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"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?
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"Free" Trade without "Fair" Trade? -- how should the U.S. react to address our negative trade imbalance in the face of unfair trade practices by most nations around the world?

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Current economic theory assumes that nations will voluntarily adopt “fair trade” practices. …

Current economic theory assumes that nations will voluntarily adopt “fair trade” practices.
The U.S. is in a strong bargaining position to negotiate balanced trade relative to partners that drive our trade deficit – in a trade war, they have a lot more to loose.
The U.S. should proactively adopt a tit-for-tat approach to foster trade liberalization and fairness or risk losing the “international trade war”.
Above ‘fair trade” enforcing mechanism would provide crucial time for retraining displaced labor and/or protecting sectors impacted by unfair practices.

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  • 1. 53rd ANNUAL TAX FORUM. “No nation was ever been ruined by trade” Benjamin Franklin “Free trade is not based on utility but on justice” Edmund Burke November, 2012
  • 2. 1 Background. Managing Partner ARGENTO DIGITAL VENTURES Partner / Vice-President ADVENTIS MANAGEMENT CONSULTING Leader, Telecommunications & Media Practice ROLAND BERGER STRATEGY CONSULTANTS Managing Director Entrepreneur SEEDS - Angel & GOLDEN Investor Venture Capital Investment Group Managing Partner ARGENTO DIGITAL VENTURES CEO / Founder MON AMI PET WORLD Principal (Twice Winner of Professional Excellence Award) BOOZ ALLEN HAMILTON Member of Technical Staff AT&T BELL LABORATORIES
  • 3. 1. International Trade and the U.S. Trade Deficit. 2
  • 4. 3 Globalization and International Trade are related by a “virtuous” cycle. Increased economic specialization Reduced transportation and communication costs INTERNATIONAL TRADE Technology evolution. Rising incomes. GLOBALIZATION Increased interdependence (goods, financial) across nations
  • 5. 4 As a result, the growth in exports worldwide has largely outpaced GDP growth since 1950. Export increased 35X while GDP only 9X. EXPORTS AND GDP GROWTH WORLDWIDE 1950 = 100 Exports (volume) 3500 GDP (volume) Exports multiplied by 35 times since 1950, while GDP only by less than 9 times 3000 2500 2000 1500 1000 500 Source: WTO 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 0
  • 6. 5 The Great Recession of 2009, temporarily slowed down exports growth. In the last decade, exports grew 1.6X, while GDP grew 1.3X. EXPORTS AND GDP GROWTH WORLDWIDE 2000 = 100 Exports (volume) GDP (volume) 160 150 140 130 120 110 100 90 volume growth rates 20% 15% 10% average growth rate of exports = 4.3% 5% 0% average growth rate of GDP= 2.4% -5% -10% Source: WTO 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -15%
  • 7. 6 In the last two decades, U.S. imports grew 3.6X, exports 3.2X, while GDP 1.7X. As a result, trade deficit has increasingly become an issue. U.S. IMPORTS & EXPORTS 1990 = 100 GDP (volume) Exports (volume) Imports (volume) 390 340 290 240 190 140 Source: IMF, World Economic Outlook 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 90
  • 8. 7 In the last two decades , the U.S. trade deficit has increased from 2% of GDP to over 5% of GDP. China has been responsible for 40% of the U.S. trade deficit, in the last three years. U.S. TRADE DEFICIT $ billion 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % of GDP current prices 0% 0 -100 -1% -200 -2% -300 -3% -400 -4% -500 -5% -600 -700 -6% -7% Trade balance in $ billion (rhs) -8% Source: IMF World Economic Outlook Database -800 - Decrease in U.S. -900 demand - QE I, II – cheaper-1000 dollar. - Sanctions.
