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Global Economics Eco 6367 Dr. Vera Adamchik


Global Economics Eco 6367 Dr. Vera Adamchik Trade Regulations and Industrial Policies * – PowerPoint PPT presentation

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Title: Global Economics Eco 6367 Dr. Vera Adamchik

Global EconomicsEco 6367Dr. Vera Adamchik
  • Trade Regulations and Industrial Policies

US Tariff Policy
In-class exercise US tariffs
  • Go to the home page of the United States
    International Trade Commission at
    http// . Click on U.S.
    Imports/Export Data (DataWeb) under Research
    Tools (on the right), and then click on U.S.
    Imports AVE Duties 1891-2008 under Trade Data
    Reports (on the right).
  • Comment on the value of imports over the past
    century that have come into the United States
    duty free or under tariff protection and on the
    value of tariffs collected in dollars and as
    percentages of total imports and of total
    dutiable imports.

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US tariff policy before 1930
  • The dominant motives government tax revenue,
  • Tariff laws were frequently changed.
  • Fluctuations of the tariff rate.

  • McKinley (1890) and Dingley (1897) Laws the
    arguments of American labor and businesses
    against cheap foreign labor.
  • Wilson (1894) Law an attempt by the Democratic
    Party to wipe out the tariff legislation of the
    Republican party which had been in power for 32
  • Payne-Aldrich (1909) and Underwood (1913) Laws
    trade liberalization.
  • World War I ? protectionism ? the concept of
    scientific tariff ? Fordney-McCumber Law (1922).

The Smoot-Hawley Tariff Act
  • The Smoot-Hawley Tariff Act (1930) brought the US
    tariff to the highest protective level yet in the
    history of the United States and imposed an
    effective tax rate of 60 on more than 3,200
    products and materials imported into the US, and
    tariff rates had quadrupled. Quoted from

The Smoot-Hawley Tariff Act
  • The Smoot-Hawley Tariff Act brought retaliatory
    tariff acts from foreign countries and caused a
    drastic contraction of international trade "U.S.
    imports from Europe declined from a 1929 high of
    1,334 million to just 390 million in 1932,
    while U.S. exports to Europe fell from 2,341
    million in 1929 to 784 million in 1932. Overall,
    world trade declined by some 66 between 1929 and
    1934. To this day, the phrase Smoot-Hawley
    remains a watchword for the perils of
    protectionism." Quoted from http//

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The Reciprocal Trade Agreement Act
  • Smoot-Hawley marked the end of the line for high
    tariffs in 20th century American trade policy.
    Thereafter, beginning with the 1934 Reciprocal
    Trade Agreements Act, the United States generally
    sought trade liberalization through bilateral or
    multilateral tariff reductions.

  • The most favored nation (MFN) clause is an
    agreement between two nations to apply tariffs to
    each other at rates as low as those applied to
    any other nation.
  • The MFN concept is misleading because it implies
    that a country is getting special, favored
    treatment over all other countries. However, the
    term means the opposite it represents an
    element of nondiscrimination in tariff policy.
    The new term normal trade relations (NTR)
    reflects the concept more satisfactory.

MFN/NTR An example
  • Suppose that the US and India conclude a
    bilateral tariff negotiation whereby India
    reduces its tariffs on US computers and the US
    reduces its tariffs on Indian clothing.
  • MFN/NTR treatment states that any third country
    with which the US has an MFN/NTR agreement (such
    as Kenya) will get the same tariff reduction on
    clothing from the US that India received.

MFN/NTR An example
  • Further, Kenya will, if it has an MFN/NTR
    agreement with India, also get the same tariff
    reduction from India on computers (if Kenya
    exported any computers to India) that the US
  • These reductions for Kenya occur even though
    Kenya itself did not take part in the bilateral
    tariff negotiations. In effect, they make the US
    tariff on clothing and the Indian tariff on
    computers nondiscriminatory by country of origin.

  • 15 countries had begun talks in December 1945 to
    reduce and bind customs tariffs. With the Second
    World War only recently ended, they wanted to
    give an early boost to trade liberalization, and
    to begin to correct the legacy of protectionist
    measures which remained in place from the early
  • Since 1948, the General Agreement on Tariffs and
    Trade (GATT) had provided the rules for the

A word of caution the fine print 
  • GATT is often described as an international
    organization formed by the GATT members. The
    phrase reflects GATT's de facto role before the
    WTO was created. However, this role was always ad
    hoc, without a proper legal foundation.
  • International law did not recognize GATT as an
    organization. Officially, GATT signatories were
    contracting parties. 

