trade regulations and industrial policies © 2011 cengage learning. all rights reserved. may not be...

1

Trade Regulations andIndustrial Policies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐

PowerPoint slides prepared by:Andreea ChiritescuEastern Illinois University


2

U.S. Tariff Policies Before 1930• The revenue argument• Dominant motive behind the early tariff laws of

the United States• First tariff law, 1789• Followed by 12 more tariff laws by 1812• Today, tariffs collected by the federal

government = 1% of total federal revenues


3

U.S. Tariff Policies Before 1930• The protective argument • 1791, Alexander Hamilton, “Report on

Manufacturers” • Young industries of the United States be granted

import protection until they could grow and prosper• The infant industry argument

• By the 1820s protectionist sentiments in the United States were well established


4

U.S. Tariff Policies Before 1930• The protective argument • 1828 , Tariff of Abominations, 45% duties• Provoked the South - wanted low duties for its

imported manufactured goods• Compromise Tariff of 1833• Downsizing of the tariff protection afforded U.S.

manufacturers


5

U.S. Tariff Policies Before 1930• 1840s and 1850s, U.S. government• Excess of tax receipts over expenditures• Walker tariffs, 23%• To eliminate the budget surplus

• Further tariff cuts, 1857, 16%• Civil War era• Morill Tariffs of 1861, 1862, and 1864• Means of paying for the Civil War


6

U.S. Tariff Policies Before 1930• Late 1800s, cheap foreign labor argument• McKinley and Dingley Tariffs• 1897, tariffs of 46%

• Payne-Aldrich Tariff of 1909• Turning point against rising protectionism

• Underwood Tariff of 1913• Reduced duties to 27%


7

U.S. Tariff Policies Before 1930• World War I• Protectionist pressures built up

• Early 1920s, scientific tariff concept• 1922, Fordney-McCumber Tariff • Tariff rates 38%


8

U.S. tariff history: average tariff ratesTABLE 6.1


9

Smoot-Hawley Act• Smoot-Hawley Act, 1930• Average tariffs of 53%• Tried to divert national demand away from

imports and toward domestically produced goods• Retaliation by 25 trading partners of the U.S.• Several nations tried to run a trade surplus by

reducing imports• Breakdown of the international trading system


10

Smoot-Hawley Act• Smoot-Hawley Act, 1930• 1932, U.S. exports decreased by nearly two-

thirds• President Hoover, protectionist trap• Refused to veto the Smoot-Hawley Act• Compelled to honor the 1928 Republican

platform • Tariffs to aid the weakened farm economy

• Bound to tradition• Bound to the platform of the Republican Part


11

The figure shows the pattern of world trade from 1929 to 1933. Following the Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs to an average level of 53 percent, other nations retaliated by increasing their own import restrictions, and the volume of world trade decreased as the global economy fell into the Great Depression

Smoot-Hawley protectionism and world trade, 1929–1933 (millions of dollars)

FIGURE 6.1


12

Smoot-Hawley Act• President Roosevelt, 1932• Democrats dismantled the Smoot-Hawley

legislation• Reciprocal trade agreements• Trade liberalization


13

Reciprocal Trade Agreements Act• 1934, Reciprocal Trade Agreements Act• Transferred authority from the Congress• Generally favored domestic import-competing

producers• To the president• Consider the national interest when forming trade

policy• Lower tariffs and a wave of trade liberalization


14

Reciprocal Trade Agreements Act• Negotiating authority• The president• Unprecedented authority to negotiate bilateral

tariff-reduction agreements with foreign governments

• Without congressional approval• Lower tariffs by up to 50% of existing level

• 1934 to 1947, 32 bilateral tariff agreements• Average level of tariffs - about half of the 1934

levels


15

Reciprocal Trade Agreements Act• Generalized reductions• Most favored nation (MFN) clause• Agreement between two nations to apply tariffs to

each other at rates as low as those applied to any other nation having MFN status

• Tariff reductions being made on a nondiscriminatory basis• 1998, U.S. government replaced the term most

favored nation with normal trade relations


16

General Agreement on Tariffs and Trade

• GATT, 1947• General Agreement on Tariffs and Trade• Agreement among the member nations• To decrease trade barriers• To place all nations on an equal footing in trading

relations• Never intended to become an organization• 1995, GATT - transformed into the World Trade

Organization (WTO)


17


• WTO• Main provisions of GATT• Include a mechanism intended to improve

GATT’s process for resolving trade disputes among member nations


18


• Major principles of GATT system• Trade without discrimination• MFN principle (normal trade relations)• National treatment principle

