CHAPTER THREE

INTERNATIONAL TRADE POLICY

3.1. Trade Restrictions: Tariffs

 Introduction
 Partial Equilibrium Analysis of a Tariff
 The Theory of Tariff Structure
 General Equilibrium Analysis of a Tariff in a
Small Country
 General Equilibrium Analysis of a Tariff in a
Large Country
 The Optimum Tariff

2
Introduction

 While it is generally accepted that free trade

maximizes world output and benefits all nations,
most nations impose some restrictions on the free
flow of international trade.
 Trade policies are advocated by special groups that
stand to benefit from trade restrictions.
 Table 8.1. Tariffs on Nonagricultural Products in the
U.S. the EU, Japan, and Canada in 2007.

3
Introduction….

 Tariffs have been sharply reduced since

World War II.

 Tariffs average 5 percent or less on industrial

products in developed nations, but are much
higher in developing nations.

4
Introduction

 What are trade (commercial) policies?

 What are the effects of trade restrictions?
 Why do nations impose trade restrictions?

5
 Introduction

 The most important type of trade restriction has historically been

the tariff.
 A tariff is a tax or duty levied on the traded commodity as it crosses
a national boundary.
 Import vs. export tariffs
 An import tariff is a tax or duty levied on imported
commodities.
 This is the most common form of tariff.

 An export tariff is a tax on exported commodities.

 Prohibited by the U.S. Constitution, but occasionally

practiced in developing countries to generate government

revenue.
 Industrial countries invariably impose tariffs or other trade

restrictions to protect some (usually labor intensive)

industry, while using mostly income taxes to raise revenues.
6
Introduction

Tariffs can be ad valorem, specific, or compound.

 Ad valorem tariff
 A fixed percentage on the value of the traded commodity.
 Specific tariff
 A fixed sum per physical unit of a traded commodity.
 A compound tariff
 A combination of an ad valorem and specific tariff.
 By combining a specific fee with a percentage of the value,
compound tariffs can protect local industries from foreign
competition by making imports more expensive, and allows
governments to generate substantial revenue, particularly
from high-value goods.

7
 For example, a 10 percent ad valorem tariff on bicycles would result in
the payment to customs officials of the sum of $10 on each $100
imported bicycle and the sum of $20 on each $200 imported bicycle.
 On the other hand, a specific tariff of $10on imported bicycles means
that customs officials collect the fixed sum of $10 on each imported
bicycle regardless of its price.
 Finally, a compound duty of 5 percent ad valorem and a specific duty
of $10 on imported bicycles would result in the collection by customs
officials of the sum of $15 on each $100 bicycle and $20 on each $200
imported bicycle.

8
Partial Equilibrium Analysis of a Tariff

 The partial equilibrium analysis of a tariff is most

appropriate when a small nation imposes a tariff on
imports competing with the output of a small domestic
industry.

 Then the tariff will affect neither world prices (because the
nation is small) nor the rest of the economy (because the
industry is small).

9
Partial Equilibrium Analysis of a Tariff

FIGURE 8-1 Partial Equilibrium Effects of a Tariff.

 DX and SX represent Nation 2’s demand and supply curves of commo
dity X.
 At the free trade price of PX =$1, Nation 2 consumes 70X (AB), of whic
h 10X (AC) is produced domestically and 60X (CB) is imported.
 With a100 percent import tariff on commodity X, PX rises to $2 for ind
ividuals in Nation 2. At PX = $2, Nation 2consumes50X(GH), of which
20X (GJ) is produced domestically and 30X (JH) is imported.
Thus,
 the consumption effect of the tariff is (–) 20X (BN);
 the production effect is 10X (CM);
 the trade effect equals (–) 30X (BN +CM);
 and the revenue effect is $30 (MJHN)
Note that:
 for the same $1 increase in PX in Nation 2 as a result of the ta
riff, the more elastic and flatter DX is, the greater is the consu
mption effect.
 Similarly, the more elastic Sx is, the greater is the production
effect.
 Thus, the more elastic Dx and Sx are in Nation 2, the greater i
s the trade effect of the tariff (i.e., the greater is the reduction
in Nation 2’s imports of commodity X) and the smaller is the
revenue effect of the tariff.
 Resulting Effects of Tariff

 Consumer surplus is the difference between what consumers

would be willing to pay and what they actually pay.
 Imposition of a tariff reduces consumer surplus.
 Producer surplus is the difference between the actual amount
producers receive for a commodity and the minimum amount
they would be willing to accept to provide it.
 it represents the extra benefit that producers receive when they
sell at a market price higher than their minimum acceptable
price.
 Imposition of a tariff Increase producer surplus, or rent, called
subsidy effect of tariff.

