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interantional economics 5th by gerber ch07

Chapter 7
Commercial
Policy

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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.

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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

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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 nontariff barriers and large subsidies in
agriculture
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TABLE 7.1
EU, Japanese, and U.S. Protection in Three
Sectors (Mid-1990s, Millions of US$)

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TABLE 7.1 (continued)
EU, Japanese, and U.S. Protection in Three
Sectors (Mid-1990s, Millions of US$)

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TABLE 7.2
Jobs Saved through Tariffs and Quotas

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TABLE 7.2 (continued)
Jobs Saved through Tariffs and Quotas

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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

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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

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7-10


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
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Table 7.3 Agricultural Subsidies, 2007

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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

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7-13


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)

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Why Nations Protect Their Industries:
The Infant Industry Argument
• Problems:
• May increase inefficiency and result in
negative linkage effects
• Technological externalities are difficult to
measure
• Which industries should be protected?
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Why Nations Protect Their Industries:
The Infant Industry Argument
• To be effective
• Protection must be limited in time
• Industry must have falling costs

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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?

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7-17


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

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7-18


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
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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

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7-20


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

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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
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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

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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.
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7-24


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)

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7-25


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