• Promoting freer trade• Improved the dispute-resolution process• Use tariffs rather than quotas

• Binding and transparency • Multilateral trade negotiations


19

U.S. tariffs on imports from nations granted, and not granted, normal trade relation status: selected examples

TABLE 6.2


20

GATT negotiating roundsTABLE 6.3


21

Uruguay Round tariff reductions on industrial products by selected countries

TABLE 6.4


22

World Trade Organization• January 1, 1995, GATT transformed into WTO• Membership organization• Governing the conduct of trade relations

among its members• WTO members adhere • To GATT rules• To the broad range of trade pacts that have been

negotiated under GATT auspices in recent decades


23

World Trade Organization• WTO• 153 nations, 97% of world trade• International organization, headquartered in

Geneva, Switzerland• Multilateral trading system• Trade in services, intellectual property, and

investment• Administers a unified package of agreements to

which all members are committed


24

World Trade Organization• WTO• Reverses policies of protection in certain

“sensitive” areas• Settling trade disputes• Is not a government• Individual nations - free to set their own

appropriate levels of environment, labor, health, and safety protections

• Various councils and committees


25

World Trade Organization• WTO• Administers • Agreements contained in the Uruguay Round• Agreements on government procurement and civil

aircraft• Oversees • Implementation of the tariff cuts • Reduction of nontariff measures

• Watchdog of international trade• Database - trade measures and statistics


26

World Trade Organization• WTO Reduce National Sovereignty?• Yes – because of WTO disputes settlement• No – because findings of a WTO dispute-

settlement panel cannot force the United States to change its laws

• Retaliatory tariffs for WTO enforcement?• Small country impose retaliatory tariffs• Relatively more costly to initiate• No favorable movements in its terms of trade


27

World Trade Organization• Trade liberalization - harm the environment?• “Race to the bottom” in environmental

standards• Social preferences

• Trade liberalization • Enhances productivity and growth• Puts downward pressure on inflation• Increasing competition

• Creates jobs


28

World Trade Organization• Trade liberalization - improve the environment• Trade stimulates economic growth• Key factors in societies’ demand for a cleaner

environment• Tougher environmental laws

• Trade and growth• Development and dissemination of environment

friendly production techniques


29

TRADE CONFLICTS

Burning rubber: Obama’s tire tariff ignites Chinese officials

• New tariff on tires from China, 2009• In response to a complaint by the USW• In addition to the existing tariff• Applied to low-price tires ($50 - $60 apiece)• 35% in the first year• 30% in the second year• 25% in the third year

• Cut off about 17% of all tires sold in U.S.• Boost U.S. industry sales and prices – increased

profitability


30

TRADE CONFLICTS

Burning rubber: Obama’s tire tariff ignites Chinese officials

• Critics• USW petition for the tariff increase• Not supported by American tire companies• Already abandoned making low cost tires in U.S. • Manufacture low-cost tires in China• Costly and complicated to revamp factory lines

• Chinese tires - replaced by low-wage manufacturers in other countries• Takes time

• Shortages of low-end tires in the U.S. market• Prices increasing by 20-30%


31

From Doha To Hong Kong: Failed Trade Negotiations

• 1999, Seattle, Washington• Disagreements among developing nations and

industrial nations• Doha Round, Doha, Qatar • “Doha development agenda”• Poor developing countries – trade liberalization• Countries disowned major portions of the

agenda• Complaining about earlier trade rounds• Little interest in compromise


32

Trade Promotion Authority• Trade promotion authority, 1974• Fast-track authority• The president - formally notify Congress of

his/her intent to enter trade negotiations with another country• Congress - 60 legislative days to permit or deny

“fast-track” authority


33

Trade Promotion Authority• Trade promotion authority, 1974• The president - limited time period in which to

complete the trade negotiations• Outcome – subject to a straight up-or-down vote• Both houses of Congress • Within 90 legislative days of submission

• The president - consult actively with Congress and the private sector throughout the negotiation


34

Safeguards: Emergency Protection From Imports

• Trade remedy laws• Designed to produce a fair trading environment

for all parties engaging in international trade• Escape clause (safeguard relief)• Countervailing duties• Antidumping duties• Unfair trading practices


35

Trade remedy law provisionsTABLE 6.5Statute Focus Criteria for Action Response

Fair trade (escape clause)

