International Economics
By Robert J. Carbaugh
9th Edition
Chapter 7:
Trade Regulations and
Industrial Policies
Copyright ©2004, South-Western College Publishing
Trade regulation
The US and international trade
 Smoot-Hawley Tariff Act (1930)
 High point of US protectionism
 Reciprocal Trade Agreements Act (1934)
 Introduced “most favored nation” (MFN) clause
(now called “normal trade relations”)
 General Agreement on Tariffs and Trade
[GATT] (1947)
 World Trade Organization (1995)
Carbaugh, Chap. 7
2
Trade regulation
GATT - Postwar trade liberalization
 Founded on the principle of nondiscrimination, including:
 "Normal Trade Relations" treatment
 National treatment of imported goods
 Included trade dispute resolution
mechanisms
 Committed signatories to use tariffs rather
than quotas
Carbaugh, Chap. 7
3
Trade regulation
GATT - Postwar trade liberalization (2)
 Started regular negotiations to reduce
tariffs and NTBs
 Exceptions allowed nations to sidestep the
rules when they felt threatened, without
abandoning the entire process
Carbaugh, Chap. 7
4
Trade regulation
GATT negotiations
 Early bilateral agreements
 Kennedy Round (1964-67) - first multilateral negotiations; focus on tariff cuts
 Tokyo Round (1973-79) - focus on lowering
non-tariff barriers
 Uruguay Round (1986-93) - covered new
issue areas (intellectual property, services,
agriculture), included developing nations
Carbaugh, Chap. 7
5
Trade regulation
GATT becomes WTO
 GATT agreement became World Trade
Organization in January 1995
 WTO members must adhere to all agreements
negotiated under GATT (not pick and choose)
 Covers trade in goods, services, intellectual
property and investment
 WTO strengthens GATT's dispute-settlement
mechanisms
Carbaugh, Chap. 7
6
Trade regulation
Controversy over WTO
 Worries about infringement on national
sovereignty
 Concern about trade liberalization
undermining environmental protection
 WTO became a target for broader
opposition to "globalization"
Carbaugh, Chap. 7
7
Trade regulation
US trade remedy laws
 Escape clause
 Countervailing duties
 Anti-dumping duties
 Unfair trade practices (Section 301)
 Protection of intellectual property
 Trade adjustment assistance
Carbaugh, Chap. 7
8
Trade regulation
Effects of dumping, subsidies, and remedies
Carbaugh, Chap. 7
9
Trade regulation
Effects of dumping, subsidies, and remedies
Carbaugh, Chap. 7
10
Industrial policy
US “industrial policy”
 Broad policies to foster economic growth
 Aid to targeted sectors
 Agriculture, ship-building, energy, technology,
manufacturing (autos, for example), etc.
 Tariff protection of declining sectors
 Export promotion and financing
 Export-Import Bank
 Commodity Credit Corporation
 Knowledge based growth policy
Carbaugh, Chap. 7
11
Industrial policy
Japan’s industrial policy
 Trade protection and subsidies (especially
early on)
 Assistance to targeted sectors
 Shipbuilding, steel, autos, machine tools, hightechnology
 Ministry of International Trade and Industry
(MITI) to target aid to promising sectors
 It is unclear how much of Japan’s success
can be attributed to government assistance
Carbaugh, Chap. 7
12
Industrial policy
Strategic trade policy
 Response to competition in sectors with
imperfect competition - small number of
producers, each large enough to affect
market price
 Subsidies can give the advantage to
domestic manufacturers over foreign ones
 Critics argue that it is too difficult to
determine where assistance makes
economic sense
Carbaugh, Chap. 7
13
Industrial policy
Welfare effects of strategic trade policy
Carbaugh, Chap. 7
14
Trade regulation
Economic sanctions
 Trade sanctions
 Financial sanctions
 Success of sanctions depends on:
 Number of nations imposing sanctions
 Nature of ties between target and imposing
nations
 Extent of political opposition in target nation
 Cultural factors in target nation
Carbaugh, Chap. 7
15