13
FIGURE 8-2 Effect of Tariff on Consumer and Producer Surplus.
 Costs and Benefits of a Tariff

FIGURE 8-3 Partial Equilibrium Costs and Benefits of a Tariff.

 Costs and Benefits of a Tariff

 The figure shows that with a 100 percent import tariff on commodity
X, PX rises from $1 to $2 in Nation 2. This reduces the consumer surp
lus by AGHB = a + b + c +d =$15+$5+$30+$10=$60.
 Of this, MJHN =c =$30is collected by the government as tariff revenu
e, AGJC = a = $15 is redistributed to domestic producers of commodit
y X in the form of increased rent or producer surplus, while the rema
ining $15 (the sum of the areas of triangles CJM = b = $5 and BHN = d
= $10) represents the protection cost, or deadweight loss, to the econo
my.
 The production component (CJM = b = $5) of the protection cost arise
s because, with the tariff, some domestic resources are transferred fro
m the more efficient production of exportable commodity Y to the les
s efficient production of importable commodity X in Nation 2.
 The consumption component (BHN = d = $10) of the protection cost,
or deadweight loss, arises because the tariff artificially increases PX i
n relation to PY and distorts the pattern of consumption in Nation 2.
Resulting Effects of Tariff

 Consumption effect
Reduction in domestic consumption

 Production effect
Expansion of domestic production

 Trade effect
Decline in imports

 Revenue effect
Increased revenue collected by the government

17
Partial Equilibrium Analysis of a Tariff

 Resulting Effects of Tariff

 Income redistribution effect
 From domestic consumers (who pay higher price for the
commodity) to domestic producers (who receive the
higher price)
 From nation’s abundant factor (producing exports) to the
scarce factor (producing imports).
 This leads to inefficiencies, or protection costs (deadweight
losses).
 By dividing the loss of consumer surplus by the number of
jobs “saved” in the industry because of the tariff (or
equivalent rate of protection), we can calculate the cost per
domestic job saved.
18
 The Theory of Tariff Structure
 The Rate of Effective Protection

 Indicates how much protection is actually provided to

domestic producer of import-competing commodity.
 When a nation imposes a lower tariff on imported
inputs than on the final commodity produced with the
inputs, the rate of effective protection exceeds the nominal
tariff rate.
 The nation usually does this in order to encourage
domestic processing and employment.
 For example, a nation may import wool duty free but
impose a tariff on the importation of cloth in order to
stimulate the domestic production of cloth and
domestic employment. 19
 The rate of effective protection is calculated on the domestic value
added, or processing, that takes place in the nation while the
nominal tariff rate is calculated on the value of the final
commodity.
 While the nominal tariff rate is important to consumers (because it
indicates by how much the price of the final commodity increases
as a result of the tariff), the effective tariff rate is important to
producers because it indicates how much protection is actually
provided to the domestic processing of the import-competing
commodity.
 Note: the rate of effective protection is definitely superior to the
nominal tariff rate in estimating the degree of protection actually
granted to domestic producers of the import-competing product.

