Trade is as good as science

international economic Relations

Klaus-Peter Kruber

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Born in 1944, is professor for economics / politics and its didactics at the Christian-Albrechts-Universität zu Kiel and director at the institute for social sciences. His main research areas are conceptual approaches to economic education, the relationship between economic and political didactics, the history of theory of economic thought and international economic relations. Prof. Kruber studied economics and economic geography at the University of Bonn and then worked at the Universities of Erlangen and Wuppertal. In 1975/76 he was appointed professor at what was then the Kiel University of Education. Since 1994 he has been teaching economics / politics at the Faculty of Economics and Social Sciences at Christian-Albrechts-Universität.

Email: [email protected]

Anna Lena Mees

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After completing her studies, she works as a teacher at grammar schools (economics / politics and English) as an employee at the chair for economics / politics and its didactics.

Christian Meyer

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Christian Meyer is a research associate at the Institute for Social Sciences at the Christian-Albrechts-Universität zu Kiel. After completing his studies in economics / politics and mathematics (teaching post for grammar schools), he works there at the chair for economics / politics and its didactics.

Email: [email protected]

Every country has opportunities to gain competitive advantages through protectionist measures. Regional integration, but also regulations within the framework of the WTO, can help to overcome such trade barriers.

Governments are influenced by interest groups: one example is the well-organized farmers' associations. They succeed in effectively protecting agriculture in the EU. (& copy AP)

Regulatory measures

Although the prevailing view in economics is that free trade is most conducive to general welfare, protection is often the dominant strategy. Every country has incentives to gain an advantage over other trading partners through protection measures. An explanation for this is provided by the model of the so-called trade policy prisoner's dilemma. Such a situation occurs when a country fails to comply with agreements that are intended to promote the welfare of all partners (for example the agreement on free trade). If a cooperation partner violates the rules by taking protectionist measures, he tries to gain an advantage to the detriment of his partner. Should other trading partners also violate the rules (possibly as a countermeasure), then they too believe that their situation will improve. Each time, the cooperation partners who adhere to the rules are the ones who suffer, and they too will then go over to protection. If everyone just pursues their own interests without sticking to the agreements, all trading partners end up worse off.

There is also a tendency towards protectionism in political decision-making processes. Democratic governments are to some extent influenced by interest groups; employers and trade unions try to persuade governments to take protective measures where international competition endangers jobs. These smaller groups are easier to organize and can exert more effective pressure than the mass of consumers who would benefit from cheaper market supplies through free trade. One example is European agricultural protectionism: through their lobbying, well-organized farmers' associations are able to effectively protect agriculture in the EU. This happens at the expense of higher food prices for domestic consumers and at the expense of foreign suppliers who are locked out of the European market.

States intervene to a considerable extent in international trade in order to restrict imports and promote exports (regulatory trade policy). Such interventions to restrict free trade make use of various instruments. They can be divided into tariff and non-tariff instruments. Tariff barriers to trade are published in public registers (tariffs), laws or ordinances; these primarily include customs duties.

These are taxes that countries levy on the import of goods during cross-border trade (customs duties on exports are rarer and are not considered here). A distinction is made between specific tariffs and ad valorem tariffs according to their tax base. In the case of the former, the duty relates to a unit of quantity of the imported goods (e.g. 2000 euros per ton). In the case of value duties, a certain percentage is added to the price of the goods (for example 20 percent on the price at the border).

Tariffs are intended to inhibit imports (in this case they protect domestic suppliers of the same good) and / or generate income for the state, accordingly a distinction is made between protective tariffs and financial tariffs. These have opposing effects: A "perfect" protective tariff (prohibitive tariff) reduces the import of the goods to zero and thus also the tariff income at the same time; a lucrative financial tariff is best placed on goods whose demand does not decrease even after the associated price increase (goods with low price elasticity).

Non-tariff barriers to trade

The non-tariff barriers to trade include quotas, import and export bans and regulatory provisions as well as dumping:

Quotas are quantitative import restrictions; the limitation of the import volume is intended to secure the sales opportunities for domestic producers. For example, only 13,000 tons of garlic from China may be imported into the EU duty-free, in order to protect Spanish production in particular.

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A good nose for garlic smugglers

They know what to look for. They meticulously go through tables and consult all available figures. The intelligence officers of the EU anti-fraud agency Olaf are real experts in analyzing data.

