US foreign trade policy in the Middle East: a comparative analysis between Egypt, Jordan and Saudi Arabia - Dissertation Example

?US FOREIGN TRADE POLICY IN THE MIDDLE EAST: A COMPARATIVE ANALYSIS BETWEEN EGYPT, JORDAN And SAUDI ARABIA Acknowledgements Certification Contents Acknowledgements 2 Certification 3 Contents 4 I.Introduction 5 II.US Trade Policy, Practices and History: An Overview 6 III.Conceptual Framework: International Trade Theories 13 A.The Heckscher-Ohlin Theory of International Trade 14 B.Adam Smith’s Theory of Absolute Advantage 15 C.Ricardo’s Theory of Comparative Advantage 16 Conclusion 23 I. Introduction Classical trade theories involve inquiring into and identifying explanations for a trade patterns, trade policies and the “welfare consequences of various trade policy instruments”.1 David Ricardo, a 19th century economist developed the theory of comparative advantage which is a basic trade theory that informs and explains trade patterns indicative of liberalization.2 In this regard, comparative advantage assumes that countries in a liberalized world market can succeed on the basis of exchanges in terms of resource advantages. 3 For example, one country has an abundance of agricultural goods and another country has an abundance of automobile parts. The two countries can agree to trade their respective abundant resources to each other at relatively lower cost. The US trade history and emerging patterns reflects comparative advantages domestically and internationally and tends to suggest a trend toward “global integration of production and distribution”.4 In terms of trade with the Middle East, the Middle East enjoys a comparative advantage in a number of sectors including crude oil, pharmaceuticals, plastics, colouring materials, footwear, textiles and fabrics.5 Giving the volatility of the Middle East and the US strong dependence on crude oil from the region, the US comparative advantage in terms of trade with the Middle East is coloured by a need to provide and ensure security in the region.6 For the Middle East, access to US markets and capital provides virtually an absolute advantage in terms of economic development, technology transfers, improved competition and national production.7 This research study examines US trade policy in the Middle East by reference to case studies on US trade with Egypt, Jordan and Saudi Arabia. The trade policy and practices with each of the three countries are compared and contrasted with a view to demonstrating the extent to which the Ricardian doctrine of comparative advantage is sustained and rationalized. Thus this research study will explore and analyse US trade policies, trends and history generally and will tie this in with the US trade policies, trends and ambitions in the Middle East. Finally this paper will provide a more detailed study on the US trade policies, practices and ambitions with respect to Egypt, Jordan and Saudi Arabia. II. US Trade Policy, Practices and History: An Overview The current US trade policy is described as an outcome of struggles between two significant factions in the US: liberalization and protectionism.8 Trade liberalization has always been the dominant approach to US trade policy however.9 Be that as it may, the shift toward liberalization was a result of the disadvantages resulting from protectionism. Protectionism can be said to have officially ended in 1934 when the US having suffered a depression that was felt globally, enacted the Reciprocal Trade Agreements Act 1934.10 Previously, the US had a trade policy that was protectionist in structure and guided by the Smoot-Hawley Tariff Act 1930 which increased tariffs on imports to 53 per cent in 1931 and again to 59 per cent the following year in 1932.11 This protectionist stance had provided other states with the incentive to take a retaliatory stance toward the US and as a result world trade declined. In fact, between 1929 and 1933, world trade decreased by 25 per cent.12 Ultimately, the protectionist stance in US trade policy was calculated to protect the US’s domestic goods and markets and to safeguard against international competition.13 In this regard, protectionism is inconsistent with the doctrine of comparative advantage. Essentially, protectionism is described as: ...the government’s use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition.14 However it can also be argued that in order to secure a comparative advantage in world trade, countries are required to provide some level of protection for domestic markets against foreign competition. If no protection was accorded, states would have minimal comparative advantages. After all, the underlying basis of comparative advantage is the over-abundance of resources of one state where a trade partner does not share that over-abundance. Thus is governments did not take steps to protect a resource, heightened competition would dilute the degree to which the state has a comparative advantage. It therefore makes sense to protect a market to some extent so that reduction of trade barriers in bilateral trade agreements will amount to a comparative advantage for both countries to a bilateral trade agreement. Even so, internal and external pressures on the US as a result of the Great Depression of the 1930s resulted in