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<?xml version="1.0"?>

<!DOCTYPE TEI.2 SYSTEM "base.dtd">





<publicationStmt><distributor>BASE and Oxford Text Archive</distributor>


<availability><p>The British Academic Spoken English (BASE) corpus was developed at the

Universities of Warwick and Reading, under the directorship of Hilary Nesi

(Centre for English Language Teacher Education, Warwick) and Paul Thompson

(Department of Applied Linguistics, Reading), with funding from BALEAP,

EURALEX, the British Academy and the Arts and Humanities Research Board. The

original recordings are held at the Universities of Warwick and Reading, and

at the Oxford Text Archive and may be consulted by bona fide researchers

upon written application to any of the holding bodies.

The BASE corpus is freely available to researchers who agree to the

following conditions:</p>

<p>1. The recordings and transcriptions should not be modified in any


<p>2. The recordings and transcriptions should be used for research purposes

only; they should not be reproduced in teaching materials</p>

<p>3. The recordings and transcriptions should not be reproduced in full for

a wider audience/readership, although researchers are free to quote short

passages of text (up to 200 running words from any given speech event)</p>

<p>4. The corpus developers should be informed of all presentations or

publications arising from analysis of the corpus</p><p>

Researchers should acknowledge their use of the corpus using the following

form of words:

The recordings and transcriptions used in this study come from the British

Academic Spoken English (BASE) corpus, which was developed at the

Universities of Warwick and Reading under the directorship of Hilary Nesi

(Warwick) and Paul Thompson (Reading). Corpus development was assisted by

funding from the Universities of Warwick and Reading, BALEAP, EURALEX, the

British Academy and the Arts and Humanities Research Board. </p></availability>




<recording dur="01:45:23" n="14280">


<respStmt><name>BASE team</name>



<langUsage><language id="en">English</language>



<person id="nm1128" role="main speaker" n="n" sex="m"><p>nm1128, main speaker, non-student, male</p></person>

<person id="sm1129" role="participant" n="s" sex="m"><p>sm1129, participant, student, male</p></person>

<person id="sm1130" role="participant" n="s" sex="m"><p>sm1130, participant, student, male</p></person>

<person id="sm1131" role="participant" n="s" sex="m"><p>sm1131, participant, student, male</p></person>

<person id="sm1132" role="participant" n="s" sex="m"><p>sm1132, participant, student, male</p></person>

<person id="sm1133" role="participant" n="s" sex="m"><p>sm1133, participant, student, male</p></person>

<person id="sm1134" role="participant" n="s" sex="m"><p>sm1134, participant, student, male</p></person>

<person id="sm1135" role="participant" n="s" sex="m"><p>sm1135, participant, student, male</p></person>

<person id="sm1136" role="participant" n="s" sex="m"><p>sm1136, participant, student, male</p></person>

<person id="sf1137" role="participant" n="s" sex="f"><p>sf1137, participant, student, female</p></person>

<person id="su1138" role="participant" n="s" sex="u"><p>su1138, participant, student, unknown sex</p></person>

<personGrp id="ss" role="audience" size="s"><p>ss, audience, small group </p></personGrp>

<personGrp id="sl" role="all" size="s"><p>sl, all, small group</p></personGrp>

<personGrp role="speakers" size="13"><p>number of speakers: 13</p></personGrp>





<item n="speechevent">Lecture</item>

<item n="acaddept">Economics</item>

<item n="acaddiv">ss</item>

<item n="partlevel">PG</item>

<item n="module">Trade agreements</item>




<u who="nm1128"> as always # you know if you want to discuss the essays with me come along <pause dur="0.2"/> you know any time or certainly i'll be in my room during <pause dur="0.2"/> <trunc>s</trunc> so-called <pause dur="0.4"/> surgery hours <pause dur="0.4"/><vocal desc="laugh" iterated="n"/><pause dur="1.4"/> right let's get this thing moving <pause dur="6.0"/> i'm dealing with the economics of # <pause dur="0.6"/> free trade <pause dur="1.2"/> areas <pause dur="0.9"/> which some of you have done i mean i'll be doing it a little bit more depth than we did on my other course <pause dur="0.6"/> but there's obviously quite a bit of overlap on this particular topic <pause dur="0.5"/> so i'm looking for you to <pause dur="0.4"/> do the lecture rather than me <pause dur="0.9"/> # <pause dur="1.6"/> so here's the handout <pause dur="5.6"/><event desc="passes out handouts" iterated="n"/> i assume you've got all </u><u who="sm1129" trans="overlap"> <gap reason="inaudible" extent="2 words"/> </u><u who="nm1128" trans="overlap"> <shift feature="voice" new="laugh"/> yes <vocal desc="laughter" iterated="y" dur="1"/><pause dur="0.4"/><shift feature="voice" new="normal"/> we're doing a little bit more <vocal desc="laughter" iterated="y" dur="1"/> i i said you're doing the lecture <vocal desc="laughter" iterated="y" dur="1"/><pause dur="3.0"/> but some people haven't <pause dur="0.8"/> had the privilege of # <pause dur="1.0"/> doing the E-U in developing countries so <pause dur="1.6"/> what i'm dealing with is that today we'll deal with the the economics <pause dur="0.7"/> of <pause dur="0.3"/> customs union and free trade agreements <pause dur="1.1"/> and in next week <pause dur="0.4"/> we'll deal with article twenty-four <pause dur="0.4"/> which is the W-T-O <pause dur="0.6"/> # <pause dur="0.3"/> article the general agreement

on tariffs and trade article <pause dur="0.7"/> # which covers authorizes <pause dur="0.6"/> # free trade areas and customs union <pause dur="0.4"/> because of course <pause dur="0.6"/> they <pause dur="0.2"/> fundamentally break article one <pause dur="0.5"/> # the principle of non-discrimination i mean the whole purpose of a free trade area or a customs union <pause dur="0.6"/> is to discriminate <pause dur="0.2"/> in favour of the partner countries <pause dur="0.3"/> and therefore against the world <pause dur="0.5"/> # so which is entirely against the whole <pause dur="0.5"/> essence <pause dur="0.5"/> of the GAT <pause dur="0.2"/> the <pause dur="0.2"/> # agreements and the W-T-O <pause dur="0.5"/> so article twenty-four permits <pause dur="0.4"/> this major break <pause dur="0.6"/> # from the principle of non-discrimination <pause dur="0.5"/> but i'll deal with that next week <pause dur="0.6"/> # 'cause it's a topic which <pause dur="0.6"/> # has come to the fore <pause dur="1.2"/> particularly given the proliferation of <pause dur="0.7"/> # these <pause dur="0.2"/> preferential trade agreements as Bhagwati <pause dur="0.2"/> prefers to call them <pause dur="0.9"/> # <pause dur="1.5"/> i mean at the moment i think there's about a hundred-and-six <pause dur="1.0"/> <shift feature="voice" new="laugh"/> preferential <shift feature="voice" new="normal"/> trade agreements have been notified <pause dur="0.7"/> to the W-T-O <pause dur="0.4"/> and not all agreements are notified <pause dur="0.8"/> # so <pause dur="0.2"/> there's something in <trunc>n</trunc> <pause dur="0.2"/> in excess <pause dur="0.6"/> of a hundred-and-six preferential trade

agreements <pause dur="0.7"/> # and the <trunc>p</trunc> <pause dur="0.7"/> as i say the previous <pause dur="0.2"/> past <pause dur="0.9"/> ten years or less <pause dur="1.1"/> have seen a proliferation of these agreements <pause dur="0.3"/> # i mean everybody's signing agreements as if there was no tomorrow <pause dur="0.6"/> # <pause dur="0.4"/> which is entirely contrary to all that we were saying <pause dur="0.5"/> about the Uruguay round <pause dur="0.4"/> and the move towards <pause dur="0.3"/> a rules based system for international trade <pause dur="0.5"/> and the principle of non-discrimination that underpins <pause dur="0.4"/> all of the <pause dur="0.2"/> new <pause dur="0.4"/> # international economic order <pause dur="1.8"/> so one of the questions really i mean one of the fundamental questions which people are asking themselves today is why <pause dur="0.3"/> you know why in a world in which on the one hand <pause dur="0.4"/> we strengthened <pause dur="0.5"/> the general agreement on tariffs and trade <pause dur="0.5"/> and we have the general agreement on trade and services <pause dur="0.5"/> and trade related intellectual property rights agreements trade related investment measures <pause dur="0.6"/> # <pause dur="0.3"/> and so on <pause dur="0.4"/> <trunc>i</trunc> particularly the strengthening of the <trunc>di</trunc> the <pause dur="0.4"/> # dispute settlement <pause dur="0.4"/> process <pause dur="0.6"/> all of that you know we we emphasized <pause dur="0.4"/> really was to underpin the <pause dur="0.3"/>

spectacular growth of world trade that we've seen <pause dur="0.7"/> # so why at this time of all times <pause dur="0.5"/> do we see this <pause dur="0.3"/> huge increase <pause dur="0.4"/> in the number of preferential trade agreements <pause dur="0.5"/> which is fundamentally based on mercantilist philosophy isn't it <pause dur="0.2"/> i mean the view that <pause dur="0.5"/> you know we sign up agreements between ourselves <pause dur="0.4"/> # and keep out the rest of the world you know <pause dur="0.5"/> we sort of concentrate the gains from trade <pause dur="0.5"/> # between us at the expense of or <pause dur="0.2"/> partly at the expense of the rest of the world <pause dur="0.5"/> so why that's one of the big questions that we'll <pause dur="0.2"/> continue to come <pause dur="0.4"/> to to come back to <pause dur="1.2"/> # <pause dur="1.0"/> i don't think anybody knows the answer to that one <pause dur="0.5"/> # but we can at least speculate on it <pause dur="1.7"/> and of course as Bhagwati puts it as well <pause dur="0.2"/> are they are they obstacles <pause dur="0.7"/> to the development of a <pause dur="0.2"/> non-discriminatory <pause dur="0.2"/> free trade world <pause dur="0.8"/> or are they simply stepping stones <pause dur="1.1"/> which might be the apologist case if you like <pause dur="0.5"/> for customs unions and free trade agreement <pause dur="1.8"/> stepping stones in the sense that <pause dur="0.6"/> # <pause dur="0.4"/> you first of all <pause dur="0.7"/> # <pause dur="0.7"/> free up trade between

the partner countries <pause dur="0.7"/> and maybe deepen relations between you <pause dur="0.9"/> # and having adjusted to that <pause dur="0.3"/> you can then go on <pause dur="0.4"/> to <pause dur="0.4"/> # free trade <pause dur="0.5"/> on a <pause dur="0.2"/> worldwide basis <pause dur="0.9"/> and particularly perhaps for developing countries <pause dur="0.6"/> # that might be very attractive <pause dur="0.2"/> rather than go suddenly for broke <pause dur="0.6"/> you know suddenly <pause dur="0.7"/> when your barriers to trade as we've <pause dur="0.2"/> discussed in the past have been very high <pause dur="0.4"/> very high tariff and non-tariff barriers <pause dur="0.7"/> # <pause dur="0.3"/> and you <pause dur="0.7"/> you know rapidly take them away over a short period of time expose yourself to world trade <pause dur="0.5"/> that's a pretty frightening thought <pause dur="0.5"/> # for for any country <pause dur="0.6"/> so maybe a regional free trade agreement <pause dur="0.3"/> particularly with <pause dur="0.4"/> an industrialized country a large industrialized country like United States <pause dur="0.6"/> or a regional grouping like the E-U <pause dur="0.6"/> that might be a sort of stepping stone <pause dur="0.3"/> so you free trade first of all with the <pause dur="0.2"/> the big <pause dur="0.3"/> industrialized market <pause dur="0.5"/> and you adjust to that <pause dur="0.5"/> and then you go in to <pause dur="0.4"/> # liberalized trade <pause dur="0.5"/> on a on a worldwide basis <pause dur="0.2"/> and that's the sort of

optimistic view if you like <pause dur="0.6"/> of <pause dur="0.3"/> # the role of free trade agreements <pause dur="0.9"/> # <pause dur="0.4"/> in which case they're stepping stones <pause dur="1.1"/> to # <pause dur="0.7"/> # final free trade <pause dur="1.1"/> or are they obstacles in the way that i indicated at the beginning they might be <pause dur="0.4"/> 'cause fundamentally <pause dur="0.2"/> they're discriminatory <pause dur="0.7"/> and the more agreements you have <pause dur="0.4"/> the more discrimination we have in the world <pause dur="0.7"/> and therefore <pause dur="0.8"/> we're running quite contrary <pause dur="0.9"/> to the fundamental principle <pause dur="0.6"/> of the W-T-O <pause dur="0.3"/> principle of non-discrimination <pause dur="1.0"/> so <pause dur="0.2"/> that's the big debate and we <pause dur="0.6"/> there's no answers to that one <pause dur="0.5"/> you just have to <pause dur="0.9"/> really <pause dur="0.8"/> make up your own minds <pause dur="2.7"/> so first of all let's go through with the basic economics of it i say my apologies to those who've done this before but it's such an important topic <pause dur="0.4"/> it comes up in all sorts of areas <pause dur="1.3"/> # so what i'm going to do <pause dur="0.6"/> is # put up the diagrams <pause dur="0.5"/> and then get those of you particularly well anyone <pause dur="0.3"/> but particularly those of you who've done E-U and developing countries course <pause dur="0.5"/> # to then explain the diagrams to me <pause dur="0.6"/> rather than me do

it <pause dur="1.6"/><kinesic desc="turns on overhead projector showing transparency" iterated="n"/> so let's see if we <pause dur="0.8"/> when we get this thing focused in this ghastly room that we have <pause dur="17.0"/> least it's not as bad as the Palmer building is it where you've got the <pause dur="0.3"/> the screen up one end and people are sitting up the other end i mean that is really <pause dur="0.4"/> truly awful <pause dur="1.6"/> okay <pause dur="2.8"/> well the starting point <pause dur="0.5"/> on the analysis of <pause dur="1.5"/> # preferential trade agreements <pause dur="1.4"/> really was by <pause dur="0.7"/> put up by Jacob Viner <pause dur="1.5"/> # <pause dur="1.3"/> who <pause dur="0.2"/> pointed out <pause dur="0.4"/> that <pause dur="0.6"/> # <pause dur="1.2"/> preferential trade agreements on the one hand <pause dur="0.4"/> freed up trade between the partner countries and therefore the theory of comparative advantage can work <pause dur="0.6"/> okay <pause dur="0.5"/> but of course it was only partial liberalization <pause dur="1.1"/> # it discriminated against the countries <pause dur="0.9"/> and so <pause dur="0.3"/> it was # Viner <pause dur="1.6"/><kinesic desc="writes on board" iterated="y" dur="4"/> who <pause dur="3.0"/> coined the terms <pause dur="0.3"/> trade creation <pause dur="1.2"/> and <pause dur="0.3"/> the next diagram that we'll do trade diversion <pause dur="2.8"/> # have we got <pause dur="0.3"/> a spare handout <pause dur="2.4"/> oh you do right <pause dur="1.0"/> <gap reason="inaudible" extent="1 sec"/></u><pause dur="1.3"/><u who="sm1130" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="overlap"> <gap reason="inaudible" extent="1 word"/> <pause dur="3.1"/> okay so trade creation then this is comparative advantage working <pause dur="0.5"/> mm <pause dur="1.0"/> but of course only between <pause dur="0.2"/> the member countries <pause dur="1.0"/> mm <pause dur="2.1"/> # <pause dur="1.8"/> this diagram here <pause dur="1.1"/> # this is <pause dur="0.2"/> a <pause dur="0.5"/>

preferential trade agreement <pause dur="0.6"/> between <pause dur="0.3"/> a developing country <pause dur="0.8"/> right <pause dur="0.2"/> which is # <pause dur="0.4"/> labelled L-B-C here <pause dur="1.6"/> and <pause dur="0.3"/> the European Union <pause dur="0.3"/> E-U <pause dur="2.8"/> # <pause dur="0.4"/> and we're looking to see what happens in the developing country here <pause dur="2.1"/> # the the argument's a general one <pause dur="0.2"/> but # <pause dur="0.4"/> purposes of <pause dur="0.3"/> our interest let's look at the developing country <pause dur="0.2"/> side of the equation <pause dur="1.0"/> # <pause dur="0.7"/> now in this case here <pause dur="0.7"/> the European Union <pause dur="0.9"/> is the cheapest source of supply <pause dur="0.8"/> # <pause dur="0.6"/> of the imported goods <pause dur="0.7"/> okay the rest of the world <pause dur="0.6"/> the dearer source of supply somewhere up here so we can forget about them <pause dur="0.8"/> okay <pause dur="1.2"/> so we're simply we're importing <pause dur="0.2"/> from the E-U <pause dur="0.7"/> # which is the cheapest source of supply <pause dur="0.8"/> prior to the preferential trade agreement <pause dur="0.9"/> there is the <pause dur="0.2"/> tariff <pause dur="0.7"/> tariff <pause dur="0.5"/> is the distance between <pause dur="1.0"/> P-star-E-U <pause dur="0.3"/> and P-E-U here <pause dur="0.6"/> okay <pause dur="1.0"/> so that's the <pause dur="0.5"/> that's the height of the tariff <pause dur="2.9"/> # <pause dur="0.4"/> and prior to the preferential trade agreement <pause dur="0.4"/> we're importing <pause dur="0.2"/> M-O <pause dur="0.8"/> from <pause dur="0.8"/> the E-U <pause dur="1.6"/> tariffs then disappear <pause dur="1.5"/> okay <pause dur="0.8"/> and <pause dur="0.3"/> # <pause dur="1.4"/> we then <pause dur="0.8"/> # <pause dur="2.4"/> expand our imports from the E-U <pause dur="0.6"/> upto M-F-T-A <pause dur="0.9"/> imports under the <pause dur="0.5"/> free trade

agreement <pause dur="2.1"/> mm <pause dur="3.5"/> okay <pause dur="1.3"/> first of all first question for you <pause dur="0.8"/> # <pause dur="1.9"/> how do consumers gain <pause dur="0.3"/> from this <pause dur="2.7"/> in the <trunc>di</trunc> in terms of the diagram <pause dur="0.6"/> what can you show has been the gain in welfare to consumers <pause dur="0.4"/> from signing the free trade agreement <pause dur="0.6"/> yeah </u><pause dur="0.6"/> <u who="sm1131" trans="pause"> can provide them choice <pause dur="0.9"/> <gap reason="inaudible" extent="3 secs"/> <pause dur="0.7"/> not very good price </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> right </u><u who="sm1131" trans="overlap"> <gap reason="inaudible" extent="1 sec"/> goods <pause dur="0.5"/> <gap reason="inaudible" extent="2 secs"/></u><pause dur="0.5"/> <u who="nm1128" trans="pause"> right </u><u who="sm1131" trans="latching"> <gap reason="inaudible" extent="2 secs"/> <pause dur="0.8"/> <gap reason="inaudible" extent="1 word"/> his prices <pause dur="0.8"/> and a wider choice of foreign goods </u><pause dur="0.9"/> <u who="nm1128" trans="pause"> okay so they pay a lower price <pause dur="0.7"/> # than before <pause dur="0.2"/> mm <pause dur="0.7"/> and they've got a wider choice of goods <pause dur="0.6"/> there's something else purely analytical terms </u><u who="sm1132" trans="overlap"> C-N-D </u><pause dur="0.5"/> <u who="nm1128" trans="pause"> sorry </u><u who="sm1132" trans="latching"> C-N-D </u><u who="sm1133" trans="latching"> <gap reason="inaudible" extent="1 sec"/><pause dur="0.6"/> <gap reason="inaudible" extent="2 secs"/> </u><u who="nm1128" trans="overlap"> okay <pause dur="1.1"/> so they pay a a lower price <pause dur="0.2"/> for the previous level of imports <pause dur="0.4"/> M-F-T-A <pause dur="0.4"/> # sorry M M-O <pause dur="0.2"/> right <pause dur="0.8"/> but then also what happens because the price falls <pause dur="0.5"/> what else happens </u><pause dur="1.1"/> <u who="sm1132" trans="pause"> consume <unclear>more</unclear> </u><u who="nm1128" trans="latching"> they they consume more that's right <pause dur="0.4"/> and there's the wider choice which you said <pause dur="0.3"/> we'll come back to that one later on <pause dur="0.6"/> we're just dealing with a particular product just now so <pause dur="0.5"/> they gain in two respects <pause dur="0.4"/> they gain <pause dur="0.4"/> that <pause dur="0.3"/> the previous level of imports they can buy cheaper than before <pause dur="0.3"/> mm <pause dur="0.5"/> and then

