• Articles VIII, X, and XI of the GATT 1994, and
• Paragraphs 5.1, 5.2, 8.2 and 11.3 of Part I of the Protocol on the Accession of the People's Republic of China (“Accession Protocol”), as well as China's obligations under the provisions of paragraph 1.2 of Part I of the Accession Protocol (which incorporates commitments in paragraphs 83, 84, 162 and 165 of the Report of the Working Party on the Accession of China) and its commitments referred to in paragraph 342 of the Working Party Report.
The European Communities cites 32 measures through which China allegedly imposes restraints on the exports in question and note that there appear to be additional unpublished restrictive measures. The European Communities considers that the measures also appear to nullify or impair the benefits accruing to the European Communities directly or indirectly under the cited agreements. Other countries including Canada, Mexico, Turkey and the United States requested and joined the consultations. On 4 November 2009, the European Communities requested the establishment of a panel to examine this dispute. The panel was subsequently established on 21st December 2009, pursuant to Article 9.1 of the WTO Dispute Settlement Understanding. The Panel which was fully constitutes on 29 March 2010 was not able to issue its report within six months.
On 5 July 2011, issued the reports of the panel that had examined complaints and below is a summary of findings.
This dispute concerns four types of export restraint that China imposes on the export of a number of raw materials. The raw materials subject to the export restraints are various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. China is a leading producer of each of the raw materials which are used to produce everyday items as well as technology products.
The complainants argued that the use of export restraints creates scarcity and causes higher prices of the raw materials in global markets. They also provide Chinese domestic industry with a significant advantage by way of a sufficient supply, and lower and more stable prices for the raw materials.
Upon its accession to the WTO, China undertook to eliminate all export duties (taxes) except for a number of products listed in an Annex to its Protocol of Accession. In this Protocol, China also committed not to apply export quotas (restrictions on the amount that can be exported).
In one of its key findings, the Panel found that China's export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession. The Panel also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules.
The Panel found that the wording of China's Protocol of Accession did not allow China to use the general exceptions in Article XX of the GATT 1994 to justify its WTO-inconsistent export duties. The Panel also considered that even if China were able to rely on certain exceptions available in the WTO rules to justify its export duties, it had not complied with the requirements of those exceptions.
In particular, China had argued in its defense that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials. The Panel acknowledged, however, that China appears to be heading in the right direction in adopting a framework to justify its quotas under WTO rules, but that the framework is not yet WTO-consistent as it still has to be put into effect for domestic producers.
As for other of the raw materials, China had claimed that its export quotas and duties were necessary for the protection of the health of its citizens. China was unable to demonstrate that its export duties and quotas would lead to a reduction of pollution in the short- or long-term and therefore contribute towards improving the health of its people.
China also committed to eliminate all restrictions on the “right to trade” — rights given to enterprises by China in parallel to market access and non-discrimination provisions guaranteed under the WTO. The complainants were successful in most of their trading rights claims.
Regarding the administration and allocation of its export quotas, China successfully defended its practices in claims brought by the United States and Mexico whereas the European Union succeeded in its separate claim that it brought against China.
The Panel also found that certain aspects of China's export licensing regime, applicable to several of the products at issue, restrict the export of the raw materials and so are inconsistent with WTO rules.
Why Countries Engage in International Trade-Analysis based on Ricardian Comparative Advantage
It is not uncommon to find that the main objective of a trade policy of almost all countries is to promote international trade. In the recent times countries have gone ahead to engage in trade negotiations all in the interest of enabling international trade. But then, why do countries engage in international trade? Why are there global attempts to liberalize trade rather that promote autarky-a situation of no trade? Does trade contribute to income distribution, factor employment and poverty reduction? In short, must a country engage in international trade in order to develop? This article delves into theories of international trade so as to answer the questions.
Economist believe that if countries engage in international trade, they can mostly benifit under a free trade environment. To get a clear perspective to this claim, I will glance though five major main theories on international trade-the Ricardian Comparative advantage Model on gains from specialization and opportunity cost theory, The Heckscher-Ohlin model on gains from specialization and income distribution effects, the new trade theory which examines the economies of scale and the Heterogeneous firms trade theory which approaches trade from a firm level perspective.
Ricardian Comparative advantage-Gains from Specialization
According to David Ricardo (1817), countries that engage in international trade benefit as long as they specialize in the production of products with low opportunity cost. The Ricardian Comparative advantage emphasises that countries should understand their factor endowments then direct production to the best alternative in utilizing the available resources. A country undertaking such specialization would then trade with others countries to get those products which are of second best alternative in utilization of resources.
