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

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

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

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

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

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

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

Trade regulation

Effects of dumping, subsidies, and remedies

Carbaugh, Chap. 7

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

Japans 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 Japans 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