because the goods are cheaper <pause dur="0.8"/> they move down their demand curve <pause dur="0.5"/> okay <pause dur="1.0"/> # consuming even more <pause dur="0.6"/> mm <pause dur="0.8"/> so the gain in the consumer surplus <pause dur="1.7"/> is this <pause dur="0.3"/> area in here <pause dur="1.4"/> someone just define for me what do we mean by <pause dur="0.2"/> the gain in the consumer surplus <pause dur="1.2"/> it's a technical term in economics what does it mean </u><pause dur="3.2"/><u who="sm1134" trans="pause"> does it <pause dur="0.2"/> mean how much <pause dur="0.2"/> work consumer's doing to pay <pause dur="1.2"/> # <pause dur="0.2"/> difference of <pause dur="0.4"/> how much <gap reason="inaudible" extent="2 secs"/> </u> <pause dur="0.5"/> <u who="nm1128" trans="pause"> that's right <pause dur="0.4"/> that's right exactly that's a <pause dur="0.3"/> that's a very good definition of it <pause dur="0.3"/> okay <pause dur="0.3"/> so the consumer surplus <pause dur="0.5"/> # is <pause dur="0.4"/> # <pause dur="0.3"/> i mean let's <pause dur="0.6"/> # <pause dur="0.4"/> well let's take a price <pause dur="0.6"/> # <pause dur="4.9"/> # well someone describe to me in terms of the diagram what it means <pause dur="0.5"/> if it's under what you mean maybe i'll leave it to you <pause dur="3.4"/> it's the difference between what people will be willing to pay and what they actually have to pay </u><pause dur="1.4"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="1 sec"/> </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> sorry </u><u who="sm1135" trans="latching"> the price that they're willing to pay <trunc>s</trunc> <pause dur="0.2"/> that should be the price P-E-star <pause dur="0.5"/> and the <gap reason="inaudible" extent="1 word"/> that actually pays P-E-U </u><u who="sm1134" trans="overlap"> P-E-U </u><u who="sm1135" trans="overlap"> <pause dur="0.4"/> <gap reason="inaudible" extent="3 secs"/></u><u who="nm1128" trans="overlap"> right <pause dur="0.6"/> right <pause dur="0.3"/> right okay <pause dur="1.1"/>

yes about right so <pause dur="0.3"/> so the consumer surplus then <pause dur="0.3"/> is the increase in the area under the demand curve <pause dur="0.5"/> okay <pause dur="1.0"/> so <pause dur="0.3"/> # <pause dur="0.2"/> that's what <trunc>i</trunc> if you take any particular level of imports imports M-O <pause dur="0.2"/> okay <pause dur="0.7"/> # they'd be willing to pay <pause dur="0.3"/> as you said <pause dur="0.2"/> P-<pause dur="0.2"/>E-U-star <pause dur="0.8"/> but they actually only have to pay that <pause dur="0.5"/> okay <pause dur="0.6"/> so they gain that about here <pause dur="0.4"/> right <pause dur="0.5"/> and similarly all the way down the demand curve <pause dur="0.2"/> it's only the very last unit <pause dur="0.6"/> that's consumed <pause dur="0.3"/> all right <pause dur="0.7"/> at which the price they have to pay <pause dur="0.4"/> is just equal <pause dur="0.5"/> at the margin is just equal <pause dur="0.2"/> to the price <pause dur="0.4"/> # that they'd be willing to pay <pause dur="0.7"/> for all the intramarginal units <pause dur="0.6"/> they'd be willing to pay a higher price <pause dur="0.4"/> but they don't have to <pause dur="0.6"/> okay they just have to pay <pause dur="0.5"/> price P-E-U okay <pause dur="0.4"/> so the area under a demand curve is the consumer surplus <pause dur="0.5"/> mm <pause dur="0.9"/> and what we're measuring here is the increase in the consumer surplus <pause dur="0.5"/> as a consequence <pause dur="0.4"/> of <pause dur="0.4"/> # <pause dur="0.3"/> the abolition of a tariff <pause dur="1.6"/> area A-B-C-D <pause dur="1.1"/> okay <pause dur="0.9"/> we then divide that up <pause dur="0.3"/> okay <pause dur="0.7"/> # <pause dur="0.3"/> i think

it <pause dur="0.2"/> pretty well speaks for itself <pause dur="2.3"/> the loss of tariff revenue of course is by the government <pause dur="0.3"/> in the developing country <pause dur="0.2"/> mm <pause dur="0.6"/> i # <pause dur="0.2"/> going back to what we were talking about this morning <pause dur="0.3"/> if Morocco <pause dur="0.5"/> # signs a free trade agreement or so <trunc>in</trunc> # indeed it has signed a free trade agreement with the E-U <pause dur="0.8"/> then <pause dur="0.3"/> one major impact <pause dur="0.3"/> on on on Morocco <pause dur="0.7"/> is that previously <pause dur="0.3"/> i think something like twenty per cent <pause dur="0.5"/> of government revenues in Morocco came from import duties <pause dur="0.4"/> most of those were from the E-U about three-quarters of its imports <pause dur="0.4"/> come from the E-U <pause dur="0.7"/> well <pause dur="0.7"/> once the agreement's fully in place <pause dur="0.4"/> that source <pause dur="0.7"/> of government revenue will disappear <pause dur="0.4"/> mm <pause dur="0.9"/> # it's a very important element <pause dur="0.4"/> it's a # a <trunc>c</trunc> a a very important cost <pause dur="0.7"/> to <pause dur="0.2"/> particularly to developing countries and signing <pause dur="1.0"/> free trade agreement with industrialized countries <pause dur="0.4"/> so that loss of government revenue <pause dur="0.4"/> is the <pause dur="0.4"/> is the size of the tariff <pause dur="1.0"/> P-star <pause dur="1.0"/> against P <pause dur="0.2"/> okay so that's the height of the tariff <pause dur="0.3"/> multiplied by <pause dur="0.2"/> the previous level of imports <pause dur="0.9"/> M-O <pause dur="0.6"/>

mm <pause dur="0.6"/> so <pause dur="0.3"/> that's the tariff <pause dur="0.3"/> it used to be <pause dur="0.2"/> applied to imports from the E-U <pause dur="0.6"/> that's now disappeared <pause dur="0.7"/> so <pause dur="1.5"/> the difference between those two prices multiplied by <pause dur="0.4"/> the previous level of imports <pause dur="0.4"/> I-E in the area A-B <pause dur="0.6"/> is <pause dur="0.3"/> the loss of tariff revenue <pause dur="0.7"/> by <pause dur="0.7"/> # Morocco <pause dur="0.5"/> or where it happened to be <pause dur="5.1"/> so that element under the demand curve <pause dur="0.8"/> the increase in the consumer surplus A-B-C-D <pause dur="0.4"/> is made up of two components <pause dur="0.6"/> mm <pause dur="0.8"/> the first one's a pure transfer <pause dur="1.2"/> mm <pause dur="0.5"/> it's a transfer <pause dur="0.5"/> from the government <pause dur="0.2"/> of Morocco <pause dur="0.7"/> to the consumers in Moroco <pause dur="0.8"/> mm <pause dur="1.6"/> so <pause dur="0.2"/> one just cancels out the other <pause dur="0.8"/> all right <pause dur="0.6"/> net <pause dur="0.5"/> # there's no welfare gain <pause dur="0.7"/> in that sense <pause dur="0.9"/> all right there's a gain in consumer surplus <pause dur="1.4"/> but that chunk of the consumer surplus in here <pause dur="0.6"/> is just <pause dur="0.2"/> a decrease in government revenues <pause dur="0.5"/> and that's transferred to consumers <pause dur="0.8"/> through the lower price <pause dur="0.4"/> that they pay for the previous level of imports <pause dur="0.5"/> one balances out the other exactly <pause dur="0.6"/> # <pause dur="0.4"/> zero change in terms of welfare <pause dur="0.9"/> unless you like to say that well <pause dur="0.7"/> it's better off if <pause dur="0.5"/> # consumers gain <pause dur="0.5"/> # <pause dur="0.2"/> than

if governments get their revenues but <pause dur="0.4"/> as economists we're we're very neutral in all those things all right <pause dur="0.5"/> # so we don't make value judgements <pause dur="0.5"/> as to whether governments should consume <pause dur="0.4"/> or whether private individuals or firms should consume <pause dur="1.0"/> point of view of the economy <pause dur="0.7"/> that's simply a a transfer <pause dur="1.0"/> # <pause dur="1.1"/> no welfare effect at all <pause dur="0.8"/> so <pause dur="0.3"/> the net welfare effect then <pause dur="0.5"/> is <pause dur="0.3"/> that the two <trunc>tri</trunc> the is the is the triangle here <pause dur="0.7"/> plus this whatever that shape is <pause dur="0.4"/> i've forgotten my methematics somebody tell me <vocal desc="laughter" iterated="y" dur="1"/><shift feature="voice" new="laugh"/> # <pause dur="0.3"/><shift feature="voice" new="normal"/> D in there <pause dur="0.5"/> # <pause dur="0.7"/> it's those two areas C-plus-D <pause dur="0.3"/> is the net <pause dur="0.2"/> welfare gain <pause dur="0.5"/> okay so <trunc>cons</trunc> the gain and the consumer surplus <pause dur="1.4"/> minus this transfer element A-B <pause dur="0.6"/> so we're left with <pause dur="0.3"/> this area in here <pause dur="1.1"/> so that's the welfare gain <pause dur="1.8"/> unambiguously a welfare gain <pause dur="0.6"/> to <pause dur="0.2"/> the developing country <pause dur="1.6"/> from the <pause dur="0.4"/> # <pause dur="0.6"/> abolition of the tariffs the free trade agreement <pause dur="0.9"/> and that's what Viner called <pause dur="0.6"/> trade creation <pause dur="1.2"/> mm <pause dur="3.0"/> the consumers <pause dur="0.6"/> # <pause dur="0.7"/> are able to <pause dur="0.8"/> purchase <pause dur="0.3"/> # <pause dur="0.2"/> a higher level of imports <pause dur="0.7"/> at <pause dur="0.5"/> a lower price <pause dur="4.7"/> let's

look a little bit further now <pause dur="0.4"/> # i've sketched in here <pause dur="0.5"/> not terribly well but i hope it's clear <pause dur="0.7"/> what's going on behind the scenes here <pause dur="0.6"/> because this is the demand for imports and the demand for imports <pause dur="0.5"/> is a residual demand <pause dur="0.7"/> mm <pause dur="0.9"/> it's the difference between <pause dur="0.3"/> domestic demand <pause dur="0.3"/> and domestic supply <pause dur="0.8"/> okay <pause dur="0.2"/> that's imports <pause dur="0.9"/> mm <pause dur="0.8"/> 'cause we assume that the good is produced <pause dur="1.2"/> within Morocco <pause dur="0.8"/> within the developing country <pause dur="0.5"/> # as well as imported from the E-U <pause dur="0.9"/> we'll come back to that assumption later <pause dur="0.4"/> but <pause dur="0.5"/> that's the basic assumption <pause dur="0.4"/> it's the same product <pause dur="0.5"/> produced within the <pause dur="0.2"/> # Morocco <pause dur="0.8"/> and also imported <pause dur="0.8"/> so imports are the difference then between domestic demand <pause dur="0.9"/> all right the demand in the developing country <pause dur="0.3"/> and supply in the developing country <pause dur="1.4"/> mm <pause dur="1.3"/> so let's look now at this <pause dur="0.3"/> what lies behind this trade creation gain <pause dur="2.5"/> what are its two components then <pause dur="1.9"/> imports rise <pause dur="0.2"/> for two reasons <pause dur="0.5"/> what are they there's rise in imports in M-O <pause dur="0.4"/> M-F-T-A <pause dur="0.5"/> it's for two reasons <pause dur="0.9"/> what are they </u><pause dur="0.6"/> <u who="sm1132" trans="pause"> <gap reason="inaudible" extent="1 sec"/><pause dur="0.2"/> <vocal desc="cough" iterated="n"/> <pause dur="0.5"/> the <pause dur="0.3"/> position of tariffs <pause dur="0.4"/> which creates obviously a lower price and # <pause dur="0.7"/> greater consumption </u><pause dur="0.4"/><u who="nm1128" trans="pause"> right <pause dur="0.5"/>

okay <pause dur="0.2"/> so that's the movement down the demand curve here <pause dur="0.5"/> okay so the lower price <pause dur="0.2"/> we demand more of something <pause dur="0.2"/> if it's cheaper <pause dur="0.2"/> we buy more of it <pause dur="0.8"/> right that's one component <pause dur="0.4"/> and the second component <pause dur="1.8"/> of the rise in imports <pause dur="4.3"/> how about the left hand side </u><pause dur="1.4"/><u who="sm1135" trans="pause"> <gap reason="inaudible" extent="10 secs"/></u><u who="nm1128" trans="latching"> right okay specifically what's happening <pause dur="0.2"/> the the tariffs taken away <pause dur="0.3"/> so <pause dur="1.6"/> competition </u><pause dur="0.5"/> <u who="sm1132" trans="pause"> will destroy the # <pause dur="1.1"/> unproductive # <pause dur="0.2"/> enterprise </u> <u who="nm1128" trans="latching"> or the less efficient one </u><u who="sm1132" trans="overlap"> or the less efficient </u><u who="nm1128" trans="overlap"> the less efficient ones that's right <pause dur="0.3"/> okay <pause dur="0.3"/> so we move back down <pause dur="0.2"/> the supply curve <pause dur="0.3"/> in the developing country <pause dur="0.3"/> okay <pause dur="0.4"/> so we take away the tariff protection <pause dur="0.5"/> okay <pause dur="0.9"/> the the marginal producers then <pause dur="0.5"/> the ones that could only survive <pause dur="0.9"/> under tariff protection <pause dur="0.6"/> now simply go under <pause dur="0.7"/> yeah </u><u who="sm1136" trans="latching"> <gap reason="inaudible" extent="1 sec"/> i have just one question # <pause dur="0.5"/> <gap reason="inaudible" extent="3 secs"/> <pause dur="1.1"/> <gap reason="inaudible" extent="6 secs"/> <pause dur="0.7"/> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.8"/> <u who="nm1128" trans="overlap"> <trunc>o</trunc> </u><u who="sm1136" trans="latching"> <gap reason="inaudible" extent="2 secs"/> <pause dur="0.5"/> <gap reason="inaudible" extent="1 sec"/> <pause dur="1.8"/> <gap reason="inaudible" extent="2 secs"/> </u><pause dur="0.7"/> <u who="nm1128" trans="pause"> yes i mean you're you're right <pause dur="0.4"/> but <pause dur="0.4"/> but <trunc>y</trunc> you're sort of <pause dur="0.2"/> jumping the gun as it were you're so you're moving ahead in the in the analysis that is indeed the fear <pause dur="0.2"/> okay <pause dur="0.4"/> that we we've

talked about the infant industry arguments the reasons for protection <pause dur="0.5"/> so maybe you shouldn't be signing just yet <pause dur="0.3"/> that's right <pause dur="0.2"/> that's right <pause dur="0.4"/> that's right maybe <pause dur="0.5"/> you know <pause dur="0.8"/> i mean i i showed a pretty steep curve here <pause dur="0.4"/> all right <pause dur="0.3"/> which indicated <pause dur="0.4"/> that <pause dur="0.5"/> they were indeed vulnerable <pause dur="0.3"/> right i deliberately drew that supply curve quite steeply <pause dur="0.5"/> for precisely the reasons you've given <pause dur="0.3"/> okay <pause dur="0.5"/> but there's an awful lot of firms <pause dur="0.7"/> that need the tariff protection <pause dur="0.9"/> because we're dealing with a developing country <pause dur="0.7"/> # they're still learning by doing <pause dur="0.4"/> # <pause dur="0.3"/> things i'll be going onto in a moment on on economies of scale and production <pause dur="0.4"/> you know <pause dur="0.2"/> they they just entered the manufacturing sector fairly recently <pause dur="0.3"/> they're still feeling their way they're still learning skills <pause dur="0.6"/> and they're still <pause dur="0.2"/> moving down their long run average cost curve and so forth <pause dur="0.5"/> # <pause dur="0.6"/> and is suddenly <kinesic desc="claps hands" iterated="n"/> bang the protection's taken away <pause dur="0.3"/> and <pause dur="0.2"/> they go <pause dur="0.2"/> straight down the supply curve here <pause dur="0.3"/> right <pause dur="0.3"/> yeah <pause dur="0.6"/> but we'll come onto that in a a

moment that's a good point <pause dur="0.7"/> # <pause dur="0.3"/> so <pause dur="1.4"/> # <pause dur="0.3"/> i've got a situation here then where <pause dur="0.4"/> # the increase in imports is due to two forces <pause dur="0.6"/> the first one is the movement down the demand curve for the product in the developing country <pause dur="0.8"/> something's cheaper you buy more of it <pause dur="0.9"/> the second element <pause dur="0.6"/> is <pause dur="0.4"/> that the <pause dur="0.2"/> doing away with the tariff protection <pause dur="0.5"/> does away with the less efficient producers <pause dur="0.7"/> mm <pause dur="0.8"/> they may be infant industries <pause dur="0.5"/> <shift feature="voice" new="laugh"/> too bad the infant never grows up all right <shift feature="voice" new="normal"/><pause dur="0.4"/> # <pause dur="0.9"/> # <pause dur="0.4"/> and that's the second reason then why imports rise <pause dur="0.7"/> mm <pause dur="3.6"/> # <pause dur="2.7"/> right let's explore that a little bit further now <pause dur="1.3"/> # <pause dur="1.0"/> given that theory <pause dur="1.9"/> suppose you had <pause dur="0.6"/> # let's go back to last term now <pause dur="0.5"/> okay <pause dur="0.6"/> where we talked about <pause dur="0.5"/> the possibilities of a free trade agreement <pause dur="0.7"/> # <pause dur="1.1"/> well certainly # on on the other course i talked about <pause dur="0.5"/> # <pause dur="0.4"/> a free trade agreement between the E-U <pause dur="0.6"/> and say sub-Saharan African countries <pause dur="0.4"/> mm <pause dur="1.3"/> # so we're talking here about countries <pause dur="0.2"/> particularly <pause dur="0.5"/> # low levels of income low levels of industrialization <pause dur="0.2"/> and the

rest <pause dur="2.4"/> given the analysis that we've got there <pause dur="1.2"/> do you think the trade creation <pause dur="0.2"/> i i'm <unclear>lost</unclear> to the fact that the E-U as i say is <pause dur="0.2"/><vocal desc="cough" iterated="n"/><pause dur="0.4"/> # <pause dur="0.6"/> you know planning to sign free trade agreements with <pause dur="0.2"/> various regional groupings of these countries <pause dur="0.6"/> # no later than two-thousand-and-eight <pause dur="0.5"/> mm <pause dur="0.2"/> two-thousand-and six two-thousand-and-eight <pause dur="1.3"/> # <pause dur="0.7"/> given then a free trade agreement between the E-U <pause dur="0.2"/> and sub-Saharan African countries <pause dur="1.2"/> do you think the trade creation effects would be large or small </u><pause dur="6.5"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="9 secs"/> </u><u who="nm1128" trans="latching"> right </u><pause dur="0.6"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="23 secs"/></u><u who="nm1128" trans="latching"> so it <trunc>i</trunc> <trunc>w</trunc> so so trade creation would be <pause dur="0.5"/> large or small </u><pause dur="1.5"/> <u who="sm1135" trans="pause"> large </u><pause dur="1.6"/> <u who="sm1132" trans="pause"> small </u><u who="nm1128" trans="latching"> ah <pause dur="0.5"/> <vocal desc="laugh" iterated="n"/> right <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="0.2"/> you're saying small <vocal desc="laughter" iterated="y" dur="1"/></u><pause dur="0.4"/> <u who="sm1132" trans="pause"> 'cause i think <pause dur="0.3"/> what they were saying that that result <pause dur="0.6"/> result packed in in <pause dur="0.5"/> small trade creation </u><pause dur="0.3"/><u who="nm1128" trans="pause"> because </u><pause dur="0.6"/> <u who="sm1132" trans="pause"> well because the sort of fact you got a less developed country # </u><u who="nm1128" trans="overlap"> mm </u><u who="sm1132" trans="overlap"> which <pause dur="0.4"/> is </u><pause dur="0.3"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="1 word"/> </u><pause dur="1.3"/> <u who="sm1132" trans="pause"> products <pause dur="0.2"/> will <pause dur="0.5"/> what was <pause dur="0.6"/> manufacturing <pause dur="0.2"/> # everything else from the whole production <pause dur="0.5"/> will not be able to compete # <pause dur="0.5"/> against the E-U <pause dur="2.3"/>

