Restrictions on international

trade: Trade wars

Introduction
The purpose of this paper is to outline the international trade policies of the
states that play a major role on the international markets. Despite the fact that
they are all supporters of the WTO regulations regarding the interdiction on
imposing restrictions on trade, they all apply, to some extent, some protectionist
measures. These refer to goods that enter their country, but especially to goods
that are produced inside their country and are exported (export subsidies).
Generally, such actions give rise to retaliation and WTO disputes, but sometimes
they generate trade wars between companies belonging to different states.
These trade wars will be the focus of this paper, since their existence is publicly
denied, allegation which is definitely not supported by the empirical evidence
presented below. In spite of the fact that these situations have neither a logical
basis for the welfare of the population of a country nor the support of the trade
theory, states do make use of them quite often, pursuing some particular
interests. The following pages will analyze these facts and the way they
contradict the official stand of these states and some real life examples will be
presented in this respect.

Theoretical background
There is an extensive literature referring to trade policy instruments and their
negative effects. According to Krugman, Obstfeld and Melitz, a tariff is a tax
levied on an imported good. The main purpose of tariffs nowadays is no more to
provide government revenue, but to protect particular domestic sectors.
According to the trade theory, the effects of a tariff differ depending on the
perspective from which they are regarded. The introduction of such an
instrument raises the prices in the country imposing it and it lowers the prices in
the exporting country, driving a wedge between the prices in the two markets.
Because of that, in the state that imposes this measure, producers supply more
and consumers demand less (so fewer imports are demanded), while in the other
country, the supply is reduced and the demand is increased. All these facts cause
a decline in the total volume of trade. In case of a country with an important
economy compared to the world, the tariff will have a big impact on the foreign
export prices, causing a decline, so the aforementioned country will benefit, at
the expense of the others (countries which export that good). On the other hand,
in case of a small country, the tariff will not be able to influence the world market
and it will only worsen the situation of the country imposing it.
In their International Economics book Krugman, Obstfeld and Melitz discuss also
the export subsidy concept which is described as a payment to a firm that ships a
good abroad. The effects of an export subsidy on prices are exactly the reverse of

those of a tariff. Because of that, in the exporting country, consumers are hurt,
producers gain, and the government loses because it must expend money on the
subsidy. Moreover, the export subsidy worsens also the terms of trade due to the
fact that it lowers the price of the export in the foreign market.
An import quota is a direct restriction on the quantity of some good that may be
imported. Such an instrument always raises the domestic price of an imported
good, because it causes a reduction in the supply of that good. Apart from these,
there are also many other types of restrictions which may not be so obvious.
They could be expressed in the form of help offered from the state to some
companies with the research & development costs or in the form of some
exaggerated standards for health, safety and customs procedures required for
some goods in order to be allowed to enter a country.
As it can be noticed, all the aforementioned instruments have the power to
generate negative effects both on the welfare of the country imposing them, but
also on other countries. What is striking and will be proven in the next sections of
this paper is that there are many developed countries that publicly support the
WTO free trade agenda, asking from developing countries to eliminate all their
protectionist measures, while they are the ones that still use some of them to
protect some of their domestic companies and industries. However, it has to be
admitted that there are cases in which the government intervention is not only
justified, but it is actually needed, in spite of all the neoliberal propaganda. These
situations are represented by market failures, when second best policies can be
applied to fix some problems that may affect the general welfare. In this respect,
there are usually the developing countries that may find themselves in need for
some well thought and well directed protectionism, in order to be able to cope
with competition and develop themselves. Nevertheless, the contexts in which
countries like US, China or EU members impose such measures are definitely not
the ones justified by the explanation above.