  • Under the GATT, member countries pursued eight
    rounds of negotiations to lower governmental
    barriers to trade.
  • The last and largest GATT round, was the Uruguay
    Round which lasted from 1986 to 1994 and led to
    the WTOs creation.
  • The Uruguay Round agreements are the basis of the
    present WTO system.

GATT trade rounds
GATT trade rounds
Year Place/name Subjects covered Countries
1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-1961 GenevaDillon Round Tariffs 26
1964-1967 GenevaKennedy Round Tariffs and anti-dumping measures 62
1973-1979 GenevaTokyo Round Tariffs, non-tariff measures, frameworkagreements 102
1986-1994 GenevaUruguay Round Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc 123
  • The WTO was established on January 1, 1995 as a
    result of the Uruguay Round negotiations
  • Membership 153 members on 23 July 2008 ,
    accounting for over 97 of world trade. Around 30
    others are negotiating membership.
  • Budget 194 million Swiss francs for 2010.
  • Secretariat staff 637
  • The WTO headquarters are in Geneva, Switzerland.

WTO contributions
  • All WTO members pay contributions. Contributions
    are determined according to each Member's share
    of international trade (), based on trade in
    goods, services and intellectual property rights
    for the last three years for which data is
    available. There is a minimum contribution of
    0.015 for Members whose share in the total trade
    of all Members is less than 0.015. The total
    2010 budget was 189,400,000 Swiss francs. The US
    contributed 24,550,028 Swiss francs, or about
    13.0. (http//
    e/contrib10_e.htm ).

WTO functions
  • Administering WTO trade agreements
  • Forum for trade negotiations
  • Handling trade disputes
  • Monitoring national trade policies
  • Technical assistance and training for developing
  • Cooperation with other international organizations

The WTOs rules (the agreements)
  • The WTOs trade rules are actually agreements
    that governments negotiated.
  • The WTO agreements cover
  • goods -- the General Agreement on Tariffs and
    Trade (GATT)
  • services -- the General Agreement on Trade in
    Services (GATS) and
  • intellectual property -- the Trade-Related
    Aspects of Intellectual Property rights (TRIPS).

The WTOs rules (the agreements)
  • http//

Trade negotiations
  • Decisions are made by the entire membership. This
    is typically by consensus. A majority vote is
    also possible but it has never been used in the
    WTO, and was extremely rare under the WTOs
    predecessor, GATT. The WTOs agreements have been
    ratified in all members parliaments.
  • The WTOs top level decision-making body is the
    Ministerial Conference which meets at least once
    every two years.

Trade disputes
  • Dispute settlement is the central pillar of the
    multilateral trading system, and the WTOs unique
    contribution to the stability of the global
    economy (http//
    s_e/tif_e/disp1_e.htm )
  • Countries often break their promises or violate
    trade rules, and the disputes need to be
    resolved. So far, the US was a complainant in 96
    cases, a respondent in 110 cases, and a third
    party in 80 cases ( http//
    wto_e/countries_e/usa_e.htm ).

Trade policy reviews
  • The WTO conducts regular reviews of individual
    countries trade policies (http//
    ish/thewto_e/whatis_e/tif_e/agrm11_e.htm ).
  • The frequency of the reviews depends on the
    countrys size
  • The four biggest traders -- the European Union,
    the United States, Japan and China (the Quad)
    -- are examined approximately once every two
  • The next 16 countries (in terms of their share of
    world trade) are reviewed every four years.
  • The remaining countries are reviewed every six
    years, with the possibility of a longer interim
    period for the least-developed countries.

Doha Round
  • In November 2001 in Doha, Qatar WTO member
    governments agreed to launch new negotiations.
    The entire package is called the Doha Development
    Agenda (DDA) (http//
    whatis_e/tif_e/doha1_e.htm )
  • The work program lists 21 subjects. The original
    deadline of 1 January 2005 was missed. So was the
    next unofficial target of the end of 2006.