E-U <gap reason="inaudible" extent="1 sec"/> of their countries producers </u><pause dur="0.2"/> <u who="nm1128" trans="pause"> well if if it couldn't compete against it okay <pause dur="0.6"/> all right <pause dur="0.9"/> then <pause dur="0.2"/> following what we've just said just now </u><u who="sm1132" trans="overlap"> right yeah </u><u who="nm1128" trans="overlap"> <pause dur="0.4"/> okay there's going to be a big surge in imports </u><u who="sm1132" trans="latching"> mm </u><u who="nm1128" trans="latching"> that's going to wipe out the local industry <pause dur="0.6"/> okay </u> <u who="sm1132" trans="latching"> but then again we did mention earlier <gap reason="inaudible" desc="1 sec"/> first term <pause dur="0.6"/> that # <pause dur="1.1"/> it's not just that tariffs <gap reason="inaudible" extent="5 secs"/> </u><u who="nm1128" trans="latching"> well all that yes </u><u who="sm1132" trans="overlap"> not sure whether they're # <pause dur="0.2"/> will be removed or not </u><u who="nm1128" trans="latching"> it will oh yes i mean because <pause dur="0.2"/> all all the non-tariff barriers will be reduced as well as the tariffs or at least most of the non-tariff barriers <pause dur="0.4"/> all the import quotas import licensing <pause dur="0.5"/> everything else has to go in a free trade agreement i mean it is <pause dur="0.3"/> free trade <pause dur="0.3"/> all right <pause dur="0.5"/> right we can <pause dur="0.5"/> i mean we can't actually look at the details you have

to <pause dur="0.9"/> say well it's not quite as simple as that but <pause dur="0.4"/> let's just keep it at that for the moment <pause dur="0.2"/> because that's more or less what it is <pause dur="0.5"/> but what i'm getting at here though is <pause dur="0.2"/> say we're talking about Chad or Mali <pause dur="0.3"/> right <pause dur="0.4"/> some very very poor countries <pause dur="0.7"/> # you know </u><u who="sm1136" trans="overlap"> yeah sorry </u><u who="nm1128" trans="overlap"> the industry that they've got </u><u who="sm1136" trans="latching"> this is this is what i thought #</u><u who="nm1128" trans="latching"> right </u><pause dur="0.3"/> <u who="sm1136" trans="pause"> what it is about <pause dur="0.3"/> is <pause dur="0.4"/> whether the <pause dur="1.4"/> what the E-U <trunc>c</trunc> could export <pause dur="0.2"/> whether it is suitable <pause dur="0.3"/> for the # <pause dur="0.5"/> # <pause dur="0.3"/> African <trunc>mark</trunc> # market <pause dur="0.4"/> for Mali for example <pause dur="0.3"/> i mean the Mali <pause dur="0.2"/> # consumer <pause dur="0.8"/> does he really want # <pause dur="0.6"/> a car or does he really want </u><u who="nm1128" trans="latching"> well he probably wants it <vocal desc="laughter" iterated="y" dur="2"/> </u><u who="sm1136" trans="overlap"> well he wants a car yeah he wants a car but can he pay for it </u><u who="nm1128" trans="overlap"> yes <pause dur="0.2"/> yes </u><u who="sm1136" trans="overlap"> so that that's that's what i was going to </u><pause dur="0.3"/><u who="nm1128" trans="pause"> right </u><pause dur="0.2"/> <u who="sm1136" trans="pause"> yeah </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> okay </u><u who="sm1136" trans="latching"> so </u><u who="nm1128" trans="overlap"> and in terms of local production then what's what's what sort of <pause dur="0.7"/> goods are going to be produced <pause dur="0.7"/> you know manufactured goods right </u><u who="sm1132" trans="overlap"> <gap reason="inaudible" extent="6 secs"/></u><pause dur="0.6"/> <u who="nm1128" trans="pause"> right <pause dur="0.6"/> so a lot

of the local industry will be producing for the domestic market <pause dur="0.2"/> okay <pause dur="0.5"/> and <pause dur="0.3"/> these goods will be pretty basic consumer goods right fundamentally selling in terms of price <pause dur="0.3"/> okay they're cheap <pause dur="0.5"/> they use local materials local labour <pause dur="0.5"/> # <pause dur="0.4"/> but not exactly state of the art <pause dur="0.4"/> they're not beautifully designed coloured <pause dur="0.3"/> whatever <pause dur="0.2"/> right <pause dur="0.6"/> but <pause dur="0.2"/> they're basic essentials of life <pause dur="0.3"/> in that country <pause dur="1.3"/> # <pause dur="0.7"/> they're <pause dur="0.4"/> you might call them non-tradeable goods <pause dur="0.4"/> a lot of them <pause dur="0.5"/> mm <pause dur="0.8"/> # they are purely produced for the domestic market <pause dur="0.9"/> they might have a regional market but that's <pause dur="0.3"/> <trunc>tha</trunc> that's another story <pause dur="0.2"/> all right <pause dur="0.3"/> they're certainly not goods <pause dur="0.3"/> that compete <pause dur="0.3"/> with the sort of goods which you'd import from the E-U <pause dur="0.5"/> what sort of goods are you going importing from the E-U <pause dur="0.6"/> if you're Chad Mali <pause dur="1.3"/> et cetera <pause dur="1.1"/> Uganda <pause dur="2.0"/> what what sort of goods are you going to be importing from the E-U <pause dur="1.6"/> capital goods investment goods <pause dur="0.2"/> intermediate products okay <pause dur="0.9"/> not produced in the local economy on the whole <pause dur="0.4"/> that's the key point <pause dur="0.3"/> okay <pause dur="0.5"/> so the key word i'm

getting round to then <pause dur="0.5"/> is that <pause dur="0.2"/> one of the important aspects of the trade creation effect <pause dur="0.7"/> is the degree of substitutability <pause dur="1.2"/> between <pause dur="0.6"/> domestic production <pause dur="0.7"/> and imported goods <pause dur="0.7"/> okay <pause dur="1.2"/> in other words my supply curve that i've got here <pause dur="1.0"/> okay <pause dur="1.5"/> # <pause dur="2.3"/> and i've drawn that quite steeply <pause dur="0.8"/> indicating that the degree of substitutability <pause dur="0.3"/> is quite small <pause dur="1.3"/> mm <pause dur="1.0"/> most of the goods you import from the E-U <pause dur="0.6"/> are not produced in the domestic economy <pause dur="1.3"/> so if you like the trade displacing effect on domestic production <pause dur="0.5"/> is also going to be <pause dur="0.3"/> quite small <pause dur="1.1"/> now it depends on the economy <pause dur="0.5"/> right i've talked about Chad or Mali <pause dur="0.5"/> if we're talking about Cote d'Ivoire <pause dur="0.5"/> # Zimbabwe <pause dur="0.5"/> Kenya <pause dur="0.9"/> # <pause dur="0.2"/> well <pause dur="1.3"/> there's going to be a greater degree <pause dur="0.4"/> of <pause dur="0.4"/> # overlap <pause dur="0.4"/> if you like <pause dur="0.6"/> between <pause dur="0.9"/> some domestic production anyway <pause dur="0.8"/> and <pause dur="0.3"/> imports from the E-U <pause dur="0.4"/> mm <pause dur="0.8"/> so if # the price of <pause dur="0.3"/> of goods fall <pause dur="0.5"/> imported from the E-U <pause dur="0.7"/> # <pause dur="0.5"/> then <pause dur="0.2"/> that's going to <pause dur="0.5"/> squeeze out <pause dur="0.4"/> # less efficient <pause dur="0.4"/> less desirable goods <pause dur="0.3"/> produced by some <pause dur="0.4"/> or # <trunc>d</trunc> domestic producers <pause dur="0.5"/> in # in the country <pause dur="0.3"/> they could only

survive <pause dur="0.5"/> behind high tariff protection <pause dur="0.4"/> but you still got a lot of other production <pause dur="0.6"/> which is simply doesn't compete <pause dur="0.6"/> # with imports from the E-U <pause dur="3.5"/> that's important because this theory was developed by Viner <pause dur="0.8"/> in the context particularly of explaining <pause dur="0.5"/> # the common market <pause dur="0.4"/> all right we're going back now to the nineteen-fifties <pause dur="0.6"/> mm <pause dur="0.5"/> if you're <pause dur="0.4"/> talking about a free trade agreement a customs union <pause dur="0.8"/> i'll give you the difference between those later on <pause dur="0.9"/> # <pause dur="0.4"/> between <pause dur="0.4"/> industrialized countries in Europe between France and Germany and Italy <pause dur="0.4"/> right <pause dur="0.8"/> then the degree of substitutability <pause dur="0.9"/> between imports and domestic production is going to be very high <pause dur="0.3"/> mm <pause dur="1.0"/> so the trade creation effect on that side is potentially very powerful <pause dur="0.6"/> mm <pause dur="0.8"/> # but going to be going to be a wide range of goods which are <pause dur="0.3"/> produced for the domestic economy <pause dur="0.3"/> which you could just as well import from France or Germany or Italy <pause dur="0.2"/> mm <pause dur="1.0"/> and so <pause dur="0.5"/> # the trade creation effect would be very powerful <pause dur="0.7"/> # <pause dur="0.2"/> in an industrialized country but between an

industrialized and a developing country <pause dur="0.3"/> we would expect it to be very much less <pause dur="2.2"/> but when you come to look at the empirical estimation <pause dur="0.4"/> of <pause dur="0.5"/> # the effects <pause dur="0.3"/> when you when you read the literature <pause dur="0.3"/> on on this such as it is <pause dur="1.8"/> # you will see no discussion at all or very little discussion <pause dur="0.5"/> about this particular point <pause dur="1.8"/> # nobody asked that question <pause dur="0.9"/> about <pause dur="0.7"/> # <pause dur="0.6"/> is the degree of substitutability between imports and domestic production <pause dur="0.2"/> high or low <pause dur="0.9"/> in particular what value does it have what is the elasticity of substitution <pause dur="0.8"/> absolutely no one knows <pause dur="0.3"/> mm <pause dur="0.3"/> if anybody finds a reference which tells you what <pause dur="0.2"/> that figure is <pause dur="0.3"/> even for one <pause dur="0.3"/> one developing country <pause dur="0.5"/> i'd be very grateful <pause dur="0.6"/> mm seriously grateful because <pause dur="0.6"/> part of my job is to try and <pause dur="0.2"/> measure these blasted things all right <pause dur="0.4"/> i've never found <pause dur="0.5"/> a source <pause dur="0.3"/> which is actually <pause dur="0.4"/> empirically measured the elasticity of substitution <pause dur="0.6"/> for imports from an industrialized country <pause dur="0.2"/> and domestic production <pause dur="1.8"/> everybody just assumes a number <pause dur="1.4"/> most of the of the

literature on that is for industrialized countries <pause dur="0.3"/> not for developing countries and it's a very important difference <pause dur="1.0"/> the other element is the extent to which the decrease in price for the increased comsumption <pause dur="0.3"/> all right <pause dur="0.6"/> # and # that <pause dur="1.3"/> well again is an empirical <pause dur="0.5"/> fact i mean <pause dur="0.3"/> it just depends if we're talking again about very poor countries <pause dur="0.3"/> mm <pause dur="0.4"/> with very low levels of income <pause dur="0.9"/> # <pause dur="0.6"/> again the sort of comsumer goods which the E-U produces <pause dur="0.4"/> are not going to have a very big market there <pause dur="0.3"/> the the the rich elite <pause dur="0.4"/> will be able to buy their Mercedes or whatever <pause dur="0.6"/> # but # <pause dur="0.2"/> they probably buy them anyway <shift feature="voice" new="laugh"/> whether <shift feature="voice" new="normal"/> the tariff was there or not <pause dur="0.5"/> and indeed because they're rich elites they're probably not paying their tariff anyway <pause dur="0.3"/> they're finding some way round it <pause dur="0.6"/> so # <pause dur="0.3"/> i don't think we need worry about that side of things <pause dur="0.6"/> what it will do however <pause dur="0.3"/> is make investment goods and intermediate goods <pause dur="0.3"/> cheaper <pause dur="1.2"/> mm <pause dur="0.2"/> than they were before <pause dur="1.0"/> mm <pause dur="3.2"/> what effect do you think that would have on

the economy </u><pause dur="1.7"/><u who="sm1136" trans="pause"> <gap reason="inaudible" extent="11 secs"/></u><u who="nm1128" trans="latching"> well <pause dur="0.2"/> certainly the short term effect will be a rise in imports <pause dur="0.2"/> we've just shown that </u><pause dur="0.3"/> <u who="sm1136" trans="pause"> yes </u><u who="nm1128" trans="overlap"> okay <pause dur="1.0"/> we haven't looked at the export side of this yet <pause dur="0.3"/> that might also rise it depends what went before </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="2 secs"/></u><u who="nm1128" trans="overlap"> but but but but but let's but let's leave the balance of trade aside for the moment we're still quite a way from looking at that <pause dur="0.5"/> let's just look solely at the effect <pause dur="0.4"/> of <pause dur="0.2"/> doing away with the tariff <pause dur="0.6"/> and moving <pause dur="0.4"/> down the demand curve <pause dur="0.5"/> and this case the demand for investment goods and intermediate products <pause dur="0.9"/> what effect's that going to have on the economy </u><pause dur="1.2"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="7 secs"/></u><pause dur="0.2"/> <u who="nm1128" trans="pause"> sorry i'm not i <pause dur="0.2"/> i don't want to look at the export side at the moment okay i'm just looking at <pause dur="0.4"/> you know <pause dur="0.6"/> if if if investment goods and intermediate goods are cheaper <pause dur="0.6"/> what effect's it going to have </u><pause dur="0.7"/> <u who="sf1137" trans="pause"> well it should somehow get an increased investment in the country </u><pause dur="1.2"/> <u who="nm1128" trans="pause"> that's it <pause dur="0.3"/> that's that's what we're looking for <pause dur="0.2"/> okay <pause dur="0.6"/> so investment goods intermediate

goods that you need in production <pause dur="0.3"/> all right <pause dur="0.5"/> both those factors you can buy capital goods cheaper <pause dur="0.5"/> and the costs of production are lower <pause dur="0.3"/> all right <pause dur="0.4"/> than they were before <pause dur="0.4"/> and given the height of the tariffs and non-tariff barriers <pause dur="0.5"/> okay <pause dur="0.5"/> # that # <trunc>e</trunc> existed before <pause dur="0.4"/> # <pause dur="0.6"/> that fall is going to be quite substantial <pause dur="1.0"/> # so that could be a powerful boost <pause dur="0.3"/> to investment in the economy <pause dur="0.9"/> remember one of the puzzles in many developing countries is that <pause dur="0.6"/> we have <pause dur="0.3"/> a basis for saving and investment <pause dur="1.1"/> which very often doesn't occur <pause dur="0.4"/> we can look at countries with similar income distributions and similar levels of per capita income <pause dur="0.5"/> but widely different saving and investment rates <pause dur="0.7"/> all right <pause dur="0.3"/> and we're always puzzled why <pause dur="0.4"/> and one of the reasons for that <pause dur="0.5"/> is the price of capital <pause dur="0.4"/> okay <pause dur="0.6"/> if the price of capital falls <pause dur="0.9"/> in terms of interest rates but also in terms of price of capital goods <pause dur="0.4"/> intermediate goods need in production <pause dur="0.5"/> then that could stimulate a a rise in production <pause dur="1.0"/> and <pause dur="0.2"/> just to briefly <pause dur="0.3"/> deal with

your point <pause dur="0.5"/> # <pause dur="0.6"/> the balance of payments might deteriorate <pause dur="0.3"/> okay <pause dur="0.2"/> as we import these goods <pause dur="0.4"/> then production rises <pause dur="0.5"/> all right <pause dur="0.3"/> and production <pause dur="0.2"/> both of exports <pause dur="0.5"/> and of import substitutes <pause dur="0.5"/> to the extent that they exist <pause dur="0.8"/> # <pause dur="0.4"/> could then <pause dur="0.4"/> move the balance of payments the other way <pause dur="0.9"/> mm <pause dur="0.7"/> so it's a <pause dur="0.2"/> it's an empirical question </u><pause dur="0.5"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="16 secs"/> </u><pause dur="0.9"/> <u who="nm1128" trans="pause"> yes i mean <trunc>the</trunc> there's a problem of financing it all <pause dur="0.4"/> that's right which we haven't discussed here we've just said imports rise <pause dur="0.6"/> the you know what you're saying to me is where does the <shift feature="voice" new="laugh"/> foreign exchange come to buy it all right <vocal desc="laughter" iterated="y" dur="1"/> <shift feature="voice" new="normal"/> and we just call that oh that's an adjustment problem you know <vocal desc="laughter" n="sl" iterated="y" dur="2"/> # <pause dur="0.2"/> but of course it's more than that you're absolutely right <pause dur="0.5"/> # <pause dur="0.2"/> so <pause dur="0.2"/> if this is going to work in a developing country and it's a very <pause dur="0.2"/> very useful point <pause dur="0.6"/> # <pause dur="0.2"/> probably with the the developing country needs aid <pause dur="0.7"/> all right <pause dur="0.7"/> # <pause dur="0.3"/> the government will need aid <pause dur="0.3"/> because its <pause dur="0.4"/> <trunc>i</trunc> its revenues have fallen <pause dur="0.5"/>