20
The Theory of Tariff Structure

 The Rate of Effective Protection

 Calculated as follows:
t - aiti
g=
1 - ai
g = rate of effective protection
t = nominal tariff rate on final commodity
ai = ratio of cost of imported input to price of final
commodity with no tariff
ti = nominal tariff rate on imported input
21
 Example

 Suppose that $80 of imported wool goes into the domestic

production of a suit. Suppose also that the free trade price of the suit
is $100 but the nation imposes a 10 percent nominal tariff on each
imported suit. The price of suits to domestic consumers would then
be $110.
 Of this, $80 represents imported wool, $20 is domestic value added,
and $10 is the tariff.
 The $10 tariff collected on each imported suit represents a 10 percent
nominal tariff rate since the nominal tariff is calculated on the price
of the final commodity (i.e., $10/$100 = 10 percent) but corresponds
to a 50 percent effective tariff rate because the effective tariff is
calculated on the value added domestically to the suit (i.e., $10/$20 =
50 percent).

22
 If a 5 percent nominal tariff is imposed on the imported
input (i.e., with ti = 0.05), the value of effective protection
is 30%.
 If ti = 10 percent instead, g=10%
 With ti = 20 percent, g=-30% t - at
i i
g=
Conclusions 1 - ai
 If ai = 0, g = t
 For given values of ai and ti, g is larger the greater is t
 The value of g is >, = or < t, as ti <, = or > t
 When aiti > t, the rate of effective protection is negative

23
 General Equilibrium Analysis of a Tariff in a
Small Country

 A small nation will not affect prices on the world

market when imposing a tariff.
 Domestic price of importable commodity will rise
by the full amount of the tariff for individual
producers and consumers in the small nation.
 Price remains constant for nation as a whole because
the nation collects the tariff.
 Volume of trade for small nation declines, but
terms of trade do not change, so welfare always
falls.
24
FIGURE 8-5 General Equilibrium Effects of a Tariff
in a Small Country.
 the nation produces at point B with free trade and exports 60Y for 60
X at PW = 1. With the 100 percent import tariff on commodity X, PX/P
Y = 2 for individual producers and consumers in the nation but remai
ns at PW = 1 on the world market and for the nation as a whole.

 Production then takes place at point F; thus, more of importable com

modity X is produced in the nation with the tariff than under free tra
de. 30Y is exchanged for 30X, of which 15X is collected in kind by the
government of the nation in the form of a 100 percent import tariff on
commodity X.

 Consumption takes place at point H on indifference curve II after imp

osition of the tariff. This is below the free trade consumption point E
on indifference curve III because, with the tariff, specialization in pro
duction is less and so are the gains from trade.
 With a 300 percent import tariff on commodity X, PX/PY
= 4 for domestic producers and consumers, and the natio
n would return to its autarky point A in production and c
onsumption (see Figure 8.5.). Such an import tariff is calle
d a prohibitive tariff.

 The 300 percent import tariff on commodity X is the mini

mum ad valorem rate that would make the tariff prohibit
ive in this case. Higher tariffs remain prohibitive, and the
nation would continue to produce and consume at point
A.
General Equilibrium Analysis of a Tariff in a
Small Country….

 Stolper-Samuelson Theorem
 An increase in the relative price of a commodity
(for example, as the result of a tariff) raises the
return of the factor used intensively in production
of the commodity.
 Thus, the real return to the nation’s scarce factor
of production will rise with the imposition of a
tariff.

28
 Stolper-Samuelson Theorem…

 The reason for this is that as PX/PY rises as a result of the import
tariff on commodity X, Nation 2 will produce more of commodity
X and less of commodity Y (compare point F with point B in
Figure 8.5).
 The expansion in the production of commodity X (the L-intensive
commodity) requires L/K in a higher proportion than is released
by reducing the output of commodity Y (the K-intensive
commodity).
 As a result, w/r rises and K is substituted for L so that K/L rises in
the production of both commodities. As each unit of L is now
combined with more K, the productivity of L rises, and therefore,
w rises.
 Thus, imposition of an import tariff on commodity X by Nation 2
increases PX/PY in the nation and increases the earnings of L (the
nation’s scarce factor of production).
29
 Stolper-Samuelson Theorem…

