International EconomicsBy Robert J. Carbaugh

8th Edition

Chapter 7:

Trade Regulations and Industrial Policies

The US and international trade

• Smoot-Hawley Tariff Act (1930)

• Reciprocal Trade Agreements Act (1934)– Introduced "most favored nation" (MFN) clause

(now called "normal trade relations"

• General Agreement on Tariffs and Trade [GATT] (1947)

• World Trade Organization (1995)

Trade regulation

GATT - Postwar trade liberalization

• Founded on the principle of non-discrimination, including:– "Normal Trade Relations" treatment– National treatment of imported goods

• Included trade dispute resolution mechanisms

• Committed signatories to use tariffs rather than quotas

Trade regulation

GATT - Postwar trade liberalization (2)

• Started regular negotiations to reduce tariffs and NTBs

• Exceptions allowed nations to sidestep the rules when they felt threatened, without abandoning the entire process

Trade regulation

GATT negotiations

• Early bilateral agreements• Kennedy Round (1964-67) - first multi-

lateral negotiations; focus on tariff cuts• Tokyo Round (1973-79) - focus on

lowering non-tariff barriers• Uruguay Round (1986-93) - covered new

issue areas (intellectual property, services, agriculture), included developing nations

Trade regulation

GATT becomes WTO

• GATT agreement became World Trade Organization in January 1995– WTO members must adhere to all agreements

negotiated under GATT (not pick and choose)– Covers trade in goods, services, intellectual

property and investment– WTO strengthens GATT's dispute-settlement

mechanisms

Trade regulation

Controversy over WTO

• Worries about infringement on national sovereignty

• Concern about trade liberalization undermining environmental protection

• WTO became a target for broader opposition to "globalization"

Trade regulation

US trade remedy laws

• Escape clause

• Countervailing duties

• Anti-dumping duties

• Unfair trade practices (Section 301)

• Protection of intellectual property

• Trade adjustment assistance

Trade regulation

Effects of dumping, subsidies, and remedies

Trade regulation

Effects of dumping, subsidies, and remedies

Trade regulation

US “industrial policy”

• Broad policies to foster economic growth• Aid to targeted sectors

– Agriculture, ship-building, energy, technology, manufacturing (autos, for example), etc.

• Tariff protection of declining sectors• Export promotion and financing

– Export-Import Bank– Commodity Credit Corporation

• Knowledge based growth policy

Industrial policy

Japan’s industrial policy

• Trade protection and subsidies (especially early on)

• Assistance to targeted sectors– Shipbuilding, steel, autos, machine tools, high-

technology

– Ministry of International Trade and Industry (MITI) to target aid to promising sectors

• It is unclear how much of Japan’s success can be attributed to government assistance

Industrial policy

Strategic trade policy

• Response to competition in sectors with imperfect competition - small number of producers, each large enough to affect market price

• Subsidies can give the advantage to domestic manufacturers over foreign ones

• Critics argue that it is too difficult to determine where assistance makes economic sense

Industrial policy

Welfare effects of strategic trade policy

Industrial policy

Economic sanctions

• Trade sanctions• Financial sanctions• Success of sanctions depends on:

– Number of nations imposing sanctions– Nature of ties between target and imposing

nations– Extent of political opposition in target nation– Cultural factors in target nation

Trade regulation