Transcript Document

Chapter 7
Commercial
Policy
Chapter Objectives
• Examine the dollar cost of the effects of
tariffs and quotas in the European
Union, U.S. and Japan in the
agriculture, clothing, and textile
industries
• Analyze the most common reasons for
countries to protect certain industries
• Discuss the mechanisms used to
provide protection
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Introduction
• Since the end of WWII, average tariff rates around
the world have fallen substantially
• By 2001, average nominal rates were 4% in US,
5.1% in Japan, 3.9% in EU
• However, all nations have higher levels of protection
in particular industries they deem “sensitive”
• In addition to tariffs and quotas, many countries
provide generous subsidies to some of their
agricultural producers, particularly among
developed nations
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Direct Costs and Jobs Saved
• Since the phase in of the Uruguay Round tariff cuts,
average tariffs have fallen 40%—but few sectors
are average
• For example, agriculture, clothing and textiles
experience much smaller reductions in tariffs and
quotas (12%, 14%, 14% respectively)
• In addition, all of these sectors in the EU, Japan, and
US have significant non-tariff barriers applied to them
including large government subsidies in the case
of agriculture
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Direct Costs and Jobs Saved (Cont.)
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Direct Costs and Jobs Saved (Cont.)
Insert Updated Table 7.2 Here
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The Costs of Protection: Lessons
• Trade policy is a grossly inefficient
mechanism to create jobs
– It is a non-transparent job-creation program
– It relies on too many intervening variables, and
does not go directly to the heart of the problem
– If job creation is the goal, tariffs and quotas are
very expensive
• Better job-creation tools: (1) sound macroeconomic
polices and (2) flexible labor markets
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Why Protect?
The Logic of Collective Action
• Given that the costs of tariffs and quotas are high to
consumers, why do consumers tolerate them?
• Mancur Olson´s Logic of Collective Action
– The costs of tariffs and quotas are borne by a great many
people: everyone pays a little for protection
– The benefits of protection is concentrated in a few industries:
few benefit a lot from protection
– Thus, there is an asymmetry in the incentives to oppose the
policy: those benefiting from protection have much greater
incentives than those hurt by it to lobby for it
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Main Arguments
behind Trade Barriers 1
• Labor: Protection must be used against
imports from countries where wages are
much lower
– Problem: Does not consider differences in
productivity between different workforces:
as productivity rises, so will wages
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Main Arguments
behind Trade Barriers 2
• Infant industry: Developing countries have nascent industries
that must be protected against competition from
industrial countries
– Assumes: (1) market forces do not allow for the development
of a certain industry and (2) the industry has positive
externalities—spillover benefits (valuable linkages to other
industries or technologies)
– Problems: (1) may increase inefficiency and result in
negative linkage effects and (2) technological externalities
are difficult to measure—which industries should
be protected?
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Main Arguments
behind Trade Barriers 3
• National security: Certain industries
must be protected in order to guard
national security (military security,
cultural values)
– Problems: (1) Vital mineral resources, for
example, can be purchased cheaply
abroad during peacetime; and (2) how to
assess the effects of, say, U.S. television
programs on Canadian culture?
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Main Arguments
behind Trade Barriers 4
• Retaliation: Another country´s trade
barriers must be countered with
trade barriers
– Problems: Although retaliation can provide
an incentive for trade negotiations, it can
also lead to escalating trade wars
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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
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The Politics of Protection in the U.S.:
Main Mechanisms
• Protection is obtained through (1) direct
action by the president (e.g., VERs) or
(2) four types of legal procedures
– Countervailing duties
– Antidumping duties
– Escape clause relief
– Section 301 retaliation
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The Politics of Protection in the U.S.:
Main Mechanisms (cont.)
• In the case of these four legal
procedures, a firm or industry petitions
the federal government to initiate an
investigation into foreign country or
foreign firm practices
• Let´s analyze each of the four
procedures in greater detail…
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Countervailing Duties
• Countervailing duty: a tariff that is granted
to a U.S. industry that has been hurt by a
foreign country’s subsidizing its firms
– Subsidies allow foreign firms to sell their products
at lower prices; countervailing duty seeks to
counter the effect of the subsidy
– Problem: defining subsidy is subjective
– Uruguay Round defined subsidies as (1) a direct
loan or transfer, (2) preferential tax treatment, (3)
the supply of goods or services other than general
infrastructure, or (4) income and price supports
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Antidumping Duties
• Antidumping duty: 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 are thus a source of
tension between countries
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Antidumping Duties (cont.)
• WTO: Dumping occurs when an
exporter sells a product as a price
below the one it charges in its
home market
– Problem: Comparing domestic and foreign
market prices is difficult due to differences
in the price of transportation, wholesale,
and other add-ons
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Antidumping Duties (cont.)
• Three methods to determine whether a good
is being dumped
1. Comparing the price in third-country markets
2. Estimating the cost of production; or
3. Estimating 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)
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Antidumping Duties (cont.)
• In order for antidumping duties to be
allowed, the 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
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Antidumping Duties (cont.)
• Problems: Economic theory and legal
definitions are not in agreement
– If a firm is not earning above average profits
somewhere, it cannot maintain a price somewhere
else that is below the cost
– Firms often sell below costs
• May sell at below costs in order to penetrate a market
• May go for extended periods selling at prices that do not
cover fixed costs as long as the costs of variable inputs
(labor and materials) are covered
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Antidumping Investigation
• U.S. firms can initiate antidumping actions by filing a
petition with the International Trade Administration
(ITA) in the Department of Commerce
• If ITA finds dumping (or subsidization in the case of
countervailing duty) occurred, the U.S. International
Trade Commission (USITC) conducts an additional
investigation to determine whether the dumping has
posed substantial harm to the domestic industry
• The relative success of U.S. firms in proving foreign
dumping has induced a growing number of firms to
file petitions with ITA
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Escape Clause Relief
• Escape clause relief: temporary tariff on imports to
allow a domestic industry to escape the 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 directly
for relief from a surge of imports
– The petitioning firm or industry must show that it has been
harmed by imports and not some other factor
(e.g., poor management)
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Section 301 Retaliation
• Section 301: section of the U.S. 1974 Trade
Act that requires the U.S. Trade
Representative (USTR) to take action against
any nation that persistently engages in unfair
trade practices
– U.S. defines the meaning of unreasonable and
unfair trade practices
– Action is launched by a request for negotiations
with the country in question
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Super 301
• Super 301: requires the USTR to name
countries that systematically engage in
unfair trade, open talks with them,
and to retaliate if talks fail to
produce changes
– Passed in 1988 as part of another trade bill
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Applications of Section 301
and Super 301
• Application of Section 301 and Super 301 are
seen as arbitrary, unfair, and one-sided
– Results from domestic political pressures
in the U.S.
– Bypasses the WTO dispute settlement
mechanism, arguably weakening the WTO’s
authority
• However, U.S. legislators argue GATT/WTO system is
too slow and rigid, and unable to deal with new trade
issues (trade in services, intellectual property
rights, investment)
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