sealPurdue News

February 2001

International trade: It's not all about barriers, tariffs and taxes

WEST LAFAYETTE, Ind. – As inevitable as globalism seems to be, the shift toward intangible, high-technology products has made reaching international trade agreements more difficult than ever before, according to a Purdue University economist.

David Hummels

"Viewing world trade through the narrow focus of tariffs and taxes misses the point," says David Hummels, a Krannert School assistant professor of economics. At least as important is what he terms "deep integration."

Deep integration means harmonizing differences in product and environmental standards between and among nations. These differences do not just exist between the United States and China or other developing nations, Hummels says. "The U.S. and Europe have major differences."

In a simple trade example, the United States may export grain to Europe and import BMWs from Germany without violating either country's product standards. But what if that grain becomes genetically modified? And what if the BMWs don't pass California's pollution control standards?

"The question is whether different views of products, production or environmental standards are legitimate health and safety issues or a mask for protectionism," Hummels says. "These disagreements can be intractable. It is much easier to tell countries what they can do at their borders than within national boundaries."

Seldom are the contentious issues black and white. "Nations arrive at differences for very good reasons," Hummels says.

For example, in the case of genetically modified crops, the United States officials say the crops are safe until it can be proved otherwise, and European officials say genetic modification is unsafe until proved otherwise.

Hummels says another important topic often left out of discussions about international trade is investment liberalization. "If a company wants to locate in India, there could be restrictions in terms of a required license," Hummels says. "And non-native owners might not be allowed to hold a majority stake."

These are major disincentives for healthy international business relations, Hummels says.

These problems can be partly resolved through a "national treatment rule" for investment liberalization, which means that countries should treat foreign firms exactly as they do domestic firms, Hummels says. But as with so much of the increasingly complex world of international trade, absolute investment liberalization is an ideal that can only be approached and not completely achieved.

The concept of intellectual property is bound up with investment liberalization because a company has to decide whether opening a new market is worth the risk of its products being stolen and then marketed elsewhere. The most cited example of intellectual capital problems is China's lack of respect for copyrighted computer software.

"How far to go in protecting intellectual property is difficult to know," Hummels says. "Protecting ideas stimulates innovation, but at some point strict intellectual property statutes stifle innovation."

So, for example, in a broad interpretation of intellectual property, there have been efforts by companies recently in patenting business methods. This means that if Company A patents how it markets its online investment consulting, Company B could not sell its widgets in the same, or, perhaps, even in a similar way.

Intellectual property's importance is increasing because products today embody more ideas, Hummels says.

A contemporary office chair is a good example of a product that contains a great deal of information: structural and ergonomic design, stain-resistant material, molded plastic, synthetic padding, etc. Functionally, a tree stump does the same thing a chair does, but the stump doesn't embody as many ideas and information.

Hummels says this information content of goods, such as the chair, will continue to increase over time, so dealing with intellectual property consistently on an international basis will become even more important in the future.

Finally, if the goal is free and unfettered trade, there are two basic views.

"The first is that you negotiate as much as you can until you reach fundamental disagreement and accept the amount of integration you have achieved," Hummels says.

"The second is that trade integration is like riding a bicycle – if you stop pedaling, you fall. The danger is not that we fail to reach full integration but, rather, if we stop negotiating, we lose the mutually beneficial agreements that are already in place."

Source: David Hummels, (765) 494-4495,

Writer: J. Michael Lillich, (765) 494-2077,

Purdue News Service: (765) 494-2096;

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