Ch 7 – Trade Regulation & Industrial Policies

1. Ch 7 – Trade Regulation & Industrial Policies The Protective system...is conservative, while the Free Trade system works destructively. It breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point. In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade. Karl Marx

2. Ch 7 – Trade Regulations Smoot Hawley Act (1930) • Peak in US protectionism • Raised tariff rate to 52.8% • Originally intended to help US farmers • Legislators from farm states put together tariff package, but needed manufacturing states’ support. • Urban states added their own tariffs to bill. • Evolved into raising tariffs on over 800 items. • World’s largest open market in 1920’s closed the door in the 1930’s. • Import prices increased 50%. • Many economists believe Smoot Hawley worsened the depression plunge. • Other nations retaliated. US Exports: 1929 $5.4 billion 1932 $1.6 billion • Hoover defeated by FDR in 1932, Smoot Hawley dismantled immediately. • FDR proposed legislation to liberalize trade in 1934.

3. Ch 7 – Trade Regulations Reciprocal Trade Agreements Act (1934) • Negotiation authority • Transferred power to reduce tariffs from Congress to president. • Allowed him to negotiate reductions bilaterally. • Tariff reductions could be up to 50%. • Reductions had to be met by trade concessions in other country. • Item by item basis. • Generalized reductions • Further developed “most favored nation” concept. • Under MFN, once tariff is negotiated with one country, deal is automatically extended to all MFN’s. • Two exceptions to MFN clause: • Developing nations can get tariff considerations not granted to industrialized. • Nations in regional trading arrangements (ie, NAFTA) can treat member nations differently than nonmembers. • Between 1934 and 1947, agreements were reached with 29 nations, tariffs reduced 25%.

4. Ch 7 – Trade Regulations Bilateral negotiations had problems: • Under MFN principle, once Country A had negotiated with Country B, reductions were automatically extended to other MFN’s. When Country A goes to negotiate with Country C, there’s nothing to offer because tariffs are already reduced. • All negotiations were revolving around tariffs, but nations were using other non-tariff trade barriers not covered in MFN negotiations. Nations enjoyed the prosperity and healthier economies they were seeing from trade reductions, wanted more. But they needed another way.

5. Ch 7 – Trade Regulations General Agreement on Tariffs and Trade (1947) • Set of bilateral agreements among contracted member nations to decrease trade barriers and place all nations on equal footing in trade relationships. • Began with 18 members in 1947, reducing tariffs on over 45,000 goods. • Primarily, GATT established rules of conduct of international trade that still exist in form of World Trade Organization.

6. Ch 7 – Trade Regulations General Agreement on Tariffs and Trade (1947) Principles: Trade to be conducted in a non-discriminatory manner. • Trade policies apply to all nations. • MFN status extended to all GATT members. • Did not eliminate nation’s ability to discriminate. Still permitted under preferential trading arrangements. Banned use of quantitative restrictions (quotas) • Unless nation has balance of payments problems. • Developing nations have more freedom to use quotas. • Domestic agricultural support programs are okay. Set up framework for conflict resolution • No enforcement power. • Provided forum for nations to come together. If nations talk, they may not fight.

7. Ch 7 – Trade Regulations General Agreement on Tariffs and Trade (1947) From 1947 to 1961, GATT held five rounds of negotiations with fairly substantial reductions. Kennedy Round (1964-1967) • Negotiations shifted from item-by-item to across-the-board. • Tariffs reduced 35% on 60,000 items. • Discussed dealing with NTB’s and agricultural products (didn’t DO it, just talked about it).

