Trade Regulations and
Industrial Policies
PowerPoint slides prepared by:
Andreea Chiritescu
Eastern Illinois University
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1
U.S. Tariff Policies Before 1930
• The revenue argument
• Dominant motive behind the early tariff laws of
the United States
• First tariff law, 1789
• Followed by 12 more tariff laws by 1812
• Today, tariffs collected by the federal
government = 1% of total federal revenues
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2
U.S. Tariff Policies Before 1930
• The protective argument
• 1791, Alexander Hamilton, “Report on
Manufacturers”
• Young industries of the United States be granted
import protection until they could grow and
prosper
• The infant industry argument
• By the 1820s protectionist sentiments in the
United States were well established
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3
U.S. Tariff Policies Before 1930
• The protective argument
• 1828 , Tariff of Abominations, 45% duties
• Provoked the South - wanted low duties for its
imported manufactured goods
• Compromise Tariff of 1833
• Downsizing of the tariff protection afforded U.S.
manufacturers
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4
U.S. Tariff Policies Before 1930
• 1840s and 1850s, U.S. government
• Excess of tax receipts over expenditures
• Walker tariffs, 23%
• To eliminate the budget surplus
• Further tariff cuts, 1857, 16%
• Civil War era
• Morill Tariffs of 1861, 1862, and 1864
• Means of paying for the Civil War
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5
U.S. Tariff Policies Before 1930
• Late 1800s, cheap foreign labor argument
• McKinley and Dingley Tariffs
• 1897, tariffs of 46%
• Payne-Aldrich Tariff of 1909
• Turning point against rising protectionism
• Underwood Tariff of 1913
• Reduced duties to 27%
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U.S. Tariff Policies Before 1930
• World War I
• Protectionist pressures built up
• Early 1920s, scientific tariff concept
• 1922, Fordney-McCumber Tariff
• Tariff rates 38%
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7
TABLE 6.1
U.S. tariff history: average tariff rates
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8
Smoot-Hawley Act
• Smoot-Hawley Act, 1930
• Average tariffs of 53%
• Tried to divert national demand away from
imports and toward domestically produced
goods
• Retaliation by 25 trading partners of the U.S.
• Several nations tried to run a trade surplus by
reducing imports
• Breakdown of the international trading system
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Smoot-Hawley Act
• Smoot-Hawley Act, 1930
• 1932, U.S. exports decreased by nearly twothirds
• President Hoover, protectionist trap
• Refused to veto the Smoot-Hawley Act
• Compelled to honor the 1928 Republican
platform
• Tariffs to aid the weakened farm economy
• Bound to tradition
• Bound to the platform of the Republican Part
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10
FIGURE 6.1
Smoot-Hawley protectionism and world trade,
1929–1933 (millions of dollars)
The figure shows the pattern of world trade from 1929 to 1933. Following the Smoot-Hawley Tariff Act of
1930, which raised U.S. tariffs to an average level of 53 percent, other nations retaliated by increasing
their own import restrictions, and the volume of world trade decreased as the global economy fell into
the Great Depression
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11
Smoot-Hawley Act
• President Roosevelt, 1932
• Democrats dismantled the Smoot-Hawley
legislation
• Reciprocal trade agreements
• Trade liberalization
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12
Reciprocal Trade Agreements Act
• 1934, Reciprocal Trade Agreements Act
• Transferred authority from the Congress
• Generally favored domestic import-competing
producers
• To the president
• Consider the national interest when forming trade
policy
• Lower tariffs and a wave of trade liberalization
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13
Reciprocal Trade Agreements Act
• Negotiating authority
• The president
• Unprecedented authority to negotiate bilateral
tariff-reduction agreements with foreign
governments
• Without congressional approval
• Lower tariffs by up to 50% of existing level
• 1934 to 1947, 32 bilateral tariff agreements
• Average level of tariffs - about half of the 1934
levels
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14
Reciprocal Trade Agreements Act
• Generalized reductions
• Most favored nation (MFN) clause
• Agreement between two nations to apply tariffs to
each other at rates as low as those applied to any
other nation having MFN status
• Tariff reductions being made on a
nondiscriminatory basis
• 1998, U.S. government replaced the term most
