ibe303 - lecture 6
TRANSCRIPT
Lecture 6August 16th 2010
The Instruments of Trade Policy
Tariffs in General•Tariffs are simply taxes a country places
on its imports.•Purpose of tariffs:
▫to protect domestic (import-competing) industries
▫to raise revenue for the government•There are two sorts of tariffs:
▫Specific ▫Ad valorem.
Specific Tariffs•Specific tariffs involve charging a tax per
physical unit imported.•For example,
▫US tariff on frozen orange juice is 7.85¢ per liter.
•Specific tariffs may be easier to administer.
•Specific tariffs are less likely to maintain the same degree of protection in times of high inflation.
Ad Valorem Tariffs•Ad valorem tariffs involve charging a tax
as a percentage of the value of the good.•For example,
▫US tariff on golf clubs is 4.4%.•Ad valorem tariffs may be more
complicated to administer than specific tariffs, but do hold their protective value in the face of inflation.
Preferential Duties and the Generalized System of Preferences (GSP)•Preferential duties:
▫Tariff rates vary according to product’s geographic source.
•The GSP involves developing countries paying lower (or zero) tariffs when exporting to the developed world.
Permanent Normal Trade Relations Status (PNTR)•PNTR status is a way to achieve non-
discrimination in trade.•If the U.S. negotiates a lower tariff with a
PNTR country, U.S. tariffs fall for all countries with which the U.S. has a PNTR treaty.
•This is also called multilateralism (and once was called ‘most favored nation’ status).
Offshore Assembly Provisions•With OAPs, the tariff applies only to the
foreign value added.•For example, if there is a tariff on
computers, the tariff is not applied to the value of domestic-made components.
Measuring Tariffs•This is sometimes referred to as the
“height” of tariffs.•There are two ways to measure this
height:▫Unweighted average▫Weighted average
Unweighted Tariffs•Suppose there are 3 imported goods.
▫Good A has a 30% tariff▫Good B has a 40% tariff▫Good C has a 10% tariff
•The unweighted average is the simple average of the three:▫(30%+40%+10%)/3 = 26.7%
•Unfortunately, this doesn’t account for the fact that the quantities of each good that are imported may differ.
Weighted Tariffs•Suppose there are 3 imported goods.
▫Good A has a 30% tariff and 200 units are imported
▫Good B has a 40% tariff tariff and 100 units are imported
▫Good C has a 10% tariff tariff and 400 units are imported
•The weighted average is the simple average of the three:
%20)400100200(
)400%)(10()100%)(40()200%)(30(
Nominal and Effective Rates of Protection•Nominal tariff rates apply only to final
products.
•Effective tariff rates take into account not only tariffs on final products, but also those on inputs into the final product.
•Basic idea: ▫A tariff on an intermediate good (e.g., steel)
raises the cost of many final goods (cars)▫This reduces the protection afforded to
auto makers.
Nominal Rate of Protection (NRP)•First consider the nominal rate of
protection (NRP).▫NRP = (PD
t - PDFT)/ PD
FT
•NRP is always equal to the tariff on the final product.
Effective Rate of Protection (ERP)•First, let’s define value added
▫VA = price of good - price of inputs
•Now we can define effective rate of protection▫ERP = (VAD
t - VADFT)/VAD
FT
ERP•When tariffs on inputs > tariffs on final
products, ▫ERP < NRP.
•When tariffs on inputs < tariffs on final products, ▫ERP > NRP.
•When tariffs on inputs = tariffs on final products, ▫ERP = NRP.
ERP: The Bottom Line•ERP gives an indication of the effects of
the whole tariff structure on industries; NRP only looks at particular goods.
•ERPs have an impact on resource allocation: resources flow out of industries with low ERPs, and into industries with high ERPs.
Export Taxes•An export tax is a tax a government
places on its own exporters.•Are applied for several reasons
▫to raise government revenue.▫to encourage domestic processing of raw
materials.
Export Subsidies•Governments can encourage exports by
paying exporters a certain premium per unit exported.
•Export subsidies work like export taxes in reverse.
