Trade Regulations and Industrial Policies Chapter 6 Copyright

Trade Regulations and Industrial Policies Chapter 6 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

U. S. Tariff Policy Before 1930 o originally revenue generators until the economy developed alternate revenue sources o Hamilton argued for protection based on infant industries o increase in tariff rates during Civil War and World War I

Smoot-Hawley Act o high point of U. S. protectionism - 1930 o caused retaliation by U. S. trading partners o currency depreciations also used to limit imports o decrease in world trade led to further economic decline o world trade in millions of dollars

Reciprocal Trade Agreements Act o trade liberalization legislation o presidential authority to negotiate bilateral tariff reduction if reciprocal in nature o most favored nation clause – agreement by two nations to maintain tariffs to each other as low as those applied to any other nation o now called normal trade relations o two exceptions – preferential tariffs on: 1) imports from developing nations 2) imports from nations that are members of the same free trade area

General Agreement on Tariffs & Trade o GATT - 1947 set of bilateral agreements to reduce trade barriers o originally not intended as an organization o 1995 World Trade Organization replaced GATT o basic principles: 1) nondiscrimination – normal trade relations or most favored nation principle 2) national treatment – treat industries from other nations 3) public good – results of negotiations by one nation available to all nations

GATT Negotiating Rounds

World Trade Organization o 1995 – Uruguay Round took effect - GATT – was transformed into the World Trade Organization (WTO) o headquartered in Geneva o international organization with 151 members o multilateral trading system including trade in services, intellectual property and investment o dispute settlement: dispute panel with established time limits and appellate body – accused party unable to block final decision

WTO & National Sovereignty o critics: WTO dispute settlement effectively supersedes decisions by U. S. government o counterargument: WTO findings cannot force the U. S. to change its laws o U. S. may choose to change its laws, compensate foreign countries, or do nothing & live with repercussions from other nations o economists: benefits of membership, namely normal trade relations with all members, compared with the costs

Retaliatory Tariffs as WTO Enforcement o The dispute-settlement system favors large nations because retaliatory tariffs might different impact on different nations. o o If a small nation imposes a retaliatory tariff, the result will be a decrease in national welfare. (Chapter 4) If a large nation imposes a retaliatory tariff, demand price throughout the world may change making imports less expensive improving the terms of trade ratio for the large nation. o Purpose of WTO is supposedly to reduce trade barriers not increase them; monetary fines would be a more suitable penalty.

WTO & the Environment Critics: o race to the bottom – lower environmental standards to the level of foreign competition o developing nations might value increased output and employment more than environmental quality Counterarguments: o trade stimulates economic growth increasing demand for a clean environment o trade encourages dissemination of information which can be used to protect the environment

Failed Negotiations o 1998 Seattle negotiations on farm subsidies, service trade, textile tariffs and manufacturing fell apart because of disagreements between developing nations and industrialized nations. o Doha development agenda failed to produce substantial changes as a result of broken promises and unwillingness to negotiate.

Trade Promotion Authority o also know as fast-track authority o president notifies Congress of intent to enter trade negotiations o Congress has 60 legislative days to permit or deny fast track authority o upon approval, the results of the president’s negotiations are subject to an up-or-down vote without possibility for amendment o instrumental in Uruguay Round Agreements of 1994 and the North American Free Trade Agreement of 1993

Escape Clause o definition - temporary relief to U. S. firms and workers injured by increases in imports that are fairly traded o president can terminate trade concession or levy trade restrictions o common forms: tariff increases, tariff-rate quotas, trade adjustment assistance o can be enacted for 4 years and extended for another 4 years o example: Multifiber Arrangement – system to restrict textile imports from developing countries

Countervailing Duties o definition – tariff imposed in retaliation against export subsidies foreign competition o U. S. Department of Commerce investigates claim o temporary tariff applied if the preliminary investigation finds reasonable indication of export subsidy o permanent tariff imposed if both Commerce Department and International Trade Commission determine export subsidy exists o duty removed when foreign exports subsidies are eliminated

Antidumping Duties o definition – tariff levied against a foreign producer: 1) whose prices on exports to U. S. are below average total cost of production 2) or who sells to the U. S. market at lower price than in home market o must include evidence of dumping, material injury, and link between imports and injury o economists support antidumping laws that address predatory pricing

Remedies Against Dumping o product dumping or subsidies will lower prices in various industries increasing consumer surplus o a tariff equal to the margin of dumping reverses trend raising prices to the original level under a fair trade scenario imports

Unfair Trading Practices o definition – actions by other countries that hinder U. S. exports o could include trade restrictions or foreign subsidies o authority established by Section 301 of the Trade Act of 1974 o negotiated by U. S. trade representative subject to approval of the president o retaliatory tariffs or import restrictions as ultimate sanction o intent is to resolve through negotiations

Intellectual Property Rights o intellectual property – invention, idea, product or process registered with government awarding the inventor exclusive right to use o copyright – protects work of original authorship o trademark – provides exclusive right to name or symbol o patents – gives inventor exclusive right to make, use and sell the invention o lack of effective international protection of IPRs problematic when cost of copying is less than cost of purchasing or leasing

Trade Adjustment Assistance o free-trade and comparative advantage arguments indicate that resources shift to more productive activities from less productive o trade adjustment assistance – provide assistance to those incurring hardships due to trade liberalization o benefits include extended unemployment, job training, and relocation and job search allowances o critics: programs do not resolve issues of unskilled workers and assist only displaced workers in manufacturing not service positions

U. S. Industrial Policy o macroeconomic policies toward stability and growth of GDP o agricultural policy including disseminating information and providing infrastructure o largest purchasers of military goods stimulates defense industry o assistance to manufacturers in general o export subsidies in the form of low cost credit promotion through U. S. Export Import Bank o Health Coverage Tax Credit program covers 65% of premiums for displaced workers

Strategic Trade Policy o based on assumption that government can help domestic producers capture profits from foreign competitors o implies government support for industries important to future economic growth o assumes imperfect competition in which trading industries are dominated by a few large companies o example: aircraft industry with Boeing (U. S. ) and Airbus (EU) o advocates argue that free trade theory based on an assumption of perfect competition is flawed

Strategic Trade Policy o without EU subsidy results are unclear o subsidy => produce is dominant strategy for Airbus [5 better than 0 and 110 better than 0] o Boeing forced into not producing [0 better than -5]

Economic Sanctions o definition - trade restrictions used for domestic or foreign policy objectives o trade sanctions – boycott exports o financial sanctions – limit aid or loans o effectiveness 1) number of nations imposing sanctions 2) degree of economic ties to imposing nations 3) extent of political opposition in target 4) cultural factors in target nation