 With labor fully employed before and after imposition of the tariff,
this also means that the total earnings of labor and its share of the
national income are now greater.
 Since national income is reduced by the tariff (compare point H to
point E in Figure 8.5), and the share of total income going to L is
higher, the interest rate and the total earnings of K fall in Nation 2.
 Thus, while the small nation as a whole is harmed by the tariff, its
scarce factor benefits at the expense of its abundant factor.
 For example, when a small industrial and K-abundant nation, such
as Switzerland, imposes a tariff on the imports of an L-intensive
commodity, w rises.
 That is why labor unions in industrial nations generally favor
import tariffs. However, the reduction in the earnings of the owners
of capital exceeds the gains of labor so that the nation as a whole
loses. 30
 General Equilibrium Analysis of a Tariff in a
Large Country
 A tariff causes the imposing nation’s offer curve to shift or rotate
toward the axis measuring the importable commodity by the amount
of the tariff.
 The reason is that for any amount of the export commodity, importers
now want sufficiently more of the import commodity to also cover
(i.e., pay for) the tariff.
 Under these circumstances, for a large nation:
 A reduction in trade volume will reduce welfare
 An improvement in terms of trade will increase welfare
 Whether welfare actually rises or falls depends on the net effect.
 This is to be contrasted to the case of a small country imposing a tariff,
where the volume of trade declines but the terms of trade remain
unchanged so that the small nation’s welfare always declines.
31
FIGURE 8-6 General Equilibrium Effects of a Tariff
in a Large Country.
 Free trade offer curves 1 and 2 define equilibrium point E and PX/PY
= 1 in both nations. A 100 percent ad valorem import tariff on commo
dity X by Nation 2 rotates its offer curve to 2, defining the new equili
brium point E’.
 With tariff-distorted offer curve 2, Nation 2 is in equilibrium at point
E by exchanging 40Y for 50X so that Px/Py = PW = 0.8 on the world m
arket and for Nation 2 as a whole.

 However, of the 50X imported by Nation 2 at equilibrium point E, 25

X is collected in kind by the government of Nation 2 as the 100 percen
t import tariff on commodity X and only the remaining 25X goes dire
ctly to individual consumers.
 General Equilibrium Analysis…

 As a result, for individual consumers and producers in Nation 2, PX/

PY = PD = 1.6, or twice as much as the price on the world market and
for the nation as a whole (see the figure).

 At point E the volume of trade is less than under free trade and PX/P
Y = 0.8. This means that Nation 2’s terms of trade improved to PY/PX
= 1.25.
 The change in Nation 2’s welfare depends on the net effect from the h
igher terms of trade but lower volume of trade.
 The Optimum Tariff

 An optimum tariff maximizes the net benefit resulting from the

improvement in the nation’s terms of trade against the negative effect
from declining trade volume.
 As the terms of trade improve for the imposing nation, those of the
trade partner deteriorate, reducing welfare for the trade partner.
 Trade partner will likely retaliate and impose its own optimum tariffs.

 World as a whole is made worse off as gains from optimum tariff are
less than losses of trade partner.

35
The Optimum Tariff…

36
 The Optimum Tariff…

 Offer curves1 and 2 define free-trade equilibrium point E and

PX/PY =1,as in Figure 8.6. the optimum tariff for Nation 2 rotates
its offer curve to 2*, Nation 2’s terms of trade improve to PX/PY =
1/PW = 1/0.625 = 1.6.
 At equilibrium point E*, Nation 2 is at its highest possible welfare
and is better off than at the free trade equilibrium point E.
 However, since Nation 1’s welfare is reduced, it is likely to
retaliate with an optimum tariff of its own, shown by offer curve
1* and equilibrium at point E**.
 Nation 2 may then itself retaliate so that in the end both nations
are likely to lose all or most of the benefits from trade.

37
 Finally, note that the optimum tariff for a small
country is zero, since a tariff will not affect its terms
of trade and will only cause the volume of trade to
decline.
 Thus, no tariff can increase the small nation’s welfare
over its free trade position even if the trade partner
does not retaliate.
 Nations do indeed impose higher tariffs on goods
with lower export elasticity (i.e., in which the nations
have more market power).

