerns really veiled protectionism? Need to be careful that enforcing labor standards in other countries does not create a worse condition for those workers.,29 of 124,International Agreements on Labor Issues,Labor Side Agreement under NAFTA NAFTA does n
45、ot change the labor laws in countries, but is meant to improve enforcement.If one country believes another is not enforcing their own laws, the country can be brought before the North American Agreement on Labor Cooperation (NAACL).Many cases have dealt with the maquiladora plants in Mexico, but cha
46、rges have been brought against the U.S. as well. Migrant workers picking apples in Washington state. 1998 case with resolution in 2000.,30 of 124,International Agreements on Labor Issues,Consumer Responsibility How much do consumers value the idea that clothing purchased is made under good working c
47、onditions?National Bureau of Economic Research (NBER) surveyed consumers on this question (see Table 11.2).Sample A asked if they cared “about the condition of the workers who make the clothing they buy.” Sample B was asked about the premium they would be willing to pay for workers in “good” conditi
48、ons, and the discount needed to buy the T-shirt made under “bad” conditions.,31 of 124,International Agreements on Labor Issues,Table 11.2 Survey Responses,32 of 124,International Agreements on Labor Issues,Consumer Responsibility One observation is that consumers have a downward-sloping demand curv
49、e for labor standards. Will pay a small amount to assume good standards. A second observation is that individuals need a higher discount to buy the shirt made under “bad” conditions than the premium they would pay for the one made under “good” conditions. Consumers are more worried about potential l
50、osses than potential gains.Corporate Responsibility Pressure from consumers and unions has forced many corporations to report on the working conditions of their overseas plants and those of sub-contractors. Nike publicized the names of their sub-contractors overseas. We see that other corporations are following suit.,