quite substantially <pause dur="0.5"/> okay <pause dur="0.4"/> and it needs to change its structure of taxation <pause dur="0.5"/> from heavy dependence on import duties <pause dur="0.4"/> towards indirect taxes value added tax or something like that <pause dur="0.6"/> that's going to take time expertise <pause dur="0.5"/> et cetera <pause dur="0.3"/> right so they'll need <pause dur="0.4"/> aid and technical assistance <pause dur="0.3"/> to bridge them over that <pause dur="0.5"/> particular adjustment problem <pause dur="0.8"/>

also we've got a rise in imports with nothing happening on the export side <pause dur="0.3"/> <trunc>s</trunc> in the in the short term <pause dur="0.3"/> which may be several years <pause dur="0.8"/> # <pause dur="0.5"/> that's got to be paid for <pause dur="0.4"/> or alternatively there's a balance of payments crisis <pause dur="0.3"/> currency devalued you get inflation <pause dur="0.3"/> all sorts of nasty effects could arise <pause dur="0.3"/> so again <pause dur="0.9"/> we're saying that you need financial assistance <pause dur="0.4"/> foreign exchange needs to come in <pause dur="0.6"/> in order to <pause dur="0.4"/> enable a country to buy these investment goods <pause dur="0.5"/> and # and these intermediate goods <pause dur="0.3"/> # <pause dur="0.4"/> then its production can expand <pause dur="0.6"/> # <pause dur="0.4"/> as production expands <pause dur="0.5"/> # and tradeable goods supply of tradeable goods rises <pause dur="0.7"/> so you don't need the aid <pause dur="1.2"/> that's the theory <pause dur="3.1"/> okay well we can squeeze quite a bit out of that diagram <pause dur="0.5"/> # <pause dur="0.3"/> and it is important that you understand the mechanics okay <pause dur="0.3"/> too often <pause dur="0.6"/> i think the the the textbooks simply <pause dur="0.2"/> throw that up <pause dur="0.4"/> there's A B C and D that's the consumer surplus you know blah blah blah on to the next thing

on to trade diversion <pause dur="0.2"/> mm <pause dur="0.5"/> think of what's going on <pause dur="0.6"/> because if you if you think of what's going on <pause dur="0.4"/> behind the scenes here <pause dur="0.6"/> then you can say <pause dur="0.8"/> is the trade creation effect going to be large <pause dur="0.2"/> or going to be small <pause dur="0.9"/> and <pause dur="0.3"/> what are the adjustment problems for the country <pause dur="0.4"/> in terms of the government revenues <pause dur="0.5"/> and in terms of <pause dur="0.4"/> dealing with the rise in imports <pause dur="0.6"/> whenever we just said <pause dur="0.5"/> exports haven't increased <pause dur="2.8"/> any <pause dur="0.2"/> questions on that before we go on to the next one and trade diversion <pause dur="2.2"/> # happy <pause dur="2.1"/> okay <pause dur="0.2"/> right <pause dur="0.5"/> well <pause dur="0.7"/> that's the welfare gain <pause dur="0.2"/> okay <pause dur="1.2"/> # remember in this view of things <pause dur="0.3"/> the fact that you wipe out a bit of local industry <pause dur="0.7"/> # certainly means they're inefficient producers <pause dur="0.3"/> <shift feature="voice" new="laugh"/> all right <pause dur="0.3"/><shift feature="voice" new="normal"/> # which you know <pause dur="0.3"/> # shouldn't be there in the first place because they're only there under protection <pause dur="0.5"/> they go away <pause dur="0.5"/> that releases resources <pause dur="0.4"/> which can be more productively used in the rest of the economy <pause dur="0.5"/> all right that's the assumption behind it <pause dur="0.5"/> but they may

just be infants that are ready to grow up </u><pause dur="0.7"/> <u who="sm1135" trans="pause"> can we add <pause dur="0.3"/> <gap reason="inaudible" extent="22 secs"/> </u><pause dur="0.6"/> <u who="nm1128" trans="pause"> no <pause dur="0.5"/> because <pause dur="0.7"/> that's just going to effect that distance up here <pause dur="0.7"/> okay <pause dur="0.9"/> # if what you're saying is <pause dur="0.2"/> i mean i haven't actually marked that in because we got enough rubbish on this diagram <pause dur="0.4"/> that's the <pause dur="0.2"/> tariff inclusive price if there was such a price for the rest of the world in fact we're not importing from the rest of the world at all <pause dur="0.6"/> so <pause dur="0.3"/> # i'm not <pause dur="0.3"/> i'm not concerned with that <pause dur="0.2"/> no <pause dur="0.8"/> # <pause dur="0.5"/> but you're <trunc>ju</trunc> you're <trunc>w</trunc> what you're saying is that <pause dur="0.5"/> # instead of being up here the rest of the world <pause dur="0.3"/> tariff inclusive price would be up here somewhere <pause dur="0.4"/> just above that <pause dur="0.7"/> but that's irrelevant to the argument <pause dur="0.2"/> that doesn't affect the magnitude <pause dur="0.5"/> of our <pause dur="0.5"/> squares and triangles and rectangles and <pause dur="0.2"/> things underneath <pause dur="0.5"/> mm </u><pause dur="0.5"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="2 secs"/> </u><u who="nm1128" trans="overlap"> see </u> <u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="11 secs"/> </u><pause dur="1.0"/> <u who="nm1128" trans="pause"> i think <pause dur="0.8"/> what it <trunc>wa</trunc> what's <trunc>con</trunc> confusing you here is <pause dur="0.2"/> on this simple diagram <pause dur="0.7"/> # we import <pause dur="0.7"/> only from the E-U <pause dur="0.8"/> we're not importing anything from the rest of the world <pause dur="0.9"/> okay <pause dur="0.3"/> i mean i

think what you're thinking in <pause dur="0.2"/> the back of your mind is in reality we import from both <pause dur="0.7"/> right <pause dur="0.7"/> # but to simplify the analysis <pause dur="0.6"/> because the E-U is the cheapest source of supply in the world <pause dur="0.3"/> we only import from the from the E-U <pause dur="0.6"/> there's no imports from the rest of the world <pause dur="0.6"/> so we don't need complicate the picture but <pause dur="0.7"/> that # i see your point <pause dur="0.2"/> yes in reality we do it <pause dur="4.5"/> okay <pause dur="1.2"/><kinesic desc="changes transparency" iterated="y" dur="3"/> let's look at the other side of things </u><gap reason="break in recording" extent="uncertain"/> <u who="nm1128" trans="pause"> okay </u><gap reason="break in recording" extent="uncertain"/> <u who="nm1128" trans="pause"> now <pause dur="0.5"/> # again <pause dur="0.3"/> let's go through the mechanics of this <pause dur="0.5"/> mm <pause dur="1.3"/> # <pause dur="1.7"/><event desc="adjusts overhead projector" iterated="y" dur="18"/> whoops <pause dur="3.1"/> this thing <pause dur="2.1"/> it's <pause dur="1.4"/> difficult when it's this close to the screen <pause dur="6.6"/> can read that <pause dur="0.6"/> okay in this case it's the reverse situation to the one we had before <pause dur="0.8"/> so <pause dur="0.4"/> here the E-U is not the cheapest source of supply in the rest of the world <pause dur="0.7"/> on the contrary <pause dur="0.3"/> the tariff inclusive price <pause dur="0.3"/> P-E-U <pause dur="0.3"/> one-plus-T <pause dur="0.7"/> # is higher <pause dur="0.5"/> than the price for the rest of the world the rest of the world now is the cheapest the U-S Japan <pause dur="0.5"/> et cetera <pause dur="0.4"/> are a cheaper source of supply <pause dur="0.7"/> mm <pause dur="1.3"/> # <pause dur="0.4"/> so <pause dur="0.5"/> # <pause dur="1.7"/> at that tariff inclusive price for the rest of the

world <pause dur="1.1"/> Morocco <pause dur="0.2"/> is importing <pause dur="0.2"/> M-zero <pause dur="0.8"/> mm <pause dur="1.7"/> # <pause dur="1.4"/> now that the tariff is taken away <pause dur="1.4"/> from imports from the E-U <pause dur="0.3"/> but not from the rest of the world <pause dur="1.4"/> mm <pause dur="1.4"/> the picture totally reverses <pause dur="0.6"/> okay <pause dur="1.6"/> because the rest of the world has to pay a tariff <pause dur="0.7"/> but the E-U doesn't <pause dur="0.9"/> okay <pause dur="1.8"/> we now import <pause dur="0.4"/> we switch <pause dur="0.7"/> our sources of imports <pause dur="0.2"/> from the rest of the world <pause dur="0.3"/> to the E-U <pause dur="0.3"/> the E-U now becomes <pause dur="0.5"/> the cheapest source of supply <pause dur="0.5"/> mm <pause dur="0.5"/> not because it's the most efficient <pause dur="1.5"/> but because the E-U <pause dur="0.2"/> doesn't have to pay a tariff <pause dur="0.7"/> imports from the E-U don't have to pay a tariff <pause dur="0.6"/> whereas those from the rest of the world do <pause dur="2.0"/> so we're discriminating <pause dur="0.3"/> against <pause dur="0.5"/> the rest of the world <pause dur="1.0"/> in favour of the E-U <pause dur="0.9"/> hence we switch our imports <pause dur="0.9"/> totally <pause dur="1.7"/> away from the rest of the world <pause dur="0.3"/> to the E-U <pause dur="0.8"/> even though the E-U is not the most efficient source of supply in the world <pause dur="0.9"/> right <pause dur="0.5"/> it's because <pause dur="0.6"/> either they're dearer they're less efficient <pause dur="0.2"/> less well designed <pause dur="1.1"/> but nevertheless they don't have to pay a tariff <pause dur="1.3"/> the rest of the world does <pause dur="0.7"/> and so they capture the

market <pause dur="1.3"/> well that's a welfare loss <pause dur="0.7"/> mm <pause dur="1.3"/> # <pause dur="1.6"/> in its simplest terms a welfare loss because <pause dur="0.3"/> there must be something wrong with E-U goods <shift feature="voice" new="laugh"/> all right <shift feature="voice" new="normal"/> otherwise we'd be importing from them in the first place right <pause dur="0.6"/> we've talked in terms of price here <pause dur="0.7"/> but remember <pause dur="0.3"/> that we've got the price and non-price characteristics of products <pause dur="0.5"/> and maybe they're just less well designed investment goods and intermediate goods they're less efficient <pause dur="0.7"/> they're not state of the art the latest technology that you get from the U-S or Japan <pause dur="0.8"/> # <pause dur="0.9"/> nevertheless you import from the E-U <pause dur="1.6"/> okay <pause dur="0.5"/> yeah the analysis is exactly the same as before <pause dur="0.5"/> # the gain in the consumer surplus is the area under the demand curve okay <pause dur="0.4"/> which is # <pause dur="0.8"/> A-plus-C <pause dur="1.1"/> okay <pause dur="0.9"/> that is that wedge in there <pause dur="1.4"/> # <pause dur="1.9"/> slightly different of course because the loss of tariff revenue <pause dur="0.7"/> is the difference between the rest of the world's price <pause dur="3.1"/> # a world prices and the tariff that's the height of the tariff sorry <pause dur="0.4"/> that's the

height of the tariff in here <pause dur="0.7"/> okay <pause dur="2.4"/> so we were getting this tariff revenue <pause dur="1.1"/> from the rest of the world <pause dur="0.5"/> plus this area up in here <pause dur="0.6"/> so <pause dur="0.2"/> the tariff revenue from the rest of the world before <pause dur="0.4"/> was A-plus-B <pause dur="0.8"/> okay that's the height of the tariff multiplied by the level of imports <pause dur="0.9"/> okay <pause dur="0.6"/> well we're losing that tariff revenue <pause dur="2.2"/> # <pause dur="0.5"/> part of that <pause dur="0.3"/> loss of tariff revenue <pause dur="0.3"/> is going to who <pause dur="0.4"/> where's B going to </u><pause dur="3.8"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="1.1"/> <u who="nm1128" trans="pause"> in <pause dur="2.2"/> where <pause dur="0.3"/> which producers are we talking about you're right </u><u who="sm1135" trans="overlap"> E-U the E-U <gap reason="inaudible" extent="1 sec"/> </u><u who="nm1128" trans="overlap"> in the E-U <pause dur="0.2"/> that's right <pause dur="0.5"/> so <pause dur="0.2"/> B <pause dur="0.7"/> is a loss of tariff revenue <pause dur="0.5"/> being handed to E-U producers <pause dur="0.7"/> okay <pause dur="0.7"/> because they are <pause dur="0.3"/> at a higher price <pause dur="0.5"/> than the price for the rest of the world <pause dur="0.7"/> okay <pause dur="0.9"/> so there's a <pause dur="0.5"/> a a transfer <pause dur="0.3"/> that's a welfare loss to Morocco <pause dur="0.8"/> it's a transfer of tariff revenue <pause dur="0.9"/> which was being previously being collected from the rest of the world <pause dur="0.4"/> now going to <pause dur="0.3"/> Philips or wherever it happens <shift feature="voice" new="laugh"/> to be the <shift feature="voice" new="normal"/><pause dur="0.3"/> immediate <pause dur="0.2"/> right <pause dur="0.6"/> # <pause dur="2.6"/> to # <pause dur="0.2"/> either <pause dur="0.5"/> boost their

profits or <pause dur="0.5"/> because they are <pause dur="0.2"/> higher cost source of supply whatever it is <pause dur="0.5"/> that's a transfer to the E-U <pause dur="0.6"/> from the government of Morocco <pause dur="1.5"/> # <pause dur="4.6"/> so we've got the gain and the consumer surplus <pause dur="0.6"/> okay the area under the demand curve <pause dur="0.3"/> right <pause dur="0.3"/> we've got the loss of tariff revenue <pause dur="0.4"/> right <pause dur="0.4"/> remember that <unclear>neutral</unclear> <pause dur="0.5"/> so the net effect <pause dur="0.4"/> is <pause dur="0.2"/> C <pause dur="1.1"/> okay <pause dur="0.3"/> that's the <pause dur="0.2"/> so the gain and the the the net welfare effect <pause dur="0.7"/> to to Morocco in terms of the gain in consumer surplus <pause dur="0.7"/> they're paying a lower price <pause dur="0.4"/> of increased quantities of imports <pause dur="0.5"/> is C <pause dur="0.3"/> the triangle <pause dur="0.7"/> mm <pause dur="1.6"/> minus <pause dur="0.4"/> the loss of tariff revenue <pause dur="0.6"/> which has been transferred <pause dur="0.4"/> to the E-U producers <pause dur="0.7"/> okay as we've just said <pause dur="2.1"/> so <pause dur="0.7"/> the net welfare effect on Morocco <pause dur="0.5"/> is <pause dur="0.2"/> the gain and the consumer surplus <pause dur="0.9"/> right minus <pause dur="0.3"/> the loss of tariff revenue <pause dur="0.2"/> transferred to E-U producers <pause dur="3.4"/> purely <pause dur="1.5"/> as a matter of geometry if you like <pause dur="0.7"/> all right <pause dur="0.5"/> the rectangle B <pause dur="0.5"/> is going to be bigger <pause dur="0.5"/> than <pause dur="0.5"/> the triangle C <pause dur="0.6"/> mm <pause dur="1.6"/> unless unless <pause dur="0.2"/> what </u><pause dur="1.8"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="latching"> yes back to your point i think you were making earlier <shift feature="voice" new="laugh"/> that's

right <vocal desc="laugh" iterated="n"/> <pause dur="0.2"/> <shift feature="voice" new="normal"/> okay <pause dur="0.3"/> unless go on spell it out </u><pause dur="0.9"/> <u who="sm1135" trans="pause"> unless the the difference <pause dur="0.3"/> # margin between <pause dur="0.3"/> the # the rest of the world and the E-U</u><pause dur="0.3"/> <u who="nm1128" trans="pause"> mm </u><u who="sm1135" trans="overlap"> is is smaller </u><u who="nm1128" trans="latching"> yes <pause dur="0.2"/> okay <pause dur="0.3"/> right so <pause dur="0.2"/> the rest of the world was just a fraction cheaper than the E-U <pause dur="0.4"/> okay <pause dur="0.5"/> then that rectangle's going to be a very small area <pause dur="0.3"/> right <pause dur="0.5"/> and so it is technically possible <pause dur="0.5"/> that that could be a very tiny rectangle <pause dur="0.5"/> compared to the triangle C <pause dur="0.5"/> in which case there would be <pause dur="0.2"/> also welfare gain <pause dur="0.5"/> but none of the textbooks say that <pause dur="1.1"/> okay <pause dur="0.7"/> # you won't find that in a textbook for the simple reason i think <pause dur="0.4"/> that it's most unlikely to occur <pause dur="0.2"/> but it's technically possible <pause dur="2.0"/> so that's trade diversion that's a welfare loss then <pause dur="0.7"/> it's a welfare loss because <pause dur="2.2"/> you're transferring government revenue <pause dur="0.3"/> from Morocco to the E-U <pause dur="0.7"/> and transferring income <pause dur="1.0"/> from Morocco <pause dur="0.4"/> to the E-U straightforwardly <pause dur="0.6"/> right <pause dur="0.3"/> it's <pause dur="0.2"/> it's like A going <shift feature="voice" new="laugh"/> in the reverse <shift feature="voice" new="normal"/> direction <pause dur="1.6"/> # and secondly <pause dur="0.5"/> # <pause dur="1.0"/> we weren't buying <trunc>fr</trunc>

anything from the E-U before <pause dur="0.7"/> presumably because it was a crummy source of supply <pause dur="0.5"/> okay <pause dur="0.5"/> # you know it was it was dearer it was less efficient it was yesterday's technology it was poor design <pause dur="0.2"/> nobody wanted the blasted thing <pause dur="0.3"/> okay <pause dur="0.7"/>

now suddenly <pause dur="0.5"/> # you're not buying from the rest of the world you're buying only from the E-U <pause dur="0.5"/> solely <pause dur="0.2"/> solely because <pause dur="0.3"/> of the preferential trade agreement <pause dur="0.9"/> solely because <pause dur="1.1"/> the E-U no longer has to pay tariffs <pause dur="0.5"/> but the rest of the world still has to <pause dur="0.6"/> okay <pause dur="0.3"/> that's a distortion <pause dur="0.7"/> in the market <pause dur="0.8"/> it's a distortion <pause dur="0.3"/> which is welfare reducing <pause dur="0.5"/> for Morocco <pause dur="1.1"/> it it's welfare reducing for the world as a whole of course as well <pause dur="0.6"/> 'cause they there's a loss of production <pause dur="0.6"/> so <pause dur="0.2"/> at a global level there's a loss of welfare <pause dur="1.4"/> borne by whoever it was that was exporting to Morocco before <pause dur="0.2"/> U-S <pause dur="0.2"/> Japan et cetera <pause dur="0.2"/> to the other developing countries <pause dur="1.3"/> so at a global level it's a loss of welfare <pause dur="0.5"/> and it's a loss of welfare <pause dur="0.3"/> to Morocco itself <pause dur="5.1"/> i emphasized the the the impact on

