International Trade Policy

INTERNATIONAL ECONOMICS, 1/e

By W. Charles Sawyer
and Richard L.Sprinkle
Introduction
 Why do most countries provide
protection to some domestic industries?
 Why is the tariff on one specific good
low and high on another good?
 What has been the evolution of US
trade policy?
 What has been the role of GATT, TWO
and other trade negotiations?
Protectionism – Political Economy
 Given gains from trade we might expect
for free trade to dominate counties
policies
 Policy refers to an action or actions that
a government implements
 When market failures exist, government
regulation can improve social welfare
Protectionism – Political Economy
 Regulation can favor one segment of
society
 In this case, industries and firms have a
demand for government regulation
 A market for government regulation
exists with international trade policy
 Imports and exports have conflicting
effects
Protectionism – Political Economy
 Consumers benefit but firms and
workers in importing industry can be
harmed
 Special interest groups lobby for
changes that benefit them
 Lobbying to restrict trade has long
history in US and other countries
Protectionism & Public Choice
 Theory of public choice developed to
describe political behavior
 Politicians attempt to maximize utility
 Utility comes in the form of votes
 Politicians therefore favor program
having immediate and clear cut benefits
with vague or deferred costs
Protectionism & Public Choice
 Since trade benefits country as a whole and
there are more consumers than firms we
might expect politicians to favor free trade
 Individuals cannot easily from groups b/c of
large numbers but firms can
 Collective action – groups designed to
influence government in group’s collective
interest
Protectionism & Public Choice
 Firms with comparative advantage
lobby foreign governments for free
trade of exports
 Firms that compete with imports would
lobby for protection from imports
 Focus on gains to importing firms from
protection versus costs of good to
consumers
Protectionism & Public Choice
 Rent-seeking occurs when government
approves a program that benefits only a small
group within society, but society as a whole
pays the cost
 Requests to government to increase
protection from imports is a form of rent-
seeking
 Given group support, votes to politician may
increase
Protectionism & Public Choice
 Politician wants to gain votes from
supporting protection but minimize
harmful effects on society
 Protection on goods varies considerably
 US tariff schedule very complicated
 Tariffs are levied on very specific goods
or product categories
Advantages of Tariff Schedule
1. Easier to gain protection for a single
product than a product group.
 Oranges versus fruit
 Consumers less likely to notice increase in
price of oranges than fruit
 Consumers are voters
Advantages of Tariff Schedule
2. Detailed tariff schedule allows
politician to pick up votes for
protecting specific good without
protests from average consumer
 Tariffs on very similar goods may be very
different
Structure of Protection
 Analysis of variation in tariffs by product
for a country
 Results from research indicates many
reasons for variation
Analysis of Variation
1. Industries that are more important to a
country and more likely to recie3ve
protection
2. More concentrated an industry, more likely
to have protection.
 Easier for firms to organize and lobby
3. Intermediate products easier to gain
protection
 Voters unlikely to notice
Analysis of Variation
4. Potential voting strength of industry’s
employees. Larger number of
employees more likely to get
protection
5. Regionally concentrated or unionized
industry more likely protected
6. Industries with comparative
disadvantage more likely protected
Evolution of Trade Policy
 Tariff schedule has evolved over time
 Average tariff imposed on US imports
shown in figure 8.1
 From 1792 to Civil War, average tariff
from10 to 60%
 From peak in Civil War, average tariff
declined to 4%
History of US Trade Policy
Evolution of Trade Policy
 Late 18th Century, tariffs convenient
way to raise government revenue
 Up to beginning of 20th century
 Congress and President could impose any
tariff on any narrowly defined good
imported from any country
 Major source of revenue came from tariffs
Federal Revenue From Tariffs
Evolution of Trade Policy
 Before income tax, “tariff bill” was major
source of revenue for government
 Governments later recognized tariffs’ ability to
protect domestic industry
 Alexander Hamilton suggested that high
tariffs on manufactured goods would allow
development in Us industry capable of
competing with British
Evolution of Trade Policy
 Infant-Industry Protection was adopted
and US tariffs were raised from 5% in
1792 to 12.5% by 1812
 The Tariff of Abominations of 1828
caused tariffs to reach a high of over
65%
 Southern states revolted since they
imported many manufactured goods
Evolution of Trade Policy
 Difference between Southern and Northern
states restricted solidarity within country
 Confederate Constitution prohibited
protection of any specific industry
 Tariffs increased to finance Civil War
