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Copyright ©2000, South-Western College Publishing International Economics By Robert J. Carbaugh 7th Edition Chapter 7: Trade regulations and industrial policies
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Carbaugh, Chap. 7 2 The US and international trade Smoot-Hawley Tariff Act (1930) Reciprocal Trade Agreements Act (1934) Introduced “most favored nation” (MFN) clause General Agreement on Tariffs and Trade [GATT] (1947) World Trade Organization (1995) Trade regulation
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Carbaugh, Chap. 7 3 GATT - Postwar trade liberalization Founded on the principle of non- discrimination, including: Most Favored Nation treatment National Treatment of imported goods Included trade dispute resolution mechanisms Committed signatories to use tariffs rather than quotas Trade regulation
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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
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Carbaugh, Chap. 7 5 GATT negotiations Early bilateral agreements Kennedy Round (1964-67) - first multi- lateral negotiations; focus on tariff cuts Tokyo Round (1973-79) - focus on lowering non-tariff barriers Uruguay Round (1986-93) - covered new issue areas, included developing nations Trade regulation
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Carbaugh, Chap. 7 6 GATT Uruguay Round results Protection of intellectual property Opened markets for trade in services Liberalized trade in agricultural products Removed some restrictions on textiles Trade regulation Limited subsidies to aviation and commercial research Enabled faster action on dumping disputes Called for creation of World Trade Organization; shift from agreement to international agency
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Carbaugh, Chap. 7 7 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
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Carbaugh, Chap. 7 8 Effects of dumping, subsidies, and remedies Price ($) SCSC S SK 0 a b c d DCDC Trade regulation S SK 0 Canadian steel industry Fair trade Unfair trade
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Carbaugh, Chap. 7 9 Effects of dumping, subsidies, and remedies SCSC Trade regulation DCDC Canadian iron ore industry - upstream D C’ Q1Q1 Q0Q0 P1P1 P0P0 SCSC DCDC Canadian auto industry - downstream Q0Q0 Q1Q1 P1P1 P0P0 S C’
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Carbaugh, Chap. 7 10 US “industrial policy” Broad policies to foster economic growth Tariff protection of declining sectors Aid to targeted sectors Agriculture, ship-building, energy, technology, manufacturing (autos, for example), etc. Tax incentives for investment Industrial policy
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Carbaugh, Chap. 7 11 US “industrial policy” (cont’d) Export promotion and financing Export-Import Bank Commodity Credit Corporation Knowledge based growth policy Industrial policy
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Carbaugh, Chap. 7 12 Japan’s industrial policy Trade protection and subsidies (especially early on) Assistance to targeted sectors Shipbuilding, steel, autos, machine tools, high- technology Ministry of International Trade and Industry (MITI) to target aid to promising sectors It is unclear how much of Japan’s success can be attributed to government assistance Industrial policy
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Carbaugh, Chap. 7 13 Strategic trade policy Response to competition in sectors with imperfect competition - small number of producers, each large enough to affect market price Subsidies can give the advantage to domestic manufacturers over foreign ones Industrial policy
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Carbaugh, Chap. 7 14 Welfare effects of strategic trade policy Price ($) A B C Demand = Price Industrial policy MC 1 (subsidy) MR MC 0 (no subsidy) US HDTV market
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Carbaugh, Chap. 7 15 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
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