Mohammad Ghodsi: Summary of Ph.D. Dissertation Trade Policy, Trade Conflicts, Determinants, and Consequences of Protectionism Issues related to trade policy, its determinants and consequences have been discussed within advanced textbooks and economic articles (i.e. Helpman and Krugman, 1989; Francois and Reinert, 1997). Grossman and Helpman (1992) in their seminal paper established a framework to show how governments support special interest groups, in exchange for pecuniary benefits, by imposing protectionist trade policies. Governments are protecting the domestic industry against foreign competitors using various policy instruments. This complicated game is called protection for sale by Grossman and Helpman (1992). The protectionism is restricting trade and raising trade conflicts between trade partners. In general, protectionist trade policies do not receive the consent of trading partners. In order to meet concerns of trade partners, governments need to provide convincing reasoning in the context of international trade regulations. Motivations behind different forms of protectionism are described broadly in the modern strand of the economic literature. By signing the General Agreement on Tariffs and Trade (GATT) in 1948, the contracting parties decided to liberalize international trade gradually. World Trade Organization (WTO) which was emerged form GATT and established by the end of 1994 provides precise international regulations on various trade aspects. The ultimate aim of GATT/WTO members was to create an organization regulating and monitoring the multilateral trading system. WTO s main function is to ensure that trade flows as smoothly, predictably and freely as possible. 1 WTO also provides the litigation mechanism at the time of trade disputes and conflicts between the member states. Trade policies can reflect various motivations and goals of governments. The implications can also be very different. The liberalization of trade policy and regulations leading to the market efficiency improvement are in line with international regulations of the WTO. In contrast, some other policy measures can create unnecessary obstacles to trade serving as form of protectionism benefitting domestic industries. These protectionist measures and prohibitive obstacles are considered as violations of international trade agreements, causing trade disputes and conflicts. Studying the determining factors behind impositions of trade policies can be a helpful in better understanding the main motivations governments. On the other hand, the analysis of consequences and effects of trade policies can demonstrate the significance of trade protectionism. Moreover, the consequences of policy instruments in various circumstances with different types of products can provide better insights to countries and the WTO secretariat for true nature of policies. In this dissertation, I am shedding light on some aspects of trade policy by studying both the 1 https://www.wto.org/ 1
causes and effects of them. I will continue the mainstream literature on international trade policy by focusing on some specific aspects and trade policy instruments. While governments provide various reasoning behind their policy instruments, they rarely reveal true motivations of their policies and the role of special interest groups in shaping policy measures. In the first chapter of this dissertation, I focus on the role of corruption in the sale of protection to the domestic industries. I investigate the impact of corruption on the level of trade protectionism, trade openness, and imports during 1996-2008. It is commonly argued in the literature that special interest groups, who are lobbying with governments for pursuing protection, can be more successful within a more corrupted society. In the analysis, average customs duties and other import taxes of a given country represent one of the protectionism measures; average taxation on international trade is another proxy for trade restrictiveness. Total trade-gdp ratio, total imports, and some subcategories of imports are also proxies for the trade openness of a given country in this chapter. Control of Corruption from World Governance Indicator (WGI) and Corruption Perception Index from Transparency International are the two data sources on corruption being separately used in the analysis. Econometric results were statistically inconclusive to show the significant impact of corruption on protectionism and on trade. The analysis presented in the first chapter shows the importance of the WTO membership. Panel estimations show that the accession to the WTO decreases the level of taxes on trade and increases trade openness and total imports. However, controlling for dynamic settings, GMM estimations do not show any significant impact of WTO membership on trade. In fact, after becoming a WTO member, trade liberalization or protectionism does not change the dynamics of trade significantly. The reason is that after the accession, countries are bound not to increase tariffs, meaning they cannot implement protectionist tariffs. However, they can use various nontariff measures (NTMs). A restrictive trade policy measure that hampers trade liberalization can be consulted and analyzed within the Dispute Settlement Mechanism (DSM) of the WTO. Agreements on NTMs have been cited in many trade disputes within the DSM. If, after consultations, a verdict of the DSM panel indicates that the analyzed measure violates a specific WTO agreement, then it means that it creates an unnecessary restriction to trade. These consultations and DSM proceedings identify most important restrictions on trade among WTO members, which are analyzed in the next two chapters of the dissertation. NTMs are specific policy instruments that are frequently based on unclear reasoning with opaque implications and they usually have administrative character. Bilateral and multilateral agreements and international regulations conducted by the WTO are set to increase the liberalization in trade. Tariffs have been decreased in the subsequent rounds of the GATT multilateral trade negotiations. However, technical issues, new sanitary and technical standards aimed at reducing market inefficiencies, increasing consumers welfare, global safety, and health have brought governments to mutual understanding on necessity of imposition of NTMs. 2
