1. Trade Regulations and Industrial 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 1 PowerPoint slides prepared by: Andreea Chiritescu Eastern 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 © 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 2

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 © 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 3

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 © 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 4

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 © 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 5

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% © 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 6

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% © 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 7

8. 8 U.S. tariff history: average tariff rates TABLE 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 © 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 9

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 © 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 10

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 © 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 11 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 © 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 12

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 © 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 13

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 © 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 14

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 © 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 15

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) © 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 16

17. General Agreement on Tariffs and Trade WTO Main provisions of GATT Include a mechanism intended to improve GATT’s process for resolving trade disputes among member nations © 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 17

18. General Agreement on Tariffs and Trade 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 © 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 18

19. © 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 19 U.S. tariffs on imports from nations granted, and not granted, normal trade relation status: selected examples TABLE 6.2

20. © 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 20 GATT negotiating rounds TABLE 6.3

21. © 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 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 © 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 22

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 © 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 23

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 © 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 24

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 © 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 25

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 © 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 26

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 © 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 27

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 © 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 28

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 © 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 29

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% © 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 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 © 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 31

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 © 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 32

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 © 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 33

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 © 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 34

35. © 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 35 Trade remedy law provisions TABLE 6.5 StatuteFocusCriteria for ActionResponse Fair trade (escape clause) Increasing importsIncreasing imports are substantial 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 or injurious to U.S. trade Unjustifiable, unreasonable, or discriminatory practices, burdensome to U.S. Commerce All appropriate and feasible action

36. © 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 36 Safeguard relief granted under the escape clause: selected examples TABLE 6.6 ProductType 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

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 © 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 37

38. Countervailing Duties: Protection Against Foreign 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 © 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 38

39. Countervailing Duties: Protection Against Foreign 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 © 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 39

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 © 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 40

41. Antidumping Duties: Protection Against Foreign Dumping 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 © 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 41

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. © 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 42 Effects of dumped and subsidized imports and their remedies FIGURE 6.2

43. Antidumping Duties: Protection Against Foreign Dumping 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 © 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 43

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 © 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 44

45. © 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 45 Section 301 investigations of unfair trading practices: selected examples TABLE 6.7 U.S. PetitionerProductUnfair Trading Practice Heilman Brewing Co.BeerCanadian import restrictions Amtech Co. ElectronicsNorwegian government procurement code Great Western Sugar Co.SugarEuropean Union subsidies National Soybean Producers Assoc.SoybeansBrazilian subsidies Association of American VintnersWineSouth 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 © 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 46

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 © 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 47

48. © 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 48 Examples of intellectual property right violations in China TABLE 6.8 Affected FirmViolation in China EpsonCopying machines and ink cartridges are counterfeited. MicrosoftCounterfeiting of Windows and Windows NT, with packaging virtually indistinguishable from the real product and sold in authorized outlets. YamahaFive 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. GilletteUp to one-fourth of its Parker pens, Duracell batteries, and Gillette razors sold in China are pirated. Anheuser-BuschSome 640 million bottles of fake Budweiser beer are sold annually in China. BestfoodsBogus 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 © 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 49

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 © 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 50

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 © 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 51

52. Will Wage and Health Insurance Make Free Trade More Acceptable to Workers? 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 © 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 52

53. Will Wage and Health Insurance Make Free Trade More Acceptable to Workers? 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 © 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 53

54. Will Wage and Health Insurance Make Free Trade More Acceptable to Workers? 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 © 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 54

55. Industrial Policies of the United States Industrial policies To enhance the competitiveness of domestic producers Tax incentives Loan guarantees Low interest loans © 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 55

56. Industrial Policies of the United States U.S. industrial policies Agricultural policy Support for shipping, shipbuilding, and energy industries Defense spending Manufacturing industry © 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 56

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 © 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 57

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 © 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 58

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 © 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 59

60. © 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 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 © 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 61

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 © 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 62

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 © 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 63

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 © 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 64

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 © 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 65

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 © 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 66

67. According to the theory of strategic trade policy, government subsidies can assist domestic firms in capturing economic profits from foreign competitors. © 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 67 Effects of a European subsidy granted to Airbus FIGURE 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 © 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 68

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 © 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 69

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 © 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 70

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 © 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 71

72. © 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 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 © 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 73

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. © 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 74 Effects of economic sanctions FIGURE 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 © 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 75

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” © 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 76

77. GLOBALIZATION Do automaker subsidies weaken the WTO? 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 © 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 77

78. GLOBALIZATION Do automaker subsidies weaken the WTO? 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 © 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 78