38
3.2. Nontariff Trade Barriers and New Protectionism

 Introduction
 Import Quotas
 Other Nontariff Barriers and the New
Protectionism
 The Political Economy of Protectionism
 Strategic Trade and Industrial Policies
 History of U.S. Commercial Policy
 The Uruguay Round, Outstanding Trade
Problems and the Doha Round
39
Introduction

 Though tariffs have historically been the most

important form of trade restriction, there are
many other types of trade barriers.
 As tariffs were negotiated down during the
postwar period, the importance of non-tariff
barriers was greatly increased.
 Nontariff barriers (NTBs): trade barriers other
than tariffs such as import quotas, voluntary
export restraints (VERs), anti-dumping duties,
export subsidies, technical, administrative and
other regulations, etc
40
Import Quotas

 A quota is a direct quantitative restriction on the

amount of a commodity allowed to be imported or
exported.
 Import quotas are used to protect domestic industry
and agriculture, and/or for balance of payments
reasons.

41
FIGURE 9-1 Partial Equilibrium Effects of an Import Quota.
 DX and SX represent the nation’s demand and supply curves of
commodity X. Starting from the free trade PX =$1, an import q
uota of 30X (JH) would result in PX = $2 and consumption of 5
0X (GH), of which 20X (GJ) is produced domestically.
 If the government auctioned off import licenses to the highest b
idder in a competitive market, the revenue effect would also be
$30 (JHNM), as with a 100 percent import tariff.
 With a shift in DX to DX’ and an import quota of 30X (JH), con
sumption would rise from 50X to 55X (GH), of which 25X (GJ)
are produced domestically.
1. The effect of Change in Demand
 Import quota:
 Higher domestic price than tariff
 Higher domestic production than tariff

 Import tariff:
 Higher consumption than quota
 Higher imports than quota
Import Quota vs. Equivalent Import Tariff…

2. Import quota involves distribution of import

licenses, while tariff does not.
 If not auctioned by government in competitive
markets, receiving firms will reap monopoly profits.
 Allocation decision often based on arbitrary
judgments rather than efficiency concerns.
 Monopoly profits lead firms to lobby for licenses in
rent-seeking activities.
 Thus, import quotas replace market mechanism ,
resulting in waste, and possible corruption.

45
Import Quota vs. Equivalent Import Tariff….

3. Import quota limits imports to specified levels

with certainty, while the trade effect of an import
tariff may be uncertain.
 When elasticity of demand and supply are not known,
it is difficult to estimate the import tariff required to
restrict imports to desired level.
 Foreign exporters cannot maintain export quantity
simply adjust to barrier by increasing efficiency or
accepting lower profits, as with tariff.
 Because import quota is less “visible, domestic
producers prefer them over tariffs.

46
Import Quotas…

 Import Quota vs. Equivalent Import Tariff

 Since import quotas are more restrictive than equivalent
import tariffs, society should resist domestic producers’
efforts to use quotas instead of tariffs.

 With tariff, the government will receive tax revenue, but in

the case of quota, revenue goes to the licensed firms unless
licenses are auctioned off in a competitive market

47
 Other Nontariff Barriers and the New
Protectionism
 Voluntary Export Restraints (VERs)

 With VERs, an importing country induces another nation to

reduce its exports voluntarily, under threat of higher trade
restrictions.
 Sometimes called orderly marketing arrangements, VERs allow
industrial nations to appear to support the principle of free
trade.
 It’s effect is similar to import quotas, VERs can lead to higher
prices for consumers in the importing country due to reduced
supply. This can benefit domestic producers by giving them a
larger market share and less competition
 Less effective in limiting imports than import quotas because
exporters tend to fill the quota with higher quality, higher
priced goods over time.
48
Other Nontariff Barriers and the New
Protectionism…

 Technical, Administrative, Other Regulations

 Health and safety regulations may serve as barriers to
international trade by raising the costs of imported products.
Egs: safety regulations for automobile and electrical equipment,
health regulations for the hygienic production and packaging of
imported food products, and labeling requirements showing
origin and contents.
 Other trade restrictions have resulted from laws requiring
governments to buy from domestic suppliers (the so-called
government procurement policies).
 The Buy American Act of 1933

