WTO and World Trade: Challenges in a New Era

320 Pages·2005·15.402 MB·English

by  Günter S. Heiduk, Kar-yiu Wong (auth.), Prof. Dr. Günter S. Heiduk, Prof. Kar-yiu Wong PhD (eds.)

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Glinter S. Heiduk
Kar-yiu Wong
Editors
WTO
and World Trade
Challenges in a New Era
With 47 Figures
and 23 Tables
Physica-Verlag
A Springer Company
Series Editors
Werner A. Mtiller
Martina Bihn
Editors
Prof. Dr. Gtinter S. Heiduk
University of Duisburg-Essen
Institute for International and Regional Economic Relations
Campus Duisburg
LotharstraBe 65
47048 Duisburg
Germany
[email protected]
Prof. Kar-yiu Wong, PhD
University of Washington
Department of Economics
Box 353330
Seattle, WA 98195-3330
USA
ISSN 1431-1933
ISBN 3-7908-1579-9 Physica-Verlag Heidelberg New York
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Contents
Giinter S. Heiduk and Kar-yiu Wong
Introduction
Part A - Trade Theory
Ngo Van Long and Huilan Tian
Non-Drastic Technology Transfer in an International Oligopoly 7
Theo Eicher
Comment 31
Henry Thompson
Income Redistribution, Trade Prices, and International Capital in
Simulated Trade Models 33
Roland Dohrn
Comment 41
Pascalis Raimondos-M0ller and Alan D. Woodland
On Two Elementary Propositions on Customs Unions 43
Ian Wooton
Comment 61
Kala Krishna, Abhiroop Mukhopadhyay and Cemile Yavas
Trade with Labor Market Distortions and Heterogeneous Labor:
Why Trade Can Hurt 65
Kenzo Abe
Comment 85
K.C. Fung and Andrea M. Maechler
The Impact of Intra-Industry Trade on the Environment 87
Keith E. Maskus
Comment 125
Julian Emami Namini
International Business Cycle Transmission in a Dynamic Multi-Sectoral
Heckscher-Ohlin Model 127
Roberto A. deSantis
Comment 153
VI
Part B - Trade Policy
Theo Eicher and Thomas Osang
Political Support or Contributions: An Empirical Investigation of
US Trade Policy 157
Volker Clausen
Comment 175
Pei-Cheng Liao and Kar-yiu Wong
Minimum Quality Standard and International Rivalry in Quality
and Price 185
Ngo Van Long
Comment 213
Udo Kreickemeier
Reforms of Quantitative Import Restrictions and Fair Wage
Unemployment 215
Henry Thompson
Comment 233
Part C-WTO
Earl L. Grinols and Roberto Perrelli
Trade Games: Modeling WTO's Role in Trade Disputes 235
Henryk Kierzkowski
Comment 249
Tran Van Hoa
Modelling the Impact of China's WTO Membership on Its Investment
and Growth: A New Flexible Keynesian Approach 251
Tran Van Hoa andAnoop Chaturvedi
Appendix: Performance of the 2SHI Estimator Under the Generalised
Pitman Nearness Criterion 267
Sweta C. Saxena
Comment 275
Fritz Breuss
WTO Dispute Settlement in Action: An Economic Analysis of Four
EU-US Mini Trade Wars 281
Nicole Pohl
Comment 319
List of Contributors 323
Introduction
Giinter S. Heiduk* and Kar-yiu Wong**
* Institute of International and Regional Economic Relations, University of Duis-
burg-Essen, Campus Duisburg, Germany
** Department of Economics, University of Washington, Seattle, USA
The rapid growth of world trade has become one of the most phenomenal features
of the international order after the World War. While different countries were ex-
periencing various growth rates of their economies, most of them found out that
foreign trade grew much faster than their economies. As a matter of fact, for most
economies, foreign trade has been determined to be one of the biggest and the
most consistent contributors to economic growth.
Nowadays world trade is a very complicated phenomenon because it is not just
an economic but also a social, political, environmental, labour, and legal matter.
Economists care about world trade because economies are getting more and more
open and world trade is related to the properties of open economies. Government
planners care about world trade because it is related to many issues that the
economies are facing: Resource allocation, income distribution, employment, pro-
duction, consumption, government revenue, economic growth, and economic wel-
fare. A right trade policy will enhance the economic welfare and growth of the
economy in a more harmonious and equitable way. A wrong policy, however,
could spell disaster.
The World Trade Organization (WTO) was established about a decade ago to
replace the General Agreement on Tariffs and Trade (GATT). The WTO was set
up to help governments to solve some of the trade problems. It not only carries out
one of the most important responsibilities of the GATT, conducting multilateral
trade negotiations, but also tries to cover more commodities and areas, including
the setting up of a dispute settlement process.
