Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 7 Commercial Policy

Introduction: Commercial Policy and Jobs Compare costs and benefits of trade barriers Common reasons to protect specific industries Look at efficiency of trade barriers in reaching goals. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-2

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-3 Protection in the EU, Japan, and US Since WWII, average tariff rates have fallen In most industrial countries agriculture, and clothing and textiles heavily protected Some countries provide subsidies with same effects as tariffs and quotas

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-4 Direct Costs and Jobs Saved in Agriculture, Clothing, and Textiles Since Uruguay Round average tariffs have fallen 40% Agriculture, clothing and textiles had much smaller decrease in tariff rates EU, Japan, and US have significant non- tariff barriers and large subsidies in agriculture

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-5 TABLE 7.1 EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-6 TABLE 7.1 (continued) EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-7 TABLE 7.2 Jobs Saved through Tariffs and Quotas

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-8 TABLE 7.2 (continued) Jobs Saved through Tariffs and Quotas

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-9 Direct Costs and Jobs Saved in Agriculture, Clothing, and Textiles Trade policy in high income countries increases poverty in low income countries Trade policy is a grossly inefficient mechanism to create jobs –A non-transparent job-creation program –Does not go directly to the heart of the problem –Tariffs and quotas are very expensive -Better job-creation tools: (1) sound macroeconomic polices and (2) flexible labor markets

Copyright © 2011 Pearson Addison-Wesley. All rights reserved The Logic of Collective Action Cost of policy is spread over many people Benefits are concentrated –Asymmetry in supporting/opposing policy Benefits from policy outweigh costs of industry’s resources to pass policy Costs of policy per person are so low, no incentive to allocate resources to fight policy

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Case Study – Agricultural Subsidies Direct subsidies are harmful –Overproduction –Squeeze out imports –Dumping of surplus in foreign markets Uruguay round decreased direct subsidies, but there were lots of loopholes Doha round is now trying to address agriculture

Table 7.3 Agricultural Subsidies, 2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-12

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The Labor Argument Protection must be used against imports from countries where wages are much lower Fails to consider differences in productivity –As productivity rises, wages rise Fails to consider that tariffs/quotas are expensive way to protect jobs –Better to use macro and labor market policies

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The Infant Industry Argument Developing countries have young industries that must be protected against competition from industrial countries Assumes: –Market forces do not allow for the development of a certain industry –Industry has positive externalities—spillover benefits (valuable linkages to other industries or technologies)

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The Infant Industry Argument Problems: May increase inefficiency and result in negative linkage effects Technological externalities are difficult to measure Which industries should be protected?

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The Infant Industry Argument To be effective Protection must be limited in time Industry must have falling costs

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The National Security Argument Certain industries must be protected in order to guard national security (military security, cultural values) Problems: –Vital mineral resources should be purchased cheaply abroad during peace –How to assess the effects of foreign goods on domestic culture?

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Why Nations Protect Their Industries: The Retaliation Argument Foreign country's trade barriers must be countered with domestic trade barriers Retaliation can provide an incentive for trade negotiations Can lead to trade wars where all countries are harmed

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Case Study – Traditional Knowledge and Intellectual Property Traditional knowledge often embedded in every day culture When traditional knowledge is used by outsiders without recognizing its origin, it is unfair and can be harmful Hard to enforce patents or ensure revenue is shared

Copyright © 2011 Pearson Addison-Wesley. All rights reserved The Politics of Protection in the United States Protectionist pressures have increased in the U.S. –Political reforms: reduced Congress’s past insulation from industry lobbyists –The end of the Cold War: reduced U.S. willingness to sacrifice domestic political considerations for geopolitical alliances –The rise of the newly industrialized countries (NICs): increased competitive pressures on U.S. industries –The growth of the U.S. trade deficit in the 1980s: spurred fears of the loss of competitiveness

Copyright © 2011 Pearson Addison-Wesley. All rights reserved The Politics of Protection in the United States Protection by direct action from president Protection by legal procedures –Firm or industry association petitions federal government to investigate foreign practices

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Countervailing Duties A tariff that is granted to a U.S. industry that has been hurt by a foreign country subsidizing its firm Subsidies allow foreign firms to sell their products at lower prices CVD tries to raise foreign firm’s price to offset subsidy Problem: defining subsidy is subjective

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Antidumping Duties A tariff levied on an import that is selling at a price below the product’s fair value Problem: Defining fair value is subjective Antidumping duties (ADD) are thus a source of tension between countries

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Antidumping Duties According to the WTO: Dumping occurs when an exporter sells a product at a price below the one it charges in its home market Problem: Comparing domestic and foreign market prices is difficult Differences in wholesalers, transportation costs, etc.

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Antidumping Duties Methods to determine if a good is being dumped: 1.Compare the price in third-country markets 2.Estimate the foreign firm’s production costs Dumping occurs if the foreign firm is not selling at a price that provides a normal rate of return on invested capital)

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Antidumping Duties Country claiming dumping must show that the dumping has caused material injury to its firms If dumping occurs without material injury, antidumping duty is not allowed Problems: Economic theory and legal definitions are not in agreement

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Escape Clause Relief Temporary tariff on imports to allow a domestic industry to escape pressure of imports and thus obtain a period of adjustment –Refers to a clause in the U.S. and GATT trade rules –Initiated when a firm or industry petitions the USTIC –The petitioning firm or industry must show that it has been harmed by imports

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Section 301 and Special 301 Section 301: Section of the U.S Trade Act that requires the U.S. Trade Representative (USTR) to take action against any nation persistently engaging in unfair trade practices –U.S. defines the meaning of unreasonable and unfair trade practices –Request for negotiations with the country in question

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Section 301 and Special 301 Special 301: Requires the USTR to monitor property rights enforcement around the world

Copyright © 2011 Pearson Addison-Wesley. All rights reserved Case Study – Economic Sanctions Sanctions are on exports or imports, may include financial component like access to international credit Sanctions used to achieve much broader policy objectives - ending South African apartheid.

Table 7.4 Economic Sanctions since World War I Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 7-31