 Rebates for indirect taxes may be given to exporters and

imposed on importers of a commodity.
49
9.3. Other Nontariff Barriers and the New
Protectionism…
International Cartels
 Organization of suppliers from different nations that agrees to
restrict output and exports of a commodity with the aim of
maximizing or increasing total profits.
 The power of international cartels cannot easily be countered
because they do not fall under the jurisdiction of any one nation.
 Example: OPEC (the Organization of Petroleum Exporting
Countries) quadrupled the price of crude oil between 1973 and
1974 by restricting production and exports.
The International Air Transport Association(until 2007)
An international cartel is more likely to be successful if there are only
a few international suppliers of an essential commodity for which
there are no close substitutes.
50
 Since the power of a cartel lies in its ability to restrict output and
exports, there is an incentive for any one supplier to remain
outside the cartel or to “cheat” on it by unrestricted
 It also showed that, as predicted by economic theory, cartels are
inherently unstable and often collapse or fail. If successful,
however, a cartel could behave exactly as a monopolist (a
centralized cartel) in maximizing its total profits

51
Other Nontariff Barriers and the New
Protectionism…

 Dumping
 The export of a commodity at below cost, or the sale of a
commodity at a lower price abroad than domestically.
 Three types of dumping:
1. Persistent dumping is the continuous tendency of a
domestic monopolist to maximize total profits by selling
the commodity at a higher price in the domestic market.
2. Predatory dumping is the temporary sale of a commodity
at below cost or a lower price abroad to drive foreign
producers out of business.
3. Sporadic dumping is the occasional sale of a commodity
at below cost or lower price abroad to unload surplus of
the commodity without reducing domestic prices.

52
 Other Nontariff Barriers and the New
Protectionism…
 Export Subsidies
 Export subsidies are direct payments (or the granting of tax
relief and subsidized loans) to the nation’s exporters and/or low-
interest loans to foreign buyers to stimulate the nation’s exports.
 Export subsidies are illegal by international agreement, but often
used in disguised form.
 Example: Export-Import Bank (U.S. government agency that
extends subsidized loans to foreigners to finance U.S. exports)
(Japan. Germany & France)
 The amount of the subsidy provided can be measured by the
difference between the interest that would have been paid on
a commercial loan and what in fact is paid at the subsidized
rate.

53
FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.
 At the free trade price of PX =$3.50,small Nation2 produces35
X(AC),consumes20X(AB),and exports 15X (BC).
 With a subsidy of $0.50 on each unit of commodity X exported,
PX rises to $4.00 for domestic producers and consumers.
 At PX = $4, Nation 2 produces 40X (GJ), consumes 10X (GH),
and exports 30X (HJ).
 Domestic consumers lose $7.50 (area a+ b), domestic producer
s gain $18.75 (area a+ b+ c), and the government subsidy is $1
5 (b+ c+ d). The protection cost or deadweight loss of Nation 2
is $3.75 (the sum of triangles BHN= b= $2.50 and CJM=d=$1.
25).
The Political Economy of Protectionism

Fallacious Arguments for Protection

1. Trade restrictions are needed to protect
domestic labor against cheap foreign labor.
 Even if domestic wages are higher than wages
abroad, domestic labor costs can still be lower
if the productivity of labor is sufficiently
higher domestically than abroad.
 Mutually beneficial trade could be based on
comparative advantage, with cheap labor
nation specializing in labor-intensive
commodities.
56
The Political Economy of Protectionism…

Fallacious Arguments for Protection

2. Scientific tariffs are needed so that domestic
producers can compete.
 A scientific tariff raises the price of imports to
the domestic price.
 This would eliminate price differences and
trade in all commodities subject to such
“scientific” tariffs.

57
The Political Economy of Protectionism…

Questionable Arguments for Protection

 Protection is needed to:
1. Reduce domestic unemployment, and
2. To cure a deficit in the nation’s balance of
payments
 Protection would lead to substitution of imports
with domestic production.
 These are beggar-thy-neighbor arguments for
protection because they come at the expense of
other nations.
 Other nations retaliate; all nations lose in the end.

