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Global EconomicsEco 6367

Dr. Vera Adamchik

Trade Regulations and Industrial Policies

Chapter 6

US Tariff Policy

In-class exercise: US tariffs• Go to the home page of the United States International

Trade Commission at http://www.usitc.gov . Click on “U.S. Imports/Export Data (DataWeb)” under “Research Tools” (on the right), and then click on “U.S. Imports: AVE Duties 1891-2008” under “Trade Data Reports” (on the right).

• Comment on the value of imports over the past century that have come into the United States duty free or under tariff protection and on the value of tariffs collected in dollars and as percentages of total imports and of total dutiable imports.

US tariff policy before 1930• The dominant

motives – government tax revenue, jobs.

• Tariff laws were frequently changed.

• Fluctuations of the tariff rate.

• McKinley (1890) and Dingley (1897) Laws – the arguments of American labor and businesses against cheap foreign labor.

• Wilson (1894) Law – an attempt by the Democratic Party to wipe out the tariff legislation of the Republican party which had been in power for 32 years.

• Payne-Aldrich (1909) and Underwood (1913) Laws – trade liberalization.

• World War I protectionism the concept of scientific tariff Fordney-McCumber Law (1922).

The Smoot-Hawley Tariff Act

• The Smoot-Hawley Tariff Act (1930) brought the US tariff to the highest protective level yet in the history of the United States and “imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the US, and tariff rates had quadrupled.” [Quoted from http://www.state.gov/r/pa/ho/time/id/17606.htm ]

The Smoot-Hawley Tariff Act

• The Smoot-Hawley Tariff Act brought retaliatory tariff acts from foreign countries and caused a drastic contraction of international trade: "U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. To this day, the phrase “Smoot-Hawley” remains a watchword for the perils of protectionism." [Quoted from http://www.state.gov/r/pa/ho/time/id/17606.htm ]

The Reciprocal Trade Agreement Act

• Smoot-Hawley marked the end of the line for high tariffs in 20th century American trade policy. Thereafter, beginning with the 1934 Reciprocal Trade Agreements Act, the United States generally sought trade liberalization through bilateral or multilateral tariff reductions.

MFN/NTR• The most favored nation (MFN) clause is an agreement

between two nations to apply tariffs to each other at rates as low as those applied to any other nation.

• The MFN concept is misleading because it implies that a country is getting special, favored treatment over all other countries. However, the term means the opposite – it represents an element of nondiscrimination in tariff policy. The new term “normal trade relations” (NTR) reflects the concept more satisfactory.

MFN/NTR: An example• Suppose that the US and India conclude a

bilateral tariff negotiation whereby India reduces its tariffs on US computers and the US reduces its tariffs on Indian clothing.

• MFN/NTR treatment states that any third country with which the US has an MFN/NTR agreement (such as Kenya) will get the same tariff reduction on clothing from the US that India received.

MFN/NTR: An example• Further, Kenya will, if it has an MFN/NTR

agreement with India, also get the same tariff reduction from India on computers (if Kenya exported any computers to India) that the US received.

• These reductions for Kenya occur even though Kenya itself did not take part in the bilateral tariff negotiations. In effect, they make the US tariff on clothing and the Indian tariff on computers nondiscriminatory by country of origin.

GATT

• 15 countries had begun talks in December 1945 to reduce and bind customs tariffs. With the Second World War only recently ended, they wanted to give an early boost to trade liberalization, and to begin to correct the legacy of protectionist measures which remained in place from the early 1930s.

• Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system.

A word of caution: the fine print • GATT is often described as an “international

organization” formed by the “GATT members”. The phrase reflects GATT's de facto role before the WTO was created. However, this role was always ad hoc, without a proper legal foundation.

• International law did not recognize GATT as an organization. Officially, GATT signatories were “contracting parties”.

GATT

• Under the GATT, member countries pursued eight rounds of negotiations to lower governmental barriers to trade.

• The last and largest GATT round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTO’s creation.

• The Uruguay Round agreements are the basis of the present WTO system.

GATT trade rounds

Year Place/name Subjects covered Countries

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13

1951 Torquay Tariffs 38

1956 Geneva Tariffs 26

1960-1961 GenevaDillon Round

Tariffs 26

1964-1967 GenevaKennedy Round

Tariffs and anti-dumping measures 62

1973-1979 GenevaTokyo Round

Tariffs, non-tariff measures, “framework”agreements

102

1986-1994 GenevaUruguay Round

Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc

123

GATT trade rounds

WTO• The WTO was established on January 1, 1995

as a result of the Uruguay Round negotiations (1986-94).

• Membership: 153 members on 23 July 2008 , accounting for over 97% of world trade. Around 30 others are negotiating membership.

• Budget: 194 million Swiss francs for 2010.• Secretariat staff: 637• The WTO headquarters are in Geneva,

Switzerland.

WTO contributions• All WTO members pay contributions.

Contributions are determined according to each Member's share of international trade (%), based on trade in goods, services and intellectual property rights for the last three years for which data is available. There is a minimum contribution of 0.015% for Members whose share in the total trade of all Members is less than 0.015%. The total 2010 budget was 189,400,000 Swiss francs. The US contributed 24,550,028 Swiss francs, or about 13.0%. (http://www.wto.org/english/thewto_e/secre_e/contrib10_e.htm ).

WTO functions

• Administering WTO trade agreements• Forum for trade negotiations• Handling trade disputes• Monitoring national trade policies• Technical assistance and training for

developing countries• Cooperation with other international

organizations

The WTO’s rules (the agreements)• The WTO’s trade rules are actually

agreements that governments negotiated. • The WTO agreements cover:• goods -- the General Agreement on Tariffs and

Trade (GATT); • services -- the General Agreement on Trade in

Services (GATS); and • intellectual property -- the Trade-Related

Aspects of Intellectual Property rights (TRIPS).