Increasing imports Increasing imports aresubstantial cause of injury

Duties, quotas, tariff-rate quotas, orderly marketing arrangements, adjustment assistance

Subsidized imports(countervailing duty)

Manufacturing production, or export subsidies

Material injury or threat of material injury

Duties

Dumped imports(antidumping duty)

Imports sold below cost of production or below foreign market price

Material injury or threat of material injury

Duties

Unfair trade(Section 301)

Foreign practices violating a trade agreement orinjurious to U.S. trade

Unjustifiable, unreasonable, or discriminatory practices, burdensome to U.S. Commerce

All appropriate and feasible action


36

Safeguard relief granted under the escape clause: selected examples

TABLE 6.6

Product Type of Relief

Porcelain-on-steel cooking ware

Prepared or preserved mushrooms

High-carbon ferrochromium

Color TV receivers

Footwear

Additional duties imposed for four years of 20 cents, 20 cents, 15 cents, and 10 cents per pound in the first, second, third, and fourth years, respectively

Additional duties imposed for three years of 20%, 15%, and 10% ad valorem in the first, second, and third years, respectively

Temporary duty increase

Orderly marketing agreements with Taiwan and Korea

Orderly marketing agreements with Taiwan and Korea


37

Safeguards: Emergency Protection From Imports

• Arguments for safeguards• Political necessity for the formation of

agreements to liberalize trade • Safety net to protect domestic producers

• Practical political argument• Appease domestic producers – strong lobbying

power• Voting constituents


38

Countervailing Duties: Protection AgainstForeign Export Subsidies

• Countervailing duties• Export subsidies = unfair competition• Importing countries can retaliate by levying a

countervailing duty• Limited to the amount of the foreign export subsidy• To increase the price of the imported good to its

fair market value


39

Countervailing Duties: Protection AgainstForeign Export Subsidies

• Countervailing duties• Canadian lumber exports - subsidized• U.S. trade restrictions• 14.7 billion board feet of Canadian lumber - duty free• Next 0.65 billion board feet - tariff of $50 per

thousand board feet• Canadian lumber exports to U.S. fell 14%• Price of lumber increased 20-35%• Cost of the average new home increased $800 -

$1,300


40

Antidumping Duties: Protection Against Foreign Dumping

• Objective of U.S. antidumping policy• To offset two unfair trading practices by foreign

nations• Export sales in the United States at prices below

the average total cost of production• Price discrimination• Foreign firms sell in U.S. at a price less than that charged

in the exporter’s home market


41


• Antidumping investigations• Evidence of dumping• Evidence of material injury• A link between the dumped imports and the

alleged injury• Antidumping duty (tariff)• Equal to the margin of dumping• Increase the price of imported goods• Decrease consumer welfare


42

Dumped or subsidized imports provide benefits to consumers if imports are finished goods and to consuming producers that use the imports as intermediate inputs into their own production; they inflict costs on import-competing domestic producers, their workers, and other domestic producers selling intermediate inputs to import-competing producers. An antidumping or countervailing duty inflicts costs on consumers if imports are finished goods and on consuming producers that use the imports as intermediate inputs into their own production; benefits are provided to import-competing domestic producers, their workers, and other domestic producers selling intermediate inputs to the protected industry.

Effects of dumped and subsidized imports and their remedies

FIGURE 6.2


43


• Antidumping duty or countervailing duty• Decrease in the consumer surplus more than

offsets the increase in the producer surplus• Successful petitioning industries – benefit• Higher prices• Higher output and employment

• Costs to the rest of the economy - far greater• Net welfare loss of $1.59 billion• Costs on consumers• Cost on downstream industries• Cost on the economy as a whole


44

Section 301: Protection Against Unfair Trading Practices

• Section 301• U.S. trade representative (USTR)• Means to respond to unfair trading practices by

foreign nations• Foreign-trade restrictions that hinder U.S. exports• Foreign subsidies that hinder U.S. exports to third-country

markets

• USTR empowered to • Impose tariffs or other import restrictions on

products and services • Deny the foreign country the benefits of trade-

agreement concessions


45

Section 301 investigations of unfair trading practices: selected examples

TABLE 6.7

U.S. Petitioner Product Unfair Trading Practice

Heilman Brewing Co. Beer Canadian import restrictions

Amtech Co. Electronics Norwegian government procurement code

Great Western Sugar Co. Sugar European Union subsidies

National Soybean Producers Assoc. Soybeans Brazilian subsidies

Association of American Vintners Wine South Korean import restrictions


46

Protection of Intellectual Property Rights

• Intellectual property rights (IPRs) violations• Pirates• Counterfeiters• Other infringers

