ECON 4321
Module 7: International Trade Policy
Corresponding Chapter in the Book: 10
FA 2025
ORGANIZATION
Introduction
The Political Economy of Protectionism
The Evolution of U.S. Trade Policy
Antidumping, Countervailing Duties, and the Escape
Clause
The General Agreement on Tariffs and Trade (GATT)
The World Trade Organization
The Future of International Trade Negotiations
Summary
Econ 4321: International Trade 2
INTRODUCTION
Why most countries protect some domestic industries?
The political economy of protection
Why is the tariff high on some goods and low on
others?
The evolution of US trade policy
Econ 4321: International Trade 3
THE POLITICAL ECONOMY OF
PROTECTIONISM
The interaction between gains from trade for the
country and the gains in trade for the producers
explains the existence of trade barriers.
In economics, policy refers to an action or actions a
government implements.
When market failures exist, government regulation takes
place to improve the welfare of society.
Regulation can favor one segment of society, and
firms in that segment can favor the regulation.
Econ 4321: International Trade 4
THE POLITICAL ECONOMY OF
PROTECTIONISM 2
Demand for regulation means there is a potential
market for government regulation
This happens in the area of international trade
Imports and exports have conflicting effects
Consumers benefit from free trade, but firms and
workers in the import-competing industry can be
harmed.
Special interest groups lobby for changes that benefit
them though not necessarily society as a whole
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THE POLITICAL ECONOMY OF
PROTECTIONISM 3
Protectionism and Public Choice
The theory of public choice describes political behavior.
The theory is that politicians attempt to maximize their
utility, the number of votes they will receive in the next
election.
The utility comes in the form of votes.
Politicians, therefore, sometimes favor programs having
immediate and clear-cut benefits with vague, difficult-
to-measure, or deferred costs.
Econ 4321: International Trade 6
THE POLITICAL ECONOMY OF
PROTECTIONISM 4
Since trade benefits the country as a whole and there
are more consumers than firms, we might expect
politicians to always favor free trade.
Collective action describes individuals forming groups
designed to influence the government to their benefit.
Individuals do not receive much direct benefit from free
trade, so they do not form collective groups to lobby in
this area.
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THE POLITICAL ECONOMY OF
PROTECTIONISM 5
Firms with comparative advantage (exporting firms)
are interested in the trade policy of foreign
governments.
Domestic trade policy only affects them to the degree
they use imports.
Firms that ineffectually/inefficiently compete with
imports generally lobby for protection from imports
Activities designed to benefit a special interest group
are called rent-seeking activities.
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THE POLITICAL ECONOMY OF PROTECTIONISM 6
Rent-seeking
It occurs when the government approves a program that
benefits only a small group within society, but the society as
a whole pays the cost.
Requests to the government to increase protection from
imports are a form of rent-seeking.
Given group support, votes for a politician may increase.
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THE POLITICAL ECONOMY OF
PROTECTIONISM 7
Rent-seeking is the act of obtaining special treatment
by the government at the expense of society as a whole
Groups that receive such support may vote for the
politician in the next election.
Politician wants to gain votes by supporting the
protection
Protection of goods varies considerably, and the U.S.
tariff schedule is very complicated.
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THE POLITICAL ECONOMY OF
PROTECTIONISM 8
Tariffs are levied on very specific goods or product
categories.
It is easier to gain protection for a single product than
for a product group.
Consumers are less likely to notice an increase in the
price of one good.
A detailed tariff schedule allows a politician to pick up
votes for protecting specific goods without protests
from the average consumer
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THE POLITICAL ECONOMY OF PROTECTIONISM 9
1. Easier to gain protection for a single product than for a
product group
Oranges versus fruit
Consumers are less likely to notice an increase in the
price of oranges than fruit.
2. A detailed tariff schedule allows a politician to pick up votes
for protecting specific goods without protests from the
average consumer.
Tariffs on very similar goods may be very different.
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THE POLITICAL ECONOMY OF
PROTECTIONISM 10
The Structure of Protection
Tariffs can vary considerably even on similar goods.