The work of the WTO, despite its short history, has already affected world
trade in many areas, including government policies, economic growth and welfare,
environment, and production and consumption of manufacturing, agriculture, and
services. Even though the ongoing Doha Round of trade talks has hit many obsta-
cles so far, it is still very alive. It is expected that some kind of agreements will be
signed by the member countries at the end, furthering the work of the GATT and
making the world economy a better environment for trade.
In 2002, the Institute of International and Regional Economic Relations, Uni-
versity of Duisburg-Essen, Germany and the Research Center of International
Economics, University of Washington, Seattle, USA organized a joint two-day
conference in Duisburg on the WTO and world trade, with internationally re-
nowned speakers from all over the world to speak about their views and research
results of some of the pressing issues about the WTO, world trade, and their rela-
tionship. Some of the papers presented in the conference, after appropriate discus-
sion and revision, have been included in the present volume. There are some addi-
tional papers included in the present volume, which we believe will enhance the
quality of this volume. All papers provide in-depth analysis of some of the most
pressing trade issues facing economists and government planners, and they will
certainly help stimulate more research and discussion.
In the opening paper, Ngo Van Long andHuilan Tian examine the role of tech-
nology transfer within a strategic trade model. They concentrate on non-drastic
and costly technology transfer in an international oligopoly and consider factors
influencing the equilibrium outcome. They conclude that if the government cannot
prove a pre-commitment in the pre-transfer phase for a low tax rate in the post-
transfer phase, transfers might not take place that would normally been conducted
under a low tax regime. With the governments' commitment, a higher welfare can
be achieved. While short-term commitments over several years seem feasible,
long-term commitments seem rather unlikely from an empirical point of view.
Theo Eicher 's comment highlights the authors' result that a minor technology gap
between countries induces more technology trade than a large gap, confirming the
observation that most of the trade in technology takes place between developed
countries and not between developed and developing countries. Eicher proposes to
embed the model into a general equilibrium framework allowing for endogenous
technology costs and to show inter-industry effects.
There has been much written on the income and redistribution effects of inter-
national trade and capital movements. Surprisingly, only very few papers are con-
cerned with a quantitative assessment of the issue. In his contribution "Income
Redistribution, Trade Prices, and International Capital in Simulated Trade Mod-
els", Henry Thompson compares the quantitative effects of changing prices and
capital endowments on income distributions in a variety of models. Quantitative
price effects tend to follow patterns suggested by factor shares. The existing simu-
lations indicate that factor price equalization holds across competitive industries,
that foreign capital has only a negligible effect on factor prices and that trade
holds more potential than capital in raising wages in low-income countries. In his
comment, Roland Dohrn points out additional consequences that might arise from
free trade and foreign capital. Trade and foreign capital may impact on technol-
ogy, productivity and prices after trade liberalization, thus influencing income lev-
els as well as income distribution.
Pascalis Raimondos-Moller and Alan D. Woodland ask whether establishing
customs unions is a way forward in reaching global free trade. Indeed, special fo-
cus must be paid to the normative impact of a customs union to the rest of the
world. Referring to Kemp and Wan (1976) as well as Kemp and Shimomura
(2001), Raimondos-Nfoller and Woodland are particularly interested in the norma-
tive effects of customs unions when not all or none, but only some countries be-
have optimally. They extend the original proposition so that non-member coun-
tries adjust their tariffs in response to the creation of the customs union. Their
proposition has important implications for the design of optimal trade policy, for
example as in WTO Article XXIV regulating the common external tariff of cus-
toms unions. Ian Wooton comments the paper and addresses the critical issue of
changes in the national production when joining a customs union. He doubts
whether a revision of Article XXIV provides any improvements.
Traditional trade and trade policy models neglect institutional characteristics of
markets and the trade distortions resulting thereof. Kala Krishna, Abhiroop Muk-
hopadhyay and Cemile Yavas overcome this shortcoming by modifying a tradi-
tional Ricardian model, a Specific Factor model and a Heckscher-Ohlin model to
capture labor market distortions. The modified Ricardian model shows how factor
market distortions affect labor allocation and output. In this case, international
trade makes existing distortions even worse. Their analysis can be applied to vari-
ous experiences and reform processes in developing economies, especially transi-
tion countries. For example, reforms including privatization can result in ineffi-
ciencies in production decisions, which would be worsened through trade. Thus,
the urgency with which the WTO pushes forward international trade liberalization
needs to be carefully revaluated in the light of these findings. Kenzo Abe's com-
ment is concerned with the fact that the country size of developing countries or
transition economies is generally considered to be smaller than that of a developed
country and that institutional distortions only have a negligible effect on the na-
tional welfare. He also emphasizes the point that it is the labor market distortion
that makes a country lose from trade, not trade liberalization itself. Introducing an
appropriate policy such as a subsidy could help to ease the negative effects of the
market distortion.