Non-Tariff Barriers•Trade gets restricted in ways not
involving taxes:▫import quotas,▫“voluntary” export restraints (VERs), and▫other provisions.
Import Quotas•Many countries restrict the quantity of
certain imports allowed entry in a given time period (usually a year).
•Quotas affect the quantity directly and the price indirectly; tariffs do the opposite.
•However, in most respects quotas and tariffs have the same effects.
“Voluntary” Export Restraints•Importing countries “persuade” exporting
countries to voluntarily limit their exports.▫Example: 1.68 million Japanese cars
permitted annually beginning in 1981.•There is an implied threat of tariffs or
quotas if exporting country doesn’t comply.
•VERs exist for political reasons, not economically valid ones.
Government Procurement Provisions
•Some countries require their government to purchase from domestic suppliers unless the imported version is substantially cheaper.
•Example: ▫“Buy American” Act requires many U.S.
government purchases to be from domestic firms unless domestic bid is more than 6% higher.
Domestic Content Provisions•Some countries require that a certain
percentage of the value of a good sold domestically must consist of domestic components or labor.
•Example: ▫NAFTA members do not allow duty-free
access to goods unless at least 62.5% of the goods’ value originates in NAFTA countries.
European Border Taxes•European (and some other) countries
have value added taxes that increase the prices of domestically produced goods.
•To compensate, European countries impose tariffs on imported products.
Other Non-Tariff Barriers•Administrative classification•Restrictions on trade in services•Trade-related investment measures•Exchange rate controls•Quality provisions•Packaging and labeling requirements
The Impact of Trade Policies
Consumer Surplus•Consumer surplus (CS) is a measure of
the overall well-being of consumers.•CS is the area between the demand curve
and the price.•CS varies inversely with the price.
Consumer Surplus
D
Q
P
P*
Producer Surplus•Producer surplus (PS) is a measure of the
well-being of producers.•PS is the area between the supply curve
and the price.•PS varies directly with price.
Producer Surplus
S
Q
P
P*
Trade Restrictions in Partial Equilibrium: The Small Country Case•What happens when a country imposes a
tariff? Its domestic price rises.•Therefore, tariffs:
▫benefit domestic producers▫harm domestic consumers▫generate tariff revenue for the government
Tariffs: Small Country Case
D
Q
P S
$1
$1.35
1000 20001250 1750
c dba
CS falls by area a+b+c+d, or $656.25.PS rises by area a, or $393.75.Revenue rises by area c, or $175.Deadweight loss is areas b+d, or $87.50.
14-32
Tariffs: Small Country Case•A tariff makes producers better off, but
overall, the small country’s welfare falls.
Import Quotas: Small Country Case•Quotas and tariffs can be designed to be
equivalent.•The difference is that with quotas there is
no revenue collected.•Instead rent will be captured by
▫holders of import licenses or ▫the government if it auctions the licenses,
or▫foreign suppliers, if they organize.
•The welfare implications of the quota are otherwise the same as for tariffs.
Production Subsidies: Small Country Case
D
Q
PS
$5
$6
100 190120 160
c
ba
A $1 subsidy has the effect of shifting the supply curve to the right.CS doesn’t change, because consumers still pay $5.PS rises by areas a+bThe cost of the subsidy is a+b+cDeadweight loss is areas c.
S'
14-35
Production Subsidies: Small Country Case•Production subsidies lead to deadweight
loss because of the expansion of relatively inefficient production.
•However, the DWL is less than would have occurred if an equivalent tariff or quota were used.
Export Taxes: Small Country Case•Export taxes cause the price in the
imposing (i.e., exporting) country to fall, since some of what had been exported is not anymore.
•We’d predict an increase in CS, a decrease in PS, and a gain in revenue.
Export Taxes: Small Country Case
P
Q
S
D
PFT
PET
CS rises by area a.PS falls by areas a+b+c+d.Revenue rises by area c.DWL is b+d.
ad
cb
Export Taxes: Small Country Case•An export tax tariff makes consumers
better off, but overall, the small country’s welfare falls.