developing countries partly 'cause that's what we're interested in <pause dur="0.9"/> but also because again you'll read in the literature <pause dur="0.9"/> again in mostly in the development literature i have to say <pause dur="0.9"/> that <pause dur="0.2"/> you needn't worry about trade diversion <pause dur="0.5"/> 'cause that's only a global loss of welfare <pause dur="0.2"/> okay <pause dur="0.3"/> that the costs of trade diversion are borne <pause dur="0.5"/> by the rest of the world <pause dur="0.3"/> all right <pause dur="0.5"/> that's nonsense <pause dur="0.2"/> okay that's complete and utter nonsense <pause dur="0.3"/> for the reasons that we've given <pause dur="0.7"/> mm <pause dur="0.7"/> from the straightforward transfer of of government revenue to the E-U <pause dur="0.5"/> and you're buying <pause dur="0.2"/> a less efficient <pause dur="0.3"/> product than you were before <pause dur="0.8"/> mm </u><pause dur="0.5"/> <u who="sm1135" trans="pause"> in this case it should be better for the devloping countries <gap reason="inaudible" extent="8 secs"/></u><u who="nm1128" trans="latching"> well <pause dur="0.2"/> that that's <vocal desc="laughter" iterated="y" dur="1"/> </u><u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.8"/> <u who="nm1128" trans="pause"> yes i mean that's what <shift feature="voice" new="laugh"/> Bhagwati <pause dur="0.2"/> <shift feature="voice" new="normal"/> so so so why do you sign the <shift feature="voice" new="laugh"/> wretched agreements all right <vocal desc="laughter" iterated="y" dur="1"/> <shift feature="voice" new="normal"/> <pause dur="0.4"/> # <pause dur="0.5"/> the point <trunc>i</trunc> i mean to be <trunc>a</trunc> <trunc>a</trunc> again <pause dur="0.2"/> be impartial on this one okay because Bhagwati <pause dur="0.3"/> hates preferential trade agreements <pause dur="0.4"/> so let's be neutral about all this <pause dur="1.2"/> #

there's the the <pause dur="0.3"/> the <pause dur="1.7"/> the <pause dur="0.4"/> the the static <pause dur="0.3"/> welfare effects <pause dur="1.0"/> of <pause dur="0.3"/> the preferential trade agreement <pause dur="0.6"/> are there for the net effect between the positive trade creation <pause dur="0.7"/> on the one hand <pause dur="0.7"/> and the trade diversion effect on the other <pause dur="0.3"/> okay <pause dur="0.5"/> and if trade creation our previous diagram is greater <pause dur="0.3"/> than trade diversion <pause dur="0.8"/> then <pause dur="0.2"/> Morocco gains <pause dur="0.6"/> from the preferential trade agreement <pause dur="0.6"/> okay so <pause dur="0.2"/> it's <pause dur="0.3"/> as always it's plusses and minuses <pause dur="0.4"/> okay we call swings and roundabouts <pause dur="0.6"/> # <pause dur="0.4"/> it's # <pause dur="0.2"/> there's a gain the trade creation gain <pause dur="0.2"/> the welfare gain on the one hand <pause dur="1.0"/> and the trade diversion the welfare loss on the other and it's the net effect of the two <pause dur="0.9"/> mm <pause dur="1.9"/> so the change in welfare if you like <pause dur="0.5"/> is <kinesic desc="writes on board" iterated="y" dur="2"/> trade creation <pause dur="0.2"/> minus trade diversion <pause dur="0.7"/> okay <pause dur="4.5"/> let's look at the magnitudes of trade diversion again <pause dur="0.5"/> our E-U Morocco agreement <pause dur="0.8"/> mm <pause dur="0.8"/> is it going to be big or small let's <sic corr="ask">gask</sic> the same question as we did before and we said it's the net effect <pause dur="3.0"/> what do you think <pause dur="2.6"/> or <pause dur="0.4"/> sub-Saharan Africa </u><u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="overlap"> sorry </u><pause dur="0.3"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="1 sec"/> </u><u who="nm1128" trans="latching">

# is trade diversion going to be big or small <pause dur="0.3"/> when you've got an African country on the one hand <pause dur="0.3"/> and the E-U on the other <pause dur="5.9"/> what would you expect it to be <pause dur="1.5"/> same logic as we used before </u><pause dur="0.4"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="2 secs"/></u><pause dur="0.8"/> <u who="nm1128" trans="pause"> sorry </u><pause dur="0.2"/> <u who="sm1136" trans="pause"><gap reason="inaudible" extent="4 secs"/> </u><pause dur="2.0"/> <u who="nm1128" trans="pause"> yeah <pause dur="0.2"/> you're right </u><u who="sm1136" trans="latching"> <gap reason="inaudible" extent="3 secs"/></u><u who="nm1128" trans="latching"> okay give yourself time </u><u who="ss" trans="latching"> <gap reason="inaudible, multiple speakers" extent="1 sec"/> </u><pause dur="2.2"/> <u who="nm1128" trans="pause"> so substitutability <pause dur="0.8"/> between </u><pause dur="1.5"/> <u who="sm1133" trans="pause"> <gap reason="inaudible" extent="1 sec"/> </u><pause dur="0.5"/> <u who="nm1128" trans="pause"> sorry </u><pause dur="0.2"/> <u who="sm1133" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="latching"> yes okay <pause dur="0.2"/> they're the ones that are in competition with each other <pause dur="0.5"/> okay <pause dur="0.9"/> so one of the key things is <pause dur="0.5"/> what sort of goods is Morocco or Mali or Chad importing <pause dur="0.7"/> from the E-U and the rest of the world <pause dur="0.9"/> do you think there'd be <pause dur="0.5"/> same goods or different goods <pause dur="2.1"/> <trunc>rough</trunc> probably speaking </u><pause dur="2.7"/> <u who="sm1132" trans="pause"> should be the same</u><pause dur="0.4"/> <u who="nm1128" trans="pause"> yeah okay we <trunc>s</trunc> we said it would be investment goods and intermediate products <pause dur="0.6"/> which largely weren't produced in the domestic economy it's a bit of a simplification that but it's not <pause dur="0.4"/> wildly different from the truth <pause dur="0.8"/> okay <pause dur="0.6"/> and whether they're produced in the E-U <pause dur="0.3"/> right

whether they're produced in Germany or France or Italy <pause dur="0.4"/> or Japan <pause dur="0.4"/> or <pause dur="0.2"/> # the United States <pause dur="0.4"/> or Taiwan all right or or Singapore <pause dur="0.3"/> okay <pause dur="0.8"/> it's purely a matter of <pause dur="0.6"/> price and technology and all the rest of it <pause dur="0.3"/> okay it's going to be a similar sort of mix of goods <pause dur="0.5"/> produced there <pause dur="0.9"/> so what's that going to tell you about the elasticity of substitution <pause dur="0.6"/> be precise now <pause dur="0.9"/> # between <pause dur="0.9"/> imports from the E-U <pause dur="0.3"/> and the rest of the world </u><pause dur="1.0"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="1 sec"/> </u><u who="nm1128" trans="latching"> yeah it's going to be very high </u><u who="sm1136" trans="latching"> very high </u><pause dur="0.4"/> <u who="nm1128" trans="pause"> yeah <pause dur="1.3"/> therefore the trade diversion effect will be </u><pause dur="1.1"/> <u who="sm1132" trans="pause"> high </u><pause dur="0.2"/> <u who="nm1128" trans="pause"> high <pause dur="0.9"/> that's the key point <pause dur="0.6"/> okay <pause dur="1.5"/> so we would expect the magnitude of the <pause dur="0.4"/> trade diversion effect <pause dur="0.7"/> where the agreement is <pause dur="1.0"/> between <pause dur="0.4"/> an industrialized and developing country we would expect trade diversion to be large <pause dur="1.4"/> because the sort of goods you import from the E-U will be a similar sort of mix of goods <pause dur="0.4"/> to the ones that you import <pause dur="0.4"/> from other industrialized countries <pause dur="0.2"/> okay <pause dur="0.5"/> no big surprise about that <pause dur="2.4"/> so the elasticity of substitution then <pause dur="0.9"/>

that's the <pause dur="0.2"/> it will will be high <pause dur="0.2"/> that's the key parameter <pause dur="1.1"/> which will determine the magnitude of the trade diversion effect <pause dur="1.0"/> mm <pause dur="2.1"/> now surprise surprise <pause dur="0.5"/> nobody's been able to measure that one either <vocal desc="laughter" iterated="y" dur="2"/> # <pause dur="0.3"/> i'm not sure why <pause dur="0.6"/> # you can look at there's a book <pause dur="0.4"/> everybody uses by Leamer and Stern which came out in the seventies <pause dur="0.4"/> on elasticities and international trade <pause dur="0.5"/> and everybody <pause dur="0.3"/> says well <pause dur="0.2"/> they say the figure's three <pause dur="0.5"/> so <pause dur="0.2"/> i'm going to use three <pause dur="0.3"/> # <pause dur="0.4"/> and that's the figure that they've had to use you know <pause dur="0.6"/> people talk about the the elasticity of subsitution <pause dur="0.3"/> as being three <pause dur="0.4"/> for the purposes of measuring the trade diversion effect <pause dur="2.0"/> do you think that would be a a sensible figure to use that we're talking about a free trade agreement between an industrialized and developing country <pause dur="1.7"/> given what we've just said <pause dur="3.5"/> you're shaking <pause dur="0.3"/> no i mean <pause dur="0.8"/> you expect it to be what <pause dur="0.5"/> slightly more lot more </u><pause dur="2.7"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="2 secs"/> </u><u who="nm1128" trans="overlap"> yeah a lot more <pause dur="0.3"/> mm a lot more okay <pause dur="0.7"/>

again the estimates that we work with <pause dur="0.6"/> are estimates produced <pause dur="0.3"/> for trade between industrialized countries <pause dur="0.7"/> mm <pause dur="0.6"/> which is still possibly the relevant one to use mm <pause dur="1.6"/> # <pause dur="0.2"/> but given the structure of imports <pause dur="1.4"/> # being heavily concentrated in investment goods and intermediate goods for a developing country <pause dur="0.8"/> i would imagine that the elasticity of substitution <pause dur="0.6"/> for this sort of trade agreement <pause dur="0.3"/> would be higher <pause dur="0.4"/> than the elasticity of substitution for an agreement <pause dur="0.3"/> say between Britain and France <pause dur="0.2"/> but <pause dur="0.3"/> you know we could debate about that <pause dur="1.7"/> debate about that <pause dur="0.8"/> anyway <pause dur="1.6"/> so <pause dur="0.2"/> going back to this then <pause dur="0.8"/> trade creation <pause dur="0.6"/> what conclusion did we draw about that magnitude </u><pause dur="2.3"/> <u who="sm1136" trans="pause"> low </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> fairly low we wouldn't expect it to be very great <pause dur="0.2"/> right <pause dur="0.4"/> but the differences in levels of income in structures of production <pause dur="0.7"/> et cetera <pause dur="0.8"/> okay between the E-U <pause dur="0.4"/> and the developing country <pause dur="0.8"/> and trade diversion <pause dur="1.7"/> high <pause dur="1.2"/> so <pause dur="0.2"/> without doing any numbers at all <pause dur="0.2"/> all right <pause dur="0.6"/> simply looking at the at the determinants <pause dur="0.7"/> of <pause dur="0.8"/> trade

creation and trade diversion <pause dur="0.8"/> we're going to say <pause dur="0.3"/> that <pause dur="0.6"/><kinesic desc="writes on board" iterated="y" dur="4"/> trade diversion will be greater <pause dur="0.5"/> than <pause dur="0.2"/> trade creation <pause dur="0.7"/> okay <pause dur="0.9"/> in which case <pause dur="0.6"/> welfare will decline <pause dur="1.4"/> and it's going to be <trunc>g</trunc> <pause dur="0.2"/> going to take an awful lot of persuading <pause dur="1.5"/> to # <pause dur="0.9"/> tell us otherwise <pause dur="0.6"/> the only question then <pause dur="0.4"/> is how big <pause dur="0.6"/> <vocal desc="laughter" iterated="y" dur="1"/><pause dur="0.4"/> # <pause dur="0.2"/> you know <pause dur="0.4"/> # <pause dur="0.9"/> how big is the loss of <shift feature="voice" new="laugh"/> welfare going to be <shift feature="voice" new="normal"/> <pause dur="3.4"/> okay everybody happy with the static <pause dur="0.3"/> Vinerian model <pause dur="2.8"/> yes </u><pause dur="0.4"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="2 secs"/> sign this </u><pause dur="0.2"/> <u who="nm1128" trans="pause"> <shift feature="voice" new="laugh"/> yes well that's <vocal desc="laughter" iterated="y" dur="1"/> that's exactly the thing i was just going to say <vocal desc="laughter" iterated="y" dur="1"/> <shift feature="voice" new="normal"/> i obviously led into it quite well <pause dur="0.5"/> # why do they sign it <pause dur="0.3"/> mm <pause dur="0.6"/> # why why do you sign it <pause dur="0.3"/> and really the <sic corr="rest">lest</sic> of the of of the lecture and probably <trunc>b</trunc> <pause dur="0.2"/> a bit of next week <pause dur="0.3"/> going to be trying to <pause dur="0.5"/> explore why that's what <kinesic desc="changes transparency" iterated="y" dur="5"/> economists have done ever since </u><pause dur="0.5"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="3 secs"/> </u><pause dur="1.5"/> <u who="nm1128" trans="pause"> yes i mean <trunc>we</trunc> <trunc>the</trunc> <trunc>the</trunc> there's various # things we'll be through that's right <pause dur="0.3"/> where it's the sort of long runs so people say that's a static

effect <pause dur="0.5"/> okay that's the once and for all effect <pause dur="0.4"/> but there's other beneficial gains to investment and blah blah blah and we'll be <pause dur="0.3"/> doing that that's right <pause dur="0.5"/> but <pause dur="0.2"/> that's the starting point okay <pause dur="0.3"/> why sign it <pause dur="0.7"/> i've given you a <trunc>th</trunc> <pause dur="0.4"/> a third diagram there <pause dur="1.0"/> which # <pause dur="0.3"/> is taken from Bhagwati 'cause i think it's a useful one <pause dur="1.2"/> # it's a variation on <pause dur="0.3"/> the <pause dur="0.6"/> # <pause dur="1.1"/> on <pause dur="0.3"/> on the model <pause dur="2.5"/> because one of the magnitudes of this <pause dur="0.2"/> # effect <pause dur="0.9"/> is going to <pause dur="0.2"/> # is going to depend also on the share <pause dur="0.9"/> of the E-U in the total imports <pause dur="0.3"/> of the developing country <pause dur="0.8"/> mm <pause dur="0.5"/> that's clearly going to be very important <pause dur="1.1"/> but haven't said anything about that we've just talked about the magnitude of the tariff change <pause dur="1.9"/> but clearly the magnitude <pause dur="0.3"/> of the trade creation effect <pause dur="0.6"/> will be larger <pause dur="1.5"/> the larger the share of the E-U in total imports of the developing country <pause dur="0.6"/> mm <pause dur="3.0"/> and <pause dur="0.5"/> conversely the trade diversion effect <pause dur="0.3"/> okay <pause dur="0.7"/> # will be <pause dur="0.5"/> # smaller <pause dur="0.9"/> the smaller the share of imports from the rest of the world <pause dur="0.6"/> other things we need <pause dur="1.2"/> in the E-U a <unclear>caveat</unclear> <pause dur="6.3"/>

so <pause dur="0.6"/> we've implicitly i think <pause dur="0.2"/> # <pause dur="0.5"/> in our previous models assumed that the share of the E-U was quite significant <pause dur="0.5"/> that's why you're signing the agreement <pause dur="0.5"/> okay you're <pause dur="0.4"/> basically it's the developing country <pause dur="0.5"/> signing <pause dur="0.5"/> a free trade agreement with its major trading partner <pause dur="0.8"/> mm <pause dur="0.3"/> and that's the usual pattern <pause dur="1.2"/> what we're looking at here is the case where the opposite's true <pause dur="1.4"/> where the developing country is signing <pause dur="0.2"/> a free trade agreement <pause dur="0.7"/> with an industrialized country that's a minor <pause dur="0.4"/> trading partner <pause dur="1.1"/> an example <pause dur="0.3"/> would be the Caribbean countries <pause dur="0.4"/> signing a free trade agreement with the E-U <pause dur="0.9"/> okay Caribbean countries fundamentally their trade <pause dur="0.6"/> is with the U-S Canada <pause dur="0.3"/> and other Latin American countries <pause dur="0.6"/> and the E-U account for a very small proportion maybe ten per cent <pause dur="0.2"/> at most <pause dur="0.8"/> of total imports <pause dur="2.0"/> nevertheless the Caribbean <pause dur="0.5"/> is heading on the route of signing <pause dur="0.3"/> a free trade agreement with the E-U <pause dur="0.4"/> round about two-thousand-and-six two-thousand-and-eight i mean it's terribly complicated <pause dur="0.2"/> # <pause dur="0.5"/>

political dynamite all round <pause dur="0.4"/> for obvious reasons <pause dur="0.5"/> the U-S are not exactly going to be jumping for joy <pause dur="0.6"/> <shift feature="voice" new="laugh"/> # and <vocal desc="laugh" iterated="n"/> <pause dur="0.3"/><shift feature="voice" new="normal"/> the Caribbean <shift feature="voice" new="laugh"/> can't # <pause dur="0.5"/> <shift feature="voice" new="normal"/> can't really # afford to <shift feature="voice" new="laugh"/> upset <shift feature="voice" new="normal"/> the U-S so <pause dur="0.3"/> not quite sure but <pause dur="0.6"/> if they want to <pause dur="0.5"/> preserve their <pause dur="0.2"/> preferential access for their exports of sugar <pause dur="0.3"/> and for bananas <pause dur="0.4"/> which are terribly important to these countries <pause dur="0.5"/> they'll have to sign a free trade agreement <pause dur="0.2"/> that's the that's the big dilemma they're faced with </u><pause dur="0.3"/>