8. Ch 7 – Trade Regulations General Agreement on Tariffs and Trade (1947) From 1947 to 1961, GATT held five rounds of negotiations with fairly substantial reductions. Tokyo Round (1973-1979) • Addressed non-tariff barriers. • Cut tariffs on manufactured goods by 40%. • Tariff on finished goods cut more than raw materials (decreased degree of tariff escalation). Uruguay Round (1986-1993) • By mid 80’s, many GATT rules were being violated. • Discussed major growth sectors of trade (services, intellectual property) that had not been addressed. • Established World Health organization

9. Ch 7 – Trade Regulations General Agreement on Tariffs and Trade (1947) From 1947 to 1961, GATT held five rounds of negotiations with fairly substantial reductions. Doha Round (2001- present) • Focus on more fair system of trade for developing countries. • Divide between the rich, developed countries, and the major developing countries (represented by the G20 developing nations). • Agricultural protectionism, especially with Europe's Common Agricultural Policy, is the most significant issue upon which agreement has been hardest to negotiate.

10. Ch 7 – Trade Regulations World Trade Organization (WTO) 1/1/95 • Headquartered in Geneva. • Maintains GATT principles, resolves disputes. • Every nation has one vote, none more powerful than any other. • Wider scope than GATT, including intellectual property, services, investment. • Administers tariff agreements. • Serves as watchdog, some enforcement power.

11. Ch 7 – Trade Regulations WTO and the Environment: “Trade Liberalization Harms the Environment” • Arguments against WTO trade policy • Industry will shift production to countries with lowest standards, especially heavily polluting industries. • Trade should be opposed in industries that encourage certain practices some find socially inappropriate or unacceptable, i.e. dolphins in fishing nets, child labor, etc. • Trade liberalization encourages trade in products creating global pollution, i.e. free trade in lumber promotes trade in forestry products, harming forests.

12. Ch 7 – Trade Regulations WTO and the Environment: “Trade Liberalization Harms the Environment” • Arguments for WTO trade policy • Trade stimulates economic growth. More prosperous nations have higher demands for cleaner environments. As people get richer, they want a cleaner environment. • Trade and growth can encourage development and trade of environment-friendly production processes. • Costs of pollution control are a small fraction of total costs, so they probably won’t cause firm relocation.

13. Ch 7 – Trade Regulations Trade Remedy Laws Designed to ensure fair trading environments. • Escape Clause • Way to provide relief to companies hurt by trade. • Allows president (or his trade representative) to modify trade concessions that are granted to foreign countries, and to impose restrictions on import of a product that causes harm or threatens to cause harm to US manufacturer of similar product. • Temporary – supposed to be for 5 years only. • Usually initiated by affected industry. • Industry petitions US government, who investigates claim and makes recommendation to president.

14. Ch 7 – Trade Regulations Trade Remedy Laws Escape Clause • Must find 3 things to be true: • Increasing imports, actual or relative to US production. • Domestic industry is being seriously injured or threatened. • Imports are a substantial cause of the injury. If all three are true, International Trade Commission (ITC) will recommend a remedy, typically a countervailing (offset) duty.

15. Ch 7 – Trade Regulations Trade Remedy Laws Section 301: Unfair Trading Practices (1970’s) • Part of Trade Act of 1974 • Directs US trade rep (USTR) to overtly eliminate unfair trade practices, with ultimate step being “change your ways or we’ll keep your goods out of the US.” • In 1988, Section 301 strengthened USTR’s power, called “Super 301”. • USTR can now self-initiate investigations (industry had to ask before). • Under Super 301, USTR can name nations as “unfair traders”, subject to retaliatory restrictions.

16. Ch 7 – Trade Regulations Economic Sanctions • Used to preserve national security, protect human rights, and combat international terrorism. • Restriction of exports for domestic and foreign policy objectives. • Government mandated limitations on customary trade. • Imposing nations hope to impair economic capabilities of target nation so they will give in to objectives. Two types: Trade (any nation can do) Stop exporting to target, or set zero quota on imports. Financial (must be strong to do) Limit lending or aid to target

17. Ch 7 – Trade Regulations

18. Ch 7 – Trade Regulations Economic Sanctions Determinants of success • Number of nations imposing sanctions • Multilateral sanctions apply more pressure • Enhances political legitimacy of the effort • Degree of political and economic ties between target and imposing nation • Extent of political opposition in target • Cultural factors in target • Citizens may identify with views of imposing nation and support their efforts.