favored nation with normal trade relations
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15
General Agreement on Tariffs and Trade
• GATT, 1947
• General Agreement on Tariffs and Trade
• Agreement among the member nations
• To decrease trade barriers
• To place all nations on an equal footing in trading
relations
• Never intended to become an organization
• 1995, GATT - transformed into the World Trade
Organization (WTO)
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General Agreement on Tariffs and Trade
• WTO
• Main provisions of GATT
• Include a mechanism intended to improve
GATT’s process for resolving trade disputes
among member nations
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17
General Agreement on Tariffs and Trade
• Major principles of GATT system
• Trade without discrimination
• MFN principle (normal trade relations)
• National treatment principle
• Promoting freer trade
• Improved the dispute-resolution process
• Use tariffs rather than quotas
• Binding and transparency
• Multilateral trade negotiations
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TABLE 6.2 U.S. tariffs on imports from nations granted, and not
granted, normal trade relation status: selected examples
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19
TABLE 6.3
GATT negotiating rounds
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TABLE 6.4
Uruguay Round tariff reductions on industrial
products by selected countries
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21
World Trade Organization
• January 1, 1995, GATT transformed into WTO
• Membership organization
• Governing the conduct of trade relations
among its members
• WTO members adhere
• To GATT rules
• To the broad range of trade pacts that have been
negotiated under GATT auspices in recent decades
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22
World Trade Organization
• WTO
• 153 nations, 97% of world trade
• International organization, headquartered in
Geneva, Switzerland
• Multilateral trading system
• Trade in services, intellectual property, and
investment
• Administers a unified package of agreements to
which all members are committed
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23
World Trade Organization
• WTO
• Reverses policies of protection in certain
“sensitive” areas
• Settling trade disputes
• Is not a government
• Individual nations - free to set their own
appropriate levels of environment, labor, health,
and safety protections
• Various councils and committees
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24
World Trade Organization
• WTO
• Administers
• Agreements contained in the Uruguay Round
• Agreements on government procurement and civil
aircraft
• Oversees
• Implementation of the tariff cuts
• Reduction of nontariff measures
• Watchdog of international trade
• Database - trade measures and statistics
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25
World Trade Organization
• WTO Reduce National Sovereignty?
• Yes – because of WTO disputes settlement
• No – because findings of a WTO disputesettlement panel cannot force the United
States to change its laws
• Retaliatory tariffs for WTO enforcement?
• Small country impose retaliatory tariffs
• Relatively more costly to initiate
• No favorable movements in its terms of trade
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World Trade Organization
• Trade liberalization - harm the environment?
• “Race to the bottom” in environmental
standards
• Social preferences
• Trade liberalization
• Enhances productivity and growth
• Puts downward pressure on inflation
• Increasing competition
• Creates jobs
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World Trade Organization
• Trade liberalization - improve the environment
• Trade stimulates economic growth
• Key factors in societies’ demand for a cleaner
environment
• Tougher environmental laws
• Trade and growth
• Development and dissemination of environment
friendly production techniques
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28
TRADE
CONFLICTS
Burning rubber: Obama’s tire tariff
ignites Chinese officials
• New tariff on tires from China, 2009
• In response to a complaint by the USW
• In addition to the existing tariff
• Applied to low-price tires ($50 - $60 apiece)
• 35% in the first year
• 30% in the second year
• 25% in the third year
• Cut off about 17% of all tires sold in U.S.
• Boost U.S. industry sales and prices – increased
profitability
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Burning rubber: Obama’s tire tariff
ignites Chinese officials
TRADE
CONFLICTS
• Critics
• USW petition for the tariff increase
• Not supported by American tire companies
• Already abandoned making low cost tires in U.S.
