Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 7 Commercial Policy.

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Chapter 7

Commercial Policy

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


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 non-tariff barriers and large subsidies in agriculture


TABLE 7.1 EU, Japanese, and U.S. Protection in Three

Sectors (Mid-1990s, Millions of US$)


TABLE 7.1 (continued) EU, Japanese, and U.S. Protection in Three

Sectors (Mid-1990s, Millions of US$)


TABLE 7.2 Jobs Saved through Tariffs and Quotas


TABLE 7.2 (continued) Jobs Saved through Tariffs and Quotas


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


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


Case Study – Agricultural Subsidies

• Direct subsidies are harmful

– Overproduction

– Squeeze out imports

– Dumping of surplus in foreign markets

• Uruguay round decreased direct subsidies, but there were lots of loopholes

• Doha round is now trying to address agriculture

Table 7.3 Agricultural Subsidies, 2007



Why Nations Protect Their Industries: The Labor Argument

• Protection must be used against imports from countries where wages are much lower

• Fails to consider differences in productivity

– As productivity rises, wages rise

• Fails to consider that tariffs/quotas are expensive way to protect jobs

– Better to use macro and labor market policies


Why Nations Protect Their Industries: The Infant Industry Argument

• Developing countries have young industries that must be protected against competition from industrial countries

• Assumes:

– Market forces do not allow for the development of a certain industry

– Industry has positive externalities—spillover benefits (valuable linkages to other industries or technologies)



• Problems:

• May increase inefficiency and result in negative linkage effects

• Technological externalities are difficult to measure

• Which industries should be protected?



• To be effective

• Protection must be limited in time

• Industry must have falling costs


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?


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


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


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


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


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


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


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.


Antidumping Duties

• Methods to determine if a good is being dumped:1. Compare the price in third-country markets

2. 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)


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


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


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


Section 301 and Special 301

• Special 301: Requires the USTR to monitor property rights enforcement around the world


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.

Table 7.4 Economic Sanctions since World War I


Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 7 Commercial Policy.

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