Empirical evidence for the use of protectionist measures

leading to trade wars
Some may argue that if developed countries, which theoretically promote free
trade, were to make an exception and establish protectionist measures, there
certainly exist an emergency, an imminent risk for their whole economy or a
threat for one of their core industries. Surprisingly, this is not what actually
happens out there.
Bananas
Firstly, the present analysis will focus on the banana trade war. Although bananas
may only look like a fruit, they represent a wide variety of environmental,
economic, social, and political problems. Just 5 companies control some 80% of
the international banana trade. Caribbean bananas are grown on small, familyrun farms. However, a 1997 World Trade Organization decision pressured by the
US, backed by the big companies, has meant that these local producers will have

to compete on a level playing field with giant multinationals (there shouldnt be

discrimination based on where the food is produced or even how it is created).
This has affected the way the European Union (EU) has its trade agreements with
the African, Caribbean and Pacific countries (ACP countries) and the Lom;
convention which is based on cooperation and partnership between the EU and
the ACP member states. In 1998, UK already voted to abolish the Caribbeans
guaranteed access to European markets. In its place was a proposal for the EU to
issue import licenses to ships arriving with bananas on a first come, first served
basis.
The ACP nations felt that they were not ready to enter a global market place with
free trade in the way that the WTO prescribed. Moreover, the new agreement
allowed the EU to follow more free trade policies in a way that could give them a
stronger bargaining position.
In 1999, to give an idea of the importance of this issue, Washington applied a set
of sanctions on a variety of EU goods, many of which had nothing to do with
bananas, due to the preferential banana trade agreement. Washington claimed
that they were protecting their interests and wanted to show that free trade can
work, while the EU battled over questions regarding the right to decide, claiming
that the US was manipulating WTO rules to implement sanctions against
countries trading with regimes it does not like. The WTO eventually authorized its
largest ever trade sanctions by USA on the EU. In 2001, an agreement was
signed, signaling an end to the sanctions resulting from the banana dispute.
Rare-earth minerals
A few years ago, China restricted exports of the rare earth minerals, claiming that
it was doing so because mining for rare earths can be environmentally
destructive, though China seems to have little desire to reign in the many other
environmentally destructive parts of its economy. But the restrictions effectively
made rare earths outside China several times more expensive than they were
inside the country. And since rare earths are essential to the clean-tech industry,
that price differential gave foreign companies an incentive to move their
manufacturing to China. Besides that, it was an attempt to give its domestic
electronics and other manufacturing industries a competitive advantage by
ensuring a cheap captive supply of raw materials. At that time, China was
producing 97% of the worlds rare earths.
In 2012, the U.S. along with the European Union and Japan had filed a case
with the World Trade Organization requesting talks with China over its export
quotas of the rare-earth minerals.
This year the WTO dispute ended when China announced plans that would
comply with a WTO decision from last year by removing export quotas and other
restrictions on rare earth elements.

US-China solar trade war

In 2012 the U.S. government decided in favor of imposing tariffs on Chinese firms
because of complaints from Solarworld, America's largest solar panel
manufacturer that argued that Chinese manufacturers were heavily subsidized by
Beijing, and therefore can out-price competitors around the globe. The US
Department of Commerce has proposed anti-dumping duties on imports of
Chinese solar cells, raising the threat of a trade dispute and dividing the
American solar industry over the decision. The tariffs were set at about 31 per
cent for 61 named Chinese suppliers and about 250 per cent for all other imports
from China, effective immediately.
Imports of Chinese solar cells, including some products not covered by the new
tariffs, rose from $640m in 2009 to $3.1bn in 2011. The department ruled that
Chinese companies had been dumping defined as selling at less than fair
value at margins ranging from about 31 per cent to 250 per cent.
Some in the U.S. solar industry said the government's decision to implement the
new tariffs was counter-productive to its own environmental, employment, and
manufacturing goals. They argue the government's position makes it hard for
solar companies to compete globally.
EU-China solar war trade
After the episode from US, the same situation arose in Europe too. China is the
worlds largest manufacturer of the PV panels that convert sunlight into
electricity and 60 percent of its $35.8 billion in solar product exports went to
Europe in 2013. Until then, there was a settlement in place, allowing around 100
Chinese companies to export tariff-free to the EU, as long as they keep their
prices above 56 European cents per watt of solar-panel generation. EU ProSun, a
European company from the solar industry, claimed that the threshold has since
been lowered to 45 European cents.
A group of European solar panel makers, also led by Germany's SolarWorld, filed
a complaint with the European Commission asking for import tariffs to be placed
on Chinese competitors' products. They argued that makers of the solar panels
have been given preferential lending, tax programs and other assistance.
On the other hand, China claimed that all those allegations were false, which is
why more than 100 Chinese exporters of solar panels have dutifully filled out
pages of forms from the European Commission. When the European inspectors
arrived, Chinese companies even gave them access to their confidential price
calculations for the domestic and international market.
However, in 2013 the European Commission introduced tariffs for all solar panels
from China with a long term level depending on individual companies' willingness
to cooperate. As a response, China has said that it would consider retaliatory
measures, including the imposition of a high tariff on seamless steel pipes from
Europe.