  • 9. 8 The U.S. ranks third in exports and second in imports, worldwide. Share of total exports The U.S. ranks 3rd in exports worldwide (share of 10.3%) 15% $ billion 2000 12% The U.S. share of WW GDP is 22% (China’s is 10.4%) 1500 9% 1000 6% 3% 500 0% 0 Share of total imports 20% 16% The U.S. ranks 2nd in imports worldwide (share of 15.6%) $ billion 2500 2000 12% 1500 8% 1000 4% 0% Source: WTO 500 0
  • 10. 9 China is the world’s largest exporter, surpassing the UK (2002), Japan (2004), the U.S. (2007) and Germany (2009). TOP WORLD EXPORTERS US exports = 100 China Germany Japan UK India Brazil 150 Is GERMANY an example 128 In 2007, worth following? the US China overtook 125 100 75 50 25 16 32 Source: WTO 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0
  • 11. 10 U.S. imports are concentrated around 5 trading partners that represent 68% of total. China is our largest import partner. U.S. TOP IMPORT PARTNERS 14% 17% 19% 6% 12% Source: WTO
  • 12. 11 U.S. exports are concentrated around 5 trading partners representing 62% of total. China is our fourth largest export partner. U.S. TOP FIVE EXPORT PARTNERS 19% 18% 7% 5% 13% Source: WTO
  • 13. 12 Germany and China rely on exports as their “economic growth engine”. The U.S. relies much less so, among industrialized nations. DEPENDANCE OF ECONOMY ON EXPORTS (EXPORTS/GDP) US China Germany Japan UK India Brazil 45% 40% The U.S. has BARGAINING POWER in TRADE NEGOTIATIONS 35% 36% 30% 26% 25% 20% 16% 21% 15% 10% 5% Source: WTO, IMF World Economic Outlook Database 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0%
  • 14. 13 The U.S. dependence on trade for “economic growth” is relatively low when compared to major trading partners. The U.S. bargaining position in trade negotiations is STRONG. DEPENDANCE OF ECONOMY ON TRADE (EXPORTS+IMPORTS/GDP) 51% 61% 30% 28% 53% 48% 23% Source: WTO The U.S. has BARGAINING POWER in TRADE NEGOTIATIONS 30%
  • 15. 2. Trade Practices the Role of Free Trade Organizations and Free Trade Agreements. 14
  • 16. 15 The U.S. has the lowest average import tariffs among large, industrialized economies. IMPORT TARIFF IMBALANCE – U.S. & ROW 9.4% 4.5% 5.3% 3.5% 9.6% 12.6% 13.7% Source: WTO 5.3%
  • 17. 16 The U.S. also has the lowest import tariffs as a percentage of total imports. 9.5% 3.1% 2.8% 2.1% 4.6% 7.2% 10.2% Source: WTO 2.1%
  • 18. 17 Import tariff imbalance across key goods is much more severe. % 10 Chemicals 8 % 40 Clothing % 20 30 15 20 10 10 5 0 6 Leather and Footwear 0 4 2 0 % 15 Non-electrical machinery % 15 Electrical machinery % 25 20 10 10 5 5 15 10 5 0 0 Source: WTO – average tariffs by product 0 Transport equipment
  • 19. 18 Non-tariff barriers, a major obstacle to fair trade are applied routinely by some export-driven nations. NON-TARIFF MEASURES (NTMs) Important NTMs (Non-Tariff Measures) Technical barriers (e.g., labeling). Sanitary measures (e.g., licenses, certifications). Domestic regulation. Quantity restrictions. Export subsidies. First three measures are often necessary to achieve public policy goals (e.g., health and safety of consumers). A harmonization, rather than elimination of these practices is recommended. The impact of NTMs on total imports is estimated at 10%, higher than the impact of tariffs. Quantification of their impact is challenging.
  • 20. 19 Other unfair practices are used to unbalance international trade. DUMPING Pricing on imported products lower than in their domestic markets. WTO’s “Anti-Dumping Agreement” aims at addressing this issue. EXCHANGE RATE MANIPULATION China’s currency is “purposely” under-valued distorting trade in their favor (imports from China become cheaper and exports to China more expensive). Trade deficit with China could be easily narrowed by a re-alignment of the Dollar/Yuen exchange rate. An agreement for global re-alignment of exchange rates is urgently needed.