Analysis of variation in tariffs by-product for a country is
called the structure of protection.
Several factors influence the probability that an industry
will receive or maintain protection.
Firms with one or more of the following characteristics
have a higher probability of receiving protection.
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THE POLITICAL ECONOMY OF PROTECTIONISM 11
1. Large industries that are more important to a country are
more likely to receive protection than smaller industries that
are less important
2. The fewer the number of firms in an industry, the more likely
to have protection
The more concentrated an industry, the more likely to have
protection
Easier for firms to organize and lobby
3. It is easier for firms that produce intermediate products to
gain protection as voters are unlikely to notice price increases
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THE POLITICAL ECONOMY OF PROTECTIONISM 12
4. Potential voting strength of the industry’s employees impacts
the degree of protection
A larger number of employees are more likely to get protection
5. Industries with a comparative disadvantage are more likely to
be protected
6. Regionally concentrated or unionized industries are more likely
protected
Econ 4321: International Trade 15
U.S. AVERAGE IMPORT DUTIES
Alexander Tariff of Smoot-Hawley GATT WTO
70 –
Hamilton’s Abominations Tariff
Policy
Average import duty (%)
60 –
50 –
40 –
30 –
20 –
10 –
| | | | |
01792
– 1825 1880 1935 2000
Duties as a % of net imports Duties as a % of dutiable imports
Econ 4321: International Trade 16
Figure 10.1 US average import duties, 1792–2010
THE EVOLUTION OF U.S. TRADE POLICY
United States Average Import Duties 1792-2005
70 – Alexander Tariff of Abominations Smoot-Hawley Tariff GATT WTO
Hamilton’s
Policy
Average Import Duty (in Percentage)
60 –
50 –
40 –
30 –
20 –
10 –
0 –| | | | |
1792 1825 1880 1935 2000
Duties as a % of Net Imports Duties as a % of Dutiable Imports
Econ 4321: International Trade 17
THE EVOLUTION OF U.S. TRADE POLICY 2
The tariff schedule has evolved over time.
Before the income tax was established, tariffs were an
important source of revenue.
Late 18th Century, tariffs were a convenient way to raise
government revenue.
Up to the beginning of the 20th century
Congress and the President could impose tariffs on any narrowly
defined goods imported from any country.
A significant source of revenue came from tariffs.
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THE EVOLUTION OF U.S. TRADE POLICY 3
Before income tax, the “tariff bill” was a major source of revenue
for the government.
Governments later recognized tariffs’ ability to protect
domestic industry
Alexander Hamilton suggested that high tariffs on manufactured
goods would allow development in U.S. industry capable of
competing with British
The difference between Southern and Northern states restricted
solidarity within country
Confederate Constitution prohibited the protection of any specific
industry
Tariffs increased to finance the Civil War
Germany was also increasing tariffs to fight imports from the UK.
The UK increased tariffs to finance the war effort.
19
Econ 4321: International Trade
THE EVOLUTION OF U.S. TRADE POLICY 4
In the late 18th century, the infant-industry protection policy was
intended to protect emerging industries from foreign competition
to allow them to become established.
Infant-Industry Protection was adopted, and U.S. tariffs were
raised from 5% in 1792 to 12.5% by 1812
The Tariff of Abominations of 1828 caused tariffs to reach a
high of over 65%
Southern states revolted since they imported many
manufactured goods.
In the early 19th century, the Tariff of Abominations set very high
rates of tariffs to protect essentially Northern industries.
This was not popular with the Southern states.
The last tariff bill Congress passed was the Smoot-Hawley Tariff of
1930 which resulted in the highest general tariff structure in U.S.
history.
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THE EVOLUTION OF U.S. TRADE POLICY 5
Smoot-Hawley Tariff of 1930
A high level of tariffs adopted by the U.S. in 1930 caused a
large decline in world trade.
The general tariff structure in U.S. history – averaged 60%
It led to retaliation by other nations.
It did not help the Great Depression.
