Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 7: Trade Regulations and Industrial Policies

Carbaugh, Chap. 7 2 The US and international trade  Smoot-Hawley Tariff Act (1930)  High point of US protectionism  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

Carbaugh, Chap. 7 3 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

Carbaugh, Chap. 7 4 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

Carbaugh, Chap. 7 5 GATT negotiations  Early bilateral agreements  Kennedy Round ( ) - first multi- lateral negotiations; focus on tariff cuts  Tokyo Round ( ) - focus on lowering non-tariff barriers  Uruguay Round ( ) - covered new issue areas (intellectual property, services, agriculture), included developing nations Trade regulation

Carbaugh, Chap. 7 6 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

Carbaugh, Chap. 7 7 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

Carbaugh, Chap. 7 8 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

Carbaugh, Chap. 7 9 Effects of dumping, subsidies, and remedies Trade regulation

Carbaugh, Chap Effects of dumping, subsidies, and remedies Trade regulation

Carbaugh, Chap 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

Carbaugh, Chap 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

Carbaugh, Chap 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

Carbaugh, Chap Welfare effects of strategic trade policy Industrial policy

Carbaugh, Chap 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