Doha Round
  • On July 28, 2006, the WTO General Council
    approved Director General Pascal Lamys
    recommendation to suspend the current Doha round
    negotiation amid irreconcilable differences in
    negotiation positions among negotiators over main
    issues, such as the reduction of farm subsidies,
    farm tariffs, and industrial tariffs. No further
    negotiation schedule was announced. The Doha
    round negotiation slipped into total uncertainty.
  • A series of meetings were held in Geneva from 21
    to 30 July 2008. Consultations took place among a
    group of ministers representing all interests in
    the negotiations. The July 2008 package is a
    stepping stone on the way to concluding the Doha
    Round. (http//
    dda_e.htm )

The WTO attracts a lot of criticism
  • The ten misunderstandings
  • 1. The WTO dictates policy2. The WTO is for
    free trade at any cost3. Commercial interests
    take priority over development 4. and over
    the environment5. and over health and
    safety6. The WTO destroys jobs, worsens
    poverty7. Small countries are powerless in the
    WTO8. The WTO is the tool of powerful lobbies9.
    Weaker countries are forced to join the WTO10.
    The WTO is undemocratic
  • Go to http//
    /10mis_e/10m00_e.htm to read how the WTO
    responds to these accusations/criticisms.

We will watch a movie!
  • Videos on WTO explained
  • The Routes of Trade (9m 32s) 03/09/2009
  • WTO at Fifteen (7m 39s) 17/09/2010

Trade promotion authoritya.k.a. fast-track
  • The objective to avoid congressional amendments
    to international trade agreements.
  • Was devised in 1974.
  • President notifies Congress of intent to enter
    trade negotiations with another country.
  • Congress has 60 legislative days to permit or
    deny fast track authority.
  • Upon completion of the presidents negotiations,
    their results are subject to an up-or-down vote
    without possibility for amendment.

Remedies against imports that are fairly traded
Escape clause
  • The objective - temporary relief to US firms and
    workers injured by increases in imports that are
    fairly traded.
  • President can terminate trade concession or levy
    trade restrictions.
  • Most common forms tariff increases, tariff-rate
    quotas, trade adjustment assistance.
  • Can be enacted for 4 years and extended for
    another 4 years.
  • Example Multifiber Arrangement system to
    restrict textile imports from developing

Remedies against imports that are unfairly
traded(dumped and subsidized imports)
Countervailing duties
  • Definition tariff imposed in retaliation
    against export subsidies for foreign competition.
  • U.S. Department of Commerce investigates claim.
  • Temporary tariff applied if the preliminary
    investigation finds reasonable indication of
    export subsidy.
  • Permanent tariff imposed if both Commerce
    Department and International Trade Commission
    determine export subsidy exists.
  • Duty removed when foreign exports subsidies are

Antidumping duties
  • Definition tariff levied against a foreign
  • who sells to the U.S. market at lower price than
    in home market
  • or whose prices on exports to U.S. are below
    average total cost of production.
  • Must include evidence of dumping, material
    injury, and link between imports and injury.
  • Economists support antidumping laws that address
    predatory pricing.

An example from the textbook
Effects of dumped and subsidized imports and
their remedies
Downstream industries consuming industries that
use imports as intermediate inputs into their own
production. Upstream industries industries
selling intermediate inputs to production of the
import-competing industry.
Remedies against unfair trade restrictions that
hinder US exports
Unfair trading practices
  • Unfair trading practices foreign trade
    restrictions that hinder US exports and foreign
    subsidies that hinder US exports to third-country

Section 301
  • Under Section 301 of the 1974 Trade Act, the US
    government can ultimately use the threat of
    imposing new import barriers, in an effort to
    force foreign-country governments to remove
    allegedly unfair policies that limit the access
    of US exports to these countries.

Section 301
  • The unfair-trade portion of US law permits the
    president to take retaliatory action in response
    to unjustifiable, unreasonable, or discriminatory
    restrictions on US exports by foreign countries.

Section 301
  • Unjustifiable refers to any action that
    violates the international legal rights of the
  • unreasonable refers to unfair and inequitable
    practices, although these are obviously hard to
    define and
  • discriminatory means actions that deny national
    or MFN/NTR treatment to the US.