  • 21. The World Trade Organization (WTO) is the main body overseeing “trade practices”. Multilateral Trade Agreements go further in liberalizing trade. ORGANIZATIONS AND AGREEMENTS AIMED AT FOSTERING “FAIR TRADE” GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) -- January, 1948. Initially 23 member countries. The first round of negotiations resulted in 45,000 tariff agreements affecting $10 billion (around one-fifth of the world trade, at that time). URUGUAY ROUND (1986-1994). Birth of the World Trade Organization (WTO) Formally replaced GATT. Permanent International Institution -- GATT was a multilateral agreement. Besides goods trading practices, WTO covers trade in services and Bare Intellectual Property (GATT focused exclusively on goods). Minimum The US has been a member of the WTO since its birth, 1 January 1995; The US was also one of the 23 first signatories of the GATT in 1948. “Free” Trade MULTILATERAL TRADE NEGOTIATIONS (Trade Rounds) Aimed at tariff reduction and non-tariff barriers elimination. Several rounds have taken place over last 50 years fostering international trade 20 by eliminating barriers to free trade (e.g., NAFTA).
  • 22. The U.S. has signed several Regional and Bilateral Trade Agreements but not with China, India, Russia, Japan or Brazil some of the most protectionist nations. TRADE AGREEMENTS – U.S. REGIONAL TRADE AGREEMENTS North-America Free Trade Association (NAFTA). Trans-Pacific Partnership Agreement (TPP). Free Trade Area of the Americas (FTAA). US-Southern African Customs Union Free Trade Agreement. The Enterprise for ASEAN Initiative. U.S.-Andean Free Trade Agreement. Central American Free Trade Agreement—Dominican Republic. BILATERAL TRADE AGREEMENTS Australia, Chile, Morocco, Bahrain, Oman, Peru, Singapore. Several other bilateral agreements are waiting for Congressional approval. 21
  • 23. 22 In 2011, the WTO had 153 members accounting for 95% of the world’s trade. Four new members entered in 2012, Russia among them. WTO FOOTPRINT
  • 24. 23 Doha Round, sponsored by the WTO, is a key effort to balance tariffs. It has been deadlocked for a number of years. DOHA ROUND Negotiations have extended for over 10 years. The U.S. is offering to improve access to foreign agricultural products into the U.S., eliminating agricultural export subsidies; easing tariffs and quotas and reducing other forms of trade-distortions. In return, the US aims to negotiate services trading and to reach a level playing field with emerging economies by reducing tariffs on industrial goods for some manufacturing sectors; Emerging economies insist that the Doha round was never intended to result in such balancing. RATIONALE FOR NEGOCIATION FAILURE Scope creep. Excessive delays. Shifting economic power away from industrialized nations. (75% of world’s GDP growth in 2011- 2014 will come from developing nations, compared to less than 50% in 1998 - 2001)
  • 25. 24 The WTO mandate does not go far enough to ensure “fair trade”. OBJECTIVE OF WTO AND MULTILATERAL TRADE AGREEMENTS Reciprocal liberalization of trade-barriers applied in a non-discriminatory fashion. BARRIERS TO “FAIR” TRADE Tariffs, import taxes across product categories. Non-tariff barriers, such as quantitative restrictions (e.g., rare earth metals) or export subsidies (e.g., solar panels). Dumping (e.g., solar panels). Currency manipulation/devaluation. NATIONS FAVORED BY TRADE IMBALANCED HAVE “LITTLE” INCENTIVE TO NEGOTIATE
  • 26. 4. Impact of International Trade on the U.S. Economy. 25
  • 27. 26 Nations’ core capabilities determine their exports. International trade influences economic development and social welfare. IMPACT OF INTERNATIONAL TRADE ON THE U.S. ECONOMY NATIONS EXPORT PRODUCTS WITH COMPETITIVE ADVANTAGE Economics Models (e.g., Heckscher - Ohlin) indicate that countries export goods that use abundant resources and import goods that use scarce resources. Under this theory, the US and other developed economies would export mostly capital-intensive and knowledge-intensive goods and import from developing economies labor-intensive goods and natural resources.. IMPORTS IMPACT THE ECONOMY AND SOCIAL WELFARE Economic structure, Welfare. Inflation. Unemployment. Wage inequality..
  • 28. 27 EXPORTS bring innumerous benefits to a nation’s economy and it drives local businesses to become world-class players. Access to New Markets Enhances Competitiveness Increased flexibility • Increased revenues. Selling to new “foreign” customers. Foreign market may be growing faster than domestic market. • Lower production costs due to economies of scale and “experience curve” effects. • Utilization of idle capacity. • Focus on core capabilities. • Improved efficiency. • Improved product quality. • Becoming more price competitive. • Balance domestic market fluctuations. • Overcome saturation of domestic markets. • Extent product-life cycle. • Follow domestic customer while overseas.