• Intellectual property • An invention, idea, product, or process• Registered with the government• Awards the inventor (or author) exclusive rights

to use the invention for a given time period


47

Protection of Intellectual Property Rights

• Copyrights • To protect works of original authorship • For the remainder of the author’s life plus 50 years

• Trademarks • To manufacturers • Exclusive rights to a distinguishing name or symbol

• Patents• Inventor - for a term (15 years or more) - exclusive

right to make, use, or sell the invention


48

Examples of intellectual property right violations in ChinaTABLE 6.8Affected Firm Violation in China

Epson Copying machines and ink cartridges are counterfeited.

Microsoft Counterfeiting of Windows and Windows NT, with packaging virtually indistinguishable from the real product and sold in authorized outlets.

Yamaha Five of every six JYM150-A motorcycles and ZY125 scooters bearing Yamaha’s name are fake in China. Some state-owned factories manufacture copies four months following the introduction of a new model.

Gillette Up to one-fourth of its Parker pens, Duracell batteries, and Gillette razors sold in China are pirated.

Anheuser-Busch Some 640 million bottles of fake Budweiser beer are sold annually in China.

Bestfoods Bogus versions of Knorr bouillon and Skippy Peanut Butter lead to tens of millions of dollars in forgone sales each year.


49

Trade Adjustment Assistance• U.S. trade adjustment assistance program • Assists domestic workers displaced by foreign

trade and increased imports• Extended income support beyond normal

unemployment insurance benefits• Job training• Allowances for job search and relocation


50

Trade Adjustment Assistance• U.S. trade adjustment assistance program • Assists businesses and communities• Technical aid in moving into new lines of production• Market research assistance• Low-interest loans


51

Will Wage and Health Insurance Make Free Trade More Acceptable to Workers?

• Trade adjustment assistance program• Expanded to include wage and health insurance

• Protect workers• Restricting imports• Losses for the overall economy

• Provide wage and health insurance


52


• Wage insurance• Encourages workers to find a new job quickly• Yields benefits for both younger workers and

older workers• Easier for younger workers to acquire new skills• Older workers - retirement with the same standard

of living• Reducing worker anxiety• Reduce worker opposition to trade

liberalization


53


• 2002, President George Bush• Expanded the trade adjustment assistance

program• Wage insurance for trade-displaced workers• Over 50 years old• Earn less than $50,000 a year• Employed fulltime at the firm from which they were

separated• Government pays half the difference between the

old and new wage for two years, up to a maximum of $10,000


54


• 2002, President George Bush• Health Coverage Tax Credit program• Federal income tax credit• Pays 65% of qualified health plan premiums for eligible

trade-displaced workers


55

Industrial Policies of the United States• Industrial policies• To enhance the competitiveness of domestic

producers• Tax incentives• Loan guarantees• Low interest loans


56

Industrial Policies of the United States• U.S. industrial policies• Agricultural policy• Support for shipping, shipbuilding, and energy

industries• Defense spending• Manufacturing industry


57

Industrial Policies of the United States• Export promotion• Marketing information and technical assistance• Trade missions• Sponsoring exhibits of U.S. goods at

international trade fairs• Establish overseas trade centers• Export trade associations• Export trading companies• Export subsidies: low-cost credit


58

Industrial Policies of the United States• Export-Import Bank (Eximbank) • Independent agency of the U.S. government• Guarantees of working capital loans for U.S.

exporters to cover pre-export costs• Export credit insurance that protects U.S.

exporters or their lenders against commercial or political risks of nonpayment by foreign buyers• Guarantees of commercial loans to creditworthy

foreign buyers of U.S. goods and services


59

Industrial Policies of the United States• Export-Import Bank (Eximbank) • Direct loans to these foreign buyers when

private financing is unavailable• Special programs to promote U.S. exports of

environmentally beneficial goods and services• Asset-based financing for large commercial

aircraft and other appropriate exports• Project financing to support U.S. exports to

international infrastructure projects


60

Examples of loans provided by Eximbank of the U.S. (millions of dollars)

TABLE 6.9


61

Industrial Policies of the United States• Commodity Credit Corporation (CCC)• Officially supports lending for U.S. exports• Government-owned corporation• Administered by the U.S. Department of