• Manufacture low-cost tires in China
• Costly and complicated to revamp factory lines
• Chinese tires - replaced by low-wage
manufacturers in other countries
• Takes time
• Shortages of low-end tires in the U.S. market
• Prices increasing by 20-30%
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From Doha To Hong Kong:
Failed Trade Negotiations
• 1999, Seattle, Washington
• Disagreements among developing nations and
industrial nations
• Doha Round, Doha, Qatar
• “Doha development agenda”
• Poor developing countries – trade liberalization
• Countries disowned major portions of the
agenda
• Complaining about earlier trade rounds
• Little interest in compromise
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31
Trade Promotion Authority
• Trade promotion authority, 1974
• Fast-track authority
• The president - formally notify Congress of
his/her intent to enter trade negotiations with
another country
• Congress - 60 legislative days to permit or deny
“fast-track” authority
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Trade Promotion Authority
• Trade promotion authority, 1974
• The president - limited time period in which to
complete the trade negotiations
• Outcome – subject to a straight up-or-down vote
• Both houses of Congress
• Within 90 legislative days of submission
• The president - consult actively with Congress
and the private sector throughout the
negotiation
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33
Safeguards: Emergency Protection From
Imports
• Trade remedy laws
• Designed to produce a fair trading environment
for all parties engaging in international trade
• Escape clause (safeguard relief)
• Countervailing duties
• Antidumping duties
• Unfair trading practices
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TABLE 6.5
Trade remedy law provisions
Statute
Focus
Criteria for Action
Response
Fair trade
(escape clause)
Increasing imports
Increasing imports are
substantial cause of
injury
Duties, quotas,
tariff-rate quotas,
orderly marketing
arrangements,
adjustment
assistance
Subsidized imports
(countervailing
duty)
Manufacturing
production, or export
subsidies
Material injury or
threat of material
injury
Duties
Dumped imports
(antidumping duty)
Imports sold below cost
of production or below
foreign market price
Material injury or
threat of material
injury
Duties
Unfair trade
(Section 301)
Foreign practices
violating a trade
agreement or
injurious to U.S. trade
Unjustifiable,
unreasonable, or
discriminatory
practices, burdensome
to U.S. Commerce
All appropriate and
feasible action
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TABLE 6.6
Safeguard relief granted under the escape clause:
selected examples
Product
Type of Relief
Porcelain-on-steel cooking ware
Additional duties imposed for four years of 20 cents,
20 cents, 15 cents, and 10 cents per pound in the
first, second, third, and fourth years, respectively
Prepared or preserved mushrooms
Additional duties imposed for three years of 20%,
15%, and 10% ad valorem in the first, second, and
third years, respectively
High-carbon ferrochromium
Temporary duty increase
Color TV receivers
Orderly marketing agreements with Taiwan and Korea
Orderly marketing agreements with Taiwan and Korea
Footwear
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36
Safeguards: Emergency Protection From
Imports
• Arguments for safeguards
• Political necessity for the formation of
agreements to liberalize trade
• Safety net to protect domestic producers
• Practical political argument
• Appease domestic producers – strong lobbying
power
• Voting constituents
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37
Countervailing Duties: Protection Against
Foreign Export Subsidies
• Countervailing duties
• Export subsidies = unfair competition
• Importing countries can retaliate by levying a
countervailing duty
• Limited to the amount of the foreign export subsidy
• To increase the price of the imported good to its
fair market value
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38
Countervailing Duties: Protection Against
Foreign Export Subsidies
• Countervailing duties
• Canadian lumber exports - subsidized
• U.S. trade restrictions
• 14.7 billion board feet of Canadian lumber - duty
free
• Next 0.65 billion board feet - tariff of $50 per
thousand board feet
• Canadian lumber exports to U.S. fell 14%
• Price of lumber increased 20-35%
• Cost of the average new home increased $800 $1,300
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Antidumping Duties: Protection Against
Foreign Dumping
• Objective of U.S. antidumping policy
• To offset two unfair trading practices by foreign
nations
• Export sales in the United States at prices below
the average total cost of production
• Price discrimination
• Foreign firms sell in U.S. at a price less than that charged
in the exporter’s home market
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Antidumping Duties: Protection Against
Foreign Dumping
• Antidumping investigations
• Evidence of dumping
• Evidence of material injury
• A link between the dumped imports and the
alleged injury
• Antidumping duty (tariff)
• Equal to the margin of dumping
• Increase the price of imported goods
• Decrease consumer welfare
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FIGURE 6.2
Effects of dumped and subsidized imports and
their remedies
Dumped or subsidized imports provide benefits to consumers if imports are finished goods and to
consuming producers that use the imports as intermediate inputs into their own production; they inflict
costs on import-competing domestic producers, their workers, and other domestic producers selling
intermediate inputs to import-competing producers. An antidumping or countervailing duty inflicts costs on
consumers if imports are finished goods and on consuming producers that use the imports as intermediate
inputs into their own production; benefits are provided to import-competing domestic producers, their
workers, and other domestic producers selling intermediate inputs to the protected industry.