The volume of world trade declined from $3 billion in 1929
to less than $500 million in 1933
Econ 4321: International Trade 21
THE EVOLUTION OF US TRADE POLICY 6
Table 10.2 Percentage of federal revenue from tariffs (customs duties)
Date % of federal revenue
1789–91 99.6
1850 91.0
1910 49.4
1920 4.9
1970 1.3
Econ 4321: International Trade 22
THE EVOLUTION OF U.S. TRADE POLICY 7
In 1934 Congress passed the Reciprocal Trade
Agreements Act, which had the following provisions
1. Tariff Reciprocity – U.S. will negotiate tariff
reductions only in return for tariff reductions by trade
partners
2. U.S. trade policy is transferred to President, and
Congress votes to approve agreements
3. The Act is based on the Most Favored Nation
principle, where any tariff reductions applied to one
country apply to the same products of all other trade
partners with MFN designation
It makes trade less risky for businesses since tariffs are not
changed on political whim.
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THE EVOLUTION OF U.S. TRADE POLICY 8
While today tariffs can not be easily raised, there is
reduced flexibility.
Comparative advantage can change over time.
A new mechanism had to be developed to protect
comparative disadvantage industries by raising tariffs on
particular imports from particular countries.
Econ 4321: International Trade 24
ANTIDUMPING, COUNTERVAILING DUTIES,
AND THE ESCAPE CLAUSE
According to World Trade Organization (WTO) rules,
countries can not increase tariffs on selected products
unilaterally.
Tariffs on particular products by a country are ‘bound’ and
can NOT be raised.
As a result, countries have developed what is known as
administered protection.
They all involve increasing the tariff on a particular good
by a country
The WTO sanctions the processes
Econ 4321: International Trade 25
ANTIDUMPING, COUNTERVAILING DUTIES,
AND THE ESCAPE CLAUSE 2
Antidumping
Antidumping laws prohibit an international firm
from selling its products in an export market for less
than they are sold for in the home market
Dumping can be defined in two ways:
Cost-based dumping occurs when a firm sells a
product at a price below its cost of production in a
foreign market
Price-based dumping occurs when a firm sells a
product in a foreign market at a price lower than the
price charged in its home market.
Econ 4321: International Trade 26
ANTIDUMPING, COUNTERVAILING DUTIES, AND
THE ESCAPE CLAUSE 3
Types of Dumping
Sporadic dumping is the occasional sale of a product
by a firm in a foreign market at a price below that
sold in its domestic market.
It can occur due to the international asymmetry of the
business cycle.
Econ 4321: International Trade 27
ANTIDUMPING, COUNTERVAILING DUTIES,
AND THE ESCAPE CLAUSE 4
Persistent dumping is the sale of a product by a firm in a
foreign market at a price below that sold in its domestic
market over an extended period of time.
It can occur if different markets have persistent
different elasticities.
Predatory dumping is the sale of a product by a firm in a
foreign market at a price below that sold in its domestic
market to drive competing firms out of business.
Econ 4321: International Trade 28
ANTIDUMPING, COUNTERVAILING DUTIES, AND
THE ESCAPE CLAUSE 5
History of Antidumping Law in the United States
The original U.S. antidumping law passed in 1916
prohibited only predatory dumping
It intended to create a legal level playing field for domestic and
foreign firms.
It became easier to restrict foreign imports sold at lower prices
than similar U.S. goods.
Legislation since 1921 has loosened the requirements
on antidumping and made it easier to restrict imports.
Econ 4321: International Trade 29
ANTIDUMPING, COUNTERVAILING DUTIES,
AND THE ESCAPE CLAUSE 6
General Agreement on Tariffs and Trade (GATT)
An agreement was reached in 1947 that established
principles to govern international trade
Until 1995, this organization administered multilateral
trade agreements and settled trade disputes.
Econ 4321: International Trade 30
THE GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT)
General Agreement on Tariffs and Trade (GATT)
sanctioned the concept of antidumping laws.
The code provides guidelines under which countries may
act against foreign firms that engage in predatory pricing
that results in material injury to an industry in the
importing country.
The WTO believes U.S. law makes it too easy to obtain
punitive tariffs against imports as it prohibits price-
based and cost-based dumping as well.