Export Subsidies: Small Country Case
•Export subsidies cause the price in the imposing (i.e., exporting) country to rise, since more of what is produced is now exported.
•We’d predict an decrease in CS, an increase in PS.
•The subsidy will generate cost, not revenue.
Export Subsidies: Small Country Case
P
Q
S
D
PES
PFT
CS falls by area a+bPS rises by areas a+b+c+d+eSubsidy cost is b+c+d+e+fOverall effect is a loss: b+f
a dc
be
f
Export Subsidies: Small Country Case
•An export subsidy tariff makes producers better off, but overall, the small country’s welfare falls.
Voluntary Export Restraints: Small Country Case•Similar to tariffs or quotas, VERs raise the
domestic price which▫lowers CS▫raises PS
•Rent, however, is captured by the exporting country.
•The imposing country will lose not only the DWL triangles, but also the rent rectangle; welfare falls.
Tariffs: Large Country Case•In the previous analysis, the tariff caused
the imposing country’s price to rise by the full amount of the tariff.
•This would mean that the imposing country is “small”; if it imposes a tariff, it is unable to affect the world price.
•What if a country is not “small”?
Tariffs: Large Country Case
P
Q
P
Q
S
D
S
D
Importing Country Exporting Country
PFT a b dc
e
The tariff causes price to rise in the importing country; P falls in the exporting country.
14-45
Tariffs: Large Country Case
P
Q
P
Q
S
D
S
D
Importing Country Exporting Country
PFT a b dc
e
Importing country CS falls by a+b+c+dPS rises by area a.Revenue increases by areas c+eOverall effect: e–(b+d)
14-46
Tariffs: Large Country Case•A large country could increase its welfare
by imposing a tariff if the revenue extracted from the exporting country (area e) is bigger than the deadweight loss (areas b+d).
•This assumes that the exporting country does not retaliate.
Import Quotas: Large Country Case•As with the tariff, IQs cause prices in the
importing country to rise, and prices in the exporting country to fall.
•As with the tariff, if enough of the quota rent is transferred from the exporting country to offset the deadweight loss, a quota can increase a country’s overall welfare.
•This also assumes no retaliation.
VERs: Large Country Case•As with the tariff and the quota, VERs
cause prices in the importing country to rise, and prices in the exporting country to fall.
•However, unlike quotas rent generated is captured by the exporting country.
•VERs are welfare-diminishing even in the large country case.
Export Taxes: Large Country Case•In the previous analysis, the export tax
caused the imposing country’s price to fall by the full amount of the tax.
•If the exporting country is large, its price will fall somewhat but the price in the importing country will also rise.
Export Taxes: Large Country Case
P
Q
P
Q
S
D
S
D
Importing Country Exporting Country
PFT
The export tax causes the price to fall in the exporting country and rise in the importing country.
a b dc
e
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Export Taxes: Large Country Case
P
Q
P
Q
S
D
S
D
Importing Country Exporting Country
PFT
CS rises by area a.PS falls by areas a+b+c+dRevenue rises by areas c+e
a b dc
e
14-52
Export Taxes: Large Country Case•A large country could increase its welfare
by imposing an export tax if the revenue extracted from the importing country (area e) is bigger than the deadweight loss (areas b+d).
•This assumes that the importing country does not retaliate.
Export Subsidies: Large Country Case
•CS falls.•PS rises.•But there is no revenue; instead cost.•Overall, export subsidies are welfare-
diminishing for small countries and for large countries.
Trade Restrictions in General Equilibrium: The Small Country Case•We can use general equilibrium analysis
to better understand the economy-wide effects of protection.
•A tariff on imports of good Y will stimulate domestic production.
•The economy winds up on a lower indifference curve.
Tariffs in General Equilibrium: Small Country Case
Y
X
B0
C0
B1
(Px/Py)0
C1
Px/Py(1+t)
In free trade, producer equilibrium is at B0, and consumer equilibrium is at C0. The tariff changes production to point B1;consumption moves to C1 (on a lower indifference curve).
14-56
Trade Restrictions in General Equilibrium: The Large Country Case•To understand the effects of protectionism
in the large country case we can use offer curve analysis.