They know that now, in the second half of August, the first loads of smuggled garlic are arriving from China. Because Olaf has carefully studied the production cycle of garlic in China and other exporting countries.
But why is that important? Quite simply: The smuggling of the tuber is a million dollar business. The EU does not register such high tariff losses due to smuggling for any other agricultural product. This is the result of a complicated agricultural policy and the EU's undisguised agricultural protectionism. European garlic producers want to use all their might to shut out China, the world's largest grower.
When the then EU Agriculture Commissioner Franz Fischler negotiated import quotas for garlic with China in 2001, he had no idea how the market would develop. According to the agreement, the Chinese are allowed to export a good 13,000 tons annually to the EU duty-free. If the quota is exhausted, 1200 euros per tonne will be incurred. The agricultural lobby from Spain and Italy in particular had insisted on this regulation, pointing out that the production costs of Chinese farmers are only a tenth of the European level. But they have not been able to stop their own decline in production. Since 2002 garlic production in the EU has decreased by 14 percent to 242,000 tons, in Spain, the largest growing country, by more than a quarter.
At the same time, smuggling has flourished. The experts at Olaf estimate that around 25,000 tons of garlic come illegally from China into the EU every year.
In the early days, garlic was brought from China to a country that enjoyed duty-free access to the EU for this product: Egypt, Jordan or Turkey. A middleman there pretends to want to export local garlic and sneaks an export permit. The Olaf people noticed, however, that shortly after the harvest in China, exports from countries in which the garlic was not yet ripe skyrocketed.
That is why the smugglers are now practicing other methods. So they hide the common garlic under a layer of elephant garlic. There are no EU quotas for this more expensive crop. Or the smugglers pretend that the garlic is frozen because then it does not fall under the quota either. Recently, they have also been increasingly forging import licenses in order to evade customs.
Olaf's investigators estimate that the EU will lose 30 million euros in customs revenue every year as a result of the trickery. This does not cause any damage to the consumer. On the contrary: the illegal imported goods are likely to depress the price, and Chinese garlic is considered particularly healthy because it contains a lot of selenium. [...]
Investigators are countering the tricks of the Chinese garlic networks with ever more sophisticated methods. If customs secure cargoes in the ports that could have come from China, they take samples and send them to the USA for isotope analysis. This examination can be used to determine where the garlic actually grew. In years of detailed work, the Americans have built up a database with the properties of garlic from all over the world.
Olaf's investigators have a good nose. "We are now achieving a good hit rate," says one investigator. [...]

Silke Wettach, "Trick with the Quota", in: WirtschaftsWoche No. 34 of August 21, 2006

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Import and export bans are intended to completely prevent trade in certain goods. According to German law, for example, the delivery of war weapons to areas of tension is prohibited. Import bans are aimed at domestically "undesirable" products (for example drugs). In dictatorships, it is not uncommon for the importation of political literature or newspapers to be prohibited.

Regulatory trade barriers are often not recognizable as such at first glance. For example, border formalities, technical standards and norms, health or environmental protection regulations or similar regulations are mostly factually justified and serve the processing of trade or the benefit of consumers. However, they can also be handled arbitrarily or in a discriminatory manner to the detriment of foreign providers. For example, if their products have to go through special, expensive approval procedures from which local manufacturers are exempt, test and procedural regulations become instruments of protectionism. Regulatory trade barriers are a particularly sensitive problem area in foreign trade policy. To what extent regulations and bureaucratic procedures issued by states actually serve the specified goals of safety, health, environmental protection, or whether they are intended to hinder the importation of foreign products, is often difficult to assess and is the subject of heated discussions between states, in the World Trade Organization (WTO) or in the European Union.

One example was the German beer purity law. Certain British beers contained the same ingredients as German beer, but their labeling as an "additive", which is mandatory in Great Britain, was seen as a violation of the German purity law. German beer must not contain any "additives". The German import ban was classified as a non-tariff trade barrier in the European internal market and prohibited by the EU.

One instrument of aggressive export promotion is dumping. It occurs when a product is systematically and sustainably sold on foreign markets at prices that do not cover the manufacturing and transport costs or are well below the domestic price. The producers cover the losses from the profits made on other products. The ruinous competition aims to conquer the importing country's market. If this succeeds, the dumping company can raise the price and offset previous losses with monopoly profits. In this case one speaks of "predatory" dumping.

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Ruinous competition

[...] There is no shortage of dairy products on the shelves of the Uchumi supermarket chain in Kampala, Uganda: Mascarpone and Parmesan from Italy, Gouda from Holland, milk powder from Ireland and South Africa. Market manager Eric Korir is proud of the international range. "National production can by no means satisfy the demand."