The Ricardian Comparative advantage is based on opportunity cost theory. Noting that resources are scarce, a country has to give up production of one product in order to produce the other. To know which one to give up, a country has to determine where it would have higher output if the same resource available was utilized in the production of either product. A country would specialize in production of that product whose utilization of the available resource produces the most output. On the basis of the opportunity cost theory, a country should specialize in production of that product whose cost for failure to produce it is higher than that of the second alternative. According to the Ricardian Comparative advantage, countries are endowed differently and so they have different opportunity costs. The difference in opportunity cost is what would enable the country to engage in international trade so as to get the product in which it is disdvantaged .
The Ricardian Comparative advantage theory sums up the above with the use of what he called the absolute and comparative advantages. To him even if a country would produce more of the two products than the other country (the absolute advantage), it should specialize in producing that product in which it has an advantage in utilization of the available resources (comparative advantage). Let us now examine this Ricardian Comparative advantage theory using the following example.
The theory assumes;
- There are two countries-We will use Rainlands and United Parkland
- There are two products produced- i.e. Coffee and Computers
- One factor of production exists- i.e. Labour
- Factor productivity is constant
- Perfect competition exists in the market
- Homogeneous of factors-They have fixed and same abilities and productivity levels
- Factors are perfectly mobile within country and between sectors –Can be shifted from production of one product to another and from one region to another
- Factors are immobile between countries –Endowments in one country cannot move to another country.
- Fixed level of technology
- Full employment
- Comparison is between no international trade and perfectly free international trade (no tariff or non-tariff barriers)
- Transport costs are ignored
The table below indicates the quantities of coffee and computers that would be produced by Rainlands and Parklands when a unit of labor is allocated in the production process. This table also indicates the situation pertaining in each country before trade.
| Production and consumption before Trade | ||
|---|---|---|
| Coffee | Computers | |
| Parklands | 50,000 | 50 |
| Rainlands | 100,000 | 400 |
From the table Rainlands has an absolute advantage in the production of both coffee and computers per unit of labour employed.Let us analyze opportunity costs so as to determine their respective comparative advantages. We achieve this by looking at the cost (foregone benefit) of not producing one product so as to produce the other. In the absence of trade the opportunity cost is calculated as the ratio of the produced product to the foregone alternative.
According to the Ricardian Comparative advantage, in a situation of autarky (i.e.no trade), the (relative) price of a good equals the opportunity cost of producing that good in a country. Under free trade however, world (relative) prices are determined by world supply and demand across countries (i.e. they fall between the opportunity costs of the two countries)
If Parklands specializes in coffee, it will have to forego 50/50,000 = 0.001 units of computers for each unit of coffee produced. If however Parklands decides to specialize in computers, it would forego 50,000/50 = 1,000 units of coffee for every unit of computers produced. Likewise, if Rainlands specializes in coffee, it will have to forego 400/100,000 = 0.004 units of computers for each unit of coffee produced. If however Rainlands decides to specialize in computers, it would forego 100,000/400 = 250 units of coffee for every unit of computers produced. The table below summarizes the opportunity costs theory as it relates to both Rainlands and Parklands if they specialized in production of one of the products
| Summary the opportunity costs for specializing | ||
|---|---|---|
| Opportunity cost of Coffee | Opportunity cost of Computers | |
| Parklands | 1,000 | 0.001 |
| Rainlands | 250 | 0.004 |
From the table we can conclude that Parkland has a comparative advantage in the production of coffee and Rainlands has a comparative advantage in production of computers. For this reason, Rainlands should specialize in production of computers and Parklands in coffee.
If the opportunity cost (relative price) of coffee is higher in Rainlands than in Parklands, it is profitable for the two countries if Parklands exports coffee to Rainlands and imports computers from there.
