Chapter 7: Commercial Policy

Class Notes: these count for 1% of your total grade

1. Definitions
Countervailing Duty: A tariff that is granted to a U.S. industry that has been hurt by a foreign
country’s subsidizing its firms
Antidumping Duty: a tariff levied on an import that is selling at a price below the product’s fair
value
Escape Clause Relief: Temporary tariff on imports to allow a domestic industry to escape the
pressure of imports and thus obtain a period of adjustment
Section 301: A section of the U.S. 1974 Trade Act that requires the U.S. Trade Representative
(USTR) to take action against any nation that persistently engages in unfair trade practices

2. List the items that high income countries tend to have the highest tariffs.
Based on trade data and economic studies, such as those from the World Trade Organization
(WTO) and World Bank, the items with the highest tariffs in high-income countries typically
include:
- Agricultural Products
- Textiles and Clothing
- Tobacco Products
- Beverages and Alcohol
- Footwear
- Certain Industrial Goods
- Automobiles and Parts
- Steel and Aluminum

3. List the industries that cost the most to save jobs using tariffs
Based on economic studies and trade policy analyses, such as those from the Peterson Institute
for International Economics, the Tax Foundation, and historical data on tariff impacts, the
following industries have consistently shown the highest costs per job saved when tariffs are
imposed:
- Textiles and Apparel
- Steel
- Automobiles
- Tires
 - Sugar

3. Why do consumers tolerate tariffs?

Consumers tolerate tariffs for several reasons, despite their tendency to increase prices and
reduce choices. These reasons stem from economic, political, psychological, and informational
factors:
1. Diffuse Costs: The cost of tariffs is spread across a large number of consumers, resulting
in relatively small per-person price increases. For example, a 25% tariff on imported steel
might raise the price of a car by $100-$200, which is noticeable but not significant
enough for most consumers to organize or protest. In contrast, the benefits (e.g., job
preservation) are concentrated among a small group of producers who actively lobby for
tariffs.
2. Lack of Awareness: Many consumers are unaware of the direct link between tariffs and
higher prices. Price increases may be attributed to general inflation, supply chain issues,
or retailer decisions rather than trade policies. Complex tariff schedules and their
downstream effects (e.g., higher input costs for manufacturers) obscure their impact,
reducing consumer pushback.
3. Nationalism and Support for Domestic Industries: Tariffs are often framed as tools to
protect local jobs, national security, or cultural identity, which resonates with consumers.
For instance, tariffs on Chinese goods may be tolerated by U.S. consumers who support
“buy American” campaigns or view imports as a threat to domestic workers. This
patriotic appeal can outweigh concerns about modest price hikes.
4. Political Inertia and Lobbying Power: Producers and industries benefiting from tariffs
(e.g., steel, textiles) have strong incentives to lobby governments, as their gains are
significant. Consumers, however, lack the organization or motivation to counter these
efforts. Public choice theory explains this as a classic case of concentrated benefits (for
producers) versus diffuse costs (for consumers), leading to policies that favor the former.
5. Perception of Fairness: Consumers may tolerate tariffs if they believe they correct
unfair trade practices, such as dumping or subsidies by foreign governments. For
example, tariffs on Chinese tires in 2009 were justified as a response to alleged predatory
pricing, which some consumers accepted as necessary to level the playing field.
6. Economic Context and Alternatives: In times of economic uncertainty (e.g., recessions
or job losses), consumers may prioritize job preservation over lower prices, especially in
communities dependent on protected industries like steel or agriculture. Additionally, the
availability of substitutes (e.g., domestic or non-tariffed imported goods) can mitigate the
perceived impact of tariffs, making them more tolerable.
 7. Short-Term vs. Long-Term Effects: The immediate effects of tariffs (e.g., slight price
increases) may seem manageable, and consumers may not fully anticipate long-term
consequences like reduced competition or innovation. This short-term focus reduces
resistance.

4. List the reasons to have tariffs and one problem associated with that reason
Tariffs are imposed for various economic, political, and social reasons. Below is a list of the
primary reasons for implementing tariffs, each accompanied by one associated problem:
1. Protect Domestic Industries and Jobs
o Reason: Tariffs shield domestic industries from foreign competition, preserving
jobs in sectors like steel, textiles, or agriculture that might otherwise be lost to
cheaper imports.
o Problem: High consumer costs. Tariffs increase prices for consumers, often
disproportionately affecting lower-income households. For example, U.S. tariffs
on textiles in the 1990s cost consumers $50 billion annually, far exceeding the
value of jobs saved (Hufbauer & Elliott, 1994).
2. Raise Government Revenue
o Reason: Tariffs generate revenue for governments, historically a major source of
income before modern tax systems, and still relevant in some economies.
o Problem: Economic inefficiency. Tariffs distort markets by raising prices and
reducing trade, leading to deadweight losses. For instance, revenue from tariffs is
often outweighed by consumer and producer losses, as seen in high-income
countries with low overall tariff reliance.
3. Promote Infant Industries
o Reason: Tariffs protect emerging industries in developing economies, allowing
them to grow and compete globally before facing full foreign competition.
o Problem: Risk of permanent dependence. Industries may become reliant on
protection, failing to innovate or become competitive, as seen in some Latin
American import-substitution policies in the 20th century.
4. Address Unfair Trade Practices
o Reason: Tariffs counter practices like dumping (selling below cost) or foreign
subsidies, leveling the playing field for domestic producers.
 o Problem: Escalation of trade disputes. Retaliatory tariffs from trading partners
can harm exporters and lead to trade wars, as occurred with U.S.-China tariffs in
2018, which triggered Chinese tariffs on U.S. agricultural goods.
5. Ensure National Security
o Reason: Tariffs protect industries critical to national defense (e.g., steel,
semiconductors) by ensuring domestic production capacity.
o Problem: Misuse for protectionism. National security claims can be exaggerated
to justify tariffs on non-critical goods, undermining free trade principles, as seen
in some U.S. Section 232 tariffs on aluminum from allies like Canada.
6. Correct Positive Externalities
o Reason: Tariffs encourage industries with positive externalities (e.g., clean
energy or technology) that the free market underproduces due to unpriced social
benefits.
o Problem: Inefficient allocation of resources. Tariffs may favor less competitive
firms, diverting resources from more productive sectors, as seen in some green
energy subsidies that inadvertently support inefficient producers.
7. Retaliate Against Trade Barriers
o Reason: Tariffs are used to pressure other countries to remove their own trade
barriers, encouraging reciprocal market access.
o Problem: Harm to domestic consumers and industries. Retaliatory tariffs can
raise input costs for domestic manufacturers and reduce export markets, as seen in
the EU’s retaliation to U.S. steel tariffs, which hurt U.S. farmers.
8. Protect Cultural or Social Values
o Reason: Tariffs support industries tied to cultural identity (e.g., agriculture in
Japan) or social goals (e.g., labor standards), preserving national heritage or
ethical priorities.
o Problem: Higher costs for consumers. Protecting cultural industries, like rice in
Japan with 700% tariffs, significantly raises food prices, burdening consumers
and limiting access to cheaper alternatives.