  • 29. 28 IMPORTS also bring significant consumer and economic benefits. Benefits to Consumers • Lower prices for certain products due to increased supply  increased real disposable income. • Increased variety of products to choose from. • Hedge against temporary shortages (e.g., agricultural products and local weather effects). Enhanced Competitiveness • Fair trade fosters competitiveness and keeps suppliers efficient (e.g., making investments, reducing production costs). • Trade barriers foster non-competitive industries, able to supply only protected domestic market (e.g., Brazil auto industry) Lower Inflation • Lower cost imported intermediate goods. • Lower production costs for local producers. • Reduced prices for consumers or increased profits for producers.
  • 30. 29 IMPORTS are capable of creating or destroying jobs. IMPACT OF IMPORTS ON “U.S. JOBS” IMPACT ON U.S. JOBS Between 1983-2002, 6 million manufacturing jobs were lost mainly due to imports and offshoring.(source: 2011 World Bank). Despite this loss of jobs the manufacturing sector maintained its share of real GDP (around 23% vs. 22% in the 1960s) and even increased its share in exports of goods (from 61% in 1963 to 71% in 2011). Manufacturing in now more concentrated on capital goods (around 38% vs. 28% in the 1960s), which is in line with theoretical predictions. Timely availability of “alternative” jobs for displaced manufacturing workers and /or retraining mechanisms MUST BE ENSURED !!.
  • 31. 30 The trade deficit with China eliminated or displaced more than 2.7 million jobs (2.1 million in manufacturing), since entering the WTO. Source: Scott (2012)
  • 32. 31 The major NEGATIVE impact of IMPORTS appears to be on wages. FLEXIBILITY AND SIZE OF U.S. ECONOMY ALLOWS TRADE TO IMPACT WAGES MORE THAN UNEMPLOYMENT LEVELS 65% of manufacturing workers who lost their job during the 1980s-90s due to trade liberalization were employed two years later. However, 25% accepted jobs with 30% lower wages. (source: The Economist, 2007) TECHNOLOGICAL CHANGE AND REQUIRED SKILLS-SETS >> WAGE EROSION. OTHER POTENTIAL REASONS. De-unionization. Decrease in real minimum wage. Immigration of unskilled workers.
  • 33. 32 The U.S. focus on EXPORT of knowledge and capital-intensive goods exacerbates demand for highly skilled labor. REAL HOURLY WAGES ACROSS INCOME PERCENTILES • The U.S. excels on knowledge and capital-intensive sectors. 1 2 3 • Demand for skilled workers increases. • Demand for unskilled workers decreases. • Skill premium increases. • WAGE INEQUALITY INCREASES
  • 34. 33 Wage inequality has been expanding since the 1980s. Individuals with lower incomes and education levels are the losers. REAL HOURLY WAGES ACROSS INCOME PERCENTILES REAL HOURLY WAGES ACROSS EDUCATION LEVELS While the real hourly wages of workers in the 90th percentile rose by 30% from 1973 to 2005, those at the 50th percentile or below saw real hourly wages increasing by only 5% to 10%. Individuals in lower skilled jobs - lower education levels - are most affected by international trade. Source: Yellen (2006)
  • 35. 34 International trade must be carefully balanced. “Dogmatic” approaches could be disastrous. INTERNATIONAL TRADE IN THE BALANCE - U.S. ECONOMY Benefits Costs Economic Growth High Unemployment Levels Improved Consumer Welfare Increased Wage Inequality Improved Competitiveness Potential loss of Industrial Base Controlled Inflation National Security
  • 36. 5. The U.S. Response to Trade Imbalance. 35
  • 37. 36 For the U.S., the promise of international trade is not being fully realized. However, the U.S. is in a strong bargaining position. THE PROMISE AND REALITY OF U.S. INTERNATIONAL TRADE PROMISE REALITY - Globalization >> Trade. - Trade >> Economic Growth, Social Welfare, Competitiveness. - U.S. Complacency >> Barriers - Barriers >> Trade Deficit. - Trade Deficit >> Unemployment, Wage Inequality, Industrial Base Erosion. - Trade partners unwilling to negotiate. - Trade Agreements Insufficient. U.S. BARGAINING POWER (TRADE / GDP) U.S.= 28%. China = 53%.. Russia = 48%. India = 51%%.
