International Economics

Woraphon Yamaka

Chapter 6:Trade Regulations and Industrial Policies

Modified form International Economics 9th Edition byRobert J. Carbaugh

Overview Previous chapters have examined the benefits and

costs of tariff and nontariff trade barriers. This chapter discusses the major trade policies of the United States.

It also considers the role of the World Trade Organization in the global trading system, the industrial policies implemented by nations to enhance the competitiveness of their producers

the nature and effects of international economic sanctions used to pursue foreign policy objectives.

Carbaugh, Chap. 5

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History of U.S. Tariff Policies Smoot-Hawley Tariff Act (1930)Effect : High point of US protectionism which U.S. average tariffs were raised to 53 percent on protected imports.

Reciprocal Trade Agreements Act (1934)Introduced “most favored nation” (MFN) clause (now called “normal trade relations”) This clause is an agreement between two nations to apply tariffs to each other at rates as low as those applied to any other nation having MFN status

General Agreement on Tariffs and Trade [GATT] (1947)GATT was never intended to become an organization; instead, it was a set of agreements among countries around the world to reduce trade barriers and establish broad rules for commercial policy. GATT was transformed into the World Trade Organization (WTO)

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Trade regulation

Major principles of the original GATT - Postwar trade liberalization The two pillars of the nondiscrimination (equality) principle were

1. "Normal Trade Relations" treatment (MFN) “favor one, favor all” if a member of GATT granted another

member a lower tariff rate for one of its products, it had to do the same for all other GATT members.

2. National treatment of imported goods

treating foreigners and locals equally

GATT members had to treat other members’ industries no less favorably than they do their own domestic industries. Therefore, domestic regulations and internal taxes could not be biased against foreign products, once foreign goods have entered the domestic market. However, tariffs could apply to foreign products when they entered a country as imports.

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Trade regulation

GATT - Postwar trade liberalization (2) Another goal of GATT was to promote free trade

through its role in the settlement of trade disputes (conflicts between two countries)

the stronger country generally won at the expense of the weaker country. So- GATT provides a conciliation (solve the conflict)- Started regular negotiations to reduce tariffs and non-

tariff barriers GATT system tried to improve predictability and stability by

making countries’ trade rules as clear and public (transparent) as possible. Countries were required to disclose their trade policies and practices publically within the country or by notifying the GATT secretariat

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Trade regulation

GATT negotiations Before GATT, The world had bilateral agreements

With the advent of GATT, trade negotiations were conducted on a multilateral basis which involved all GATT members participating in the negotiations

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 (intellectual property, services, agriculture), included developing nations

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Trade regulation

GATT becomes WTO GATT agreement became World Trade Organization in

January 1995WTO members must follow to all agreements

negotiated under GATT (not pick and choose)Covers trade in goods, services, intellectual property

and investmentWTO strengthens GATT's dispute-settlement

mechanisms The old GATT dispute mechanism suffered from long delays, the ability of accused parties to block decisions of GATT panels that

went against them, and inadequate enforcement.

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Trade regulation

Watch this https://www.youtube.com/watch?v=fWmHHfimLvw

Does the WTO Reduce National Sovereignty (authority)? Controversy over WTO Worries about infringement on national sovereignty. In

fact, proponents note that the findings of a WTO dispute-settlement panel cannot force the country to change its laws.

Concern about trade liberalization destroying environmental protection

Economists generally agree that the real issue raised by the WTO is not whether it decreases national sovereignty, but whether the specific obligations that it imposes on a nation are greater or less than the benefits the nation receives from applying the same requirements to others (along with itself).

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Trade regulation

Trade remedy laws to produce a fair-trading environment for all parties engaging in international trade

1) Escape clause provides temporary safeguards (relief) to domestic firms and workers who are substantially injured from surges in imports that are fairly traded. Levy trade restricitons

2) Countervailing duties Protection Against Foreign Export Subsidies If foreign country subsidizes its exports, injuring domestic producers in the importing country, WTO decide to charge extra duties, provided such additional duties.

3) Anti-dumping duties Protection Against Foreign DumpingOffset two unfair trading practices by foreign nations: export sales in domestic at prices below the average total cost of

production, and price discrimination in which foreign firms sell in the domestic at a price less than that charged in the exporter’s home market

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Effect of Anti-dumping duties

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Illustrates the effects of unfair trade practices on Canada, a nation too small to influence the foreign price of steel; for simplicity, the figure assumes that Canada’s steel. In Figure, SC and DC represent the Canadian supply and demand for steel. Suppose that South Korea, which has a comparative advantage in steel, supplies steel to Canada at the fair-trade price of $600 per ton. At this price, Canadian production equals 200 tons, Canadian consumption equals 300 tons, and imports equal 100 tons.