Tariffs or Export Taxes
Y
X
(PX/PY)FT
X2
Y2
OCA
OCB
OCA' (PX/PY)t
By imposing a tariff or an export tax, Country A decreases trade volume, but improves its terms of trade (note: B’s terms of trade deteriorate).
Y1
X1
Export Subsidies
Y
X
(PX/PY)FT
X1
Y1
OCA
OCB
(PX/PY)ES
X2
Y2
Country A’s terms of trade deteriorate; volume rises.
Import Quotas
Y
X
(PX/PY)FT
X1
Y1
OCFTA
OCFTB
OCIQA
Y2
The quota causes the imposingcountry’s terms of trade to improve, and trade volume to fall.
(PX/PY)IQ
X2
VERs
Y
X
(PX/PY)E
X1
Y1
OCFTA
OCFTB
OCVERB
Y2
The quota decreases trade volume, and causes A’s terms of trade to deteriorate.
Arguments for Interventionist Trade Policies
Is Protectionism Ever a Good Idea?•Our trade theories tell us that generally
free trade is the best policy.•Why, then, is there so much
protectionism?•What are the arguments for
protectionism, and are any of them valid?
Trade Policy as Part of Broader Social Policy Objectives•There are a number of common
arguments in favor of protection.•These may help certain groups within a
country, or may help a nation achieve some overall goal.
Argument #1: Government Revenue
•Tariffs, export taxes, and perhaps quotas, can be used to generate government revenue.
•Trade taxes are attractive because:▫They are easy to collect.▫For developing countries, there may not be
much income to tax.▫If country is large, it can pass some of the
tax burden to trading partners.•In the longer term, income or
consumption taxes may be better choices.
Argument #2: National Defense•There may be industries that are vital to
national security.•If these industries are diminished because
of import penetration, the country may be vulnerable during times of conflict.
•Could other policies (such as stockpiling or production subsidies) be better?
Argument #3: Balance of Payments•A country may wish to address a trade
deficit by limiting imports.•This would work if exports were not also
diminished.•However, a number of factors (e.g.,
retaliation by trading partners, a reduction of income abroad, a rise in value of domestic currency) make it likely that exports will fall.
•There is no guarantee that this approach will work.
Argument #4: Terms of Trade•We’ve seen from offer curves that a
country will improve its terms of trade by imposing a tariff or a quota, as long as it isn’t “small.”
•However, this assumes that the trading partner does not retaliate.
X
Y OCUS
OCF
TOT1
When the U.S. imposes atariff on French products,U.S. terms of trade improve(although volume decreases).
TOT2
X
Y OCUS
OCF
TOT1
However, it is very likelythat France will retaliatewith tariffs on U.S. products.Overall, the volume of tradedeclines, and the U.S. termsof trade may go up, down, or stay the same.
Argument #5: Protection to Increase Nat’l Employment•Unemployment high? Why not restrict
imports? Wouldn’t this put Americans to work?
•No, because:▫Reduced income of trading partner lowers
their demand for our exports.▫Our trading partners will likely retaliate.▫Our protection may trigger a dollar
appreciation.
Argument #5: Protection to Increase Nat’l Employment•Bottom line: jobs may be saved in the
protected industry, but jobs in our export industries will be lost.
•In the U.S., export-industry jobs pay better on average than import-competing industries.
Argument #6: Protection to Increase Employment in a Particular Industry•Even if overall employment isn’t
increased under protectionism, tariffs can be used to increase employment in a particular industry.
•This will be costly, however. Consumers will be paying for every job created.
•A production subsidy might be a better idea.
Argument #7: Protection to Benefit Scarce Factor•As we have seen, tariffs redistribute
income from the owners of the relatively abundant factor to the owners of the relatively scarce factor.
•If this is the goal, fine: it will be costly, however.
Other Arguments•Protection of certain key “national pride”
industries•Discriminatory protectionism: the
Generalized System of Preferences (GSP)
Protection to Offset Market Imperfections•Trade policy is sometimes used to correct
for market failures caused by:▫externalities,▫foreign monopoly power, or▫domestic monopoly power.