  • 38. 37 In an environment where “lack of trust” prevails, how to play the game to balance our trade deficit ? FAILURE OF TERMS-OF-TRADE APPROACH FAIR TRADE SHOULD LEAD TO OPTIMAL OUTCOMES, BUT… Consider two trading partners (e.g., U.S. and China) and two trade policy options: i. Fair trade or ii. Impose tariffs that raises own real income at the expense of trading partner’s income The Prisoners' Dilemma game illustrates that short-term mentality and lack of trust, would drive both partners to protect themselves and get sub-optimal payoffs (-5, -5) -- equilibrium position. If both parties are not equally aggressive, the passive party pays dearly (-10, 20). China (aggressive) Fair Trade U.S. (passive) Fair Trade (10, 10) Protection (20, -10) Protection C (-10, 20) NE (-5, -5)
  • 39. 38 A “tit-for-tat” approach to trade would induce aggressive trade partners to cooperate – fair trade. (1/2) CURRENT AGGRESSIVE PARTNER SAYS ‘UNCLE” “FAIR TRADE” (NASH EQUILIBRIUM) The U.S. is in a STRONG BARGAINING position Source: The Evolution of Cooperation. D. Axeldrod.
  • 40. 39 A “tit-for-tat” approach to trade would induce aggressive trade partners to cooperate – fair trade. (2/2). In trade relations, short-run incentives for non-cooperation often dominate. Countries boost domestic production by levying tariffs on imports or by resorting to non-tariff barriers. Disadvantaged trade partners may retaliate and initiate what is known as a TIT-FOR-TAT strategy The objective of this strategy is twofold: (i) In the short-term it stops unfair trade. (ii) in the longer-term, it enforces cooperative behavior. The threat of future payoffs forgone in case of non-cooperation serves as a disciplining device to foster cooperation. A tit-for-tat strategy would foster trade liberalization and fairness..
  • 41. 6. Conclusion. 40
  • 42. 41 Most agree with the end-goal of free trade and its benefits. The path for getting there is crucial and must be defended. CONCLUSION International Trade driven by Globalization is here to stay. Exports fuel GDP growth – the U.S, does not export enough – 10% of WW exports and 22% of WW GDP. Unfair trade practices by key U.S. trading partners have created a trade deficit that contributes to job losses, wage inequality and erosion of our industrial base. WTO is unable to guarantee “fair trade”. “Rogue” nations have no incentive to negotiate. Multi-lateral Trade Agreements are effective but take long to negotiate. Economic theory models free trade, “statically” (end goal only, not the path) and assumes that nations will voluntarily adopt “fair trade” practices while getting there. The dynamic nature of international trade and its consequences – unemployment, wage inequality, potential loss of industrial base - demands a dynamic, proactive response. The U.S. is in a strong bargaining position to negotiate balanced trade relative to partners that drive our trade deficit – in a trade war, they have a lot more to loose. The U.S. should proactively adopt a tit-for-tat approach to foster trade liberalization and fairness or risk losing the “international trade war”. Above ‘fair trade” enforcing mechanism would provide crucial time for retraining of displaced labor and/or protecting sectors impacted by unfair practices.
  • 43. Appendix 42
  • 44. 43 REFERENCES  Ebenstein A., Ann Harrison, Margaret McMillan and Shannon Phillips, “Estimating the Impact of Trade and Offshoring on American Workers Using the Current Population Surveys”, World Bank, 2011.  Janet L. “Economic inequality in the United States.” FRBSF Economic Letter 33-34 (2006): 1-7.  Scott R., “The China toll - Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state”, Economic Policy Institute, 2012.  Sitchinava N. “Trade, Technology, and Wage Inequality: Evidence from U.S. Manufacturing, 19892004” (working paper).  “Trade's victims - In the shadow of prosperity.” The Economist, January 18, 2007.  “The Doha round - Dead man talking.” The Economist, April 28, 2011.  World Trade Reports of 2007, 2008, 2011 and 2012, www.WTO.org.  Tariff Profiles, www.WTO.org.

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