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Chapter 8
Commercial Policy: History and Practice

This chapter is devoted to a discussion of the history of U.S. commercial policy and current U.S. practices
in this area. Along the way, U.S. policies are compared with foreign. In addition to these issues, the
chapter provides a discussion of the operation of the WTO. It also presents specific case studies of some
recent U.S. trade cases.

This chapter and the next, which discusses regional trade agreements, are perhaps the most topical of all
that are to be found in the first half of the text. It is hoped that the discussions of U.S. trade provisions
will provide the student with a firm grounding in the trade policy process. To that end, this material is
designed to be easily supplemented with discussions of particular ongoing trade disputes or new U.S.
trade initiatives.

There are many excellent sources for supplementary material on the topics covered in the chapter.
Dominick Salvatore has edited a volume which provides overviews on the trade policy practices of various
countries and trading blocs. See National Trade Policies, Dominick Salvatore, ed., Greenwood Press,
1992. For an exceptionally good book on Section 301, see Jagdish Bhagwati and Hugh T. Patrick, eds.,
Aggressive Unilateralism, University of Michigan Press, 1990. Finally, an excellent source for stories on
U.S. trade policy run amok, see The Fair Trade Fraud, by James Bovard, St. Martin’s Press, 1991.

◼ Chapter Outline
Introduction
History of U.S. Commercial Policy
Global Insights 8.1: The GATT Agreement
The Uruguay Round and the Creation of the WTO
Trade Policy Case Study 1: U.S. Tuna Quotas to Save Dolphins
The DOHA Round
The Conduct of U.S. Commercial Policy
Dumping
Antidumping Law
Countervailing Duty Law
Unfair Foreign Practices: Section 301
Trade Policy Case Study 2: The International Bananas Dispute
The Escape Clause: Section 201
Other Measures
Trade Policy Case Study 3: Tire Imports from China
Comparison with Policies in Other Countries
Summary
Exercises
 Chapter 8 Commercial Policy: History and Practice 37

◼ Suggested Answers for the End-of-Chapter Exercises

1. Examine Figure 8.1 carefully. In what periods were U.S. tariffs high? When were they low? How do
you explain these patterns?

High Levels
During the War of 1812, tariffs were raised to generate revenue for the war.
Around 1830 (Tariff of Abominations), manufacturers sought to regain protection enjoyed during the
War of 1812.
During and immediately after the Civil War, first to raise money to fight the war, then after the war
as manufacturers sought to keep protection enjoyed during the Civil War.
Smoot-Hawley Tariff, to protect domestic manufacturers during the Great Depression.

Low Levels
To the beginning of the War of 1812, tariffs were used only for revenue purposes.
Immediately after the War of 1812, tariffs were removed since they were no longer needed for
revenue purposes.
After World War II, countries sought to establish a liberal world trading order (including GATT and
the WTO).

2. What is the WTO? What services does it perform? Explain carefully.

The World Trade Organization (WTO) is an international institution created by the Uruguay Round
Agreement to replace the GATT. Its chief goal is to ensure orderly international trading markets for
all countries. Signatories to the WTO agree to follow a given set of rules in trading with each other,
based on the most favored nation principle. In addition to setting the rules of trade, the WTO settles
commercial disputes between members, and acts as a forum for international negotiations to reduce
trade barriers.

3. What is dumping? What are the welfare costs of dumping? Why would firms ever dump? Explain
carefully.
Dumping occurs when a product is sold in a foreign market at a price that is either lower than in the
home producer’s country or below fair market value. The welfare costs of dumping are borne by the
competitive domestic producers—they produce and sell fewer goods at a lower price than they would
in the absence of the dumped product. Consumer welfare, on the other hand, is greatly enhanced—
they are able to buy more of the product at a lower price. Gains in consumer welfare usually exceed
the losses in producer surplus, with the country receiving the dumped product experiencing a net
welfare gain.
Firms might dump for a variety of reasons. (a) The most likely reason is that they are international
price discriminators (if they have some market power), responding to different demand conditions in
different countries. They would logically charge a higher price in markets with relatively inelastic
demand curves, and a lower price in markets with elastic demand. This could only happen in
situations where resale is impossible. (b) Alternatively, firms might have production advantages that
result in lower costs, including subsidies. (c) They might also practice predatory dumping, hoping to
lower prices until they drive the domestic competitors out of the market so they can then behave as
monopolists in the domestic market. (d) A firm might also dump goods if it is trying to gain a market
share through initial discounts or any number of standard marketing practices.
38 Husted/Melvin • International Economics, Ninth Edition