Protection to Offset Externalities• Let us consider two types of externalities:
▫Negative consumption externalities: the consumption of a good by an individual may damage other individuals or society. Example: tobacco If the costs to society are ignored, too much of the
good gets consumed.▫Positive production externalities: the production
of a good yields benefits that affect other individuals or society. Example: skills that workers acquire at a firm can
benefit other firms that might hire away the worker. If costs to society are ignored, too little is produced.
Protection to Extract Foreign Monopoly Profit•If a foreign company is a global
monopolist, a tariff may permit the domestic country to capture some of the monopolist’s profits.
•However, world efficiency and welfare are diminished because of the tariff.
•Would the foreign country retaliate?
Protection to Extract Domestic Monopoly Profit•If a domestic company is a monopolist, an
export tax may permit the government to capture some of the monopolist’s profits and transfer some of it back to consumers.
Protection as a Response to Int’l Policy Distortions•Some protectionist policies by foreign
countries may warrant protectionism in response.
•We’ll consider protection to offset▫dumping▫foreign subsidies
Tariffs to Offset Dumping•Dumping occurs when:
▫one country sells its product at a lower cost in the foreign market than in its domestic market, or when
▫one country sells its product below cost in the foreign market.
Tariffs to Offset Dumping•There are three types of dumping:•Permanent (or persistent) dumping occurs
when a foreign firm continually sells its product for a lower price than domestic firms.▫Often, this is because the firm faces
competition when exporting, but has market power at home.
Tariffs to Offset Dumping•Sporadic dumping occurs when the
foreign exporter occasionally liquidates a surplus on the domestic market.▫Since this sort is short-term by definition,
tariffs probably do more harm than good here.
Tariffs to Offset Dumping•Predatory dumping: the idea is to sell
below cost until rivals fold; then the predator can raise price to monopoly level.
•However, domestic firms could then enter the market again.
•It isn’t clear why a firm would want to do this.
•Still, if this behavior occurs it is probably inefficient.
Tariffs to Offset Foreign Subsidies•When our trading partners subsidize their
industries, we can punish those countries with countervailing duties.
•Foreign subsidies lower prices for domestic consumers.
•Still, foreign subsidies may harm domestic producers.
Strategic Trade Policy: Fostering Comparative Advantage•Some argue that a country can foster
comparative advantage by “strategic” trade policy.
•Possibilities include▫Protection of infant industries▫Protection to take advantage of economies
of scale▫Protection to promote exports through
research and development
Infant Industry Protection•Basic idea:
▫a country should protect a new industry from foreign competition until it grows up and gets big enough to realize economies of scale; that country may develop a comparative advantage!
•It is plain that domestic consumers will have to pay for this, but they may eventually benefit from having a globally efficient producer.
Infant Industry Protection•Problems:
▫Are there really economies of scale in the protected industry? If not, then the industry will never pay back what it cost to protect it.
▫Protection may simply lead to inefficiency.▫There are typically factors at work to
preserve the protection forever.
Economies of Scale in a Duopoly Framework•Suppose firms take into account the
actions of other firms.•Suppose also there are economies of scale
present.•We can examine the effects of protection
by considering each firm’s reaction function.
Economies of Scale in a Duopoly Framework
Xi*
Xi(home-firm sales)
(fore
ign
-firm
sale
s)
H
H
F
F
Reaction functions slope downwards because increased sales by the other firm will depress price and profits, so sales are reduced.
Equilibrium is reached at point EE
Economies of Scale in a Duopoly Framework
Xi*
Xi(home-firm sales)
(fore
ign
-firm
sa
les)
H
H
F
F
A tariff by the home country would shift the reaction function to the right, since the increased output lowers the home firm’s marginal cost.This reduces the foreign firm’s output and increases its marginal costs.
E
H'
H'
F'
F'
E'
Economies of Scale in a Duopoly Framework•It may be possible to use protection to
help a domestic firm achieve economies of scale and an expanded market share.
•However, the foreign country may retaliate.