 Germany was also increasing tariffs to fight
imports from UK
 UK increased tariffs to finance war effort
Evolution of Trade Policy
 Smoot-Hawley Tariff of 1930
 Highest general tariff structure in US
history – averaged 60%
 Retaliation by other nations occurred
 Did not help the Great Depression
 Volume of world trade declined from $3
billion in 1929 to less than $500 million in
1933
Evolution of Trade Policy
 Reciprocal Trade Agreements Act of
1934
1. Tariff Reciprocity – US will negotiate tariff
reductions only in return for tariff
reductions by trade partners
2. US trade policy transferred to President
with authorization to negotiate trade
agreements. Congress votes to approve
and agreement cannot be amended
Evolution of Trade Policy
 Reciprocal Trade Agreements Act of
1934
3. Based on Most Favored Nation (MFN)
principle
 Any tariff reductions the US agrees to with
one country apply to same products of all
other trade partners with MFN designation
 Makes trade less risky for businesses since
tariffs not changed on political whim
Trade Agreements
 Major wars used to be followed by
recessions as governments tried to
balance budgets
 In 1944, allied powers met in Bretton
Woods, NH to set guidelines for world
economy after the war
 International Monetary Fund (IMF) and
World Bank were conceived here
Trade Agreements
 Framework for international trade was
developed to repair damage from tariffs of
1930’s
 International Trade Organization (ITO) was
conceived
 US congress did not ratify the agreement
 An interim committee was formed to launch
ITO
 General Agreement on Tariffs and Trade (GATT)
GATT
 Did not require US congressional
ratification
 Existed for 50 years
 Purpose was to operate an an interim
committee until ITO was established
 Not an official organization, joining
countries were called contracting
parties
GATT
 Changed world trade – went from 23
contracting parties to more than 100
 Contracting parties covered more than
90% of world trade
 To become a contracting party
 Had to have MFN status with all other
parties
 Must remove any quotas
Goals of GATT
 Reduce high levels of tariffs from 1930’s
with Multilateral Trade Negotiations
(MTN)
 Trade minister of GATT would propose
agenda of what was to be negotiated
 Trade minister of each country would ask
their government to participate in MTN
 Negotiations could not proceed with out US
participation
Goals of GATT
 Other contracting parties did not want
to enter negotiation unless US agreed
to honor negotiated agreement
 US Congress would vote to ratify
negotiated agreement without
modifying trade agreement –
Congressional fast track approval
Congressional Legislation & MTN
Goals of GATT
 After Congressional agreement, MTN
would be phased in over a number of
years
 Another MTN would be planned and
stared as soon as possible
 Tariff reduction had to keep moving
forward
Tariff Problems
 Although tariffs have decreased
significantly, they continue to be a
problem
 Tariffs on some products are still high even
in developed countries
 Fruit juice
 Developing countries and transition
economics are latecomers to GATT and
therefore in reducing tariffs
Uruguay Round
1. Contracting parties would reduce
tariffs by approximately 33 percent
 Participation of developing countries
changed nature of negotiations
2. Remaining quotas and VER’s would be
phased out and converted to ad
valorem equivalent tariffs
Uruguay Round
3. Trade related investment measures
(TRIMs) were negotiated.
 Developing countries agreed to phase out
 trade balancing rules
 domestic content rules
4. General Agreement on trade Services
(GATS) was created
Uruguay Round
5. No agreement was reached
concerning rules governing
government procurement
6. Attempted to reduce trade distortions
caused by agriculture subsidies
 Agreement made to end use of quotas on
agricultural commodities
 Make level of protection transparent
Uruguay Round
7. Created World Trade Organization
(WTO)
 Made GATT a reality
 Any country can file complaint against
another country and WTO panel will
investigate
 WTO rules are legally binding
Future of Trade Negotiations
 Conflicts have followed WTO meetings
 Number of trade issues and increasing
number of countries make negotiations
very complicated
 Gains from negotiations could be
extremely large
Major Issues Facing WTO
 Reductions in tariffs and non-tariff barriers to
trade between countries
 Agricultural commodities
 Trade between developed and developing
countries
 Reduction of discriminatory government
procurement practices
 Development of general rules governing trade
in services
Major Issues Facing WTO
 Development of additional rules
governing Trade-Related Aspects of
Intellectual Property Rights (TRIPs)
 Would enable poor countries to override
patent protection on drugs when public
health needs justify it
 Development of additional trade related
investment measures (TRIMs) to
balance home and host country
Major Issues Facing WTO
 Development of rules rest4ricting the
use of dumping and countervailing duty
measure by countries
 US Congress has not passed authority
authorizing executive branch of US to
participate in multilateral trade
negotiations