That is true and false at the same time. Because Uganda's farmers provide sufficient milk - many of them crossed Friesian cows years ago in order to increase their yields. But most of the milk does not find its way into dairies. The marketing that the state dairy company organized until the beginning of the 90s no longer works.
"GBK Dairy Products" is one of the few dairies that survived the decline of the dairy industry following the euphoria of liberalization. At its only location in Mbarara, GBK processes up to 35,000 liters of milk a day - including butter and yoghurt. "We would like to increase capacity, the demand is there, but we don't have the means," says Operations Manager Godwin Tumwebaze.
[...] Domestic producers have almost no chance against dumping imports from Europe. According to calculations by Oxfam, export prices in Germany are on average 41 percent and in the EU 31 percent below production costs in Europe. "Dumping is still taking place on a large scale," says Oxfam agricultural officer Marita Wiggerthale. A large part is due to the EU export subsidies of 1.43 billion euros, which went to the account of large dairy companies. [...] "There are many dairy farmers who can no longer feed their families properly," says farmer Patrick Bharunhanga, who has around 70 cows on the pasture. [...] "None of us get subsidies, how are we supposed to be able to compete with imports?"
For Armin Paasch, trade expert of the Food First Information and Action Network (Fian), the situation of smallholders is a direct consequence of European trade policy. "European agricultural exports at dumping prices endanger the human right to food," says Paasch. [...] African states like Uganda cannot defend themselves against imports from the EU. This is ensured by Economic Partnership Agreements (EPAs) to which numerous countries have already agreed. Uganda has also committed itself to abolishing its import tariffs for 80 percent of EU imports in the next few years and to freezing the remaining tariffs at a low level. [...]

Tobias Schwab, "What remains of the milk of Moses"

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Economic Partnership Agreements (EPAs) are regional free trade agreements that are negotiated between the European Union and 79 ACP countries - the majority of which are ex-colonies in Africa, the Caribbean and the Pacific. EPAs have been in force with 15 Caribbean countries since January 2008. The EU has concluded interim agreements with 22 other countries, including the East African Community (Kenya, Tanzania, Uganda, Rwanda and Burundi), which only concern trade in goods and which are soon to be expanded into full EPAs (including services and investments). The EU is not negotiating with individual states, but with a total of six regional groups.
The history: The European Union has allowed the ACP states since 1975 (Lome and Cotonou agreements) to export goods to the EU largely duty-free. The aim of these treaties was to reduce poverty. Since such unilateral preferential treatment cannot be reconciled with the rules of the World Trade Organization (WTO) and a WTO exemption expired at the end of 2007, EPAs based on reciprocity had to be negotiated under time pressure. This means that the ACP countries also undertake to open their markets to European products, investments and services.
The goods trade: The interim agreements so far only relate to goods. In the treaties, the ACP states accept extensive liberalization of their trade in goods. By 2010 they will have to remove up to 97 percent of tariffs on imports from the EU. With the contract, a "standstill clause" also comes into force, which means that all customs duties are to be frozen at the current level. And what's more, it prohibits the introduction of tariffs and quotas ever again. Particularly sensitive products can be exempted from liberalization. However, the EU and ACP regions must agree on this, with different trade interests colliding.
Pressure and threats: Numerous non-governmental organizations (NGOs) accuse the EU of blackmail. During the negotiations, you threatened the ACP countries with the withdrawal of development aid. This has succeeded in enforcing conditions such as the "Standstill Clause", which the WTO does not even require. Several African presidents spoke of "double standards" at the EU-Africa summit in December 2007. While the partnership is ostensibly praised, the EU is focused on asserting trade interests.
The consequences : According to numerous non-governmental organizations (NGOs), the EPAs pose a serious threat to the development of poor countries. Germanwatch and the human rights organization Fian criticize, among others, the possibility of protecting their markets from subsidized imports from the EU. The EPAs put the livelihoods of millions of smallholders at risk and caused hunger.An Oxfam study assumes that the tariff cuts will mean that the African countries will lose a total of 227 million euros in household income every year.
"Cheap imports from Europe and a privatization policy have increased rural poverty"

Both articles in: Frankfurter Rundschau from June 3, 2008

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However, dumping is also used as an instrument of state export promotion to conquer foreign markets. In this case, the state compensates for the dumping company's losses on foreign markets by subsidizing the state budget. An example of this type of dumping is the conquest of the shipbuilding market by South Korean shipyards, which is not only due to location advantages, but also to government subsidies.

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Economic effect of trade barriers

(using the example of an import duty)

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The market diagram (Figure 1) initially shows the domestic market for good X without world trade. A certain domestic production volume is offered at the domestic price IP.
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In Figure 2, the domestic market is opened up to the world market, on which the world market price WP applies. The domestic price is now falling to the benefit of the consumer on WP, and domestic production is falling. At the WP price, consumers buy the remaining domestic production and the amount imported.
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An import duty is now levied (Figure 3). The domestic price rises above the world market price. This means that consumption decreases (consumption effect K) and some domestic producers become competitive again, their production increases (protective effect S). The import volume is falling. It becomes clear that the situation of domestic producers has improved compared to the situation with free trade, whereas that of consumers has deteriorated. The state generates revenue equal to the amount of duty on the reduced import volume. Even if this is interpreted as increasing welfare, there remains a net welfare loss (triangle above area K).

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