Week Three – International Trade, International Trade Theory & Political Economy of Trade

Absolute comparative and competitive advantages in trade are real and occur all the time. However there are many disruptions to the pattern caused by external disruptions to free flowing international commerce.

These are, as listed in the assignment:

• Tariff barriers that can also include quantitative restrictions (quotas) were set up to protect domestic industries that were challenged regarding these three advantages. Domestic interests in job creation and retention were greater than the protection of consumer interests that would benefit through free trade. Inefficient industries were allowed to enjoy a market without the rigors of international competition. To continue, probably those industries that enjoyed competitive or some other advantage faced tariffs from international markets that were similarly protected by tariffs in other countries. This folly of the global trade inefficiencies have been increasingly addressed by GATT and now the WTO over the last half a century to the point that these barriers have mostly disappeared.
• Non Tariff Barriers have unfortunately replaced formal tariffs and quotas as the modern day approach to protecting a domestic industry. Take Canada and the USA on beef. Canada detected BSE or mad cow disease in our herd nearly two years ago and yet the border remains closed to a once thriving business of Canadian exports of live cattle. This has been most advantageous to the US cattle industry as a major competitor has been eliminated from the market. Meanwhile there is no evidence that the young animals that make up this trade can carry the disease.
• Intellectual Property and Competition Law clearly impact on international trade but in different ways. Those who control the IP can choose where they will carry out their business activities including manufacturing. For a host of reasons, including protecting IP, the company may wish to conduct business in the jurisdiction where they are located. Here they understand and know how to best use patent and copyright protection. This is of a greater corporate advantage than locating where the best competitive, comparative or absolute advantage can be achieved. Competition Law restricts the concentration of too much industry share in the hands of a single corporate entity. This may impede the establishment of economic activity in the most advantaged country. However the real concern that non competitive pricing may come into play is deemed more important than permitting the excessive concentration of an industry in the hands of a single corporate entity.
  An example of this activity at play occurred recently when the German Competition Bureau formally contacted Iogen to obtain our opinion on market effects of a Danish Enzyme manufacturer’s intention to acquire the global assets of Genencore, a major US enzyme producer. They were concerned that their own enzyme industry was going to be negatively impacted and also that German enzyme consumers would be disadvantaged by higher priced imports. As the enzymes involved were not directly competitive with my company, we did not express concern over the pending transaction.
• Product/Service Standards – Health and safety standards are non tariff barriers in another guise, Yes, there are real safety risks that can be mitigated through well designed products but the system is abused. Take the ban on young Canadian beef animals – there is no scientific reasons that there is any health risk but the ban (read non-tariff barrier) exists. While automobile standardization is more a reality today, there were all sorts of pseudo safety regulations to inhibit exports a couple of decades ago. For example, it was determined that the German made Mercedes was unsafe and required a special bumper for North America. The one that made the grade was ugly and expensive – was this a non tariff barrier or a real safety concern?
• Anti Competitive practices – also disrupt trade. For example, Brazil and Canada both produce a regional jet - there are hundreds of them in the US. The length that both sides go to claim anti competitive practices when sales are made are quite extraordinary and most times one party or the other is right but they both practice the same means of winning a contract. Clearly a government should not overtly back exports by offering overly advantageous financing or other incentives to “buy” the deal – this is trade disruptive even if the customer benefits. (The taxpayer of the exporting country gets a raw deal though.) When this occurs the various trade advantages no longer apply as the price to the end user is artificially low and does not reflect economic reality. The same number of jets are sold even though treasuries are subsidizing exports but the more efficient producer is stymied in the market from gaining whatever advantage that should exist. This is not supposed to happen by international agreement but it still does.

Yours,

Maurice Hladik

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