the US renewing its stance on protectionism with the result that the US passed the Reciprocal Trade Agreements Act 1934.15 The 1934 Act essentially conferred upon the US president the power to enter into negotiations for and completion of trade agreements with foreign partners.16 Essentially the Reciprocal Trade Agreements Act 1934 facilitated the law of comparative advantage. The facilitation of the law of comparative advantage is evidenced by the liberal authority of the President. The US President was at liberty to negotiate and conclude trade agreements without having to obtain approval from the US Congress. Congress could only review the President’s exercise of his/her authority on a three year basis. Moreover, the removal and reduction of trade barriers were no longer conducted by virtue of unilateral legislative provisions and was instead relegated to individual bilateral trade agreements in exchange for similar trade barrier reductions or eliminations.17 The reciprocity underlying the Reciprocal Trade Agreements Act 1934 is symptomatic of economic and political relations among states in the international community. This reciprocity is necessary for obtaining cooperation among states in the absence of a global central authority.18 The doctrine of comparative advantage can thus function to secure this form of informal global governance where countries negotiate and complete trade agreements by negotiating and agreeing on reciprocating their respective comparative advantages. The US’s shift away from protectionism to liberalization under the Reciprocal Trade Agreements Act 1934 is one way of advancing its move toward capitalizing on its comparative advantages. The move toward trade liberalization and thus obtaining and sharing comparative advantages intensified in the aftermath of the Second World War. This was primarily because there was a prevailing view that the protectionism endemic in world trade and its underlying tensions in the years leading up to the War was partly if not wholly responsible for the War.19 Thus the US expanded on the Reciprocal Trade Agreements Act 1934 and the US led the way to the formation of the Bretton Woods agreement, the United Nations and the General Agreement on Tariffs and Trade (GATT).20 Ultimately GATT and its replacement World Trade Organization (WTO) would institutionalize world trade liberalization and thus reflect the doctrine of comparative advantage on a broader level. The outcome has been a move toward negotiating for and securing comparative advantages on both an economic and political level.21 For countries with limited resources and economic growth, access to the markets of developed countries like the US meant that for developed countries to obtain a comparative advantage, developing and least developing countries would have to make political reforms that would support economic growth and entrance to global markets. With the US involvement in GATT and subsequently the WTO, the authority to negotiate foreign trade agreements was further facilitated by the implementation of the Trade Expansion Act 1962. The 1962 Act conferred up the US President the authority to negotiate under GATT for greater concessions and the removal of trade barriers on a multilateral trade level. For the purpose the 1962 Act created the US Trade Representative for the purpose of conducting the necessary trade negotiations rather than the State Department. As Canto explains: The purpose behind this shift was to meet the congressional concerns that the State Department was too prone to negotiate trade agreements based on nebulous foreign policy grounds. Thus, trade policy was made less a stepchild of foreign policy and more subject to commercial realities and special-interest pressures.22 Comparative advantages as a result of liberalized trade can become compromised when an overabundance of domestic resources are competing with an overabundance of similar resources entering domestic markets. Thus in 1970 internal pressures on the US government caused the US to re-evaluate its comparative advantage and to look instead toward the possibility of shifting toward a protectionist stance. For example, trade liberalization initially brought with it encouraging results. In 1964 the US trade peaked at US6.8 million and by 1968 declined to US650 million.23 US steel manufacturers for example, would put pressure on the US government to impose restrictions on the import of steel as the import of steel threatened profitability for domestic producers. Thus the US responded by imposing “voluntary restraints” in January 1971 which were further extended to December 1974.24 Thus it is important to note that in order to capitalize on or to have a comparative advantage, some degree of protectionism is necessary unless the US intends to confer upon its trade partner an absolute advantage with the risk of alienating domestic manufacturers and thus political support. Internal pressures against wide-sweeping trade liberalization resulted in the US considering the Trade Bill 1970 which would permit any local industry to impose protection when threatened by foreign imports. However external pressures, particularly from the European Economic Community intervened by threatening similar measures should the US pass the Trade