Agriculture• Export credit financing for eligible agricultural

commodities• Interest rates - slightly lower


62

Industrial Policies of Japan• Japanese industrial policy• From the 1950s to the early 1970s• Strong control over the nation’s resources and the

direction of the economy’s growth• Since the mid-1970s,• Modest and subtle industrial policy


63

Industrial Policies of Japan• Ministry of Economy, Trade and Industry

(METI)• Facilitate the shifting of resources into high-

tech industries• Targets specific industries for support• Assisted by consultants from leading

corporations, trade unions, banks, and universities• Increase domestic R&D, investment, and

production


64

Industrial Policies of Japan• METI• Facilitate the shifting of resources into high-

tech industries• Targets specific industries for support• Assisted by consultants from leading

corporations, trade unions, banks, and universities• Increase domestic R&D, investment, and

production


65

Industrial Policies of Japan• METI• Trade protection• Allocations of foreign exchange• R&D subsidies• Loans at below market interest rates• Loans that must be repaid only if a firm

becomes profitable• Favorable tax treatment• Joint government-industry research projects• To develop promising technologies


66

Strategic Trade Policy• Strategic trade policy• Government - help domestic companies to

capture economic profits from foreign competitors• Support for certain “strategic” industries• Important to future domestic economic growth• Provide widespread benefits (externalities) to

society• Imperfect competition• Potential to attain long-term economic profits


67

According to the theory of strategic trade policy, government subsidies can assist domestic firms in capturing economic profits from foreign competitors.

Effects of a European subsidy granted to AirbusFIGURE 6.3


68

Strategic Trade Policy• Critics of strategic trade policy • Political perspective• Special-interest groups may dictate who will receive

government support• Worldwide cycle of activist trade-policy

retaliation and counter retaliation• All nations worse off

• Governments lack the information to intervene intelligently in the marketplace• Minor miscalculations - home economy worse off


69

Strategic Trade Policy• Critics of strategic trade policy • Existence of imperfect competition • No guarantee for a strategic opportunity to be

pursued• Need for a continuing source of economic

profits• With no potential competition


70

Economic Sanctions• Economic sanctions • Government-mandated limitations placed on

customary trade or financial relations among nations• Protect the domestic economy• Reduce nuclear proliferation• Set compensation for property expropriated by

foreign governments• Combat international terrorism• Preserve national security• Protect human rights


71

Economic Sanctions• Imposing nation• Nation initiating the economic sanctions• Trade sanctions• Boycotts on imposing-nation exports• Quotas on imposing-nation imports from the target

nation• Financial sanctions• Limitations on official lending or aid


72

Selected economic sanctions of the U.S.TABLE 6.10


73

Economic Sanctions• Target nation• Unused production capacity• Inward shift of production possibilities curve• Economic inefficiencies• Hardship on the population and government• Reduced growth rate


74

Economic sanctions placed against a target country have the effect of forcing it to operate inside its production possibilities curve. Economic sanctions can also result in an inward shift in the target nation’s production possibilities curve.

Effects of economic sanctionsFIGURE 6.4


75

Economic Sanctions• Factors influencing the success of sanctions• Number of nations imposing sanctions• Degree to which the target nation has

economic and political ties to the imposing nation(s)• Extent of political opposition in the target

nation• Cultural factors in the target nation


76

GLOBALIZATION Do automaker subsidies weaken the WTO?

• 2008–2009, turmoil in financial markets, economic downturn • Substantial financial stress to the automobile

industry• Autoworkers, auto suppliers, stock and

bondholders, dealers, and certain states

• The Big Three (Ford, General Motors, and Chrysler)• Financial assistance, “too big to fail”


77


• December 2008, U.S. government allocated $36 billion• Bridge loans to Chrysler and GM.• $4 billion to Chrysler and $13.4 billion to GM• Submit restructuring plans in 2009

• France• $7.7 billion to its failing automakers

• United Kingdom• $3.2 billion in governmental loan guarantees


78


• WTO rules, illegal government assistance if• A financial contribution – made to a particular

firm, not to a wide spectrum of firms• Must provide the firm an advantage that would

not occur under normal market conditions• Subsidy must cause serious injury, or threat of

serious injury, to imports from foreign firms• Auto bailouts - adhered to the WTO definition

of illegal subsidies

trade regulations and industrial policies © 2011 cengage learning. all rights reserved. may not be...

Documents

tariff policies

classroom use

tariff cuts

tariff of abominations

early tariff laws

tariff protection afforded

passwordprotected website

cengage learning