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THE GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT) 2
Driven by an initial complaint and following two
investigations, a tariff equal to the difference between the
U.S. market price and the foreign market price (the
dumping margin) can be ordered.
Many cases are terminated before this point as the foreign
firm may agree to raise prices rather than incur a tariff.
U.S. exporters are having similar cases filed against them in
foreign countries
Econ 4321: International Trade 32
THE GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT) 3
Countervailing Duties
A countervailing duty is a tariff designed to offset the
effects of foreign government subsidies for exports.
U.S. firms can petition the government for a
“countervailing duty” to offset the subsidy
Determining the size of government subsidies is
difficult
Problems arise in determining which subsidies can
be countervailed and disentangling trade policy and
industrial policy
Between 1980 and 2001, 444 countervailing duty
cases were filed in the U.S.
Econ 4321: International Trade 33
THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 4
The Escape Clause
An escape clause allows temporary protection for
a U.S. industry to adjust its operations to compete
with more intense import competition.
This is especially important in a period of floating
exchange rates.
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THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 5
Major wars used to be followed by recessions as
governments tried to return to balanced budgets.
In 1944, allied powers met in Bretton Woods, NH, to set
guidelines for the world economy after the war.
International Monetary Fund (IMF) and World Bank were
conceived at this conference.
A framework for international trade was developed to
repair the damage of escalating tariffs and prevent it from
occurring in the future.
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THE GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT) 6
International Trade Organization (ITO) was
conceived to develop the international trading system.
This did not occur because the U.S. Congress did not
ratify the agreement.
An interim committee was formed to launch ITO:
The General Agreement on Tariffs and Trade (GATT)
This did not require Congressional approval and
functioned effectively for 50 years.
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THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 7
More than 100 contracting parties (countries)
participate in GATT, and it covers more than 90% of
world trade.
To become a contracting party, a country had to give
MFN status to all other contracting parties and
eliminate any quotas.
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THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 8
GATT and Multilateral Trade Negotiations
Several Multilateral Trade Negotiations (MTNs)
successfully reduced tariffs.
First, a meeting of trade ministers would
propose negotiation agenda
Trade ministers of each country would ask their
government for authorization to participate in
MTN
Given its size, U.S. participation was critical;
negotiations could not proceed without U.S.
participation
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THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 9
Other contracting parties did not want to enter
negotiation unless the U.S. agreed to honor the
negotiated agreement.
Congressional fast-track approval was a statement that
the U.S. Congress would vote to ratify the negotiated
agreement without modification or amendments.
Once negotiated and approved, the tariff cuts would be
phased in over a number of years.
Econ 4321: International Trade 39
THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) 10
Table 10.3 GATT and WTO multilateral trade negotiations
Multilateral trade round Dates Tariff cuts (%) # of countries Major negotiations
Pre-GATT 1934–1947 33.2% 23 Tariffs
First round 1947 21.1 23 Tariffs
Second round 1949 1.9 13 Tariffs
Third round 1950–1951 3.0 38 Tariffs
Fourth round 1955–1956 3.5 26 Tariffs
Dillon round 1961–1962 2.4 26 Tariffs
Kennedy round 1964–1967 36.0 62 Tariffs, agriculture,
and dumping
Tokyo round 1974–1979 29.6 99 Tariffs and NTBs
Uruguay round 1987–1994 38.0 125 Tariffs, services,
agriculture
Millennium round 1999 Aborted
Doha round 2001– 142 See text for details
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THE GENERAL AGREEMENT ON TARIFFS
AND TRADE (GATT) 11
The process has continued to move forward, but
tariffs are still a problem for two reasons
Tariffs on some products are still high
Developing countries and the economies of Eastern
Europe have been latecomers in joining the WTO and
reducing their tariffs.
Econ 4321: International Trade 41
THE WORLD TRADE ORGANIZATION
The World Trade Organization (WTO) was created
in the Uruguay Round.
This replaced the old GATT Interim Committee.
The large number of countries participating in
negotiations and the increasing complexity of the
issues made the old system unworkable.