Bill 1970.25 Essentially, what this means is that the US could not protect a comparative advantage without creating a comparative disadvantage and thus it was forced to rethink a reversion to a protectionism trade policy. The 1970 Bill was ultimately ignored26 and the US moved forward with trade liberalization and thus the manifestation of a foreign trade policy that ultimately seeks to secure comparative advantages. The US has subsequently passed the Trade Act 1974 and the Trade Act 2002 which essentially facilitates trade liberalization and set parameters for trade protectionism. In other words, the Trade Acts are designed to respond realistically to comparative advantages for the US in trade negotiations and agreements with foreign partners. US trade policy have historically been structured to provide US exporters with access to foreign markets while at the same time protecting them from “import-competing interests”.27 This has proven to require a delicate balancing act as the US cannot gain unrestricted access to foreign markets without giving something back in return and likewise, foreign merchants cannot expect to receive unrestrained market access to US markets without giving something back. This is where comparative advantage comes into play. Each country dealing with the US under the Free Trade Act as amended and updated, with have to evaluate its comparative advantage as does the US. For the US assessing comparative advantages with respect to adopting liberalist or protectionist trade policies or adopting a cross between the two is ultimately influenced by both internal and external forces as evidenced with the Trade Bill 1970. Internal politics emanating from pressures from voters will force the US to consider protectionism policies and comparative advantages and disadvantages.28 External pressures would cause the US to consider trade liberalization as a means of obtaining and capitalizing on comparative advantages. At the end of the day, the US merely considers protectionism in instances where private interests are issues.29 However, as demonstrated throughout history, these private interests are outweighed by public concerns and issues and in particular, pressures from the outside. This research study examines how the US trade policy has often attempted and continues to attempt to evaluate comparative advantages with respect to foreign trade policies and how it carries over to its trade policies with the Middle East. This research study identifies how the US evaluates and identifies its comparative advantages with respect to liberalized trade with the Middle East and the extent to which protectionism plays a role in the evaluation of a comparative advantage with respect to trade with the Middle East. Again, these trade policies and the underlying influence of comparative advantages as driven by trade liberalization and protectionism are specially examined by reference to three case studies: US-Egypt; US-Jordan and US-Saudi Arabia trade policies, practices and agreements. III. Conceptual Framework: International Trade Theories Adam Smith’s theory of absolute advantage and David Ricardo’s theory of comparative advantage established in the 18th and 19th century respectively have come to be referred to as classical theories of international trade.30 However, during the early 10th century, Eli Heckscher and Bertil Ohlin developed a theory of international trade founded on the concept of “factor endowments”.31 The Heckscher-Ohlin theory of international trade has come to be known as the modern theory of trade.32 Each of these theories are explained as a means of justifying the rationale for using the Ricardian comparative advantage as the basis for explaining and analysing the US trade policy toward the Middle East and in particular with Egypt, Jordan and Saudi Arabia. A. The Heckscher-Ohlin Theory of International Trade The Heckscher-Ohlin (HO) theory of international trade is essentially an expansion on the Ricardian comparative advantage international trade theory.33 For the HO model of international trade a country’s comparative advantage emanates from the cost of production. A country that has relatively low cost in production of specific product or service has a comparative advantage in that resource. For example, in a country where land and money is abundant but labour is inconsistent with these resources will have a comparative advantage in terms of land and money but not in terms of labour. Land and money will therefore be sold at lower prices and goods that require labour will be relatively higher. Therefore the country will be best served by importing goods that require high labour production.34 The HO model therefore assumes that all countries have the same level of production tools and depend on labour to the same extent to produce goods. The HO model also ignores the fact that labour is mobile and can be imported from abroad with relatively minimal costs. As with the Middle East, technology and labour have both been imported from Western states and thus in this regard, the HO theory of international trade is ineffective for explaining the comparative advantages of the US trade policies in the Middle East. As Leamer explains, the HO theory of international trade is incompatible with oil producing countries because it culls together endowment factors of capital, land and labour.35 B. Adam Smith’s Theory of Absolute Advantage Adam Smith’s theory of absolute advantage takes the position that it is more frugal to purchase that which would cost more to produce. As an example, Smith stated that: The tailor does not attempt to make his own shoes, but buys them from the shoemaker. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.36 Thus Smith looks at the comparative costs from the perspective of the merchant and not in terms of country to country perspective. Since the US does not intentionally import what it cannot produce at a cheaper rate, but looks to reciprocity in trade agreements, Smith’s absolute advantage theory is inapplicable to the broad spectrum of the US’s trade liberalisation and protectionism stance in its trade policies and practices over the years. Smith essentially focuses too sharply on the development of the domestic economy rather than the proliferation of world trade.37 Thus there is little consideration of the protectionism and liberalization that drives the US trade policy and little consideration of the reciprocity that fuels trade liberalization and tempers protectionism in the US foreign trade policies and practices. Thus the theory of absolute advantage is incompatible with an analysis of the US trade policy with the Middle East, particularly since, as will be demonstrated throughout this research study, reciprocity is a staple ingredient of the US trade policies with the Middle East and more especially reciprocating comparative advantages. C. Ricardo’s Theory of Comparative Advantage Ricardian comparative advantage theory takes the position that there are trade gains even where no absolute advantage exists when there are comparative advantages.38 Thus, the Ricardian comparative advantage engages an examination of all gains that can emanate from trade and does not focus entirely on economies of scale. In trading with another state on the basis of reciprocity, the country involved in the trade agreement does not have to obtain an absolute advantage in terms of economic benefit. There may be the need to improve security so that access to a specific commodity abroad is not compromised. In an examination of the Ricardian comparative advantage, the US’s trade policy with the Middle East can be looked upon as a quid pro quo measure that ensures the trade liberalization and access to the US’s markets will improve security in the Middle East by removing the tensions that create volatility. In return the US is assured of its continued access to crude oil in the Middle East. Thus the comparative advantage is present in the absence of an absolute advantage. Throughout this paper, the Ricardian comparative advantage is explained and analysed in greater detail to demonstrate its applicability to an analysis of the US’s trade policy in the Middle East. IV. Comparative Advantage and US Trade Policies From the 1970s onward, US trade policy has emerged as intensified efforts to “expand export markets” and to “decrease foreign trade barriers on US goods and services”.39 Section 301 of the Trade Act 1974 authorises the US to secure trade agreements by issuing threats of retaliatory trade measures if the country in question refuses to admit US access to its markets.40 Thus the US has been basing its trade policy on the theory of comparative advantage albeit, aggressively and intensely with the use of retaliatory threats. This would seem to suggest that the US has become keenly aware of the need to trade access to its abundant resources with access to the abundant resources of other countries. One of example of the US aggressive approach to obtaining a comparative advantage came in 1995 when then President Clinton threatened to impose a “punitive tariff” against Japan in the sum of US$5.9 billion on a number of luxury cars from Japan.41 The two countries eventually settled their differences with Clinton claiming that the renegotiated agreement would improve the export of automobiles to Japan and would secure thousands of US jobs.42 The US and Japan however are both automobile producing countries. The US in taking a hard-line with Japan was attempting to protect its comparative advantage by forcing a degree of cooperation from Japan so that Japan’s automobile market did not put the US’s own automobile market at risk. It was also obvious that the US did not want to compromise domestic competition or the US’s competitive edge in the international market. A review of the emerging realities of world trade informs of the US incentive to pursue aggressive tactics in securing its comparative advantage. After the Second World War, the US occupied a dominant market position in world trade. However, Japan and Western Europe and developing nations started establishing significant industrialization. By the end of the 1960s and into the 1970s, a number of US manufacturers were superseded by their foreign counterparts, especially those from Japan. In particular, Japan provided the US with its most formidable competition in technology. Complicating matters, agricultural prices began to fall.43 The US confronted with a decline in its competitive edge in industries, the fall in agricultural prices, the appreciation