Inferences
Given the evidence above, it is clear that both developed and developing
countries apply protectionist measures to international trade, despite the right
approach according to theory and to WTO recommendations. These were only a
few examples that were presented, but actually there are many others cases like
that:

There is the trade war between Boeing (which is a US company) and Airbus
(which is a European company) caused by the fact that each state
supports its company through subsidies, at the expense of the other.
US has tariffs on apparel import coming from China.
EU had subsides for cheese exports to South Africa.
US applied quotas for the ethanol imports from EU, and after it put an end
to them (at the request of the EU), the EU imposed restrictions of ethanol
imports coming from US.
Both the US and EU have in place subsidy programs for the agricultural
sector.

What can be noticed from all these examples is not only the fact that
protectionist measures are used by all countries, but also that they actually have
negative effects on the welfare of the population. Even they advantage the
companies in some particular sectors (which in the case of solar panels does not
apply), they hurt the wages of the workers, the employment, the competitiveness
and sometimes the entire population of a country through increased prices. In
these cases, some firms gain at the expense of the ordinary consumer who bears
the costs.
Of course that all these problems could vanish by simply eliminating all these
barriers through a creation of a multilateral trade agreement, as argued by
Fuentes Sosa in her 2014 paper supporting free trade. According to standard
economic theory, in order to maximize economic interests of export oriented
industries, trade agreements with larger numbers of members are better than
bilateral ones. Because a larger union always produces larger benefits, there is
always an incentive for export oriented industries to pursue trade liberalization
until reaching a global scale. The problem with these views and these WTO
principles is that this is all they will always be: simple principles and idealistic
concepts. As long as private interest will exist, and it will always exist, it will
reign. Unfortunately, it will not reign in the way envisioned by Adam Smith, in
which private interest drives the free market that regulates itself, creating a winwin situation. Private companies will want more than can be fairly achieved
through the participation in a free market environment, so they will use the
government to satisfy their interest. There will always be an official justification
for these actions, but their real purpose is not and will never be the one that is
publicly expressed. Some of these acts will lead to positive effects, but more like
a side effect than as a planned outcome. The best way to understand the
direction of the international trade nowadays is through strategic trade policy and
game theory analysis (as in the Boeing vs. Airbus example). However, no matter
how much literature is dedicated to these topics, how many WTO rounds there

will be, how many negotiations between states will take place, protectionism will
never disappear. This is one of the biggest drawbacks for the welfare of the world
population, no matter the country.

Conclusions
As noted in the previous sections, the matter of protectionism is a controversial
one on the world stage. The government intervention, with the corresponding
trade policy instruments, has their use, but not in the way they are generally
applied. No matter the official attitude, the logic or the trade theory behind,
protectionist measures are applied on a general basis. Therefore, the only
solution that is left is for the economists to try to influence the policies, such as
the benefits to exceed the negative effects.

References:
1. International Economics: Theory and Policy, 9th Edition, Paul R. Krugman,
Maurice Obstfeld, Marc Melitz.
2. Fuentes Sosa 2014: Literature review on trade agreements.
3. Trade Wars and Trade Talks with Data, by Ralph Ossa.
4. http://www.reuters.com/article/2015/02/12/usa-trade-chinaidUSL1N0VL1SH20150212
5. http://www.cnbc.com/id/102296106
6. http://www.ft.com/intl/cms/s/0/eeda5714-a051-11e1-88e600144feabdc0.html#axzz3Yrw0IW1O
7. http://www.spiegel.de/international/business/trade-war-brews-between-euand-china-over-solar-panels-a-846622.html
8. http://www.globalissues.org/article/63/the-banana-trade-war
9. http://science.time.com/2012/03/13/raring-to-fight-the-u-s-tangles-withchina-over-rare-earth-exports/
10.http://registration.ft.com/registration/barrier?location=http%3A%2F
%2Fblogs.ft.com%2Fbeyond-brics%2F2015%2F01%2F08%2Frare-earthsand-chinas-self-correcting-folly%2F&referer=