International Economics By Robert J. Carbaugh 7th Edition

1. International EconomicsBy Robert J. Carbaugh7th Edition Chapter 7: Trade regulations and industrial policies

2. Trade regulation 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) Carbaugh, Chap. 7

3. Trade regulation 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 Carbaugh, Chap. 7

4. Trade regulation 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 Carbaugh, Chap. 7

5. Trade regulation 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 Carbaugh, Chap. 7

6. Protection of intellectual property Opened markets for trade in services Liberalized trade in agricultural products Removed some restrictions on textiles 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 Trade regulation GATT Uruguay Round results Carbaugh, Chap. 7

7. Trade regulation US trade remedy laws • Escape clause • Countervailing duties • Anti-dumping duties • Unfair trade practices (Section 301) • Protection of intellectual property • Trade adjustment assistance Carbaugh, Chap. 7

8. Trade regulation Effects of dumping, subsidies, and remedies Canadian steel industry Price ($) SC Fair trade SSK0 a c d b SSK0 Unfair trade DC Carbaugh, Chap. 7

9. Trade regulation Effects of dumping, subsidies, and remedies Canadian iron ore industry - upstream Canadian auto industry - downstream SC SC SC’ P0 P0 P1 P1 DC DC DC’ Q1 Q0 Q0 Q1 Carbaugh, Chap. 7

10. Industrial policy 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 Carbaugh, Chap. 7

11. Industrial policy US “industrial policy” (cont’d) • Export promotion and financing • Export-Import Bank • Commodity Credit Corporation • Knowledge based growth policy Carbaugh, Chap. 7

12. Industrial policy 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 Carbaugh, Chap. 7

13. Industrial policy 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 Carbaugh, Chap. 7

14. Industrial policy Welfare effects of strategic trade policy US HDTV market Price ($) A B MC0 (no subsidy) C MC1 (subsidy) Demand = Price MR Carbaugh, Chap. 7

15. Trade regulation 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 Carbaugh, Chap. 7