12.07.2023 Political Economy#

Arguments#

Case for Free Trade#

  • lower prices

  • efficient allocation, competition

  • economies of scale

Case against Free Trade#

  • better terms of trade trough tariffs

  • big country can be beneficial

  • optimal tax rate and export subsidy exists

  • domestic market failures (unempl. underutilization)

But: unintended consequences, market failures other options better

Political Model of Trade Policy#

Median Voter#

Assumptions:

  • Two-Party Democracy

  • Obejctive: majority vote

Parties in Democracies pick position of voter in middle of political spectrum

Effect should be: Consumers > producers, free trade

Collective Action#

a group has incentive to advocate for issue, but each individual close to no incentive

  • e.g consumers can save big money, but each individual consumer only 10 cent

  • Therefore special interests > collective action

International Politics#

since 1944 reduction of tariffs

img

  • General Agreement of Tariffs and Trade (GATT) 1947

  • World Trade Organization (WTO) 1995

to stop trade wars with shared rule book

WTO#

World Trade Organization

WTO Rules:

  • reducing tariff rates

  • bind tariff rates

  • eliminate nontariff barriers

Elelements:

  • GA on Tariffs and Trade

  • GA on Tariffs and Services

  • GA on Trade-Aspects of Intellectual property

  • Dispute settlement procedure

Preferrential Trading Agreements#

Agreement, where one country pays less than rest of the world

  • under WTO Rules generally not allowed, except

    • Free Trade Area: each country own trade policy (NAFTA)

    • Customs Union: common trade policy (EU)

but not always beneficial