58
The Political Economy of Protectionism…

A Qualified Argument for Protection

 Infant-industry Argument

 Temporary trade protection is justified to establish and

protect a domestic industry during its “infancy” until it
can meet foreign competition, achieve economies of scale,
and reflect the nation’s comparative advantage.

 To be valid, the return in the grown-up industry must be

high enough to offset the higher prices paid by domestic
consumers of the commodity during infancy.

59
The Political Economy of Protectionism…

 Infant-industry Argument
 Requires several qualifications which, together, take away
most of its significance:
1. More justified for developing nations than industrial
nations.
2. May be difficult to identify which industry qualifies for
protection, which, once given, is difficult to remove.
3. What trade protection can do, an equivalent production
subsidy to the infant industry can do better.
a purely domestic distortion such as this should be
overcome with a purely domestic policy

60
Strategic Trade and Industrial Policies

 According to the strategic trade policy argument, a nation can

create a comparative advantage in industries deemed crucial to
future growth in the nation.
 Nations may use temporary trade protection, subsidies, tax
benefits and cooperative government-industry programs.
 Strategic trade policy suggests that by encouraging such
industries, the nation can reap the large external economies that
result from them and enhance its future growth prospects.
 Similar to infant-industry argument in developing nations.

61
Strategic Trade and Industrial Policies…

 Concerns
 Difficult to pick winners and devise
appropriate policies to nurture them.
 Efforts largely neutralized when leading
nations undertake strategic trade policies at
the same time.
 Retaliation in other markets may eliminate
any gains.

62
9.6. History of U.S. Commercial Policy

 1930 – Smoot-Hawley Tariff Act

 Raised average import duties to 59% by 1932.
 Spurred international retaliation

63
History of U.S. Commercial Policy

 1934 – Trade Agreements Act

 Authorized the president to negotiate mutual
tariff reductions by as much as 5%.
 Reductions were based on the principle of
most favored nation.
 The most favored nation principle extends to all
trading partners any reciprocal tariff reduction
negotiated with any trading partner.
 For example, a negotiated reduction with Canada
would extend to Mexico if it had most favored
nation status.
64
History of U.S. Commercial Policy

 1947 – The General Agreement on Tariffs

and Trade (GATT)
 Designed to promote expanded international
trade through multilateral negotiations.
 GATT rested on three basic principles:
1. Nondiscrimination
2. Elimination of nontariff barriers
3. Consultation among nations in solving trade
disputes

65
History of U.S. Commercial Policy

 1950s – Movements away from free trade

1. Peril-point provisions prevented the president
from negotiating tariff reductions that would
seriously damage a domestic industry.
2. Escape clause allowed any domestic industry
claiming injury from imports to petition for tariff
reduction.
3. National security clause prevented tariff
reductions when they would hurt industries
important for national defense.

66
History of U.S. Commercial Policy

 1962 – Trade Expansion Act

 Authorized the president to negotiate across
the board tariff reductions of up to 50%.
 Introduced Trade Adjustment Assistance
(TAA) to workers displaced by international
trade.
 Allowed the passage of the Kennedy Round
negotiation of the GATT.

67
History of U.S. Commercial Policy

 1974 – Trade Reform Act

 Authorized the president to negotiate tariff
reductions of up to 60% and the elimination of
tariffs below 5%.
 Contributed to passage of the Tokyo Round
negotiations of the GATT.

68
History of U.S. Commercial Policy

 1984 – The Trade and Tariff Act

 Authorized the president to negotiate
international agreements for the protection of
intellectual property rights.
 Extended the Generalized System of Preferences
(GSP), a system by which developing nation
exports are granted preferential access to US
markets.
 Provided authority for negotiations leading to
free trade with Israel.
69
History of U.S. Commercial Policy

 1988 – The Omnibus Trade and

Competitiveness Act
 Required the U.S. Special Trade Representative
to set a rigorous schedule for negotiating
reductions in trade barriers with countries
maintaining high barriers to U.S. exports.

70
FIGURE 9-3 U.S. Average Tariff Rates on Dutiable Imports,
1900-2000.
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

 GATT’s eighth round of negotiations, with 123
countries participating.
 Began in September 1986 with completion
scheduled for December 1990.
 Disagreements between United States and
European Union, on reducing agricultural
subsidies, delayed conclusion for three years.
 Agreement took effect in July, 1995.