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Antidumping Duties: Protection Against
Foreign Dumping
• Antidumping duty or countervailing duty
• Decrease in the consumer surplus more than
offsets the increase in the producer surplus
• Successful petitioning industries – benefit
• Higher prices
• Higher output and employment
• Costs to the rest of the economy - far greater
• Net welfare loss of $1.59 billion
• Costs on consumers
• Cost on downstream industries
• Cost on the economy as a whole
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Section 301: Protection Against Unfair
Trading Practices
• Section 301
• U.S. trade representative (USTR)
• Means to respond to unfair trading practices by
foreign nations
• Foreign-trade restrictions that hinder U.S. exports
• Foreign subsidies that hinder U.S. exports to thirdcountry markets
• USTR empowered to
• Impose tariffs or other import restrictions on
products and services
• Deny the foreign country the benefits of tradeagreement concessions
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TABLE 6.7 Section 301 investigations of unfair trading practices:
selected examples
U.S. Petitioner
Product
Unfair Trading Practice
Heilman Brewing Co.
Beer
Canadian import restrictions
Amtech Co.
Electronics
Norwegian government
procurement code
Great Western Sugar Co.
Sugar
European Union subsidies
National Soybean Producers Assoc.
Soybeans
Brazilian subsidies
Association of American Vintners
Wine
South Korean import restrictions
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45
Protection of Intellectual Property Rights
• Intellectual property rights (IPRs) violations
• Pirates
• Counterfeiters
• Other infringers
• Intellectual property
• An invention, idea, product, or process
• Registered with the government
• Awards the inventor (or author) exclusive rights
to use the invention for a given time period
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Protection of Intellectual Property Rights
• Copyrights
• To protect works of original authorship
• For the remainder of the author’s life plus 50 years
• Trademarks
• To manufacturers
• Exclusive rights to a distinguishing name or symbol
• Patents
• Inventor - for a term (15 years or more) - exclusive
right to make, use, or sell the invention
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TABLE 6.8 Examples of intellectual property right violations in China
Affected Firm
Violation in China
Epson
Copying machines and ink cartridges are counterfeited.
Microsoft
Counterfeiting of Windows and Windows NT, with packaging
virtually indistinguishable from the real product and sold in
authorized outlets.
Yamaha
Five of every six JYM150-A motorcycles and ZY125 scooters bearing
Yamaha’s name are fake in China. Some state-owned factories
manufacture copies four months following the introduction of a
new model.
Gillette
Up to one-fourth of its Parker pens, Duracell batteries, and Gillette
razors sold in China are pirated.
Anheuser-Busch
Some 640 million bottles of fake Budweiser beer are sold annually
in China.
Bestfoods
Bogus versions of Knorr bouillon and Skippy Peanut Butter lead to
tens of millions of dollars in forgone sales each year.
