Ch 7 Trade Regulation

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Ch 7 Trade Regulation Industrial Policies

• The Protective system...is conservative, while
  the Free Trade system works destructively. It
  breaks up old nationalities and carries
  antagonism of proletariat and bourgeoisie to the
  uttermost point. In a word,
• the Free Trade system hastens the Social
  Revolution.
• In this revolutionary sense alone, gentlemen,
• I am in favor of Free Trade.
• Karl Marx

2
Ch 7 Trade Regulations

• Smoot Hawley Act (1930)
• Peak in US protectionism
• Raised tariff rate to 52.8
• Originally intended to help US farmers
• Legislators from farm states put together tariff
  package, but needed manufacturing states
  support.
• Urban states added their own tariffs to bill.
• Evolved into raising tariffs on over 800 items.
• Worlds largest open market in 1920s closed the
  door in the 1930s.
• Import prices increased 50.
• Many economists believe Smoot Hawley worsened the
  depression plunge.
• Other nations retaliated.
• US Exports 1929 5.4 billion
• 1932 1.6 billion
• Hoover defeated by FDR in 1932, Smoot Hawley
  dismantled immediately.
• FDR proposed legislation to liberalize trade in
  1934.

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Ch 7 Trade Regulations

• Reciprocal Trade Agreements Act (1934)
• Negotiation authority
• Transferred power to reduce tariffs from Congress
  to president.
• Allowed him to negotiate reductions bilaterally.
• Tariff reductions could be up to 50.
• Reductions had to be met by trade concessions in
  other country.
• Item by item basis.
• Generalized reductions
• Further developed most favored nation concept.
• Under MFN, once tariff is negotiated with one
  country, deal is automatically extended to all
  MFNs.
• Two exceptions to MFN clause
• Developing nations can get tariff considerations
  not granted to industrialized.
• Nations in regional trading arrangements (ie,
  NAFTA) can treat member nations differently than
  nonmembers.
• Between 1934 and 1947, agreements were reached
  with 29 nations, tariffs reduced 25.

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Ch 7 Trade Regulations

• Bilateral negotiations had problems
• Under MFN principle, once Country A had
  negotiated with Country B, reductions were
  automatically extended to other MFNs. When
  Country A goes to negotiate with Country C,
  theres nothing to offer because tariffs are
  already reduced.
• All negotiations were revolving around tariffs,
  but nations were using other non-tariff trade
  barriers not covered in MFN negotiations.
• Nations enjoyed the prosperity and healthier
  economies they were seeing from trade reductions,
  wanted more. But they needed another way.

5
Ch 7 Trade Regulations

• General Agreement on Tariffs and Trade (1947)
• Set of bilateral agreements among contracted
  member nations to decrease trade barriers and
  place all nations on equal footing in trade
  relationships.
• Began with 18 members in 1947, reducing tariffs
  on over 45,000 goods.
• Primarily, GATT established rules of conduct of
  international trade that still exist in form of
  World Trade Organization.

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Ch 7 Trade Regulations
General Agreement on Tariffs and Trade
(1947) Principles

• Trade to be conducted in a non-discriminatory
  manner.
• Trade policies apply to all nations.
• MFN status extended to all GATT members.
• Did not eliminate nations ability to
  discriminate. Still permitted under preferential
  trading arrangements.

• Banned use of quantitative restrictions (quotas)
• Unless nation has balance of payments problems.
• Developing nations have more freedom to use
  quotas.
• Domestic agricultural support programs are okay.

• Set up framework for conflict resolution
• No enforcement power.
• Provided forum for nations to come together. If
  nations talk, they may not fight.

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Ch 7 Trade Regulations
General Agreement on Tariffs and Trade
(1947) From 1947 to 1961, GATT held five rounds
of negotiations with fairly substantial
reductions.

• Kennedy Round (1964-1967)
• Negotiations shifted from item-by-item to
  across-the-board.
• Tariffs reduced 35 on 60,000 items.
• Discussed dealing with NTBs and agricultural
  products (didnt DO it, just talked about it).

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Ch 7 Trade Regulations
General Agreement on Tariffs and Trade
(1947) From 1947 to 1961, GATT held five rounds
of negotiations with fairly substantial
reductions.

• Tokyo Round (1973-1979)
• Addressed non-tariff barriers.
• Cut tariffs on manufactured goods by 40.
• Tariff on finished goods cut more than raw
  materials (decreased degree of tariff escalation).

