Tag: trade blocs

Donald Trump has threatened to pull out of the World Trade Organization. ‘If they don’t shape up, I would withdraw from the WTO,’ he said. He argues that the USA is being treated very badly by the WTO and that the organisation needs to ‘change its ways’.

Historically, the USA has done relatively well compared with other countries in trade disputes brought to the WTO. However, President Trump does not like being bound by an international organisation which prohibits the unilateral imposition of tariffs that are not in direct retaliation against a trade violation by other countries. Such tariffs have been imposed by the Trump administration on steel and aluminium imports. This has led to retaliatory tariffs on US imports by the EU, China and Canada – something that is permitted under WTO rules.

Whether or not the USA does withdraw from the WTO, Trump’s threats bring into question the power of the WTO and other countries’ compliance with WTO rules. With the rise in protectionist sentiments around the world, the power of the WTO would seem to be on the wane.

Even if the USA does not withdraw from the WTO, it is succeeding in weakening the organisation. Appeals cases have to be heard by an ‘appellate body’, consisting of at least three judges drawn from a list of seven, each elected for four years. But the USA has the power to block new appointees – and has done so. As Larry Elliott states in the first article below:

The list of judges is already down to four and will be down to the minimum of three when the Mauritian member, Shree Baboo Chekitan Servansing, retires at the end of September. Two more members will go by the end of next year, at which point the appeals process will come to a halt.

This raises the question of the implication of a ‘no-deal’ Brexit – something that seems more likely as the UK struggles to reach a trade agreement with the EU. Leaving without a deal would mean ‘reverting to WTO rules’. But if these rules are being ignored by powerful countries such as the USA and possibly China, and if the appeals procedure has ground to a halt, this could leave the UK without the safety net of international trade rules. Outside the EU – the world’s most powerful trade bloc – the UK could find itself having to accept poor trade terms with the USA and other large countries.

Articles

Information

Questions

  1. Explain the WTO’s ‘Most-favoured-nation (MFN)’ clause. How would this affect trade deals between the UK and the EU?
  2. Would the trade deals that the EU has negotiated with other countries, such as Japan, be available to the UK after leaving the EU?
  3. Demonstrate how, according to the law of comparative advantage, all countries can gain from trade.
  4. In what ways is the USA likely to gain and lose from the imposition of tariffs on steel and aluminium?
  5. How could a country that supports free trade ever support the imposition of tariffs?
  6. Why are tariffs not the most serious restriction on trade?

A deal has just been signed between 26 African nations to form a new free trade area, the Tripartite Free Trade Area (TFTA). The countries have a population of 625 million (56% of Africa’s total) and a GDP of $1.6 trillion (63% of Africa’s total). The deal effectively combines three existing free trade areas: the Common Market for Eastern and Southern Africa, the Southern African Development Community and the East African Community.

Although the deal has been signed by the nations’ leaders, it still needs parliamentary approval from each of the countries. It is hoped that this will be achieved by 2017. If it is, it will mark a major step forward in encouraging intra-African trade.

The deal will involve the removal of trade barriers on most goods and lead to a reduction in overall tariffs by more than 50%. The expectation of the leaders is that this will generate $1 trillion worth of economic activity across the 26 countries through a process of trade creation, investment, increased competition and the encouragement of infrastructure development. But given the current poor state of infrastructure and the lack of manufacturing capacity in many of the countries, the agreement will also encourage co-operation to promote co-ordinated industrial and infrastructure development.

Up to now, the development of intra-African trade has been relatively slow because of poor road and rail networks and a high average protection rate – 8.7% on exports to other African countries compared with 2.5% on exports to non-African countries. As a result, intra-African trade currently accounts for just 12% of total African trade. It is hoped that the development of TFTA will result in this rising to over 30%.

Much of the gains will come from economies of scale. As Kenyan academic Calestous Juma says:

“By having larger markets, it signals the possibility of being able to manufacture products at a scale that is cost-effective. For example, where you need large-scale investments like $200m to create a pharmaceutical factory, you couldn’t do that if you were only selling the products in one country.”

The question is whether the agreement signed on the 10 June will lead to the member countries fully taking advantage of the opportunities for trade creation. Agreeing on a deal is one thing; having genuinely free trade and investing in infrastructure and new efficient industries is another.

Videos and audio
African leaders ink trade deal Deutsche Welle (11/6/15)
African leaders sign pact to create ‘Cape to Cairo’ free trade bloc euronews (10/6/15)
Africa Free Trade Analysis BBC Africa, Calestous Juma (9/6/15)

Articles

African Leaders To Sign Free Trade Agreement To Create Common Market International Business Times, Aditya Tejas (10.6.15)
EAC, COMESA and SADC Blocs Ink ‘Historic’ Trade Deal allAfrica, James Karuhanga (11/6/15)
Tripartite Free Trade Area an Opportunity Not a Threat allAfrica, Sindiso Ngwenya (9/6/15)
Africa a step closer to free trade area Business Report (South Africa), Rob Davies (11/6/15)
The Cape to Cairo trade ‘super bloc’ is here; 15 surprising – and shocking – facts on trade within Africa Mail & Guardian (Kenya), Christine Mungai (8/6/15)
The tripartite free trade area agreement in Africa is bound to disappoint Quartz Africa, Hilary Matfess (10/6/15)
Africa creates TFTA – Cape to Cairo free-trade zone BBC News Africa (10/6/15)
Will the Cape to Cairo free-trade zone work? BBC News Africa, Lerato Mbele (10/6/15)
African free trade still some way off BBC News, Matthew Davies (10/6/15)
Zambia not to benefit from Africa’s TFTA Medafrica, Geraldine Boechat (10/6/15)

Questions

  1. Distinguish between a free trade area, a customs union and a common market.
  2. What does the law of comparative advantage imply about the gains from forming a free trade area?
  3. Distinguish between trade creation and trade diversion.
  4. Why is it likely that there will be considerable trade creation from TFTA? Would there be any trade diversion?
  5. Why are small countries with a relatively low level of economic development likely to experience more trade creation than larger, richer ones?
  6. What barriers might remain in trade between the TFTA countries?
  7. Why might smaller, less developed members of TFTA be worried about the removal of trade barriers?
  8. Why might concentrating on developing local capacity, rather than just lowering tariffs, be a more effective way of developing intra-African trade
  9. What ‘informal’ barriers to trade exist in many African countries?
  10. Why is it that ‘Ordinary Africans are most probably not holding their breath’ about the gains from TFTA?