of the US dollar each converged to increase the US trade deficit. This trade deficit was a manifestation of other internal problems such as the displacement of US workers by competition from abroad and domestic farmers finding it increasingly difficult compete in the international market which was “plagued by subsidized products and restrictive domestic markets”.44 Thus the US was finding it difficult to sustain exports in an increasingly competitive global market, thus compromising the US comparative advantage. The US was also mindful of the fact that exports into the US had provided American consumers with a wider range of products and prices to choose from. US consumers shopping for a car had choices from Yugoslavia, Japan, Korea or any other number of foreign cars. Additionally, US consumers were in a position to choose from among a number of “high-quality electronic equipment from Europe, Japan, the US or Taiwan.”45 Thus the US was confronting a number of conflicting pressures. There was the pressure from local producers to protect their products from excessive foreign competition. On the other hand there were the private citizens who were determined to continue to have access to foreign goods at home. There was also the pressure emanating from international trade suggesting that without trade concessions, potential and actual trade partners had access to other markets providing the same products and services that the US could or was offering. It therefore followed that unless the US relaxed its restrictive or protectionist stance relative to protecting domestic markets, it would not be able to claim a comparative advantage. The only way to obtain a comparative advantage was to liberalize trade with foreign markets. This meant taking a more peaceful approach to opening US markets in return for access to other markets. Thus the US trade policy is and has been informed by the comparative advantage theory in that the gains associated with trade are attributed to and associated with the global markets and trade liberalization46. Much of the gains depend on the international demand for a country’s products. The larger the demand for those goods the higher the price for those goods.47 The US found that it could not expect to place its goods on the foreign market unless it reciprocated by importing goods from other countries. Thus the US in shopping for trade partners was compelled to seek countries with abundant products that the US could use and could not produce as cheaply as competing markets. The US view of gains from liberalization in international trade has expanded in more recent times. This view of the gains from liberalization speaks to both an economic and political advantage for the US and thus from the US perspective, gains for the international community. Comparative advantage for the US is best understood as “competitive liberalization.”48 The US Trade Representative Robert Zoellick revealed this trade policy and objective by the US during the 2001 administration by George W. Bush. This trade policy is informed by three distinct goals. The first goal is to secure competition among countries for access to US markets and thus providing an incentive for foreign markets to open their “economies to US companies and farmers”.49 The second goals is to: Encourage the adopting abroad of US-style market-friendly business laws and regulations, or at least the adopting of regulations that US businesses can accommodate more easily.50 Together these two goals are intended to be achieved by virtue of bilateral, regional and multilateral trade agreements and negotiations. The third goal is to provide other countries with incentives to lend support to the foreign policies and military aspirations of the US and “more broadly what might be termed US values.”51Thus the US in attempting to foster world trade and trade liberalization that is consistent with the theory of comparative advantage is seeking to obtain for itself and for the world at large a comparative advantage based on the concept that both economic and political reforms abroad are gains for the international community. The US’s competitive liberalization was spurred by the fact that the US was at a standstill while other countries were entering into Free Trade Agreements (FTAs).52 From the perspective of Zoellick, the US could not continue to sit back idly while other countries seized the “mantle of leadership on trade from the United States”.53Zoellick went on to state: Given the size of the US economy, - and the reach, creativity, and influence of our private sector – we should be and can be shaping the rules of the international economic system for the new century.54 Zoellick’s comments are instructive as he went further to state: We need to align the global trading system with our values. We can encourage open and efficient markets while respecting national sovereignty. We can encourage respect for core labor standards, environmental protection, and good health without slipping into fear-based campaigns and protectionism. And we must always seek to strengthen freedom, democracy, and the rule of law.55 There is no doubt that from the US perspective a comparative advantage for foreign trade is much more than simply trade liberalization. The US trade policy