Chapter Commercial Policy Copyright © 2011 Pearson Addison-Wesley All rights reserved Introduction: Commercial Policy and Jobs • Compare costs and benefits of trade barriers • Common reasons to protect specific industries • Look at efficiency of trade barriers in reaching goals Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-2 Protection in the EU, Japan, and US • Since WWII, average tariff rates have fallen • In most industrial countries agriculture, and clothing and textiles heavily protected • Some countries provide subsidies with same effects as tariffs and quotas Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-3 Direct Costs and Jobs Saved in Agriculture, Clothing, and Textiles • Since Uruguay Round average tariffs have fallen 40% • Agriculture, clothing and textiles had much smaller decrease in tariff rates • EU, Japan, and US have significant nontariff barriers and large subsidies in agriculture Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-4 TABLE 7.1 EU, Japanese, and U.S Protection in Three Sectors (Mid-1990s, Millions of US$) Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-5 TABLE 7.1 (continued) EU, Japanese, and U.S Protection in Three Sectors (Mid-1990s, Millions of US$) Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-6 TABLE 7.2 Jobs Saved through Tariffs and Quotas Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-7 TABLE 7.2 (continued) Jobs Saved through Tariffs and Quotas Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-8 Direct Costs and Jobs Saved in Agriculture, Clothing, and Textiles • Trade policy in high income countries increases poverty in low income countries • Trade policy is a grossly inefficient mechanism to create jobs – A non-transparent job-creation program – Does not go directly to the heart of the problem – Tariffs and quotas are very expensive -Better job-creation tools: (1) sound macroeconomic polices and (2) flexible labor markets Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-9 The Logic of Collective Action • Cost of policy is spread over many people • Benefits are concentrated – Asymmetry in supporting/opposing policy • Benefits from policy outweigh costs of industry’s resources to pass policy • Costs of policy per person are so low, no incentive to allocate resources to fight policy Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-10 Why Nations Protect Their Industries: The National Security Argument • Certain industries must be protected in order to guard national security (military security, cultural values) • Problems: – Vital mineral resources should be purchased cheaply abroad during peace – How to assess the effects of foreign goods on domestic culture? Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-17 Why Nations Protect Their Industries: The Retaliation Argument • Foreign country's trade barriers must be countered with domestic trade barriers • Retaliation can provide an incentive for trade negotiations • Can lead to trade wars where all countries are harmed Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-18 Case Study – Traditional Knowledge and Intellectual Property • Traditional knowledge often embedded in every day culture • When traditional knowledge is used by outsiders without recognizing its origin, it is unfair and can be harmful • Hard to enforce patents or ensure revenue is shared Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-19 The Politics of Protection in the United States • Protectionist pressures have increased in the U.S – Political reforms: reduced Congress’s past insulation from industry lobbyists – The end of the Cold War: reduced U.S willingness to sacrifice domestic political considerations for geopolitical alliances – The rise of the newly industrialized countries (NICs): increased competitive pressures on U.S industries – The growth of the U.S trade deficit in the 1980s: spurred fears of the loss of competitiveness Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-20 The Politics of Protection in the United States • Protection by direct action from president • Protection by legal procedures – Firm or industry association petitions federal government to investigate foreign practices Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-21 Countervailing Duties • A tariff that is granted to a U.S industry that has been hurt by a foreign country subsidizing its firm • Subsidies allow foreign firms to sell their products at lower prices • CVD tries to raise foreign firm’s price to offset subsidy Problem: defining subsidy is subjective Copyright â 2011 Pearson Addison-Wesley All rights reserved 7-22 Antidumping Duties • A tariff levied on an import that is selling at a price below the product’s fair value • Problem: Defining fair value is subjective • Antidumping duties (ADD) are thus a source of tension between countries Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-23 Antidumping Duties • According to the WTO: Dumping occurs when an exporter sells a product at a price below the one it charges in its home market • Problem: Comparing domestic and foreign market prices is difficult Differences in wholesalers, transportation costs, etc Copyright â 2011 Pearson Addison-Wesley All rights reserved 7-24 Antidumping Duties • Methods to determine if a good is being dumped: Compare the price in third-country markets Estimate the foreign firm’s production costs • Dumping occurs if the foreign firm is not selling at a price that provides a normal rate of return on invested capital) Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-25 Antidumping Duties • Country claiming dumping must show that the dumping has caused material injury to its firms • If dumping occurs without material injury, antidumping duty is not allowed • Problems: Economic theory and legal definitions are not in agreement Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-26 Escape Clause Relief • Temporary tariff on imports to allow a domestic industry to escape pressure of imports and thus obtain a period of adjustment – Refers to a clause in the U.S and GATT trade rules – Initiated when a firm or industry petitions the USTIC – The petitioning firm or industry must show that it has been harmed by imports Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-27 Section 301 and Special 301 • Section 301: Section of the U.S 1974 Trade Act that requires the U.S Trade Representative (USTR) to take action against any nation persistently engaging in unfair trade practices – U.S defines the meaning of unreasonable and unfair trade practices – Request for negotiations with the country in question Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-28 Section 301 and Special 301 • Special 301: Requires the USTR to monitor property rights enforcement around the world Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-29 Case Study – Economic Sanctions • Sanctions are on exports or imports, may include financial component like access to international credit • Sanctions used to achieve much broader policy objectives - ending South African apartheid Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-30 Table 7.4 Economic Sanctions since World War I Copyright © 2011 Pearson Addison-Wesley All rights reserved 7-31 ... reserved 7-20 The Politics of Protection in the United States • Protection by direct action from president • Protection by legal procedures – Firm or industry association petitions federal government... have increased in the U.S – Political reforms: reduced Congress’s past insulation from industry lobbyists – The end of the Cold War: reduced U.S willingness to sacrifice domestic political considerations... Traditional knowledge often embedded in every day culture • When traditional knowledge is used by outsiders without recognizing its origin, it is unfair and can be harmful • Hard to enforce patents