Section 301
  • The range of US possible actions is broad, and
    includes (among others) suspending trade
    agreement concessions, imposing duties or other
    import restrictions, and entering into agreements
    with the other country to eliminate the behavior
    or to provide compensation to the US.
  • With the advent of the much-improved dispute
    settlement procedure in the WTO, the US has
    reduced its use of Section 301.

In January 2009, Less than a week before it
leaves office, the Bush administration has
sparked anger across the Atlantic by tripling the
import duty rate on Roquefort cheese to 300, a
move which the US hopes will "shut down trade" in
the sheep's milk product by making it
prohibitively expensive. The decision, part of
Washington's attempts to force the EU into
dropping its ban on hormone-treated beef, was
greeted with disbelief by the French government
and by farmers in the south-western Aveyron
region who depend on the industry for their
livelihoods. (http//
9/jan/17/france-america-import-tariffs ) These
changes were scheduled to go into effect on March
23, 2009.
The EU claimed this action constituted an
escalation of the dispute and was more
punitive than current trade sanctions. The EU
decided to hold off further action until the
Obama Administration reviewed the decision. The
Administration delayed implementing the changes,
pending further negotiations with the EU. In May
2009, following a series of negotiations, the
United States and the EU agreed to a settlement
that could resolve this longstanding trade
dispute. The terms of this agreement will be
phased in over the next few years.
Trade adjustment assistance
  • Trade adjustment assistance (TAA) was introduced
    in the Trade Expansion Act (1962).
  • TAA means that, if a tariff reduction injures
    workers or industries by causing an inflow of
    imports, displaced workers can petition for
    additional unemployment compensation or for help
    in retraining for other types of jobs.

Trade adjustment assistance
  • Recently, the Trade Adjustment Assistance Reform
    Act (2002) created an additional program for a
    health coverage tax credit and added a new
    benefit for older workers. Workers who lost their
    jobs because their companies shifted production
    abroad to countries that were part of a free
    trade agreement with the US, or to some African
    and Western Hemisphere countries, were also made
    eligible for TAA.

TAA Arguments in favor
  • To most economists, the introduction of TAA in
    1962 was a marked step forward for public policy,
    because previously the only alternative
    considered was to reimpose the tariff (the
    escape clause). Adjustment assistance is better
    than using a tariff or nontariff barrier to limit
    imports and resist shrinking the domestic
    industry. And politically, it can reduce the
    pressure to enact these import barriers.

TAA Arguments against
  • Some people think that TAA is discriminatory
    because special assistance is given to workers
    displaced by imports while workers displaced by
    domestic competition receive no such special
    favors. Workers are faced with the need to
    relocate and develop new skills for a variety of
    reasons not only increased imports but also
    changing technologies. There is nothing special
    about increasing imports, and workers affected by
    increasing imports deserve no special treatment.

TAA Arguments against
  • In fact, offering adjustment assistance could
    encourage workers to take jobs in
    import-competing industries that are shrinking,
    because they have the social insurance offered by
    adjustment assistance. In addition, adjustment
    assistance is not that effective. It does offer
    temporary income assistance to those who qualify,
    but it is much less successful at effective
    retraining and smooth relocation.

Export promotion and financing
  • Go to the Export-Import Bank website
    http// and learn about the ExIm
    Bank products for exporters (a) click on Learn
    About Export Credit Insurance, then click on
    Video Resources under the Shortcuts title on
    the left, then click on ExIm Bank Products for
    Exporters Video, watch the video. (b) click on
    Products Policies on the upper horizontal

Export promotion and financing
  • Go to the Foreign Credit Insurance Association
    (FCIA) website http// and learn
    about their products (click on the Our Products
    link on the upper horizontal toolbar).

Strategic trade policy
  • Strategic trade policy government assists
    domestic companies in capturing economic profits
    from foreign competitors.
  • Typically, strategic industries that are
    important to future domestic economic growth and
    that provide widespread benefits to society.
  • Influential since the 1980s.

Economic sanctions
  • Economic sanctions government-mandated
    limitations placed on customary trade or
    financial relations among nations.
  • The nation initiating the economic sanctions, the
    imposing nation, hopes to impair the economic
    capabilities of the target nation to such extent
    that the target nation will succumb to its

Determinants of the success of economic sanctions
  • The number of nations imposing sanctions.
  • The degree to which the target nation has
    economic and political ties to the imposing
  • The extent of political opposition in the target
  • Cultural factors in the target nation.
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