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International Trade Policy Environment

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DR. BERTRAND GUILLOTIN: Hello everyone. My name is Bertrand Guillotin. Today, we're going to discuss international trade policy environment. Learning objectives include explaining, first of all, what trade policy is. Number two, identify business implications.

And to start with, basically, we have to say that trade policy is a government tool to open or close market access. I think that if you read the news lately, you know exactly what that means.

We have some precedent. We have been there before in terms of in putting tariffs on imported goods in the US. 1930s, Smoot and Hawley Tariff Act actually restricted access to US market. But unfortunately, it also is known to have caused the Great Depression and World War II as a result of economic disasters around the world, including Germany, because other countries retaliated.

So typically, when tariffs are imposed, countries retaliate and tit-for-tat. Tensions increase and exacerbate the problems and not necessarily solve them.

Since 1945, thankfully, free trade has been promoted by the US and other countries. Institutions were created-- the GATT, the WTO, World Trade Organization-- to supervise and put rules in place to make sure that free trade is as fair as possible. I know it's not perfect. But at least it's been successful. And the flows have increased.

So understanding trade policy means also that free trade is free flow of goods, people, and capital, which leads to economic prosperity. The consensus among economists is that actually free trade equals growth and prosperity. This is not just me saying it. A lot of economists will agree.

And growth happens in the aggregate. Unfortunately, there are winners and losers. Globalization, free trade have lifted millions out of poverty. But we also know that some have been losing at this global game. So we need to be including them. And we need to be discussing not just trade policy in a vacuum but also inclusive globalization.

Governments can therefore use trade policies to join the global economy. That's the example of Singapore and other countries that have, for the last 50, 70 years, you know, broken records and transformed their economy by joining the global economy.

Free trade agreements provide opportunities to exporters. And governments can use those trade policies to protect some industries, as we've seen the US for steel and aluminum.

Protecting nascent industries, should be noted, is accepted by the World Trade Organization. Typically, we are talking about new industries such as photovoltaic panels, nanotechnology-related developments. And that's for a period of time. Once the industry is established, you cannot really impose those tariffs and/or quotas. The WTO would send you a warning.

So trade policy, the climate has changed. It can change unexpectedly. It has changed unexpectedly since 2016, 2017, the US and the world. Negotiations are ongoing. And maybe trade policies needed to be revisited to actually rebalance this free trade into fair trade. Time will tell.

Definitely, the US tariff on steel and aluminum in 2018 has been a source of interest and a great source of research. You can see the implications basically. Not to forget that tariff and non-tariff administrative barriers can be erected. So in other words, even if you don't put a tariff like, you know, a tax on imported products like steel and aluminum, you can actually establish a non-tariff administrative barrier, which is basically a headache for people to import steel or aluminum in the US and therefore reduce those import flows. Has been done before.

In general, no one benefits from tariff trade war. That's pretty much an accepted implication. But, again, if it's part of negotiation to rebalance certain flows and/or discuss other aspects of international business, such as intellectual property and protection thereof, then maybe it's a good tactic. We'll see.

Tariffs can lead to an increase in FDI. In other words, in Japan, they were exporting their cars to the US and faced import tariffs. To circumvent the tariffs that they were faced with, the Japanese actually built plants in the US. So tariffs can be used to increase FDI in any given country by this simple, simple strategy of circumventing those tariffs by building plants in any given country.

So if we look at the US, again, imposing tariffs on steel and aluminum and/or other products, if the exporters from Europe and China do not want to pay those tariffs, what is the solution? You can build a plant in the US, and you will not have to pay the tariffs because that product would not be imported. That product would be made in the US.

So tariffs can lead to an increase in FDI. And that's an implication that has not been mentioned much in the news. That should be kept in mind.

So conclusion. Trade policy can be a powerful enabler but also an obstacle. Free trade is a powerful force to eradicate poverty. That should also be kept in mind. Yes, there are losers in the process. But overall, in the aggregate, everybody benefits from free trade.

Free trade benefits should be shared better. We need to include everybody in the benefits as much as possible. And we should also keep in mind that trade war is unproductive, unless it leads to FDI increases as mentioned a minute ago. Typically, FDI, Foreign Direct Investment, also leads to job creation in the market where that FDI takes place.

So, last but not least, tension between free trade and protectionism will remain. This has been part of the game for decades. We need to manage it. We need to understand it. And I hope this was helpful to do so.

We have covered these learning objectives. We have explained trade policy. And we have identified business implications. Thank you for watching. And I'll see you next time.

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