The WTO also has an effective enforcement
mechanism that was lacking in GATT.
Econ 4321: International Trade 42
THE FUTURE OF INTERNATIONAL TRADE
NEGOTIATIONS
Many conflicts have occurred surrounding WTO
meetings.
In 2002, the U.S. Congress passed legislation
authorizing the executive branch to participate in
MTNs.
They were to have been completed in 2005
The issues are complex but provide a roadmap for
modernizing the WTO rules.
Econ 4321: International Trade 43
THE FUTURE OF INTERNATIONAL TRADE
NEGOTIATIONS 2
The major issues are
International Trade in Agricultural Products
Market Access – The WTO describes tariff
reduction as market access
International Trade in Services covered in the
General Agreement of Trade in Services (GATS)
Trade-Related Intellectual Property (TRIPS)
Trade-Related Investment Measures (TRIMS)
Econ 4321: International Trade 44
THE FUTURE OF INTERNATIONAL TRADE
NEGOTIATIONS 3
The Future of MTNs
MTNs are becoming difficult to negotiate
The Doha Round was to be completed by December
2006, but that point had reached no agreement.
The opportunities for world trade are enormous,
but tariffs distort world trade in agriculture.
Liberalizing world trade in this area holds the
promise of both rationalizing the production of food
and feeding the world’s hungry
Econ 4321: International Trade 45
THE FUTURE OF INTERNATIONAL TRADE
NEGOTIATIONS 4
International trade in services is hindered by the lack
of trade rules.
Governments are essentially free to restrict trade in
service as they see fit.
Even so, world trade in services is growing faster than
the trade in goods.
This could be one of the more important factors in
world economic growth in the 21 st century.
Econ 4321: International Trade 46
THE FUTURE OF INTERNATIONAL TRADE
NEGOTIATIONS 5
Liberalizing trade in the framework of MTNs has been
slow.
There is opposition to the WTO itself.
Some countries want to move at a faster rate than MTNs
can allow, consistent with WTO rules.
Econ 4321: International Trade 47
SUMMARY
A country’s international trade policies are measures
that the country’s government designs to affect its
trade relations with the rest of the world.
An industry or firm will seek government regulation
that enhances the profits of nearly all forms of the
industry.
International trade can create losses for firms and
workers in the industries that compete with imports
(import-competing sectors), resulting in an incentive
to seek protection from imports.
Econ 4321: International Trade 48
SUMMARY 2
The study of politics by economists is called public
choice, and the theory of public choice states that
politicians attempt to maximize utility.
In general, industries and/or products receive high
tariffs when: (1) they are large; (2) are concentrated
regionally; (3) they produce an intermediate product;
(4) employees have voting strength; (5) industries
have a comparative disadvantage
Econ 4321: International Trade 49
SUMMARY 3
Tariffs were raised to the highest level in U.S. history
during the Great Depression.
The Reciprocal Trade Agreements Act of 1934
mandated reciprocity in negotiations, transferred
authority to the president, mandated MFN, and is the
basis of all subsequent U.S. trade policy.
Econ 4321: International Trade 50
SUMMARY 4
Three forms of administered protections are
antidumping, countervailing duties, and the escape
clause.
In 1944 the ITO was developed at the Bretton Woods
conference but never ratified – the GATT interim
committee performed the intended functions for 50
years.
Upon entering GATT, countries must adopt MFN tariffs
with respect to all other contracting parties.
Econ 4321: International Trade 51
SUMMARY 5
The agenda for the Uruguay Round covered: (1) tariffs
would be reduced by approximately 33%; (2) quotas
and voluntary export restraints would be phased out;
(3) trade-related government investment measures
were discussed; (4) the GATS was created; (5) rules
governing government procurement were discussed;
(6) contracting parties tried to reduce trade
distortions caused by agricultural subsidies; and (7)
the WTO was created to replace GATT.
Econ 4321: International Trade 52
SUMMARY 6
The agenda for the Doha Round included a reduction
in farm subsidies in developed countries; a lowering of
tariffs in general; and agreements on trade in services,
intellectual property, and FDI, but there has been little
progress.
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