R&D and Home Firm Sales•Suppose a firm can lower its marginal
costs by investing in R&D.•If the home country imposes a tariff, the
home firm’s sales may rise.•The increase in sales permits greater
R&D investment; this lowers marginal costs and increases sales at the expense of the foreign firm.
•Retaliation may occur.
Export Subsidy in Duopoly•Suppose a firm can lower its marginal
costs with the help of an export subsidy.•This may cause the foreign firm to exit the
market.•However, the foreign government may
retaliate with their own export subsidy.
Strategic Government Interaction•Suppose each country can choose free
trade or protectionism.•Suppose if Country I pursues free trade
and Country II also does so, each country’s welfare is $100.
•If Country I pursues free trade but Country II engages in protectionism, Country I’s welfare is $50 and Country II’s is $120.
•If both countries are protectionist, welfare of each is $60.
Strategic Government Interaction: Payoff Matrix
Country II
Free Trade Protection
Country I Free Trade $100$100
$120$50
Protection $50$120
$60$60
Strategic Government Interaction•The dominant strategy for each country is
protectionism.•This is the case even though free trade
would enhance both countries’ welfare.
Political Economy and U.S. Trade Policy
The Political Economy of Trade Policy
•Q: If free trade has so many economic benefits, why is there so much protectionism?
•A: The political economy of trade policy must be considered.
•Two main areas examine these political factors: ▫the self-interest approach, and▫the social objectives approach.
The Self-Interest Approach to Trade Policy•The median-voter model:
▫public decision-makers can increase their re-election chances by voting to satisfy the median voter.
•This should mean that the will of the majority is followed.
•However, if some parties do not have full information, some policies that benefit only a few may be enacted.
The Self-Interest Approach to Trade Policy•Interest groups can have great influence.•The benefits of protectionist policies to
interest group members may be great; the costs to the many other individuals may be so diffuse that no one individual has incentive to acquire information or participate.
The Social Objectives Approach to Trade Policy•Some economists argue instead that a
government may conduct trade policy in order to meet certain social objectives, such as▫avoiding loss of real incomes of certain
groups,▫minimizing consumer loss, or▫improving real incomes of disadvantaged
groups.•Gov’t must stick to its guns; otherwise
credibility suffers.
A Review of U.S. Trade Policy•1930: Smoot-Hawley (S-H) Tariff
▫Eventually the S-H Tariff Act caused average tariff levels to rise to about 50%.
▫Very quickly, our trading partners retaliated, and over the next three years U.S. exports fell dramatically.
▫It is said that S-H put the “Great” in the Great Depression.
Reciprocal Trade Act (1934)•Congress gave up its authority over trade
negotiations to the President.•The President was authorized to enter
into bilateral negotiations with trading partners.
•Congress only authorized item-by-item reductions.
•Bottom line: tariffs fell, but slowly and painstakingly.
GATT and Multilateralism•General Agreement on Tariffs and Trade
(GATT) was born in 1947.•GATT involved multilateral negotiations to
lower trade barriers.•In general GATT supports non-
discrimination in trade.•GATT established of the Most-Favored
Nation principle (now called ‘Normal Trade Relations’).
GATT: Early Rounds•Negotiations (called “rounds”) occurred
every few years.•The first two rounds were:
▫Geneva (1947), and▫France (1949).
•These first rounds were very successful, mainly because protectionist groups within each country hadn’t gotten organized.
GATT: Early Rounds•Other early rounds:
▫England (1951)▫Geneva (1956)▫“Dillon Round” (Geneva, 1962)
•These rounds were less successful than the first two, but progress was made.
GATT: The Kennedy Round•In 1962, Congress passed the Trade
Expansion Act (TEA).▫President was authorized to make tariff
cuts across the board, not just item-by-item.
▫Trade Adjustment Assistance: industries “damaged” by imports could receive unemployment compensation and retraining for workers.
GATT: The Kennedy Round•70 countries participated in the Kennedy
round.•Negotiations went from 1964-1967, and
were named in memory of President Kennedy.
•Tariffs on manufactured goods were reduced by one-third.
