1. Copyright ©2000, South-Western College Publishing International Economics By Robert J. Carbaugh 7th Edition Chapter 7: Trade regulations and industrial policies

2. Carbaugh, Chap. 7 2 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) Trade regulation

3. Carbaugh, Chap. 7 3 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 Trade regulation

4. Carbaugh, Chap. 7 4 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 Trade regulation

5. Carbaugh, Chap. 7 5 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 Trade regulation

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

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

8. Carbaugh, Chap. 7 8 Effects of dumping, subsidies, and remedies Price ($) SCSC S SK 0 a b c d DCDC Trade regulation S SK 0 Canadian steel industry Fair trade Unfair trade

9. Carbaugh, Chap. 7 9 Effects of dumping, subsidies, and remedies SCSC Trade regulation DCDC Canadian iron ore industry - upstream D C’ Q1Q1 Q0Q0 P1P1 P0P0 SCSC DCDC Canadian auto industry - downstream Q0Q0 Q1Q1 P1P1 P0P0 S C’

10. Carbaugh, Chap. 7 10 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 Industrial policy

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

12. Carbaugh, Chap. 7 12 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 Industrial policy

13. Carbaugh, Chap. 7 13 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 Industrial policy

14. Carbaugh, Chap. 7 14 Welfare effects of strategic trade policy Price ($) A B C Demand = Price Industrial policy MC 1 (subsidy) MR MC 0 (no subsidy) US HDTV market

15. Carbaugh, Chap. 7 15 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 Trade regulation