trade liberalization legislation presidential authority to negotiate bilateral tariff reduction if reciprocal in nature most favored nation clause – agreement by two nations to maintain tariffs to each other as low as those applied to any other nation now called normal trade relations two exceptions – preferential tariffs on: imports from developing nations imports from nations that are members of the same free trade area critics: WTO dispute settlement effectively supersedes decisions by U.S. government counterargument: WTO findings cannot force the U.S. to change its laws U.S. may choose to change its laws, compensate foreign countries, or do nothing & live with repercussions from other nations economists: benefits of membership, namely normal trade relations with all members, compared with the costs The dispute-settlement system favors large nations because retaliatory tariffs might different impact on different nations. If a small nation imposes a retaliatory tariff, the result will be a decrease in national welfare. (Chapter 4) If a large nation imposes a retaliatory tariff, demand and price throughout the world may change making imports less expensive improving the terms of trade ratio for the large nation. Purpose of WTO is supposedly to reduce trade barriers not increase them; monetary fines would be a more suitable penalty. The dispute-settlement system favors large nations because retaliatory tariffs might different impact on different nations. If a small nation imposes a retaliatory tariff, the result will be a decrease in national welfare. (Chapter 4) If a large nation imposes a retaliatory tariff, demand and price throughout the world may change making imports less expensive improving the terms of trade ratio for the large nation. Purpose of WTO is supposedly to reduce trade barriers not increase them; monetary fines would be a more suitable penalty. The dispute-settlement system favors large nations because retaliatory tariffs might different impact on different nations. If a small nation imposes a retaliatory tariff, the result will be a decrease in national welfare. (Chapter 4) If a large nation imposes a retaliatory tariff, demand and price throughout the world may change making imports less expensive improving the terms of trade ratio for the large nation. Purpose of WTO is supposedly to reduce trade barriers not increase them; monetary fines would be a more suitable penalty. The dispute-settlement system favors large nations because retaliatory tariffs might different impact on different nations. If a small nation imposes a retaliatory tariff, the result will be a decrease in national welfare. (Chapter 4) If a large nation imposes a retaliatory tariff, demand and price throughout the world may change making imports less expensive improving the terms of trade ratio for the large nation. Purpose of WTO is supposedly to reduce trade barriers not increase them; monetary fines would be a more suitable penalty.

1. Trade Regulations
and Industrial Policies
C h a p t e r 6
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

2. U.S. Tariff Policy Before 1930
o originally revenue generators until the economy
developed alternate revenue sources
o Hamilton argued
for protection
based on infant
industries
o increase in tariff
rates during
Civil War and
World War I

3. Smoot-Hawley Act
o high point of U.S. protectionism - 1930
o caused retaliation by U.S. trading partners
o currency
depreciations
also used to limit
imports
o decrease in
world trade led
to further
economic
decline
o world trade in
millions of
dollars

4. Reciprocal Trade Agreements Act
o trade liberalization legislation
o presidential authority to negotiate bilateral
tariff reduction if reciprocal in nature
o most favored nation clause – agreement by
two nations to maintain tariffs to each other as
low as those applied to any other nation
o now called normal trade relations
o two exceptions – preferential tariffs on:
1) imports from developing nations
2) imports from nations that are members of
the same free trade area

5. General Agreement on Tariffs & Trade
o GATT - 1947 set of bilateral agreements to
reduce trade barriers
o originally not intended as an organization
o 1995 World Trade Organization replaced GATT
o basic principles:
1) nondiscrimination – normal trade relations or
most favored nation principle
2) national treatment – treat industries from
other nations
3) public good – results of negotiations by one
nation available to all nations

6. GATT Negotiating Rounds

7. World Trade Organization
o 1995 – Uruguay Round took effect - GATT –
was transformed into the World Trade
Organization (WTO)
o headquartered in Geneva
o international organization with 151 members
o multilateral trading system including trade in
services, intellectual property and investment
o dispute settlement: dispute panel with
established time limits and appellate body –
accused party unable to block final decision

8. WTO & National Sovereignty
o critics: WTO dispute settlement effectively
supersedes decisions by U.S. government
o counterargument: WTO findings cannot force
the U.S. to change its laws
o U.S. may choose to change its laws,
compensate foreign countries, or do nothing &
live with repercussions from other nations
o economists: benefits of membership, namely
normal trade relations with all members,
compared with the costs

9. Retaliatory Tariffs as WTO Enforcement
o The dispute-settlement system favors large
nations because retaliatory tariffs might
different impact on different nations.
o If a small nation imposes a retaliatory tariff, the
result will be a decrease in national welfare.
(Chapter 4)
o If a large nation imposes a retaliatory tariff, demand
and price throughout the world may change making
imports less expensive improving the terms of trade
ratio for the large nation.
o Purpose of WTO is supposedly to reduce trade
barriers not increase them; monetary fines
would be a more suitable penalty.