Therefore, in the context of international rules and regulations, countries are allowed to impose NTM restrictions on imports for above-mentioned purposes. However, the imposition of NTMs needs to have justifiable and eligible reasoning in the context of WTO rules. Otherwise, the NTMs are considered as unnecessary obstacles to trade and should be abolished as soon as trading partners are concerned. When trading partners cannot get to bilateral agreement regarding the policy instrument, they can request for consultation within the DSM of the WTO. These consultations and dispute settlements will become more complex and time-consuming the more opaque the trade policies are. Therefore, the next two chapters provide insights on the complexity of NTMs and shall explain the roots of some trade disputes. Tariffs are transparent because the level of ad-valorem tax rates imposed on importation of products is notified. The main motivation behind their imposition is to reduce the amount of imports by increasing the final prices for consumers. In fact, tariffs can distort the free market system and consumers behavior. On the other hand, the exporting producer will also change its strategy in response to tariffs. Overall, the consequences of these policies can be easily evaluated due to the transparent nature of tariffs. Thus, the motivation and reasoning of the government manipulating tariffs can be very clear. However, these statements cannot be readily applied to NTMs. Second chapter establishes a theoretical framework to study the benefits of free trade, when a prohibitive NTM halts the importation of a specific product that is believed to be harmful for a group of concerned consumers in a society. Within a partial equilibrium cost-benefit analysis, welfare consequences of an NTM are studied. The analysis is focused on the technical barrier restricting the importation of a potentially harmful product. The important issue of the analysis is having two groups of indifferent and concerned consumers. This study investigates whether or not the paternalistic behavior of government is in line with the willingness of the consumers to pay for products. The existence of information about the origin of goods is the leading issue of the analysis that provides two different scenarios. The model is then calibrated with a data on consumption and importation of shrimps into the EU. The findings suggest that in the existence of such information, NTM has the lowest international losses and highest domestic gains. These results suggest that governments should try to increase the information and transparency in the market when they really want to protect the domestic consumers by imposing NTM barrier. The analysis of the third chapter is focused on trade conflicts and disputes, on the cases in which the WTO TBT agreement is cited. International regulations establish frameworks encouraging positive externalities, reducing negative externalities and reduction of production of harmful products. Third chapter of this dissertation is aimed to verify to which extent and in which circumstances the TBT notifications can serve as a system of early warning for future disputes in the areas of TBTs. During 1995-2011, there have been 45 requests for consultations for the DSB of the WTO in order to identify the violations in TBT agreement. The possible explanations and violations of TBT agreement analyzed by the DS bodies are discussed in this chapter. 3
WTO provided a TBT dataset covering Specific Trade Concerns (STC) raised by its members. The third chapter finds the linkages between DS cases citing TBT agreement and the TBT STC notifications. In an econometric analysis using a data for bilateral trade of products at two-digit level of Harmonized System, a positive relationship between raising TBT STCs and DS cases on TBT is concluded. In other words, it is acknowledged that a rise in the number of STC on TBT would increase the probability of trade conflicts on TBT. In conclusion, some new NTM instruments hamper the liberalization in trade causing disputes and conflicts with the WTO. In order to decrease these conflicts, a new set of regulations should be set to increase the transparency of NTMs. The new rules should allow only legitimate NTMs to be imposed with clear reasoning far from trade protectionism, but as genuinely requested only to pursue good faith objectives, such as protection of consumers health. As I emphasized, benefits of trade liberalization are the main issues of this dissertation. Multilateral trade liberalization under the GATT has accelerated the speed of postwar globalization. The process of globalization is strengthening the financial and economic links within and between geographic regions. The process of globalization was quickened by deregulation and privatization of state-owned enterprises, unilateral liberalization of trade and investment, and the lower cost of foreign transactions resulting from technological progress in telecommunications and transportation. European Union is the best example of regional integration fostering free trade of goods and services, mobility of factors of production and common policies in many areas. The last chapter of this dissertation shows that railroad transportation service trade is not completely liberalized among member states of the EU. Transportation sectors play an important role in the economies of the European countries. The aim of the fourth chapter is to assess the degree of the trade liberalization and its impact on bilateral trade of rail transportation services. In spite of the endeavors of EU directives and regulations to provide free liberalized trade of goods and services between member states, trade restrictions in rail services still exist. A standard gravity equation, using bilateral trade in services data, similar to those used in the analysis of merchandise trade, was estimated. The estimated gravity model is then used to compute time varying tariff equivalents of trade restrictiveness in rail services. In the absence of duties or tariffs imposed on services trade, computation of tariff equivalents proposed in the study sheds light on the degree of liberalization in rail services trade. The quantification of trade effects resulting from existing NTMs applied to the rail services is another major outcome of the last chapter of my dissertation. Summing up, my dissertation is focused on various aspects of contemporary protectionism. Firstly, I studied the determinants of tariff policies in a number of countries, with a special focus on the role of corruption. Next, I analyzed in a theoretical framework the rationale for NTMs in a society of developed country, with a large share of concerned consumers. I concluded that the introduction of prohibitive NTMs requires a high level of transparency in implementing protectionist policies. The introduction of non-tariff measures can restrict international trade and 4
lead to trade conflicts. In the third chapter, I analyzed whether notifications of specific trade concerns regarding the TBT and SPS measures, can be treated as a predictor of future trade disputes among WTO member states. Finally, I analyzed empirically the tariff equivalents of barriers existing in transport services. I also estimated the possible impact of trade liberalization of this sector of services. I believe that my dissertation sheds a light on various aspect of contemporary protectionism in the societies with a high proportion of concerned consumers in which governments apply various forms of non-tariff measures. The thesis contains chapters discussed above, which consisted of four separate texts. The first two were written by me while two others are coauthored. My contribution in the third chapter is 60%, and to the fourth is 30%. References: Francois, J. F., & Reinert, K. A. (Eds.). (1997). Applied methods for trade policy analysis: a handbook. Cambridge University Press. Grossman, G. M., & Helpman, E. (1992). Protection for sale (No. w4149). National Bureau of Economic Research. Helpman, E., & Krugman, P. R. (1989). Trade policy and market structure. MIT Press. 5