<u who="sm1136" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.6"/> <u who="nm1128" trans="pause"> sorry the banana war again <shift feature="voice" new="laugh"/> yes <pause dur="0.2"/> no yes there'll be another one <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="1.1"/> <shift feature="voice" new="normal"/> so this is an agreement then between <pause dur="0.2"/> # the Caribbean countries and the E-U <pause dur="0.4"/> with the E-U <pause dur="0.2"/> counting a maybe only a small proportion <pause dur="0.4"/> of imports <pause dur="0.9"/> well as i put here <pause dur="0.9"/> # <pause dur="2.0"/> it's a question of price-takers and price-makers all right that we talked about last term <pause dur="0.6"/> # <pause dur="0.9"/> here <pause dur="0.5"/> fundamentally <pause dur="0.4"/> prices are set by the U-S <pause dur="0.2"/> okay that's the big source of supply <pause dur="0.6"/> okay <pause dur="0.7"/> and E-U producers <pause dur="0.2"/> simply <pause dur="0.4"/> # <pause dur="0.6"/> sell <pause dur="0.6"/> # in <pause dur="0.2"/> in the market at the price set

by the U-S suppliers okay they have they're such a small proportion of the market <pause dur="0.5"/> that they have no influence on price <pause dur="0.7"/> okay <pause dur="0.6"/> common sense assumption <pause dur="0.6"/> okay <pause dur="0.7"/> let me see what <pause dur="0.3"/> what happens in this case <pause dur="1.3"/> well again we've got <pause dur="0.2"/> free <pause dur="0.4"/> # <pause dur="0.4"/> <trunc>w</trunc> # # free trade <pause dur="0.4"/> imports from <pause dur="0.5"/> # the E-U <pause dur="0.7"/> # here <pause dur="0.4"/> and imports from the rest of the world call that United States <pause dur="0.2"/> okay <pause dur="0.7"/> but the difference in this case <pause dur="0.7"/> is that because the U-S <pause dur="0.3"/> is the major source of supply it's the price-maker <pause dur="0.8"/> perfectly elastic supply <pause dur="0.5"/> okay <pause dur="2.9"/> the Caribbean however is a distant market <pause dur="0.8"/> # <pause dur="0.3"/> for E-U producers <pause dur="0.8"/> substantial transport costs <pause dur="1.0"/> only a small proportion of their export's going there <pause dur="0.5"/> so transport costs would be a significant proportion of total cost <pause dur="0.6"/> so the supply curve will be anything but <pause dur="0.2"/> perfectly elastic <pause dur="0.8"/> # <pause dur="0.2"/> it'll be fairly steep <pause dur="0.9"/> <trunc>re</trunc> reflecting the fact that they <pause dur="0.4"/> command only a small proportion of the market <pause dur="0.8"/> price is set <pause dur="0.2"/> here <pause dur="1.2"/> so <pause dur="1.3"/> the U-S sets the price <pause dur="0.3"/> in the Caribbean market <pause dur="0.5"/> the E-U <pause dur="0.4"/> suppliers provide <pause dur="0.3"/> <trunc>m</trunc> move up their supply curve <pause dur="0.7"/> until they

hit point B <pause dur="0.7"/> okay <pause dur="0.8"/> and <pause dur="0.5"/> # at that point <pause dur="0.4"/> which is set by <pause dur="0.6"/> the U-S <pause dur="0.8"/> # <pause dur="0.2"/> price <pause dur="0.2"/> plus the tariff <pause dur="0.8"/> okay <pause dur="0.6"/> # <pause dur="0.2"/> then <pause dur="0.4"/> that determines <pause dur="0.3"/> imports from the E-U <pause dur="0.3"/> O-Q-one <pause dur="0.8"/> okay <pause dur="1.2"/> and then the rest of imports come from the U-S <pause dur="1.0"/> now let's take the tariff away from <pause dur="0.5"/> # <pause dur="0.2"/> imports <pause dur="1.0"/> from the E-U <pause dur="0.2"/> but not from the U-S <pause dur="1.0"/> okay <pause dur="0.5"/> free trade agreement with E-U <pause dur="0.5"/> mm <pause dur="1.2"/> # <pause dur="0.5"/> in that case then <pause dur="2.1"/> we show the effect of that by an output movement <pause dur="0.5"/> of the E-U supply curve <pause dur="0.9"/> okay <pause dur="0.8"/> # <pause dur="0.9"/> in which case imports <pause dur="0.5"/> from the E-U expand from Q-one <pause dur="0.4"/> out to Q-two <pause dur="1.3"/> okay <pause dur="2.0"/> the important thing to note <pause dur="0.8"/> is that <pause dur="0.3"/> nothing happens <pause dur="1.1"/> to <pause dur="0.2"/> the internal price levels <pause dur="0.5"/> in the Caribbean <pause dur="0.8"/> 'cause they're set by U-S suppliers <pause dur="0.6"/> so it's U-S supply <pause dur="0.3"/> plus the tariff <pause dur="0.6"/> so it's the tariff inclusive U-S price <pause dur="0.9"/> which sets the domestic price level in the Caribbean <pause dur="0.6"/> mm <pause dur="1.2"/> what the <pause dur="0.5"/> E-U exporters do is simply maximize profits <pause dur="0.9"/> with price is set by the U-S suppliers <pause dur="1.6"/> so <pause dur="1.0"/> imports from the U-S expand from Q-one out to Q-two <pause dur="0.3"/> mm <pause dur="1.0"/> # <pause dur="0.4"/> there's a loss of tariff revenue to the Caribbean governments <pause dur="0.7"/> of A-<pause dur="1.1"/>C-<pause dur="0.3"/>G-E <pause dur="0.3"/>

okay that area in there where they previously collected the tariff <pause dur="0.7"/> now <pause dur="0.4"/> that's being lost <pause dur="0.8"/> and guess who's getting it </u><pause dur="1.1"/> <u who="su1138" trans="pause"> <gap reason="inaudible" extent="1 word"/> </u><pause dur="0.9"/> <u who="nm1128" trans="pause"> no the E-U <pause dur="0.3"/> okay <pause dur="0.4"/> that <unclear>got to be</unclear> the U-S are still paying the tariffs <unclear>excuse me</unclear> <pause dur="0.7"/> # <pause dur="1.1"/> the but but the <pause dur="0.3"/> E-U suppliers aren't paying the tariff <pause dur="0.3"/> mm <pause dur="0.6"/> nothing's happened to the domestic price level 'cause they're price-takers <pause dur="0.6"/> okay <pause dur="0.3"/> so that loss of tariff revenue <pause dur="0.3"/> goes straight into the pockets <pause dur="0.3"/> of the E-U <pause dur="0.2"/> exporters <pause dur="0.9"/> very nicely thank you <pause dur="0.4"/> mm <pause dur="1.1"/> # <pause dur="1.1"/> and that's it <pause dur="1.4"/> there is no gain for the consumers <pause dur="0.7"/> because nothing happens to the price <pause dur="1.6"/> # <pause dur="0.4"/> the <pause dur="0.3"/> internal price level of the Caribbean doesn't fall <pause dur="0.7"/> because <pause dur="0.5"/> the E-U <pause dur="0.6"/> # previously was accounting for maybe ten per cent of imports <pause dur="0.3"/> now goes up to fifteen per cent of imports <pause dur="0.7"/> but it's not going to affect price <pause dur="0.3"/> okay <pause dur="2.9"/> you still get eighty-five per cent of <pause dur="0.4"/> of imports coming from the U-S <pause dur="0.3"/> that's what determines the internal price level in the Caribbean <pause dur="1.7"/> so the price-makers <pause dur="0.6"/> of the U-S exporters <pause dur="1.5"/> the E-U exporters

are price-takers <pause dur="1.0"/> mm <pause dur="0.6"/> they can't influence price they're too small to do so <pause dur="1.2"/> so they simply clean up <pause dur="0.7"/> in terms of the of not having <pause dur="0.4"/> having to pay the tariff <pause dur="0.8"/> they previously had to <pause dur="0.3"/> they simply <pause dur="0.3"/> boost their profits <pause dur="0.8"/> # no gain in consumer surplus <pause dur="0.6"/> straightforward deterioration in the terms of trade from the Caribbean against <pause dur="0.3"/> the E-U <pause dur="0.8"/> # straightforward transfer of government revenue <pause dur="0.4"/> from the Caribbean governments and <pause dur="0.3"/> people <pause dur="0.9"/> to the E-U <pause dur="0.2"/> producers <pause dur="0.8"/> full stop <pause dur="0.3"/> end of story <pause dur="2.6"/> that's the price <pause dur="0.3"/> of continuing to get access <pause dur="0.5"/> for your exports of sugar and bananas <pause dur="3.1"/> and you can measure it <pause dur="0.3"/> <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="2.4"/> get to make the right assumptions <pause dur="1.7"/> when i <pause dur="0.3"/> i <pause dur="0.3"/> actually went <event desc="takes off transparency" iterated="n"/> through this one when we because # as you know there's # all the <pause dur="0.6"/> # will be up to about two-thousand-and-six two-thousand-and-eight <pause dur="0.5"/> the trade negotiations <pause dur="0.4"/> # <pause dur="0.2"/> going on <pause dur="0.5"/> # <pause dur="0.2"/> with the commission <pause dur="1.6"/> # <pause dur="0.3"/> over there that will be starting quite soon <pause dur="0.4"/> and i went through that analysis # with the <pause dur="0.3"/> and the with people over the the within the

the commission <pause dur="0.5"/> # there was a <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="0.4"/> <shift feature="voice" new="laugh"/> it wasn't favourably received <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="0.6"/> # <shift feature="voice" new="normal"/> <pause dur="0.4"/> people were unhappy with the idea that the price wouldn't change <pause dur="0.5"/> # <pause dur="0.3"/> but that's the reality i mean it's an empirical question <pause dur="0.2"/> okay <pause dur="0.7"/> but if you account for only ten or fifteen per cent of the market <pause dur="0.4"/> and the Caribbean group <pause dur="0.2"/> very helpfully <pause dur="0.3"/> told me well actually that was a bit high <pause dur="0.4"/> it's about seven or eight per cent actually you know in many countries <pause dur="0.6"/> then you're a price-taker you don't influence price <pause dur="0.4"/> and that's what the whole analysis <pause dur="0.2"/> hinges on <pause dur="0.7"/> # <pause dur="1.2"/> so that's # by way of # a variation of a theme yeah </u><u who="sm1132" trans="overlap"> one question <pause dur="0.4"/> the role of the U-S company in that last model </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> yes <pause dur="1.4"/> is to get very upset you know </u><u who="sm1132" trans="overlap"> <gap reason="inaudible" extent="2 secs"/><pause dur="1.2"/> as a <trunc>price-ma</trunc> as a price-maker i mean <pause dur="0.5"/> how <pause dur="0.3"/> i mean how how will the U-S respond <pause dur="0.9"/> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="overlap"> <shift feature="voice" new="laugh"/> well they get very upset <vocal desc="laughter" n="sl" iterated="y" dur="1"/> <pause dur="0.2"/><shift feature="voice" new="normal"/> yes i mean # <pause dur="0.2"/> it's obviously it's it's crowding out <pause dur="0.3"/> # imports from the U-S <pause dur="0.7"/> that's right <pause dur="0.6"/> yeah <pause dur="0.2"/> that's it </u><u who="sm1132" trans="overlap"> so <pause dur="0.7"/> is there anything the U the U-S <pause dur="0.8"/> will do in that situation </u><u who="nm1128" trans="latching"> yes i mean that's the that's the big

issue that's the dilemma which the Caribbean countries are faced with </u><pause dur="0.4"/> <u who="sm1132" trans="pause"> how </u><u who="nm1128" trans="overlap"> because at the at the <pause dur="0.2"/> currently <pause dur="0.4"/> they have <pause dur="0.5"/> # <pause dur="0.3"/> under the Caribbean Basin Initiative <pause dur="0.6"/> they have preferential access to the U-S market <pause dur="0.7"/> principally for clothing <pause dur="0.2"/> i mean that's the key one for them really <pause dur="0.7"/> # <pause dur="1.0"/> you know <pause dur="0.7"/> i can't imagine the U-S standing by and continuing to allow them that preferential access <pause dur="0.6"/> while their exporters are saying but we're losing market share </u><pause dur="1.3"/> <u who="sm1132" trans="pause"> so isn't the isn't <trunc>rea</trunc> <pause dur="1.3"/> to the # <pause dur="0.8"/> Caribbean countries in this example <pause dur="0.7"/> are better off sticking with the price-maker <pause dur="0.9"/> than rather </u><u who="nm1128" trans="latching"> and <pause dur="0.2"/> but then if they don't sign the free trade agreement they lose their exports of sugar and and bananas <pause dur="0.5"/> and that cause large scale unemployment in Jamaica and in the <pause dur="0.6"/> # <pause dur="0.2"/> you know the # <pause dur="0.3"/> # Windward Islands </u><pause dur="0.3"/><u who="sm1132" trans="pause"> but then again if if if that happens then the U-S <pause dur="0.4"/> might retaliate <pause dur="0.2"/> say well <pause dur="0.4"/> you know <gap reason="inaudible" extent="2 secs"/></u><u who="nm1128" trans="overlap"> yeah </u><u who="sm1132" trans="overlap"> to import from </u><u who="nm1128" trans="overlap"> yeah </u><pause dur="0.4"/> <u who="sm1132" trans="pause"> Indonesia or somewhere else </u><u who="nm1128" trans="latching"> and then the <pause dur="0.3"/> so <pause dur="0.3"/> so the guys in the in the in in

the sugar and banana plantations <pause dur="0.5"/> do all right but the guys in the clothing industry are unemployed </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="overlap"> <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="0.2"/> yeah that's the dilemma they've got </u><pause dur="1.2"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="5 secs"/></u><u who="nm1128" trans="overlap"> right </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="4 secs"/> </u><pause dur="0.6"/> <u who="nm1128" trans="pause"> yeah </u><pause dur="0.4"/> <u who="sm1136" trans="pause"> <gap reason="inaudible" extent="4 secs"/></u><u who="nm1128" trans="overlap"> mm </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="3 secs"/></u><pause dur="0.2"/> <u who="nm1128" trans="pause"> well <pause dur="0.2"/> that is well <trunc>th</trunc> yes that is exactly what the Caribbean and and and CARICOM in particular the Caribbean community <pause dur="0.4"/> which is a free trade agreement in fact it's it's moving over to a customs union <pause dur="0.6"/> there <pause dur="0.3"/> and they're physically signing i mean some of those hundred-and-six agreements i mentioned <pause dur="0.4"/> were between CARICOM <pause dur="0.7"/> # and various Latin American countries 'cause they see that as being their future </u><u who="sm1136" trans="latching"> <gap reason="inaudible" extent="4 secs"/> </u><u who="nm1128" trans="overlap"> <shift feature="voice" new="laugh"/> yes <shift feature="voice" new="normal"/></u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="3 secs"/></u><u who="nm1128" trans="overlap"> yeah <pause dur="0.3"/> yeah that's right that's right so # better off <pause dur="0.2"/> building up your trade with Latin America <pause dur="0.4"/> yes <pause dur="0.2"/> i mean <pause dur="0.2"/> i <trunc>a</trunc> again it's an example of of <pause dur="0.4"/> the patterns of trade not being determined so much by <pause dur="0.4"/> purely economic considerations <pause dur="0.4"/> as by a colonial heritage <pause dur="0.9"/>

# that's why their export in sugar and bananas to Europe <pause dur="0.6"/> # <pause dur="0.3"/> in a free trade situation <pause dur="0.7"/> they may or may not be doing so probably wouldn't <pause dur="0.8"/> # free trade probably sugar will be coming from India or from Brazil or somewhere like that <pause dur="0.5"/> where a a very low cost producer well it's from Australia <pause dur="0.2"/> are a very low cost producer <pause dur="0.5"/> not from the Caribbean i mean that's a reflection <pause dur="0.4"/> of the fact that were British colonies <pause dur="0.7"/> # i'm not saying that <gap reason="inaudible" extent="1 sec"/> market <pause dur="1.8"/> #

but and that's created a dilemma <pause dur="0.9"/> and similarly with clothing you see the clothing industry <pause dur="0.3"/> in Jamaica which is a quite an important source of employment for them that live there <pause dur="0.9"/> is principally because of the <pause dur="0.4"/> Caribbean Basin Initiative it's because of preferences in the U-S market <pause dur="0.4"/> without those preferences <pause dur="0.4"/> again in a free trade situation <pause dur="0.4"/> the clothing would come from Asia <pause dur="0.5"/> not from Jamaica <pause dur="1.0"/> i mean Jamaica then says well what the heck are we <shift feature="voice" new="laugh"/> going to produce <pause dur="0.5"/> but <shift feature="voice" new="normal"/> <pause dur="0.5"/> but <pause dur="0.2"/> you've got the answer i mean the answer is that it'll be other things which of course we don't know about <pause dur="0.4"/> because they don't exist <pause dur="0.7"/> but <pause dur="0.4"/> # the obvious trade pattern would be towards Latin American countries <pause dur="0.3"/> that have a different resource base a different level of income <pause dur="0.6"/> a different stage of technology <pause dur="0.4"/> so the two economies are complementary to each other <pause dur="0.4"/> and that's the future for these countries' <unclear>problems</unclear> <pause dur="1.6"/> but that gets us away from <pause dur="0.8"/> here anyway that's just # a variation on the <pause dur="0.7"/> on the i mean <trunc>th</trunc> <trunc>th</trunc> the

the previous models assume <pause dur="0.6"/> that the <pause dur="0.5"/> partner country in the trade agreement was a price-maker <pause dur="0.3"/> okay <pause dur="0.4"/> this is a case where <pause dur="0.3"/> the partner country's a price-taker <pause dur="0.6"/> with the rest of the world <pause dur="0.3"/> determining the price <pause dur="0.3"/> and that alters the analysis <pause dur="3.3"/><kinesic desc="puts on transparency" iterated="n"/> okay so <pause dur="0.2"/> why sign the damn thing <vocal desc="laughter" iterated="y" dur="2"/> you know <vocal desc="laughter" iterated="y" dur="1"/> # <pause dur="1.9"/> and that's # as i say that's the question which everybody has # <pause dur="0.7"/> you know <pause dur="0.2"/> really <pause dur="0.2"/> teased their brains about <pause dur="1.7"/> # <pause dur="2.8"/> you have to look to the so-called dynamic <pause dur="1.0"/> arguments okay <pause dur="0.5"/> i don't like the term dynamic because we've nicked it off <pause dur="0.2"/> thermodynamics or <pause dur="0.2"/> physics or something like that <pause dur="0.6"/> # <pause dur="0.2"/> growth enhancing <pause dur="0.2"/> i think is more accurate <pause dur="0.3"/> okay <pause dur="0.8"/> # <pause dur="0.2"/> phrase so it's a growth enhancing <pause dur="0.5"/> effects of a free trade agreement <pause dur="0.3"/> what might they be <pause dur="1.2"/> 'cause remember <pause dur="0.3"/> trade creation and trade diversion <pause dur="0.3"/> are once and for all <pause dur="0.3"/> static effects <pause dur="0.4"/> okay <pause dur="0.3"/> they just have a once and for all impact <pause dur="0.4"/> and that's it <pause dur="0.3"/> okay <pause dur="1.0"/> fundamentally what we're talking about here <pause dur="0.2"/> is accelerating the growth of these countries <pause dur="0.6"/> okay <pause dur="0.4"/> it's a continuous

process <pause dur="0.8"/> so <pause dur="1.0"/> okay <pause dur="0.2"/> trade diversion might be greater than <pause dur="0.5"/> trade creation <pause dur="0.8"/> all right <pause dur="0.7"/> but that's just a once and for all cost if you like <pause dur="0.5"/> mm <pause dur="0.9"/> # <pause dur="1.1"/> is there something about the free trade agreements that <pause dur="0.5"/> has a continuous effect <pause dur="0.3"/> on <pause dur="0.7"/> increasing output year by year <pause dur="0.4"/> more rapidly <pause dur="0.5"/> than would otherwise have occurred <pause dur="0.4"/> if you hadn't signed the free trade agreement <pause dur="0.9"/> and those who favour free trade agreements say those are the really important things <pause dur="0.3"/> those growth enhancing effects <pause dur="0.3"/> they're the really important ones <pause dur="0.5"/> but they're difficult to measure <pause dur="0.9"/> rather fortunate that perhaps but <pause dur="0.6"/> # <pause dur="0.3"/> the other ones are difficult to measure anyway <pause dur="1.0"/> so the first one then <pause dur="0.2"/> obvious one <pause dur="0.4"/> is <pause dur="0.2"/> # <pause dur="0.2"/> economies of scale <pause dur="0.8"/> okay <pause dur="1.5"/> basically the argument is a simple one <pause dur="1.8"/> # <pause dur="1.1"/> the developing country <pause dur="1.6"/> has access to a wider market <pause dur="0.9"/> so <pause dur="0.3"/> previously if you imagine producers <pause dur="0.3"/> simply selling <pause dur="0.5"/> in the home market <pause dur="1.0"/> the home market's small <pause dur="0.5"/> 'cause you're a small country small size of population <pause dur="0.6"/> and you've got a low level of <pause dur="0.5"/> per capita G-N-P <pause dur="0.8"/>