is also influenced by a need to obtain freedom, democracy and the rule of law within the political constructs of trade partners. Therefore the US foreign trade policy is not merely about joining the global trade and exporting its goods abroad. The US foreign trade policies are also informed by the need to establish and enforce the rules relative to international trade and trade liberalization. It is also argued that for the US a comparative advantage emanating from US foreign trade policies is also informed by national security concerns by the US. For the US there is a strong tie between international trade liberalization and national security. Zoellick in quoting President Bush noted that: economic freedom creates habits of liberty. And habits of liberty create expectations of democracy.56 Zoellick explicitly stated that “expanded trade affects our national security”.57 National security can be compromised under “hostile protection and national socialism”58 Zoellick goes further to state that: Communism could not compete with democratic capitalism, because economic and political freedom creates dynamism, opportunity, and independent thinking.59 Following the September 11, 2001 terror attacks in the US, the link between US concerns for national security and trade was more pronounced. Thus, foreign policy and security policies influenced the US competitive liberalization strategies and policies since September 11, 2001. These concerns and issues influencing the US’s foreign trade practices and policies were specially declared. For example, Zoellick stated that US in negotiating with trade partners would put forth the message that the US is prepared to: Negotiate if they are serious about eliminate barriers, yet also make clear that America will look elsewhere if they delay – the United States will move forward, and it is up to them to join use or be left behind.60 The political motivation for foreign trade partners is not new. The Declarations of Principles executed in 1993 revealed a determination to obtain both economic and political cohesion within the Middle East. It was believed that if the Middle East is peaceful, it would come with political “stability and economic prosperity.”61 Today, the existing trade policy in the US is admittedly influenced by a number of factors. The influencing facts are both economic and political in nature. As throughout histry, the political factors influencing US foreign trade policy is the American public which is comprised of businesses, workers, agriculture, non-governmental organizations, the perspective of congress, the president’s perspectives and tensions between the executive and congress. The influential economic factors are the current global financial crisis, the emerging of stronger developing countries and increases in production worldwide, the growth in free trade agreements and the on-going trade deficit of the US.62 Thus since the 1980s the US has persistently felt threatened by the potential loss of its comparative advantage and has acted accordingly in its determination to take control of the global trade markets. Conclusion Ricardo’s theory of comparative advantage is consistent with the forces, factors and influences that ultimately steers the US away from a trade policy characterized by protectionism and toward a trade policy characterized by liberalization. Protectionism isolated the US from the global trade market, or rather restricted its access to consumer markets globally. Thus there were no real gains politically or economically under a protectionist driven foreign trade policy. Thus the US could not be said to have contributed to gains in the global trade market since it did not actively contribute to global trade. However, all of that changed when the US found that in the absence of reciprocity in trade arrangements and active participation in the global market, there was a lot to lose. The US having lost a large share of the global consumer market to developing countries and other developed was forced to abandon its protectionist stance and to adopt a liberalization approach to foreign trade policies. This meant aggressive pursuit of reciprocal trade agreements as a means of protecting its comparative advantages rather than the need to protect domestic markets. The US had to surrender to an international trade regime so as to ensure gains for the US and the global community. For the US gains for the international community occurs when US values, political and military aspirations are adopted by its trade partners. Thus the US foreign trade policies are informed and influenced by both national and international realities and ultimately comparative advantage in trade policies is seen as a solution to the problems attending the problems associated with international realities. Bibliography Textbooks Leamer, E. The Heckscher-Ohlin Model in Theory and Practice. (Princeton, NJ: International Finance Section, Department of Economics, Princeton University Press, 1995). Mann, Catherine, L. Is the U.S. Trade Deficit Sustainable? (Washington, DC: Institute for International Economics, 1999). Rittenberg, L. and Tregarthen, T. Principles of Microeconomics. (Nyack, NY: Flat World Knowledge, Inc. 2008). Smith, A. 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