72
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Aims of the Uruguay Round:
 Establish rules for monitoring protectionism and
reversing the trend.
 Bring services, agriculture and foreign
investments into negotiations.
 Negotiate international rules for protection of
intellectual property rights.
 Ensure more timely decision and compliance with
GATT rulings on dispute settlements.

73
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Tariffs
 Tariffs on industrial products to be cut from an
average of 4.7% to an average of 3%.
 The share of good with zero tariffs to increase
from 20-22% to 40-45%.
 Tariffs removed on pharmaceuticals,
constructions equipment, medical equipment,
paper products, and steel.

74
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Quotas
 Quotas on agricultural products were to be
replaced with less restrictive tariffs by 1999
 Quotas on textiles were to be replaced with less
restrictive tariffs by 2004

75
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Antidumping
 Tougher and quicker resolution of disputes
resulting from antidumping laws, but not a ban
on their use.
 Subsidies
 The volume of subsidized agricultural products
was to be reduced by 21 percent, with
government subsidies for industrial research
limited to 50% of the applied research cost.
76
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Safeguards
 Countries barred from implementing health and
safety standards that are not based on scientific
research.
 Temporary tariffs allowed to protect domestic
industries from temporary imports surges.

77
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Intellectual property
 Twenty-year protection of patents, trademarks,
and copyrights.
 A 10 year phase-in period for patents over
pharmaceuticals in developing countries.

78
9.7. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Services
 United States failed to gain access to markets in
Japan, Korea and many developing nations for
banks and security firms.
 United States did not succeed in having France
and the European Union lift restrictions on
showing American films and TV programs in
Europe.

79
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Other Industry Provisions
 United States and Europe agreed to talks on
limiting government subsidies to civil aircraft
makers, opening up distance telephone market,
and limiting European steel subsidies.
 United States expressed intention to negotiate
opening Japanese computer chip market.

80
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 Trade-Related Investment Measures
 Phased out requirement that foreign investors
buy supplies locally or export as much as they
import.

81
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 The Uruguay Round

Major Provisions of Uruguay Accord:
 World Trade Organization (WTO)
 Established the WTO in place of the GATT
Secretariat, with authority in industrial and
agricultural products and services.
 Trade disputes to be settled by vote of two-thirds
or three-quarters of nations rather than
unanimously.

82
FIGURE 8-4 Pre- and Post-Uruguay Round Cascading Tariff
Structure in Industrial Countries.
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 Outstanding Trade Problems

 Trade disputes between the United States and
the European Union.
 EU subsidies to Airbus
 EU ban on US exports of hormone-raised beef
and genetically modified food

 High subsidies and tariffs on agricultural

products, and frequently abused antidumping
laws.

84
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 Outstanding Trade Problems

 Tendency for world to divide into three major trade blocs:
 European Union (EU)

 North American Free Trade Area (NAFTA)

 Asian Bloc

 Call by some developed nations for labor and environmental

standards, to ensure “leveling of working conditions” and
avoid “social dumping”
 Social dumping is a practice involving the export of a good
from a country with weak or poorly enforced labour
standards, where the exporter’s costs are artificially lower
than its competitors in countries with higher standards,
hence representing an unfair advantage in international
trade.
85
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 Doha Round
 Launched in November, 2001, in Doha, Qatar.
 Agenda included:
 Further liberalization of production and trade
in agriculture, industrial products, and
services.
 Further tightening of antidumping regulations,
investment and competition policies.

86
9.8. The Uruguay Round, Outstanding Trade
Problems, and the Doha Round

 Doha Round
 Developing nations reluctant to make concessions
because of feeling that Uruguay Round failed to
deliver on promises.
 Developing nations insisted on making Doha Round
a true “development round”.
 Intended to conclude by end of 2004, all but
collapsed in 2006 over disagreements over
agricultural subsidies between developed and
developing nations.
 As of beginning of 2009, still not concluded.
87
END
88