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Determinants of Trade Policy Preferences

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What are Trade, International Trade and Trade Policy?

                        Trade is an exchange of goods. Before man came up the concept of money, people used barter. Now we have money to value things and so we can trade based on monetary value. Trade happens at all levels, from goods being made and sold in the came city to within the borders of the same country, but in this article we will discuss about the trade that happens within countries and how different countries prefer to trade and why. Most importantly, how do different people form their opinion on the ‘logic’ of a countries trade preference? This is called as a trade policy.

                        The Global Policy Forum explains trade as follows:

“Capitalist economic theory holds that a completely liberalized global market is the most efficient way to foster growth, because each country specializes in producing the goods and services in which it has a comparative advantage. Yet, in practice, cutting trade barriers and opening markets do not necessarily generate development. Rich countries and large corporations dominate the global marketplace and create very unequal relations of power and information. As a result, trade is inherently unequal and poor countries seldom experience rising well-being but increasing unemployment, poverty, and income inequality.”

                        Trade is a basic component of every country’s economic progress, the laws of economics dictate that country’s should produce what they are best at and export it and import the products that they are worst at. In technical terms, a country must produce the advantageous products and export it, while importing the goods that it has a disadvantage in producing.

                        The issue with trade is that the benefits that accrue to one country may not accrue to the other country. We do not live in a world that only depends on two commodities for survival, but in a world where the powerful countries bully the weaker ones into agreeing to join free trade.

The term free trade makes the rich richer and the poor poorer, at least which is what the finance ministers of many nations think. However, the critical part is that we all must cooperate with one another for international trade to thrive. In a way, we end up cooperating because we know that it is only by cooperating with others that we can grow ourselves. Therefore, although, we may not want to work together, the forces of economics make us work along with others.

                        In the same light, Zaki Laidi’s article ‘Are European Preferences Shared by others?’ talks about the 4 major preferences that Europeans have (although the authors agrees that there could be other preferences) towards trade policy; agreements, negotiations and implementation. They are as follows:

  1. Rejection of power politics
  2. The Kantian belief of interdependence through trade
  3. The defense of non market values and
  4. The constitutionalizaion of world order

The conflict between governments and citizens, policy and pressure

                        Reaching these goals is not easy, especially after the defeat in France. Making the EU a reality and the constitution effective is always going to be a challenge and with the process delayed by 10 years, making Europe have a combined and better say will be difficult. However, Europeans per se can cooperate within their borders and outside to create a more Europe friendly trade policy.

                        Finding common ground is critical for trade policy. In the Scheve and Slaughter article, we see that the authors try to prove that the areas where people are disadvantaged by industry would like to see restrictions and the areas that are flourishing would not want restrictions.

                        This stems from the basic concept that wants us to maximize our resources and use them to produce goods wroth the maximum value. However, it is not that simple. Governments have to keep many other things in mind, the most important being taking care of their citizens.

Therefore, governments usually create opportunities for employment. All senators and government officials need to create jobs so that the citizens can be employed. In countries like ours, we provide social security, so if a person does not have a job he or she gets money from the government. However, in most of the developing countries, this concept is missing and so people who do not have jobs have to fend for themselves and have no way of earning money unless they make themselves useful in other ways.

                        So the primary responsibility of every government is its citizens, whether it’s the jobs, the housing, the living standards, the availability of resources, safety, liberty, all these and many more are the responsibility of the government; and that is why the governments have to make polices that are conversant with their needs and help improve the standards of the citizens in one way or more. Most importantly, they do not want their citizens to be hurt by trade or any other economic activities. The same principle applies on trade policies.

                        The governments view is not always in accord with all the citizens so obviously people have different opinions, just as the senate. We would like to believe that the best way to make trade policy decisions is to decide what is best to produce and produce it the maximum capacity, import it and export everything else. However, factors like employment come in and so decisions might be taken differently.

                        In just the same way, citizens also think of their priorities when making decisions on what they like or do not like about the policies of the government, the government policy is for the greater good – just like the dam in china, but that doesn’t mean its for the good of everyone. It might be the largest dam in the world and it will produce power to suffice some of the growing needs of the Chinese economy, power that is desperately needed for the double-digit growth that the country is enjoying however, the dam has made millions of people lose their homeland and caused a lot of damage to the environment.