• Uruguay Round (1986-1993)
• By mid 80s, many GATT rules were being violated.
• Discussed major growth sectors of trade
  (services, intellectual property) that had not
  been addressed.
• Established World Health organization

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Ch 7 Trade Regulations
General Agreement on Tariffs and Trade
(1947) From 1947 to 1961, GATT held five rounds
of negotiations with fairly substantial
reductions.

• Doha Round (2001- present)
• Focus on more fair system of trade for developing
  countries.
• Divide between the rich, developed countries, and
  the major developing countries (represented by
  the G20 developing nations).
• Agricultural protectionism, especially with
  Europe's Common Agricultural Policy, is the most
  significant issue upon which agreement has been
  hardest to negotiate.

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Ch 7 Trade Regulations
World Trade Organization (WTO) 1/1/95

• Headquartered in Geneva.
• Maintains GATT principles, resolves disputes.
• Every nation has one vote, none more powerful
  than any other.
• Wider scope than GATT, including intellectual
  property, services, investment.
• Administers tariff agreements.
• Serves as watchdog, some enforcement power.

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Ch 7 Trade Regulations
WTO and the Environment Trade Liberalization
Harms the Environment

• Arguments against WTO trade policy
• Industry will shift production to countries with
  lowest standards, especially heavily polluting
  industries.
• Trade should be opposed in industries that
  encourage certain practices some find socially
  inappropriate or unacceptable, i.e. dolphins in
  fishing nets, child labor, etc.
• Trade liberalization encourages trade in products
  creating global pollution, i.e. free trade in
  lumber promotes trade in forestry products,
  harming forests.

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Ch 7 Trade Regulations
WTO and the Environment Trade Liberalization
Harms the Environment

• Arguments for WTO trade policy
• Trade stimulates economic growth. More
  prosperous nations have higher demands for
  cleaner environments. As people get richer, they
  want a cleaner environment.
• Trade and growth can encourage development and
  trade of environment-friendly production
  processes.
• Costs of pollution control are a small fraction
  of total costs, so they probably wont cause firm
  relocation.

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Ch 7 Trade Regulations
Trade Remedy Laws Designed to ensure fair
trading environments.

• Escape Clause
• Way to provide relief to companies hurt by trade.
• Allows president (or his trade representative) to
  modify trade concessions that are granted to
  foreign countries, and to impose restrictions on
  import of a product that causes harm or threatens
  to cause harm to US manufacturer of similar
  product.
• Temporary supposed to be for 5 years only.
• Usually initiated by affected industry.
• Industry petitions US government, who
  investigates claim and makes recommendation to
  president.

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Ch 7 Trade Regulations
Trade Remedy Laws Escape Clause

• Must find 3 things to be true
• Increasing imports, actual or relative to US
  production.
• Domestic industry is being seriously injured or
  threatened.
• Imports are a substantial cause of the injury.
• If all three are true, International Trade
  Commission (ITC) will recommend a remedy,
  typically a countervailing (offset) duty.

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Ch 7 Trade Regulations
Trade Remedy Laws Section 301 Unfair Trading
Practices (1970s)

• Part of Trade Act of 1974
• Directs US trade rep (USTR) to overtly eliminate
  unfair trade practices, with ultimate step being
  change your ways or well keep your goods out of
  the US.
• In 1988, Section 301 strengthened USTRs power,
  called Super 301.
• USTR can now self-initiate investigations
  (industry had to ask before).
• Under Super 301, USTR can name nations as unfair
  traders, subject to retaliatory restrictions.

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Ch 7 Trade Regulations
Economic Sanctions

• Used to preserve national security, protect human
  rights, and combat international terrorism.
• Restriction of exports for domestic and foreign
  policy objectives.
• Government mandated limitations on customary
  trade.
• Imposing nations hope to impair economic
  capabilities of target nation so they will give
  in to objectives.
• Two types
• Trade (any nation can do)
• Stop exporting to target, or set zero quota on
  imports.
• Financial (must be strong to do)
• Limit lending or aid to target

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Ch 7 Trade Regulations
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Ch 7 Trade Regulations
Economic Sanctions

• Determinants of success
• Number of nations imposing sanctions
• Multilateral sanctions apply more pressure
• Enhances political legitimacy of the effort
• Degree of political and economic ties between
  target and imposing nation
• Extent of political opposition in target
• Cultural factors in target
• Citizens may identify with views of imposing
  nation and support their efforts.