10. WTO & the Environment
Critics:
o race to the bottom – lower environmental
standards to the level of foreign competition
o developing nations might value increased
output and employment more than
environmental quality
Counterarguments:
o trade stimulates economic growth increasing
demand for a clean environment
o trade encourages dissemination of information
which can be used to protect the environment

11. Failed Negotiations
o 1998 Seattle negotiations on farm subsidies,
service trade, textile tariffs and manufacturing
fell apart because of disagreements between
developing nations and industrialized nations.
o Doha development agenda failed to produce
substantial changes as a result of broken
promises and unwillingness to negotiate.

12. Trade Promotion Authority
o also know as fast-track authority
o president notifies Congress of intent to enter
trade negotiations
o Congress has 60 legislative days to permit or
deny fast track authority
o upon approval, the results of the president’s
negotiations are subject to an up-or-down vote
without possibility for amendment
o instrumental in Uruguay Round Agreements of
1994 and the North American Free Trade
Agreement of 1993

13. Escape Clause
o definition - temporary relief to U.S. firms and
workers injured by increases in imports that are
fairly traded
o president can terminate trade concession or
levy trade restrictions
o common forms: tariff increases, tariff-rate
quotas, trade adjustment assistance
o can be enacted for 4 years and extended for
another 4 years
o example: Multifiber Arrangement – system to
restrict textile imports from developing
countries

14. Countervailing Duties
o definition – tariff imposed in retaliation against
export subsidies for foreign competition
o U.S. Department of Commerce investigates
claim
o temporary tariff applied if the preliminary
investigation finds reasonable indication of
export subsidy
o permanent tariff imposed if both Commerce
Department and International Trade
Commission determine export subsidy exists
o duty removed when foreign exports subsidies
are eliminated

15. Antidumping Duties
o definition – tariff levied against a foreign
producer:
1) whose prices on exports to U.S. are below average
total cost of production
2) or who sells to the U.S. market at lower price than
in home market
o must include evidence of dumping, material
injury, and link between imports and injury
o economists support antidumping laws that
address predatory pricing

16. Remedies Against Dumping
o product dumping or subsidies will lower prices in
various industries increasing consumer surplus
o a tariff equal to the margin of dumping reverses
trend raising prices to the original level under a fair
trade scenario

17. Unfair Trading Practices
o definition – actions by other countries that
hinder U.S. exports
o could include trade restrictions or foreign
subsidies
o authority established by Section 301 of the
Trade Act of 1974
o negotiated by U.S. trade representative subject
to approval of the president
o retaliatory tariffs or import restrictions as
ultimate sanction
o intent is to resolve through negotiations

18. Intellectual Property Rights
o intellectual property – invention, idea, product
or process registered with government
awarding the inventor exclusive right to use
o copyright – protects work of original authorship
o trademark – provides exclusive right to name
or symbol
o patents – gives inventor exclusive right to
make, use and sell the invention
o lack of effective international protection of IPRs
problematic when cost of copying is less than
cost of purchasing or leasing

19. Trade Adjustment Assistance
o free-trade and comparative advantage
arguments indicate that resources shift to more
productive activities from less productive
o trade adjustment assistance – provide
assistance to those incurring hardships due to
trade liberalization
o benefits include extended unemployment, job
training, and relocation and job search
allowances
o critics: programs do not resolve issues of
unskilled workers and assist only displaced
workers in manufacturing not service positions

20. U.S. Industrial Policy
o macroeconomic policies toward stability and
growth of GDP
o agricultural policy including disseminating
information and providing infrastructure
o largest purchasers of military goods stimulates
defense industry
o assistance to manufacturers in general
o export subsidies in the form of low cost credit
promotion through U.S. Export Import Bank
o Health Coverage Tax Credit program covers
65% of premiums for displaced workers

21. Strategic Trade Policy
o based on assumption that government can
help domestic producers capture profits from
foreign competitors
o implies government support for industries
important to future economic growth
o assumes imperfect competition in which trading
industries are dominated by a few large
companies
o example: aircraft industry with Boeing (U.S.)
and Airbus (EU)
o advocates argue that free trade theory based
on an assumption of perfect competition is
flawed

22. Strategic Trade Policy
o without EU subsidy results are unclear
o subsidy => produce is dominant strategy for
Airbus [5 better than 0 and 110 better than 0]
o Boeing forced into not producing [0 better than -5]

23. Economic Sanctions
o definition - trade restrictions used for domestic
or foreign policy objectives
o trade sanctions – boycott exports
o financial sanctions – limit aid or loans
o effectiveness
1) number of nations
imposing sanctions
2) degree of economic ties
to imposing nations
3) extent of political
opposition in target
4) cultural factors in target
nation