The citizens who are affected adversely by this are not happy, neither are many environmental groups, its jus that in china the government doesn’t let them protest about things like thins, its neighbor India though, has regular protests and hunger strikes over the dam its building. That dam too though not as big has displaced millions of people and although both countries are building infrastructure to meet the requirements for the greater good of the country, the people in the affected regions are not in support of the dams that are being built.

                        In the example of the dam mentioned above, the people are being displaces so they are losing whatever they had, and they are promised by their governments that they will be rehabilitated at other places in the country. Scheve and Slaughter are saying a similar thing albeit they expect the people to stay in the same place and expect changes to the macro economic environment.

                        Scheve and Slaughter have an advantage because they measure trade policy preferences directly; they measure the impact of trade policy preference in terms of asset value and not income alone and most importantly, their data is by person and not by community or county.

Using these, they say that people make their decisions on supporting trade liberalization based on the impact it has on their real estate value. What they essentially say is that if the liberalization affects the real estate value in an area, the people living there are likely to support it, while if they feel that liberalization will make that region sores off and the prices of real estate are going to fall down, they are likely not support liberalization.

                        Heckscher Ohlin says that people make their choices based on their skill level while Ricardo-Viner says that people make their choices based on the sector they are working in. Both models have merit because people get affected if they feel they are going to lose at a personal level, the comparative good is not on anyone’s’ mind. Moreover, that holds good even in the Scheve Slaughter model where people are thinking of their real estate value.

The Economy of the US and the Economy of UK

                        The US economy is the largest economy in the world and with a GDP in excess of 12 Trillion dollars; its output is almost equal to the combined output of the next five countries- Japan, Germany, China, UK and France.

                        Each of these economies specializes in one or more kind of products and thus focuses on them. China of course is the world’s manufacturing hub and more and more companies are moving to China in search of cheaper production facilities. Those who have not moved are facing the brunt of higher costs and thus lower profit margins or losses in certain cases. That is not to say that if you do not move to china you are in for a loss, it has only to say that the comparative advantage that a competitor will gain by moving to china will be difficult to cut unless you follow suit.

                        The assumptions that Scheve and Slaughter make are practical and it is obvious that when people think of limiting imports they are going to think of limiting exports to protect the disadvantaged sectors.

                        The housing prices have been continuously monitored since the start of the century and my debate is that the housing prices per se might affect a persons’ opinion. Imagine this, if the housing prices are high, the person will be tempted to move to another place or another country because he can sell his house for a good price and get another one at a similar of cheaper price.

                        People living in disadvantaged locations might oppose the trade liberalization but on the other hand, many towns might actually develop themselves to be hubs and centers for economic growth by providing facilities that are lacking in area.

 According to the graph and highlighting the point I made, people might be willing to move locations even if their industry is under attack. Imagine a worker in the UK with an appreciated home value, he would be wiling to move to the US as the houses in the US are cheaper and he can actually get a better house or get a similar house for a lower cost. One can argue that this data is cumulative and not by the location where an industry might progress, but let us put it in perspective, both the US and the UK (Halifax) are not growing so fast. The UK (Halifax) is certainly not out growing the US to justify a 60% increase in houses over the last 4 years.

                        In another very interesting article by Les Christie titled Housing prices put Americans on the move we can see how Americans are moving within the country to locations where housing is more affordable and the prices are realistic. The housing boom in the last few years seems to render the argument of Scheve and Slaughter out of perspective at times. You can make your trade polices and people might link it to their jobs being kept or lost, but I do not think that people are linking real estate value to trade policy anymore. People are more than willing to move to other locations and cash out on the property they own or move to other locations and buy new property.

New York lost nearly a million people in the 5-year period from 2000 to 2004, people are also moving out of other cities and mainly into relatively cheaper cities like Dallas, Atlanta and Phoenix. The trend of course is to move to a lower cost location, going by this people are not really that bothered about their jobs, as they feel they can get equally well paying jobs in other areas. Compared to New York, San Francisco, Los Angles, Chicago there are very few places in the country or outside the country where persons’ skills can be used; likewise there is so much opportunity in these cities that even people with a lower level of skill will be able to find jobs for themselves.

                        Looking at the overall picture, I think that the Scheve and Slaughter argument probably held true in the early 90’s when the housing prices weren’t booming the way they are now. Today, the argument does not seem to hold true as people are freely moving across cities and perhaps even countries as they find locations that are cheaper or more affordable for housing and other perspectives. Does the Scheve and Slaughter argument hold in the UK, my answer is No.