K.C. Fung and Andrea M. Maechler combine two strands of literature, intra-
industry trade and environmental consequences of trade, in a partial-equilibrium
setting. In a variety of models, the authors analyze the environmental impact of
trade liberalization in the context of intra-industry trade. Their main argument is
that while trade expansion has an impact on environmental quality via the compo-
sition of national output, the driving force may be international oligopolistic ri-
valry instead of comparative advantage. Among other interesting results, Fung and
Maechler conclude that environmental deterioration is determined by i) which
country liberalizes trade and ii) the nature of pollution (local, transboundary or
global). They also find that a large number of firms in the liberalized country in-
creases the negative environmental impact of trade liberalization, giving rise to the
policy advice not to push anti-trust policies forward because they could harm the
environment. Keith E. Maskus encourages the authors in his comment to include a
technology term into their models that could help to answer the question why
openness can improve environmental use. This is especially important for small
economies that are open to trade and that enjoy pro-competitive gains.
Julian Emami Namini develops a multi-sectoral model with Heckscher-Ohlin
characteristics in order to gain more knowledge on international business cycle
transmission that is driven by negative technology shocks. This compares to a
situation particularly relevant for developing countries such as China. The author
is predominantly interested in the exact process of transmission and its welfare
implications. His model uses two countries and four sectors, two of which serve as
intermediate input to the other two sectors producing final goods. The sign of the
transmission channel seems to depend on the factor intensity of the sector in
which the shock occurs. In a so-called trade pattern effect, a country may gain
from a domestic temporary technological shock if a higher production of the capi-
tal intensive good leads to a future increase of the capital stock. Moreover, if a
trade partner is hit by a shock, a country can neutralize the expected negative spill-
over effect by inducing a domestic technological shock. This neutralization may
occur in sectors that are intra-sectoral correlated and do not interfere with the
magnitude of comparative advantages. Roberto A. de Santis compares Namini's
model with the standard two-goods model and highlights the main advantages and
disadvantages of the approaches.
Recent years have witnessed the idea that trade protection is "for sale", as de-
scribed in the eminent paper of Grossman and Helpman (1994). Theo Eicher and
Thomas Osang empirically investigate US trade policy and compare the perform-
ance of Contribution Driven models and Political Support models. They find
strong evidence confirming that protection is indeed for sale, but reject the Politi-
cal Support models developed by Hillman (1982). Commenting the paper, Volker
Clausen takes a closer look at supply-side and demand-side factors and calculates
the optimal tariff for both approaches, first for a closed and then for an open econ-
omy. This tariff is then utilized to determine the respective production losses and
tariff revenues.
Pei-Cheng Liao and Kar-yiu Wong examine the policy interactions between
two governments in an international duopoly with vertical product differentiation,
in which the foreign firm produces a low-quality good and exports it to the home
country. Taken this framework, the authors prove that the foreign government has
an incentive to set a minimum quality standard. There are situations in which the
country with an inferior technology in quality improvement can use such a policy
as a strategic instrument, shifting parts of the profit of the advanced firm towards
its own firm, thereby increasing its own welfare. Interestingly, the results indicate
that both countries' welfare increases. In contrast to other protectionist trade in-
struments, e.g. an export subsidy, setting a minimum quality standard is not pro-
hibited by WTO regulations. As an extension, Ngo Van Long suggests a Bayesian
game with two types of politicians (good and bad) and active foreign politicians to
cover additional issues as for example certain externalities or reasonable argu-
ments such as health or safety protection.
Udo Kreickemeier focuses on the issue of non-tariff trade barriers restricting
imports by imposing a binding upper limit on import quantities and analyzes the
welfare implications. Kreickemeier thereby explicitly considers the existence of
involuntary unemployment by setting out a specific multi-sector efficiency wage
model with unemployment in the equilibrium stage. The underlying idea of this
approach stems from the notion that a lot of developed countries are unwilling to
further liberalize trade because of concerns for domestic employment. The
model's central result is the significance of the labor intensity as decisive variable.
Henry Thompson offers his comments on the paper and proposes to shift the focus
of the model also to the results of changing trade policy and to include political
factors, e.g. unionization or labor laws.
The last years have shown an increasing application of the WTO dispute set-
tlement body. The WTO's role in these international trade disputes is simulated in