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Trade Adjustment Assistance
• U.S. trade adjustment assistance program
• Assists domestic workers displaced by foreign
trade and increased imports
• Extended income support beyond normal
unemployment insurance benefits
• Job training
• Allowances for job search and relocation
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Trade Adjustment Assistance
• U.S. trade adjustment assistance program
• Assists businesses and communities
• Technical aid in moving into new lines of
production
• Market research assistance
• Low-interest loans
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Will Wage and Health Insurance Make Free
Trade More Acceptable to Workers?
• Trade adjustment assistance program
• Expanded to include wage and health
insurance
• Protect workers
• Restricting imports
• Losses for the overall economy
• Provide wage and health insurance
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Will Wage and Health Insurance Make Free
Trade More Acceptable to Workers?
• Wage insurance
• Encourages workers to find a new job quickly
• Yields benefits for both younger workers and
older workers
• Easier for younger workers to acquire new skills
• Older workers - retirement with the same standard
of living
• Reducing worker anxiety
• Reduce worker opposition to trade
liberalization
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Will Wage and Health Insurance Make Free
Trade More Acceptable to Workers?
• 2002, President George Bush
• Expanded the trade adjustment assistance
program
• Wage insurance for trade-displaced workers
• Over 50 years old
• Earn less than $50,000 a year
• Employed fulltime at the firm from which they
were separated
• Government pays half the difference between the
old and new wage for two years, up to a maximum
of $10,000
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Will Wage and Health Insurance Make Free
Trade More Acceptable to Workers?
• 2002, President George Bush
• Health Coverage Tax Credit program
• Federal income tax credit
• Pays 65% of qualified health plan premiums for eligible
trade-displaced workers
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Industrial Policies of the United States
• Industrial policies
• To enhance the competitiveness of domestic
producers
• Tax incentives
• Loan guarantees
• Low interest loans
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Industrial Policies of the United States
• U.S. industrial policies
• Agricultural policy
• Support for shipping, shipbuilding, and energy
industries
• Defense spending
• Manufacturing industry
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Industrial Policies of the United States
• Export promotion
• Marketing information and technical assistance
• Trade missions
• Sponsoring exhibits of U.S. goods at
international trade fairs
• Establish overseas trade centers
• Export trade associations
• Export trading companies
• Export subsidies: low-cost credit
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Industrial Policies of the United States
• Export-Import Bank (Eximbank)
• Independent agency of the U.S. government
• Guarantees of working capital loans for U.S.
exporters to cover pre-export costs
• Export credit insurance that protects U.S.
exporters or their lenders against commercial
or political risks of nonpayment by foreign
buyers
• Guarantees of commercial loans to
creditworthy foreign buyers of U.S. goods and
services
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Industrial Policies of the United States
• Export-Import Bank (Eximbank)
• Direct loans to these foreign buyers when
private financing is unavailable
• Special programs to promote U.S. exports of
environmentally beneficial goods and services
• Asset-based financing for large commercial
aircraft and other appropriate exports
• Project financing to support U.S. exports to
international infrastructure projects
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TABLE 6.9
Examples of loans provided by Eximbank of the U.S.