Within the United States (where housing prices have increased relatively lesser than UK), people are changing locations to move to other locations based on housing prices so a similar trend would hold true in the UK too. That is why; trade policy will not have to depend on prices of houses or real estate. Another lesser critiqued part of the Scheve and Slaughter argument is that they expect people to be able to judge the value of their houses once they are driven into a disadvantageous position, this is expecting too much from a normal citizen as people are going to have a reactionary approach to things rather than having a anticipatory approach.

                        Although Scheve have superior data on the people because their data is on an individual level, I feel that their argument has more credence when the real estate prices are stable, in economies where real estate prices are rising, their argument has much less impact as people are able to make decisions based on other parameters.

                        The US makes its trade policy based on many factors; let us look at the primary data on our trading partners. Canada is our biggest partner, followed closely by China Mexico and Japan. All these countries except China have had long relationships with us. Canada and Mexico enjoy the near shore advantage and Japan was always an important partner due to the cold war when we needed a base in that part of the world. Nevertheless, from an economic standpoint, it is cheaper and faster to transport goods from Mexico and Canada while Japan has always been a technological partner or challenger depending on the industry.

However, off late we are reviewing our policies to benefit the lesser developed nations of the world. We are industry leaders in many industries and are not disadvantaged in any area apart from oil perhaps. Even here, our companies control large oil fields across the world and we have 22 Billion Bbl of reserves. We get our strength from our superiority in technology, aerospace and military equipment.

We protect our agriculture sector and provide subsidies to our farmers; this does cause lot of outcry at international forums and does go against us in our policy of free trade. Other notable areas of our trade policy is the continued high valuation of the Chinese Yuan (RMB) which we believe gives Chinese products an unfair advantage and had led to what is popularly known as the bra wars. However, the Chinese have now pegged the Yuan against a basket of currencies against the previous peg of the US dollar.

                        The UK on the other hand is on an economic war with its neighbors and has not accepted the Euro. Other powerful European nations like France Germany and Italy are all members and this is actually forcing UK to come closer to the US. Terrorism of course gets us closer on many other aspects, but economics is a major force. US is the biggest export partner of the UK.

                        Looking at the validity of results of Scheve Slaughter in the UK, I do not believe that results hold true in these times let alone across countries. However, upon reading the paper by Michael Hoffman titled ‘Politico-Economic Determinants of American trade Policy Attitudes I feel that even the factors of political allegiance, education levels and location do not completely cover the aspects of how people might react to trade policies. We can put in more and more factors to determine how people will react but at the end of the day, it seems that people react on the knowledge they have and the perceived effect of the trade policy on their own life.

References

Christie Les (2006) Housing prices put Americans on the move retrieved from          Fortune.com       http://money.cnn.com/2006/04/19/real_estate/net_migration_tilts_south/index.ht  m on 16th Aug’06

Max Sarah (2005) Homes: U.K. went cold; U.S. could too retrieved from       CNNMoney.com       http://money.cnn.com/2005/05/03/real_estate/investment_prop/lessons/index.htm           retrieved on 16th Aug’06

McGivering Jill (2006) Three Gorges dam’s social impact retrieved from BBC World       http://news.bbc.co.uk/2/hi/asia-pacific/5000198.stm on 16th Aug’06

Chishti Seema (2006) Narmada dam work ‘can continue’ retrieved from BBC World       http://news.bbc.co.uk/2/hi/south_asia/4751793.stm on 16th Aug’06

International Trade and Development retrieved from the Global Policy Forum       http://www.globalpolicy.org/socecon/trade/index.htm on 16th Aug’06

CIA World Fact Book retrieved from CIA       https://www.cia.gov/cia/publications/factbook/geos/uk.html on 16th Aug’06

USPolicy.be U.S. Orders Review of Trade Preferences to Benefit More Countries     retrieved from

      http://www.uspolicy.be/Article.asp?ID=6B225935-15A9-42F1-A774-      13AEC3CA6BDC on 16th Aug’06

Foreign Trade and Global Economic Policies retrieved from       http://usinfo.state.gov/products/pubs/oecon/chap10.htm on 16 Aug’06

Hoffman Michael S. (2004) Politico-Economic Determinants of American Trade      Policy Attitudes retrieved from http://129.3.20.41/eps/it/papers/0510/0510017.pdf        on 16 Aug

Laidi Zaki (2006) Are the European Preferences shared by others. Retrieved from     http://www.ceri-      sciencespo.com/archive/july06/artzl.pdf#search=%22trade%20policy%20preferen           ces%20of%20the%20US%22 on 16th Aug’06

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