GATT: The Tokyo Round•The Trade Reform Act (TRA): 1974
▫President authorized to complete further tariff reductions of 60%. get rid of any tariff under 5% (“nuisance”
tariffs).•The Tokyo round ended in 1979, with
average tariff reductions of 30%.
GATT: The Uruguay Round•Tariff levels were by this time quite low.•Negotiations began in earnest in 1986.
The Uruguay Round: Agenda•Further tariff reductions•Reductions in non-tariff barriers•Negotiations regarding the Multi-Fiber
Agreement (MFA)•Trade in services•Anti-dumping duties•Agricultural protection•Intellectual property rights
Uruguay Round: Actions•Most tariffs to be cut another 34%; others
eliminated.•MFA to be phased out over 10 year
period.•Many remaining quota to be converted to
tariffs.•Patent protection to be tightened
somewhat.•Very little progress was made with
services.•Agricultural subsidies to be cut over a 6 -
10 year period.
The World Trade Organization (WTO)
•The Uruguay round was the end of GATT.•GATT’s successor, the WTO, was approved
during the Uruguay round.•WTO was established January 1, 1995.•WTO has 148 member countries
(Cambodia most recently).•In theory, WTO has a stronger dispute-
settling mechanism.
Trade Policy Issues After the Uruguay Round•Many countries wanted further relaxation
of protectionism in agriculture.•Developed countries wanted to discuss
labor and environmental standards.•Other issues being discussed included
trade in services, anti-trust policy, the Multi-Fiber Agreement phase-out, and others.
WTO and the Doha Round•WTO trade ministers met in Seattle in
1999 to set an agenda; no agreement was reached due in part to anti-trade demonstrations.
•WTO members met in Doha, Qatar in November of 2001 to set an agenda for the round.
•An attempt at meeting in Mexico City ended bitterly in 2003.
•Negotiations still haven’t started.
WTO and the Doha Round•The agenda will include continued
reductions in trade barriers, cutting farm subsidies, patent laws, and other issues.
•Doha is supposed to be the round that addresses developing countries’ concerns.
Recent U.S. Actions
•“Banana War” with Europe▫U.S. argued that EU is discriminating
against bananas from Central and South America.
▫WTO sided with the U.S.•Hormone-treated U.S. beef
▫Europe has objected to importation of U.S. beef on health grounds.
▫WTO allowed U.S. to impose tariffs on some European products.
▫An agreement was reached in 2009.
Recent U.S. Actions
•Extra-Territorial Income Exclusion▫U.S. provides tax relief to exporting
countries.▫WTO has ruled this to be illegal.
•U.S. has unilaterally imposed tariffs on steel and textiles.
•U.S. has had a long-term dispute with Canada regarding softwood lumber.
•U.S. has been active in negotiating bilateral free trade agreements outside of the WTO framework.
Recent U.S. Actions
•There is much concern in the U.S. over “outsourcing.”▫For example, call centers in India
•In the short run, outsourcing causes job losses and other dislocations.
•In the longer term, the U.S. economy may benefit from this specialization, and may even gain jobs.
The Conduct of Trade Policy
•Should trade policy be “rules-based” or “results-based?”
•Rules-based policies follow rules embodied by the WTO and similar organizations.▫These embrace the normal trade relations
concept.▫These follow WTO standards on anti-
dumping duties, countervailing duties, etc.
The Conduct of Trade Policy
•Results-based policies suggest aggressive unilateral action to ensure that certain results are achieved.▫For example, the U.S. may demand
penetration of a particular foreign market of a certain percentage.
▫Failure by the trading partner to comply would result in trade sanctions.
•This notion is also referred to as “industrial policy” or “managed trade.”
Midterm
Midterm Score• 67 students
▫ A: 2▫ B: 3▫ C: 3▫ D: 12▫ F: 47
• Average:▫ 6.67 39%
• High:▫ 17 100% class grade
• Grade▫ A >= 85% ▫ B >= 70%, < 85%▫ C >= 60%, < 70%▫ D >= 50%, < 60%▫ F < 50%