(millions of dollars)
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Industrial Policies of the United States
• Commodity Credit Corporation (CCC)
• Officially supports lending for U.S. exports
• Government-owned corporation
• Administered by the U.S. Department of
Agriculture
• Export credit financing for eligible agricultural
commodities
• Interest rates - slightly lower
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Industrial Policies of Japan
• Japanese industrial policy
• From the 1950s to the early 1970s
• Strong control over the nation’s resources and the
direction of the economy’s growth
• Since the mid-1970s,
• Modest and subtle industrial policy
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Industrial Policies of Japan
• Ministry of Economy, Trade and Industry
(METI)
• Facilitate the shifting of resources into hightech industries
• Targets specific industries for support
• Assisted by consultants from leading
corporations, trade unions, banks, and
universities
• Increase domestic R&D, investment, and
production
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Industrial Policies of Japan
• METI
• Facilitate the shifting of resources into hightech industries
• Targets specific industries for support
• Assisted by consultants from leading
corporations, trade unions, banks, and
universities
• Increase domestic R&D, investment, and
production
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Industrial Policies of Japan
• METI
•
•
•
•
•
Trade protection
Allocations of foreign exchange
R&D subsidies
Loans at below market interest rates
Loans that must be repaid only if a firm
becomes profitable
• Favorable tax treatment
• Joint government-industry research projects
• To develop promising technologies
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Strategic Trade Policy
• Strategic trade policy
• Government - help domestic companies to
capture economic profits from foreign
competitors
• Support for certain “strategic” industries
• Important to future domestic economic growth
• Provide widespread benefits (externalities) to
society
• Imperfect competition
• Potential to attain long-term economic profits
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FIGURE 6.3
Effects of a European subsidy granted to Airbus
According to the theory of strategic trade policy, government subsidies can assist domestic
firms in capturing economic profits from foreign competitors.
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Strategic Trade Policy
• Critics of strategic trade policy
• Political perspective
• Special-interest groups may dictate who will receive
government support
• Worldwide cycle of activist trade-policy
retaliation and counter retaliation
• All nations worse off
• Governments lack the information to intervene
intelligently in the marketplace
• Minor miscalculations - home economy worse off
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Strategic Trade Policy
• Critics of strategic trade policy
• Existence of imperfect competition
• No guarantee for a strategic opportunity to be
pursued
• Need for a continuing source of economic
profits
• With no potential competition
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Economic Sanctions
• Economic sanctions
• Government-mandated limitations placed on
customary trade or financial relations among
nations
• Protect the domestic economy
• Reduce nuclear proliferation
• Set compensation for property expropriated by
foreign governments
• Combat international terrorism
• Preserve national security
• Protect human rights
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Economic Sanctions
• Imposing nation
• Nation initiating the economic sanctions
• Trade sanctions
• Boycotts on imposing-nation exports
• Quotas on imposing-nation imports from the target
nation
• Financial sanctions
• Limitations on official lending or aid
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TABLE 6.10 Selected economic sanctions of the U.S.
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Economic Sanctions
• Target nation
•
•
•
•
•
Unused production capacity
Inward shift of production possibilities curve
Economic inefficiencies
Hardship on the population and government
Reduced growth rate
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FIGURE 6.4
Effects of economic sanctions
Economic sanctions placed against a target country have the effect of forcing it to operate
inside its production possibilities curve. Economic sanctions can also result in an inward shift
in the target nation’s production possibilities curve.
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Economic Sanctions
• Factors influencing the success of sanctions
• Number of nations imposing sanctions
• Degree to which the target nation has
economic and political ties to the imposing
nation(s)
• Extent of political opposition in the target
nation
• Cultural factors in the target nation
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GLOBALIZATION
Do automaker subsidies weaken
the WTO?
• 2008–2009, turmoil in financial markets,
economic downturn
• Substantial financial stress to the automobile
industry
• Autoworkers, auto suppliers, stock and
bondholders, dealers, and certain states
• The Big Three (Ford, General Motors, and
Chrysler)
• Financial assistance, “too big to fail”
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GLOBALIZATION
Do automaker subsidies weaken
the WTO?
• December 2008, U.S. government allocated
$36 billion
• Bridge loans to Chrysler and GM.
• $4 billion to Chrysler and $13.4 billion to GM
• Submit restructuring plans in 2009
• France
• $7.7 billion to its failing automakers
• United Kingdom
• $3.2 billion in governmental loan guarantees
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GLOBALIZATION
Do automaker subsidies weaken
the WTO?
• WTO rules, illegal government assistance if
• A financial contribution – made to a particular
firm, not to a wide spectrum of firms
• Must provide the firm an advantage that would
not occur under normal market conditions
• Subsidy must cause serious injury, or threat of
serious injury, to imports from foreign firms
• Auto bailouts - adhered to the WTO definition
of illegal subsidies
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