SK1

SK0

Carbaugh, Chap. 7 11

Effect of dumping policy of KoreaNow suppose that as a result of South Korean dumping and subsidizing practices

CS gain equal a+b+c+d

PS loss equal b+c+d ( Domestic of demand is 400 but producer willing to produce only 100. They loss their production equal 300

CS – PS = a (domestic gain as CS gain > PS loss)

Carbaugh, Chap. 7 12

Effect of Anti-dumping dutiesNow suppose that as a result of Anti dumping duties of Canada

CS loss equal a+b+c+d

PS gain equal a+b :- Redistribution effect = Producer could sale more products(a) - Subsidy effects = Producer produce with efficiently production process (b)

CS – PS-Government = d(Country loss as CS Loss > PS and Government gain)

Government Revenues = c

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Unfair trade also affects Canada’s upstream and downstream industries. If the Canadian iron-ore industry (upstream) supplies mainly to Canadian steelmakers, the demand for Canadian iron ore will decrease as their customers’ output falls due to competition from cheaper imported steel without unfair trade, the quantity of iron ore demanded by Canadian steelmakers is Q0 tons at a price of P0 per ton.

Effect of Anti-dumping duties

Demand of Domestic Steel (Upstream) Supply of Domestic Auto (Downstream)

Effect of Anti-dumping duties

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Because of unfair trade in the steel industry

1) the demand for iron ore decreases from DC to DC ;Thus, Canadian auto production increases from Q0 units to Q1 units. (Because Steel industry want to buy Korean steal instead, Korean steel is cheaper)2) Canadian auto production increases from Q0 units to Q1 units, as the supply curve shifts downward from SC to SC In autos (downstream), production will increase as manufacturing costs decrease because of the availability of cheaper imported steel.

4) Unfair trade practicesthese unfair practices are foreign-trade restrictions that hinder U.S. exports and foreign subsidies that hinder U.S. exports to third-country markets

5) Protection of intellectual propertyIntellectual property is an invention, idea, product, or process that has been registered with the government and that awards the inventor (or author) exclusive rights to use the invention for a given time period. Governments use several techniques to protect intellectual property. Solution is copyright6) Trade adjustment assistanceAct as a way to reduce the damaging impact of imports felt by certain sectors of the U.S. economy. The current structure features four components of Trade Adjustment Assistance = workers, firms, farmers, and communities.

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Trade remedy laws to produce a fair-trading environment for all parties engaging in international trade

US “industrial policy” Broad policies to foster economic growth Aid to targeted sectors

Agriculture, ship-building, energy, technology, manufacturing (autos, for example), etc.

Tariff protection of declining sectors Export promotion and financing

Export-Import BankCommodity Credit Corporation

Knowledge based growth policy

Carbaugh, Chap. 7

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Example 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

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Example industrial Policy

Strategic trade policy strategic trade policy is that government can

assist domestic companies in capturing economic profits from foreign competitors.

Such assistance entails government support for certain “strategic” industries (such as high-technology) that are important to future domestic economic growth and that provide widespread benefits (externalities) to society.

Employ in the imperfect competition sector -small number of producers, each large enough to affect market price Ex. Airbus and Boing, Iphone and Samsung

Subsidies can give the advantage to domestic manufacturers over foreign ones

Critics argue that it is too difficult to determine where assistance makes economic sense

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Industrial policyExample industrial Policy

EFFECTS OF A EUROPEAN SUBSIDY GRANTED TO AIRBUS

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Industrial policy

According to the theory of strategic trade policy, government subsidies can assist domestic firms in capturing economicprofits from foreign competitors. Now assume the European governments decide to subsidize Airbus productionin the amount of $10 million

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

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Instead of promoting trade, governments may restrict trade for domestic and foreign policy objectives. Economic sanctions are government-mandated limitations placed on customary trade or financial relations among nations. They have been used to protect the domestic economy, reduce nuclear proliferation, set compensation for property expropriated by foreign governments, combat international terrorism, preservenational security, and protect human rights

Example industrial Policy

Example21

Economic sanctions placed against a target countryhave the effect of forcing it to operate inside itsproduction possibilities curve. Economic sanctions canalso result in an inward shift in the target nation’sproduction possibilities curve.