so <pause dur="0.4"/> # <pause dur="0.2"/> the effect of that <pause dur="0.4"/> is # <pause dur="1.3"/> # <pause dur="0.7"/> to mean that <pause dur="3.5"/> if that's the <pause dur="0.4"/><kinesic desc="writes on board" iterated="y" dur="28"/> long run average cost curve <pause dur="4.1"/> # <pause dur="0.8"/> then <pause dur="1.0"/> you know <pause dur="0.2"/> it <pause dur="0.6"/> you're probably this is <pause dur="0.8"/> cost <pause dur="0.8"/> output <pause dur="4.0"/> your small size of the domestic market <pause dur="5.7"/> producing a P-A just producing <pause dur="0.4"/> # a production for the <pause dur="0.3"/> for the for the home market <pause dur="0.8"/> # <pause dur="0.9"/> means that you're operating at quite high <pause dur="0.3"/> average cost of production <pause dur="1.5"/> you then sign a free trade agreement gives you access to this huge E-U market <pause dur="0.7"/> i don't know how many million people there are i've forgotten how many there are in the E-U </u><u who="sm1132" trans="overlap"> two-hundred-and-forty something like that </u><u who="nm1128" trans="overlap"> right </u><u who="sm1136" trans="overlap"> three-hundred-and <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="overlap"> yeah </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="1 sec"/> </u><pause dur="0.5"/> <u who="nm1128" trans="pause"> yeah three-hundred-and-fifty-million people okay <pause dur="0.3"/> and instead of your population of <pause dur="0.4"/> twelve-million <vocal desc="laughter" iterated="y" dur="1"/> # <pause dur="0.5"/> so <pause dur="0.2"/> you don't need too many of that three-hundred-and-fifty-million people to buy your goods <pause dur="0.5"/> to be able to move somewhere out here <pause dur="0.6"/><kinesic desc="indicates point on board" iterated="n"/> okay <pause dur="1.3"/> # so <pause dur="0.4"/> you may # having <pause dur="0.8"/> free access <pause dur="0.6"/> unrestricted access to this huge market <pause dur="0.6"/> enables you to increase exports <pause dur="0.7"/> expand productions way above the constraint <pause dur="0.5"/> of the <pause dur="0.6"/> #

domestic market <pause dur="0.6"/> and you move down your long run average cost curve <pause dur="0.7"/> okay <pause dur="0.8"/> and that makes you even more competitive of course <pause dur="1.2"/> than you were before <pause dur="0.6"/> and so exports expand even more <pause dur="0.3"/> so you get a <pause dur="0.2"/> a virtuous process <pause dur="0.8"/> if you're moving down <pause dur="0.4"/> if you expand your exports <pause dur="0.4"/> you're moving down the long run average cost curve <pause dur="0.5"/> because you're more efficient than you were before producing a <pause dur="0.3"/> lower average cost than before <pause dur="0.3"/> you sell more output <pause dur="0.3"/> and so you go on <pause dur="0.9"/> moving down <pause dur="0.4"/> the average cost curves in that way </u> <pause dur="1.4"/> <u who="sm1132" trans="pause"> i'm sorry just # <pause dur="0.3"/> one point <pause dur="0.3"/> is the assumption here that # <pause dur="0.7"/> we have free # <pause dur="0.4"/> trade agreement just between <pause dur="0.7"/> the developing countries and <pause dur="0.2"/> for example the E-U <pause dur="1.0"/> # but what what if we say well <pause dur="0.5"/> got # <pause dur="0.2"/> free trade <gap reason="inaudible" extent="2 words"/></u> <u who="nm1128" trans="overlap"> mm </u><u who="sm1132" trans="overlap"> <pause dur="0.3"/> you know <trunc>w</trunc> with the whole world <pause dur="0.3"/> then obviously <pause dur="0.6"/> do we have still economies of scale then <pause dur="0.6"/> that is the question </u><pause dur="0.2"/> <u who="nm1128" trans="pause"> well then it gets complicated for the reasons that you've <pause dur="0.2"/> indicated because everybody else has got a free trade agreement <pause dur="0.2"/> all right <pause dur="0.6"/> # so

you've just got free trade i mean ultimately then you've just got world free trade <pause dur="1.3"/> in which case comparative advantage should work on a on a world basis <pause dur="0.2"/> all right <pause dur="0.5"/> and <pause dur="1.0"/> provided you've got a comparative advantage in this product <pause dur="1.0"/> the same argument should hold <pause dur="0.8"/> mm <pause dur="1.6"/> i mean <pause dur="0.4"/> the only difference is that this might hold for a product in which you don't have a comparative advantage <pause dur="0.5"/> on a worldwide level <pause dur="0.5"/> all right <pause dur="0.4"/> but you do in terms of trade with E-U <pause dur="0.5"/> so if you just had a an agreement between Morocco and E-U <pause dur="0.3"/> nothing else in the world <pause dur="0.8"/> all right <pause dur="0.2"/> Morocco can move down its long run average cost curve say for clothing <pause dur="0.4"/> it's an important industry in Morocco <pause dur="0.6"/> okay <pause dur="1.4"/> mm <pause dur="0.7"/> # because it doesn't have to compete with Asia and the rest <pause dur="0.5"/> but if the E-U signs agreements up with all the Asian countries and Eastern Europe and everybody else <pause dur="0.2"/> okay <pause dur="0.4"/> then that might not hold <pause dur="0.3"/> you had to have a comparative advantage at a world level <pause dur="1.3"/> so # <pause dur="0.4"/> i mean in a sense you see what what i'm saying is

that <pause dur="0.6"/> # <pause dur="0.2"/> a preferential trade agreement can create a false comparative advantage <pause dur="0.8"/> mm <pause dur="1.1"/> because <pause dur="0.2"/> you have free access to the E-U <pause dur="0.6"/> but the rest of the world doesn't <pause dur="0.4"/> okay <pause dur="0.8"/> then you're more competitive but it's a false <pause dur="0.4"/> comparative advantage <pause dur="0.9"/> mm <pause dur="0.5"/> and as more agreements are signed <pause dur="0.5"/> you might well find that you've committed yourself to produce clothing <pause dur="0.8"/> but then <pause dur="0.2"/> you're left high and dry because you're a high cost producer <pause dur="0.8"/> just that the Caribbean countries <pause dur="0.6"/> # <pause dur="0.2"/> had a false comparative advantage in selling bananas in the U-K market <pause dur="0.6"/> or sugar cane in the U-K market <pause dur="0.6"/> only because they have preferential access <pause dur="0.2"/> to to to Britain <pause dur="0.7"/> but Australia <pause dur="0.6"/> Brazil <pause dur="0.7"/> # Ecuador in the case of bananas and so on <pause dur="0.5"/> # didn't <pause dur="0.3"/> mm <pause dur="0.6"/> so it created a false comparative adavantage they built up these industries <pause dur="0.7"/> and now <pause dur="0.4"/> when we've got free trade virtually on those products <pause dur="0.6"/> # they can't survive without

preferences </u><pause dur="1.1"/> <u who="sm1132" trans="pause"> so basically <pause dur="0.4"/> as the <pause dur="0.3"/> for example the European Union # signs more and more trade agreements </u><u who="nm1128" trans="overlap"> yes </u><u who="sm1132" trans="overlap"> which it's which is in the process of doing so now </u><u who="nm1128" trans="overlap"> yes that's right </u><u who="sm1132" trans="overlap"> with the <pause dur="0.5"/> Caribbean with Eastern Europe and <pause dur="0.2"/> other countries <pause dur="0.5"/> # </u><u who="nm1128" trans="overlap"> that's right </u><pause dur="0.6"/> <u who="sm1132" trans="pause"> and so so basically that preferential <pause dur="0.7"/> # lose </u><u who="nm1128" trans="overlap"> margin </u><u who="sm1132" trans="overlap"> # it loses it's # significance </u><u who="nm1128" trans="latching"> absolutely <pause dur="0.2"/> absolutely <pause dur="0.2"/> that's right <pause dur="0.3"/> that's right <pause dur="0.8"/> # yes <pause dur="0.2"/> i mean it's # <pause dur="0.8"/> yes i mean it <pause dur="0.2"/> <trunc>whi</trunc> which of course <pause dur="0.5"/> # <pause dur="0.3"/> those who say <pause dur="0.3"/> therefore free trade agreements are stepping stones <pause dur="0.6"/> to multilateral trade liberalization might <pause dur="0.3"/> <trunc>exa</trunc> you know say well that's exactly what i'm saying <pause dur="0.4"/> mm <pause dur="0.8"/> that they're just stepping stones <pause dur="0.2"/> to world free trade <pause dur="0.8"/> i shall point out at the end it's not quite as simple as that <pause dur="0.7"/> 'cause the agreements differ <pause dur="0.2"/> in their content <pause dur="0.5"/> and that creates barriers to trade <pause dur="0.8"/> but that's getting <trunc>a</trunc> that's jumping the gun a bit <pause dur="1.2"/> but that's right we're talking as if it was the only

agreement in the world <pause dur="0.4"/> mm <pause dur="0.7"/> # <pause dur="0.7"/> obviously if it isn't <pause dur="0.3"/> then that <pause dur="0.6"/> that reduces the gains <pause dur="0.4"/> to Morocco <pause dur="0.3"/> or wherever it happens to be <pause dur="0.7"/> but then we move over more to <pause dur="0.6"/> just global or multilateral trade liberalization getting closer to that <pause dur="0.7"/> perhaps <pause dur="2.5"/> okay so the first dynamic gain might be economies of scale you move down your long run average cost curve <pause dur="0.9"/> the second one the familiar one to us from any trade liberalization <pause dur="0.6"/> # greater competition <pause dur="0.6"/> mm <pause dur="1.1"/>

to the extent <pause dur="0.2"/> that imports <pause dur="1.0"/> compete with domestic production we're back to that argument again <pause dur="0.6"/> the elasticity of substitution between domestic production <pause dur="0.3"/> and imports <pause dur="0.6"/> if that's small <pause dur="0.4"/> then <pause dur="0.7"/> that argument's not terribly important <pause dur="1.4"/> # <pause dur="1.2"/> but it's still going to <trunc>e</trunc> <pause dur="0.2"/> exist <pause dur="0.5"/> a wider choice of goods <pause dur="0.4"/> okay previously you'd all sorts of barriers to trade <pause dur="0.8"/> i mean <pause dur="0.6"/> many developing countries in the past anyway <pause dur="0.7"/> simply prohibited a whole range of imported goods <pause dur="0.4"/> so as to conserve foreign exchange <pause dur="0.4"/> for so-called essentials <pause dur="0.5"/> mm <pause dur="0.7"/> # <pause dur="0.3"/> free trade <pause dur="0.5"/> widens choice <pause dur="0.3"/> that's a

a welfare gain in itself <pause dur="2.0"/> increase in foreign direct investment <pause dur="0.2"/> people particularly emphasize this gain here <pause dur="1.1"/> and <pause dur="0.6"/> # <pause dur="1.7"/> the two terms here investment creation <pause dur="0.4"/> and investment deflection <pause dur="1.9"/> # <pause dur="9.7"/> investment creation somebody tell me about that </u><pause dur="2.3"/> <u who="sm1135" trans="pause"> # <pause dur="0.7"/> it's like </u><gap reason="break in recording" extent="uncertain"/> <u who="sm1135" trans="pause"> the share of the market <pause dur="1.8"/> <gap reason="inaudible" extent="13 secs"/></u><pause dur="1.8"/> <u who="nm1128" trans="pause"> right <pause dur="0.2"/> okay <pause dur="0.5"/> so we've got two <pause dur="0.2"/> forces working just like the trade aspect <pause dur="0.5"/> okay <pause dur="1.1"/> first of all let's again go back to our agreement between E-U and Morocco <pause dur="0.4"/> mm <pause dur="0.8"/> now # # previously we had barriers to trade between the two countries <pause dur="0.7"/> # <pause dur="0.8"/> let let's assume that was the case <pause dur="1.0"/> # <pause dur="0.2"/> now we've a situation where there's no barriers to trade at all <pause dur="1.8"/> a producer of say clothing in France <pause dur="1.3"/> where labour costs are high <pause dur="0.8"/> mm <pause dur="1.2"/> can now close down that factory <pause dur="0.8"/> relocate it in Morocco <pause dur="0.3"/> where labour costs are much lower <pause dur="1.9"/> # and then export <pause dur="0.5"/> # the output back into France again <pause dur="1.6"/> so that the <pause dur="0.8"/> # the <trunc>manufact</trunc> the the the clothing manufacturer <pause dur="0.5"/> can now serve the domestic market in France <pause dur="0.4"/> much more cheaply than they could before <pause dur="0.9"/> # <pause dur="0.2"/> as a result of the

preferential trade agreement <pause dur="1.0"/> mm <pause dur="1.2"/> so <pause dur="0.4"/> # that's one gain from the free trade agreement <pause dur="1.2"/> yeah </u><u who="sm1135" trans="latching"> so the <pause dur="0.3"/> <vocal desc="cough" iterated="n"/> there would be in # <trunc>inves</trunc> investment diversion from the <pause dur="1.7"/> <gap reason="inaudible" extent="1 word"/></u><u who="nm1128" trans="overlap"> in the sense of </u><pause dur="0.3"/> <u who="sm1135" trans="pause"> in the sense of <pause dur="0.2"/> maybe # <pause dur="0.6"/> an investor will move # <pause dur="0.5"/> <gap reason="inaudible" extent="8 secs"/> and then the export <gap reason="inaudible" extent="3 secs"/></u><pause dur="0.2"/> <u who="nm1128" trans="pause"> yes that was the case i was i was i was going though just now </u><u who="sm1136" trans="overlap"> <gap reason="inaudible" extent="6 secs"/></u><pause dur="0.6"/> <u who="nm1128" trans="pause"> well it's <trunc>i</trunc> # # it's normally called <trunc>in</trunc> <pause dur="0.2"/> <trunc>in</trunc> <pause dur="0.2"/> investment deflection <pause dur="0.3"/> that one </u><u who="sm1136" trans="latching"> <gap reason="inaudible" extent="1 word"/></u><u who="nm1128" trans="overlap"> okay <pause dur="0.7"/> # but it's it's a bit i mean it depends which as you say which <trunc>wh</trunc> which standpoint you view it from <pause dur="0.8"/> # but if you're viewing it from the E-U point of view <pause dur="0.4"/> it's investment deflection <pause dur="0.8"/> okay <pause dur="1.5"/> # <pause dur="0.6"/> in the case of the <pause dur="0.6"/> # say <pause dur="0.2"/> the United States <pause dur="0.2"/> okay <pause dur="0.6"/> that was <pause dur="0.3"/> previously <pause dur="1.2"/> selling goods in the <pause dur="0.2"/> you know that that was exporting goods <pause dur="0.3"/> to Morocco <pause dur="0.3"/> mm <pause dur="1.0"/> but now a trade diversion against it <pause dur="0.6"/> okay <pause dur="0.9"/> it may wish to retain its market share <pause dur="0.4"/> in Morocco <pause dur="0.9"/> okay <pause dur="0.3"/> in which case it replaces its exports <pause dur="0.4"/> by investment <pause dur="0.5"/> in <pause dur="0.4"/> a plant <pause dur="0.5"/> which will <pause dur="0.3"/> produce <pause dur="0.2"/> the goods previously exported <pause dur="0.5"/> and that's called investment creation <pause dur="0.8"/> right it's called <pause dur="0.3"/> <trunc>i</trunc> it's the creation of

investment because investment <pause dur="0.4"/> is taking the place <pause dur="0.4"/> of exports <pause dur="0.4"/> as a way of servicing the market <pause dur="6.1"/> so <pause dur="0.3"/> yeah </u><pause dur="0.3"/> <u who="sf1137" trans="pause"> <gap reason="inaudible" extent="13 secs"/></u><pause dur="0.6"/> <u who="nm1128" trans="pause"> yes previously i mean let's say they were selling say agricultural machinery to Morocco <pause dur="0.5"/> and they were exporting that from the U-S to Morocco <pause dur="0.9"/> now because <pause dur="0.5"/> of <pause dur="0.2"/> <trunc>o</trunc> of trade diversion <pause dur="1.0"/> <trunc>the</trunc> <trunc>the</trunc> they they've lost the market <pause dur="0.7"/> the market was big enough <pause dur="1.1"/> then they might say we want to retain our market share <pause dur="0.5"/> by jumping <pause dur="0.2"/> the tariff wall <pause dur="0.6"/> in in Morocco if there's still place for it <pause dur="0.6"/> and setting up an assembly plant for <pause dur="0.5"/> the combine harvesters the tractors <pause dur="0.3"/> in in Morocco <pause dur="0.4"/> and in <trunc>s</trunc> and and and <pause dur="0.2"/> and continuing <pause dur="0.7"/> to retain its market share </u><pause dur="1.6"/> <u who="sf1137" trans="pause"> <gap reason="inaudible" extent="4 secs"/></u><u who="nm1128" trans="overlap"> right </u><u who="sf1137" trans="overlap"> <gap reason="inaudible" extent="3 secs"/> </u><u who="nm1128" trans="overlap"> <trunc>i</trunc> <pause dur="0.6"/> <trunc>i</trunc> <pause dur="0.4"/> <trunc>i</trunc> <pause dur="1.1"/> investment deflection <pause dur="0.3"/> yeah </u><u who="sf1137" trans="overlap"> invest deflection </u><u who="nm1128" trans="latching"> yeah investment deflection is France <pause dur="0.8"/> # <pause dur="0.5"/> closing down a factory in France <pause dur="0.4"/> and setting up a clothing factory in Morocco <pause dur="0.7"/> it's deflecting investment <pause dur="0.4"/> from investment in the home country <pause dur="0.3"/> to <pause dur="0.2"/> investment <pause dur="0.5"/> in in Morocco </u><pause dur="1.4"/> <u who="sf1137" trans="pause">

other word for deflection <gap reason="inaudible" extent="3 secs"/></u><pause dur="0.3"/> <u who="nm1128" trans="pause"> these are the <pause dur="0.3"/> technical terms that are used in the literature </u><pause dur="0.2"/> <u who="sm1135" trans="pause"> de-investment <gap reason="inaudible" extent="1 word"/> </u><u who="nm1128" trans="latching"> sorry </u><pause dur="0.2"/> <u who="sm1135" trans="pause"> de-investment </u><pause dur="1.4"/> <u who="nm1128" trans="pause"> yes i mean <trunc>i</trunc> <pause dur="0.2"/> it's <trunc>ca</trunc> it's called deflection <pause dur="0.6"/> because <pause dur="0.4"/> it's simply <trunc>in</trunc> <trunc>in</trunc> investment taking place in a different geographical location <pause dur="0.6"/> mm <pause dur="0.6"/> but the total amount of investment hasn't increased <pause dur="0.7"/> all right <pause dur="0.4"/> it's just been deflected <pause dur="0.3"/> to a different geographical location <pause dur="0.4"/> hence the word deflection <pause dur="1.0"/> <vocal desc="laughter" iterated="y" dur="1"/> <pause dur="0.3"/> not a not that <pause dur="0.6"/> i mean if you can imagine sort of investment flowing <pause dur="0.3"/> in into France <pause dur="0.4"/> over the years <pause dur="0.5"/> then the preferential trade agreement's signed <pause dur="0.6"/> and it's closed off there and it's deflected off down towards Morocco <pause dur="0.5"/> okay <pause dur="1.4"/> that's <pause dur="0.3"/> whereas the other case is creation of investment that didn't exist before <pause dur="0.5"/> okay <pause dur="0.3"/> you're not closing anything down in the United States necessarily <pause dur="0.3"/> i mean they'll probably sell the factory somewhere else <pause dur="0.7"/> what you're doing is <pause dur="0.5"/> <trunc>in</trunc> instead of servicing the market through exports <pause dur="1.0"/> you now