Now let us examine the effect of transferring one unit of labor to specialize in production of a product where each country has a comparative advantage. As one unit of labour is specialized in production of coffee, Parklands foregoes (loses) 50 units of units of computers to gain 50,000 units of coffee. Likewise, as one unit of labor is transferred from the production of coffee to the production of computers, Rainlands loses 100,000 units for a gain of 400 units. As the countries specialize in their respective comparative advantages, the changes in their outputs will look as follows;
| Changes in outputs due to specialisation | ||
|---|---|---|
| Coffee | Computers | |
| Parklands | +50,000 | -50 |
| Rainlands | -100,000 | +400 |
But each country will still need the products it has not produced. Rainlands will demand for the 100,000 units of coffee from Parklands. Parkland to be able to produce that amount will have to allocate 2 units of labor. The effect of this labor transfer is that Parklands will forego production of 100 units of computers so as to meet the demand for coffee by Rainlands. Rainlands still using its one unit of labor will have to exchange its 50 units of computers with the 100,000 units of coffee from Parklands. The table shows the trade related changes in output as countries utilize their respective labor resource in the best alternative;
| Changes in production with specialisation for trade | ||
|---|---|---|
| Coffee | Computers | |
| Parklands | +100,000 | -100 |
| Rainlands | -100,000 | +350 |
| Total change in output | 0 | 250 |
Due to specialization and trading based on comparative advantage, additional 250 units of computers are produced and consumed without reducing the quantities of coffee produced and traded in the international market.
In general,countries gain if when they engage in international trade which is liberalised because the output and consumption possibilities of both countries expand as opposed to no trade. Let us try to analyze the mechanism allowing countries to gain from trade. If the world price of coffee is equal to $1and the price of a computer equals $500, Parklands can buy 200 units of computers from the Rainlands by exporting 100,000 coffee units. Both countries end up consuming more computers and the same amount of coffee than in the situation without trade.
Therefore enabling countries to specialize their resources in the economic activities in which they have a comparative advantage and then engage in international trade to access those products in which they have a comparative disadvantage does not only expand the size of global production, it allows for expanded “ global consumption possibilities”.
The downside of the Ricardian Comparative Advantage Theory
The Ricardian Comparative advantage theory has been criticized mainly because of its assumptions which to some economists are not realistic. Below are some of the areas that the theory ignores.
- Free trade is beneficial not only to that country with a more productive sector than foreign countries but also to those countries that are able to avoid the high costs for goods that they would otherwise have to produce domestically.
- The Ricardian Comparative advantage theory is not complex enough to examine income distributional issues within a country. For example free trade with countries that pay law wages can hurt high wage countries. Even though consumers benefit because they can purchase goods more cheaply, trade may reduce wages for some workers, thereby affecting the distribution of income within a country. In effect trade with such low wage countries erodes the incomes of the producers/workers that are earned using resources more efficiently and through higher prices/wage.
- The assumption that all countries are identical except for their differences in technologies is farfetched. Countries differ in their endowments of important factors of production (inputs). Does that matter for trade?
- The theory ignores the nature and form of transport in the different countries and the effect this has on the relative price for one good to any other. Transport costs differ in terms of cost, swiftness and appropriateness in delivery mechanisms. These differences have a bearing on the price of the product and do influence the terms of trade. In other words, a country with a comparative advantage say in using labor to produce coffee could find itself disadvantaged in the international market, if its transport sector is not well developed.
- Free trade does not exist in the real world since governments will always come up with obstacles (trade blocks) in the interest of meeting their development challenges including ensuring safety for their citizens, developing the skills of the people, ensuring security and developing infrastructure among others. So even though the general results still hold, economies cannot reach the most efficient allocation of resources, in situations where there are obstacles such as tariffs and non-tariff trade barriers. Even some obstacles meant to correct market failures such as restrictions on production due to environmental concerns do lower the volume of trade.
- The assumption of constant cost of production is irrelevant in situations where increasing output due to employment of an additional resource will lead to diminishing returns. This limits the expected benefits of specialization.
- To engage in international trade under a full liberalised environment can actually lead to long-run continued poverty for small poor countries especially where complete specialization has been attained by the developed countries.Developing countries are not able to compete in the global market including even in their own countries in situations where a developed is able to decrease cost of production as output increases.
- Technology have since been varied and differently by different countries. Although the general idea of gains from trade still holds in changing technology, comparative advantage attained as a result, seems to have been underestimated by the Ricardian Comparative advantage theory. Unless technology change is allowed to move freely across nations, countries with this advantage are able to again, higher productivity and competitiveness thus enabling them to earn better incomes to the detriment of the disadvantaged countries
- With advancement in technology, immobility of factors of production cannot hold in a free trade environment. If the principal of efficient utilization of resources is to be upheld, then gains can be best made when labour and capital are enabled to move not only within but also across countries. But this can result in increased capital flight and brain drain as capital and labor moves to where returns are higher, instead of producing at home for export.
- Factors of production are not necessarily homogeneous. Because they are not the same, they cannot necessarily move from the production of one good to another.
Ok, keep your eyes here for the next article on what Heckscher-Ohlin model says about the comparative advantage theory.