4. Compare and contrast how the U.S. government handles antidumping and countervailing duty cases.
Antidumping cases begin with a complaint filed simultaneously with the Department of Commerce
and the International Trade Commission, which includes evidence that dumping may be occurring
and illustrating injury or threat of injury. While the ITC investigates injury, the DOC investigates
whether dumping has actually occurred. They make a preliminary assessment of the size of the
dumping margin, and can immediately charge all imports of the good with a tariff equal to this
margin. If the final investigation determines that dumping has not occurred, then that tariff is rebated.
The DOC can calculate the fair market value in one of three ways: the price of the identical good sold
in the exporter’s home market; the price of the good in a third market; or a figure based on domestic
production costs plus 10% for expenses and 8% for profits. If both the ITC and DOC rule in favor of
the petition, a permanent tariff is placed on the good.
Countervailing duty cases involve the existence of a subsidy for the foreign producer. A complaint is
filed with the DOC, and with the ITC, only if an injury test is required. If a producer is found to use
any subsidized inputs, or receive any other type of subsidy that allows him lower production costs,
then a countervailing duty is applied to the import of the good in an amount equal to the value of
the subsidy. There are two main differences between this and the antidumping case: foreign firms
do not need to be practicing price discrimination (they can be charging exactly the same price as the
domestic producer); and in some cases they do not have to prove injury—a countervailing duty can
be charged even if domestic industry has not been threatened.

5. What is Section 301 of U.S. trade law? Describe how it works. Do you think it is likely to be very
effective? Comment.
Section 301 of U.S. trade law (Unfair Foreign Practices) allows the President to limit imports of
goods from countries that discriminate against U.S. firms in their own markets.
A petition is made to the USTR, and it has about 6 weeks to decide whether or not to accept the case.
If it does, it negotiates with the other government (within the WTO for cases involving perceived
violations of WTO rules or outside the WTO for others). The President has a year to rule to continue
the talks, drop it, or impose retaliation by closing the U.S. market to (some or all of) the country’s
exports.
Its effectiveness depends upon the enthusiasm with which the USTR and the administration pursue
the claims. First, it doesn’t have to accept any of them. Second, the President can stretch the cases out
for a very long time. It may have some effect on opening markets that were partially or fully closed to
U.S. producers, as these cases can be very costly to foreign governments to negotiate.

6. In 1988, Senator Ernest Hollings of South Carolina was quoted as saying that “going the 201 route
is for suckers.” By this, he appeared to mean that American firms seeking protection from foreign
competition would do better by using other trade remedies. Given your knowledge of how
Section 201 and alternate forms of U.S. trade laws are administered, do you agree with the senator’s
statement? Why or why not?
Given recent experience with U.S. policy, this statement is certainly correct. Section 201 provides
only temporary protection to domestic firms. This protection must be approved by the President and
is seldom imposed. In contrast, other trade remedies, including antidumping laws, are increasingly
easy to obtain and are administered by agencies that are completely sympathetic to their use.
Moreover, once protection is achieved it may be imposed on a permanent basis. The threat of an
antidumping suit is often sufficient to cause foreign firms to raise their prices, thus achieving the
desired goal for local industry.
 Chapter 8 Commercial Policy: History and Practice 39

7. A former ITC commissioner, Alfred Eckes, has written “in battling dumping, trade administrators not
only help sustain political support for an open global trading system, but they also bring benefits to
consumers as well as producers. I remember well how imposition of U.S. antidumping duties against
Korean television makers prompted them to lower high home market prices in order to avoid the
payment of U.S. dumping duties.” Comment on Mr. Eckes’s statement. Do you agree or disagree
with its general thrust? Support your answer with examples from how U.S. policy is applied and
recent world experience with such policies.
It is relatively seldom that foreign firms will take the actions described by Mr. Eckes. Moreover, it is
clearly not Congress’s intention for antidumping laws to have this effect.

8. The late Milton Friedman often wrote that instead of imposing countervailing duties on subsidized
foreign goods, the United States should write a note of thanks to foreign tax payers. Do you agree?
Why or why not? Illustrate with a simple diagram.
The statement is clearly correct. U.S. consumers benefit from subsidized foreign goods; foreign tax
payers pick up the tab for this largess.

9. What are the benefits and costs of U.S. antidumping laws?

Opponents of antidumping laws argue that these laws are not in the national interest but rather serve
the special interests of import-competing producers. By overstating costs (such as the 8% markup
rule for calculating profits), the procedures used by the Department of Commerce to calculate
dumping margins are biased against foreign exporters. Even if foreign firms are selling at below cost,
this is to the advantage of the importing country, since the gains accruing to domestic consumers
outweigh the losses suffered by domestic producers.

10. How likely is dumping to be predatory? Discuss.

Predatory dumping is pricing at below cost with the intention of first driving competitors out of
business and then using newly acquired monopoly power to raise prices. There is probably a greater
perceived threat of dumping by the public than is really warranted. As the book states, predatory
dumping has never been documented. It is hard to imagine a predatory firm being able to earn
monopoly profits for very long. With the breadth of today’s capital markets, it would take little time
for a new competitor to obtain the funds with which to build a new plant and have the required
machinery installed. It could take a little more time for the competitor to acquire workers with the
necessary job skills. But in an era of educated, mobile workers, even this does not seem to present
too much of an obstacle.
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