service it through investment <pause dur="0.2"/> in a production facility <pause dur="0.7"/> so it's <trunc>i</trunc> it's creation of investment <pause dur="0.3"/> that didn't exist before </u><pause dur="0.9"/> <u who="sf1137" trans="pause"> but it is the U-S would have to look what to do with <gap reason="inaudible" extent="1 sec"/></u><u who="nm1128" trans="latching"> yes but we don't ask that question <pause dur="0.2"/> that's right <vocal desc="laughter" iterated="y" dur="2"/> <pause dur="1.3"/> 'cause that's the rest of the world <pause dur="0.5"/> and the rest of the world's very big <pause dur="0.6"/> all right <pause dur="0.8"/> # and Morocco's very small <pause dur="0.4"/> so we needn't bother about that question that's all we're saying <pause dur="4.3"/> so <pause dur="0.5"/> # <pause dur="0.4"/><event desc="drops paper" iterated="n"/> whoops <pause dur="3.7"/><event desc="picks up paper" iterated="n"/> the the the first case <pause dur="0.2"/> # <trunc>we</trunc> well i mentioned here anyway the the the investment deflection <pause dur="0.2"/> can be quite important i i <pause dur="0.2"/> didn't pick clothing by accident <pause dur="0.6"/> # <pause dur="0.2"/> 'cause it's the one in which you very often see this <pause dur="0.4"/> # <pause dur="1.3"/> where <pause dur="0.4"/> # <pause dur="0.6"/> particularly the the labour intensive stages <pause dur="0.3"/> of the production process <pause dur="0.6"/> could often be <pause dur="0.2"/> relocated <pause dur="0.8"/> from <pause dur="0.3"/> the industrialized country <pause dur="0.2"/> to the developing country <pause dur="0.4"/> that's what the U-S is doing in Jamaica <pause dur="0.2"/> talked about the Caribbean Basin Initiative agreement <pause dur="0.7"/> # <pause dur="0.2"/> this is what France indeed has done in Morocco all right <pause dur="0.5"/> and that is what Egypt is hoping will happen <pause dur="0.4"/> # if it signs a free

trade agreement <pause dur="0.4"/> # with the E-U <pause dur="0.4"/> that there'll be this outward processing <pause dur="0.8"/> # will take place on quite a large scale <pause dur="1.0"/> whether that's beneficial or not for the country is another question <pause dur="0.2"/> we talked about that under on direct investment <pause dur="0.6"/> but that would be a clear case of investment deflection mm <pause dur="0.5"/> investment creation would be the U-S <pause dur="0.3"/> coming in to Egypt <pause dur="0.4"/> because <pause dur="0.5"/> they # they're they're losing their market <pause dur="0.3"/> and it's a big market for the U-S <pause dur="0.4"/> yeah </u><u who="sm1132" trans="latching"> just one question <pause dur="0.5"/> say you're a policy maker in Morocco or in <pause dur="0.3"/> the Caribbean <pause dur="0.8"/> and # <pause dur="0.6"/> you've done your analysis you've looked at the gains you have <pause dur="0.8"/> and <gap reason="inaudible" extent="1 sec"/> of free trade agreements <gap reason="inaudible" extent="1 sec"/> well i've got on one side # <pause dur="0.7"/> # <pause dur="0.3"/> trade creation <pause dur="0.6"/> the other hand i've got <pause dur="0.6"/> trade diversion <pause dur="0.3"/> but i also have dynamic # <pause dur="0.6"/> dynamic gains along with that </u> <u who="nm1128" trans="overlap"> right </u><u who="sm1132" trans="overlap"> <pause dur="0.5"/> # i mean <pause dur="0.5"/> you have nothing to measure you have <gap reason="inaudible" extent="2 secs"/> <vocal desc="laughter" n="nm1128" iterated="y" dur="1"/> </u><u who="nm1128" trans="overlap"> no that's right </u><u who="sm1132" trans="overlap"> you know <pause dur="0.3"/> how do you how do you decide <gap reason="inaudible" extent="2 words"/> this case and it's very difficult </u><u who="nm1128" trans="latching"> yeah </u><u who="sm1132" trans="overlap"> it's a very difficult choice </u><u who="nm1128" trans="overlap"> # </u><u who="sm1132" trans="overlap"> <pause dur="0.5"/> to make </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> yeah i mean you just have to in the end you have to trust your judgement <pause dur="0.7"/> # <pause dur="0.5"/> all you can do however is analyse the situation <pause dur="0.3"/> okay <pause dur="0.2"/> and what this does is provide you with a framework of saying <pause dur="1.6"/> are these things going to be important <pause dur="0.2"/> okay let's go back to the Morocco case <pause dur="0.3"/> all right <pause dur="1.1"/> # Morocco actually had <pause dur="0.3"/> already had preferences with the E-U <pause dur="0.4"/> okay <pause dur="1.0"/> so <pause dur="0.4"/> at the stimulating an effects on its exports <pause dur="0.2"/> were zero <pause dur="1.2"/>

okay <pause dur="0.6"/> because they already had preferential access under a bilateral agreement <pause dur="0.5"/> so Morocco could say <pause dur="1.1"/> forget that <pause dur="0.5"/> economies of scale <pause dur="0.4"/> okay <pause dur="0.7"/> because we've <pause dur="0.2"/> we <pause dur="0.3"/> we reaped those in the past <pause dur="0.2"/> all right <pause dur="0.3"/> # # and we're not being given any more preferences <pause dur="0.8"/> greater competition <pause dur="0.7"/> # <pause dur="0.7"/> well <pause dur="0.9"/> the goods that we import from E-U <pause dur="1.0"/> compete to a limited extent with domestic production but not a lot <pause dur="1.0"/> so that's not going to be great <pause dur="1.1"/> wider choice of goods <pause dur="0.4"/> similar sort of argument <pause dur="0.7"/> # maybe a little bit more than we did before <pause dur="0.6"/> because we had but we're already dismantling barriers to trade anyway <pause dur="0.3"/> you know <pause dur="0.9"/> # so that's not going to be great <pause dur="0.3"/> increased foreign direct investment <pause dur="0.6"/> # <pause dur="1.0"/> well <pause dur="0.7"/> what's changed you know <pause dur="0.3"/> # <pause dur="0.6"/> the only thing that's changed that may be important <pause dur="0.4"/> is <pause dur="0.4"/> that <pause dur="0.2"/> my tariffs on importing goods setting up a production facility in Morocco <pause dur="0.6"/> # <pause dur="0.6"/> the # # <trunc>i</trunc> <trunc>i</trunc> # it's certainly <trunc>i</trunc> <pause dur="0.2"/> it's more profitable to set up a production facility in Morocco than it was before <pause dur="0.7"/> if a French <pause dur="0.5"/> # clothing manufacturer was setting

up a factory <pause dur="0.3"/> in Morocco <pause dur="0.4"/> all the machinery <pause dur="0.4"/> and the intermediate goods would have to pay duty <pause dur="0.7"/> previously <pause dur="0.6"/> # <pause dur="0.2"/> but <pause dur="0.4"/> # they <pause dur="0.2"/> they no longer have to do so <pause dur="0.9"/> # <pause dur="0.6"/> but the duties usually are not terribly high on these products <pause dur="0.2"/> in developing countries it's consumer goods that carry the very high tariffs <pause dur="0.8"/> i mean it may be tariffs of <pause dur="0.4"/> you know ten per cent or so so it might make a difference <pause dur="0.6"/> # but not a <pause dur="0.3"/> a dramatic amount <pause dur="0.9"/> and am i going to get investment from the rest of the world <pause dur="1.6"/> i'm a tiny little market <pause dur="0.2"/> right <pause dur="0.7"/> if this is Brazil that's signing an agreement <pause dur="0.5"/> okay <pause dur="0.5"/> then sure <pause dur="0.2"/> i mean as soon as as <pause dur="0.2"/> # as the Mercasor agreement was signed <pause dur="0.2"/> American investment poured in <pause dur="0.7"/> # to retain market share <pause dur="0.2"/> very big market <pause dur="0.7"/> Brazil # <trunc>b</trunc> <trunc>t</trunc> # # # # Morocco <pause dur="0.5"/> what's its population did we say </u><pause dur="1.1"/> <u who="sm1133" trans="pause"> <gap reason="inaudible" extent="1 sec"/> </u><u who="nm1128" trans="overlap"> sorry </u><pause dur="1.4"/> <u who="sm1133" trans="pause"> <gap reason="inaudible" extent="2 secs"/> </u><pause dur="0.3"/> <u who="nm1128" trans="pause"> is it as much as that </u><u who="sm1132" trans="latching"> i don't think it's that much </u><u who="sm1133" trans="latching"> <gap reason="inaudible" extent="1 sec"/> </u><u who="sm1132" trans="latching"> it's even less than that </u><u who="nm1128" trans="overlap"> mm yes <pause dur="0.2"/> it's pretty small </u><u who="sm1133" trans="overlap"> <gap reason="inaudible" extent="1 sec"/> </u><u who="nm1128" trans="overlap"> and and Tunisia's

what about twelve-million </u><pause dur="0.5"/> <u who="sm1135" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.3"/> <u who="nm1128" trans="pause"> yeah <pause dur="1.6"/> yeah <pause dur="0.2"/> yeah <pause dur="0.5"/> so we've we've got a small <pause dur="0.2"/> # a small market <pause dur="0.2"/> so <pause dur="0.2"/> <trunc>thi</trunc> this is the way you'd go through it <pause dur="0.4"/> yeah </u><u who="sm1135" trans="latching"> <gap reason="inaudible" extent="15 secs"/></u><pause dur="0.8"/> <u who="nm1128" trans="pause"> right </u><u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.7"/> <u who="nm1128" trans="pause"> yes if you </u><u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="5 secs"/></u><u who="nm1128" trans="overlap"> mm </u><u who="sm1135" trans="overlap"> the # access to # <pause dur="0.5"/> Moroccan or Egyptian market </u><u who="nm1128" trans="latching"> mm </u><u who="sm1135" trans="overlap"> <gap reason="inaudible" extent="8 secs"/> </u><pause dur="1.2"/> <u who="nm1128" trans="pause"> that's right <pause dur="0.9"/> so <trunc>y</trunc> but you you have to i mean going through the point <trunc>y</trunc> <trunc>y</trunc> <trunc>d</trunc> you already had preferential access before <pause dur="0.5"/> so you ask the question how much has it increased <pause dur="0.5"/> all right </u><u who="sm1135" trans="latching"> yeah potential <gap reason="inaudible" extent="1 word"/></u><u who="nm1128" trans="latching"> yeah <pause dur="0.6"/> now one key thing though is that <pause dur="0.6"/> you you may have had preferences before but they were unilateral preferences <pause dur="0.5"/> a free trade agreement <pause dur="0.4"/> is <pause dur="0.3"/> a a binding agreement <pause dur="0.2"/> mm a legally binding agreement <pause dur="0.2"/> of indefinite duration <pause dur="0.9"/> and that might give the investors <pause dur="0.2"/> greater confidence <pause dur="0.4"/> than they had under the previous thing <pause dur="0.6"/> so that might be a big plus <pause dur="0.3"/> and these are the questions i mean what this does is provide a framework <pause dur="0.4"/> for asking a whole series of questions <pause dur="0.9"/> that's i can forget about that

one that's not going to be terribly big <pause dur="0.3"/> that's going to be small <pause dur="0.7"/> this one might be big it might not <pause dur="0.2"/> we have to look at that more carefully <pause dur="0.4"/> and that's what it does <pause dur="0.4"/> and then at the end of the day <pause dur="0.4"/> you make a judgement <pause dur="2.9"/> but the big question too is all of these things i've mentioned here <pause dur="0.3"/> you could get from unilateral trade liberalization <pause dur="0.5"/> at least a lot of it anyway <pause dur="0.4"/> mm <pause dur="1.0"/> # i mean you wouldn't <trunc>nes</trunc> i mean you wouldn't get the so much the investment creation investment deflection effects that wouldn't tell us very much <gap reason="inaudible" extent="1 word"/> <pause dur="0.7"/> but the other ones economies of scale greater competition <pause dur="0.5"/> wider choice of goods <pause dur="0.7"/> # <pause dur="1.0"/> we'd all <pause dur="0.4"/> i would all get if i simply lowered my barriers to trade with the world as a whole <pause dur="1.1"/> and there'd be no trade diversion cost <pause dur="0.9"/> mm <pause dur="5.7"/> so again we come back and think why the hell did <shift feature="voice" new="laugh"/> we sign the agreement <shift feature="voice" new="normal"/> right <pause dur="0.8"/> # <pause dur="0.6"/> okay <pause dur="0.2"/> there might be this <pause dur="0.2"/> # investment creation investment deflection effects to the extent that they're important <pause dur="1.0"/> # <pause dur="0.2"/> as i say <pause dur="0.4"/> i would <pause dur="0.7"/>

think fundamentally that depends how big an economy you are <pause dur="0.6"/> mm <pause dur="0.9"/> if you're a small economy i wouldn't expect it to be terribly great <pause dur="0.7"/> may be wrong <pause dur="0.8"/> # Mauritius might be an example where it was quite substantial <pause dur="0.5"/> mm <pause dur="0.7"/> # where <pause dur="0.4"/> you know it's it's the <pause dur="0.2"/> third largest exporter of woollen clothes in the world <pause dur="0.6"/> and it's a tiny little island <pause dur="0.8"/> and that's <pause dur="0.2"/> largely because of preferences <pause dur="0.5"/> so <pause dur="0.7"/> yeah we got to be careful with that one <pause dur="0.4"/> <trunc>i</trunc> <trunc>i</trunc> it could be important <pause dur="1.1"/> # <pause dur="1.6"/> but # <pause dur="0.9"/> so so maybe that's important but <pause dur="0.2"/> in terms of stimulating foreign direct investment because <pause dur="0.3"/> duties on imports of capital goods and intermediate goods have come down <pause dur="0.4"/> well <pause dur="0.2"/> liberalize to the world as a whole <pause dur="0.4"/> mm <pause dur="0.5"/> so investors can then buy <pause dur="0.8"/> capital goods and intermediate goods at world prices <pause dur="1.1"/> mm not simply <pause dur="0.5"/> # at whatever price <pause dur="0.3"/> the E-U exporter <pause dur="0.2"/> sells them to you <pause dur="1.2"/> so we still got <pause dur="0.8"/> really we still haven't really answered the question <pause dur="1.1"/> why sign the agreement <pause dur="0.5"/> we've got the gains from trade <pause dur="1.0"/> but why not just get

those <pause dur="0.4"/> on a non-discriminatory basis through unilateral trade liberalization <pause dur="0.5"/> why do it in a in a discriminatory way <pause dur="1.0"/> we've still got that puzzle <pause dur="1.4"/> well <pause dur="0.9"/> # <pause dur="0.6"/> next week i'll go through some new thinking <pause dur="0.5"/> and # <pause dur="0.2"/> to explain <pause dur="0.6"/> why some of the what those gains might be <pause dur="0.8"/> i've hinted at one of them already <pause dur="0.8"/> that is in an uncertain world <pause dur="1.1"/> binding yourself in to a free trade agreement <pause dur="0.4"/> provides you with a bit more certainty <pause dur="1.3"/> so if i engage in unilateral trade liberalization <pause dur="0.7"/> and it's or <pause dur="0.2"/> maybe with other countries <pause dur="0.6"/> # negotiate reciprocal tariff reductions in the W-T-O <pause dur="0.9"/> # there's always the danger <pause dur="0.5"/> of going back to the nineteen-thirties <pause dur="0.4"/> all right there's always <pause dur="0.2"/> the W-T-O <pause dur="0.4"/> has been weakened <pause dur="0.2"/> by the Seattle <pause dur="0.7"/> # situation that we've talked about before okay <pause dur="0.5"/> maybe it's not quite such a strong organization that we thought it was <pause dur="0.6"/> okay <pause dur="0.5"/> maybe if there was serious unemployment in the industrialized countries <pause dur="0.4"/> the whole agreement would just be torn up <pause dur="0.6"/> and we'd be back to the <pause dur="0.5"/> # # discrimination and <pause dur="0.5"/> # barriers to trade

of the nineteen-thirties <pause dur="0.2"/> you know that's not improbable <pause dur="1.6"/> but if i lock myself in to the E-U or to United States through a free trade agreement <pause dur="0.6"/> maybe that gives me a bit more certainty <pause dur="0.8"/> okay it's a <trunc>i</trunc> it's a <pause dur="0.2"/> it's a legally binding agreement <pause dur="0.8"/> you'd build up institutional arrangements which link you in with the other country <pause dur="0.7"/> so when push comes to shove <pause dur="0.4"/> all right <pause dur="0.5"/> if we if we did have a bit of a recession in the <trunc>u</trunc> in the E-U or <pause dur="0.2"/> or United States <pause dur="0.5"/> they'll discriminate against other people <pause dur="0.9"/> # <pause dur="0.2"/> not against me at least not in the first instance <pause dur="0.8"/> all right <pause dur="0.7"/> so <pause dur="0.2"/> bit more certainty then perhaps <pause dur="0.4"/> yeah </u><u who="sm1132" trans="overlap"> <gap reason="inaudible" extent="3 secs"/> </u><u who="nm1128" trans="overlap"> well it <pause dur="0.6"/> yeah i mean in the case of Eastern European <pause dur="0.2"/> agreements <pause dur="0.2"/> it's heavily political <pause dur="0.3"/> all right you're trying to reinforce <pause dur="0.4"/> the overthrow of communism <pause dur="0.4"/> # democratic governments as long as

they're not communist governments <pause dur="0.4"/> # and so on <pause dur="0.7"/> that's right <pause dur="0.2"/> so i mean that was a heavy political element in that one <pause dur="0.5"/> that was the top of the of the agenda <pause dur="0.6"/> and the E-U was willing to pay quite a high price <pause dur="0.5"/> to maintain that <pause dur="1.3"/> with the other <trunc>dev</trunc> <trunc>o</trunc> other developing countries <pause dur="0.6"/> not really willing to pay a price <pause dur="0.4"/> and that in a sense is part of the of of also of the puzzle <pause dur="0.6"/> the developing countries in effect i mean from what we've said <pause dur="0.4"/> have to pay quite a high price <pause dur="0.8"/> upfront right at the beginning <pause dur="0.6"/> for these agreements <pause dur="0.6"/> okay that's the welfare loss <pause dur="0.5"/> there's the rising unemployment as industries close down that are competing with imports from the E-U <pause dur="0.4"/> there's the loss of government revenue <pause dur="0.5"/> you know there's a lot of upfront costs <pause dur="0.3"/> for the developing country <pause dur="1.1"/> from the agreement <pause dur="0.8"/> really not much

cost <pause dur="0.6"/> for the industrialized country <pause dur="0.5"/> mm <pause dur="1.0"/> so why do they sign <pause dur="0.6"/> why do developing countries sign these agreements with industrialized countries <pause dur="0.7"/> hinted at one of them <pause dur="0.4"/> and that's that's increased certainty i think that figures quite prominently <pause dur="0.8"/> but there's other <pause dur="0.3"/> aspects as well <pause dur="0.3"/> that we'll talk about next week <pause dur="0.5"/> to do with <pause dur="0.4"/> timing consistency problems signalling <pause dur="0.4"/> all sorts of other things that we <pause dur="0.4"/> talk about <pause dur="2.7"/> any final points <pause dur="2.1"/> okay <pause dur="0.5"/> well i'll carry on doing the theory and then we'll <pause dur="0.9"/> talk a bit more about actual agreements next week <pause dur="0.7"/> and then we'll get on to talk about article twenty-four <pause dur="0.4"/> and # <pause dur="0.2"/> how it <pause dur="0.3"/> <trunc>i</trunc> its weaknesses <pause dur="0.6"/> and how <pause dur="0.2"/> it needs to be reformed <pause dur="0.5"/> hopefully in a <pause dur="0.2"/> Seattle type row whatever it's going to be called <pause dur="0.4"/> <vocal desc="laugh" iterated="n"/> <pause dur="1.5"/> thank you