The WTO’s rules (the agreements)

• http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm

Trade negotiations• Decisions are made by the entire

membership. This is typically by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments.

• The WTO’s top level decision-making body is the Ministerial Conference which meets at least once every two years.

Trade disputes• Dispute settlement is the central pillar of the

multilateral trading system, and the WTO’s unique contribution to the stability of the global economy (http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm )

• Countries often break their promises or violate trade rules, and the disputes need to be resolved. So far, the US was a complainant in 96 cases, a respondent in 110 cases, and a third party in 80 cases ( http://www.wto.org/english/thewto_e/countries_e/usa_e.htm ).

Trade policy reviews• The WTO conducts regular reviews of individual countries’

trade policies (http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm11_e.htm ).

• The frequency of the reviews depends on the country’s size:

• The four biggest traders -- the European Union, the United States, Japan and China (the “Quad”) -- are examined approximately once every two years.

• The next 16 countries (in terms of their share of world trade) are reviewed every four years.

• The remaining countries are reviewed every six years, with the possibility of a longer interim period for the least-developed countries.

Doha Round

• In November 2001 in Doha, Qatar WTO member governments agreed to launch new negotiations. The entire package is called the Doha Development Agenda (DDA) (http://www.wto.org/english/thewto_e/whatis_e/tif_e/doha1_e.htm )

• The work program lists 21 subjects. The original deadline of 1 January 2005 was missed. So was the next unofficial target of the end of 2006.

Doha Round• On July 28, 2006, the WTO General Council approved

Director General Pascal Lamy’s recommendation to suspend the current Doha round negotiation amid irreconcilable differences in negotiation positions among negotiators over main issues, such as the reduction of farm subsidies, farm tariffs, and industrial tariffs. No further negotiation schedule was announced. The Doha round negotiation slipped into total uncertainty.

• A series of meetings were held in Geneva from 21 to 30 July 2008. Consultations took place among a group of ministers representing all interests in the negotiations. The July 2008 package is a stepping stone on the way to concluding the Doha Round. (http://www.wto.org/english/tratop_e/dda_e/dda_e.htm )

The WTO attracts a lot of criticismThe ten misunderstandings 1. The WTO dictates policy2.

The WTO is for free trade at any cost3. Commercial interests take priority over development …4. … and over the environment5. … and over health and safety6. The WTO destroys jobs, worsens poverty7. Small countries are powerless in the WTO8. The WTO is the tool of powerful lobbies9. Weaker countries are forced to join the WTO10. The WTO is undemocratic

• Go to http://www.wto.org/english/thewto_e/whatis_e/10mis_e/10m00_e.htm to read how the WTO responds to these accusations/criticisms.

We will watch a movie!

Videos on WTO explained• The Routes of Trade (9m 32s) 03/09/2009• WTO at Fifteen (7m 39s) 17/09/2010

Trade promotion authoritya.k.a. fast-track authority

• The objective – to avoid congressional amendments to international trade agreements.

• Was devised in 1974.o President notifies Congress of intent to enter trade

negotiations with another country.o Congress has 60 legislative days to permit or deny

fast track authority.o Upon completion of the president’s negotiations,

their results are subject to an up-or-down vote without possibility for amendment.

Remedies against imports that are fairly traded

Escape clauseo The objective - temporary relief to US firms and

workers injured by increases in imports that are fairly traded.

o President can terminate trade concession or levy trade restrictions.

o Most common forms: tariff increases, tariff-rate quotas, trade adjustment assistance.

o Can be enacted for 4 years and extended for another 4 years.

o Example: Multifiber Arrangement – system to restrict textile imports from developing countries.

Remedies against imports that are unfairly traded

(dumped and subsidized imports)

Countervailing dutieso Definition – tariff imposed in retaliation against

export subsidies for foreign competition.o U.S. Department of Commerce investigates claim.o Temporary tariff applied if the preliminary

investigation finds reasonable indication of export subsidy.

o Permanent tariff imposed if both Commerce Department and International Trade Commission determine export subsidy exists.

o Duty removed when foreign exports subsidies are eliminated.

Antidumping duties

o Definition – tariff levied against a foreign producer:1) who sells to the U.S. market at lower price than in home

market;

2) or whose prices on exports to U.S. are below average total cost of production.

o Must include evidence of dumping, material injury, and link between imports and injury.

o Economists support antidumping laws that address predatory pricing.

Effects of dumped and subsidized imports and their remedies

Downstream industries – consuming industries that use imports as intermediate inputs into their own production.Upstream industries – industries selling intermediate inputs to production of the import-competing industry.

An example from the textbook

Remedies against unfair trade restrictions that hinder US

exports

Unfair trading practices

• Unfair trading practices – foreign trade restrictions that hinder US exports and foreign subsidies that hinder US exports to third-country markets.

Section 301

• Under Section 301 of the 1974 Trade Act, the US government can ultimately use the threat of imposing new import barriers, in an effort to force foreign-country governments to remove allegedly unfair policies that limit the access of US exports to these countries.

Section 301

• The unfair-trade portion of US law permits the president to take retaliatory action in response to unjustifiable, unreasonable, or discriminatory restrictions on US exports by foreign countries.

Section 301

• ‘Unjustifiable’ refers to any action that violates the international legal rights of the US;

• ‘unreasonable’ refers to unfair and inequitable practices, although these are obviously hard to define; and

• ‘discriminatory’ means actions that deny national or MFN/NTR treatment to the US.

Section 301• The range of US possible actions is broad, and

includes (among others) suspending trade agreement concessions, imposing duties or other import restrictions, and entering into agreements with the other country to eliminate the behavior or to provide compensation to the US.

• With the advent of the much-improved dispute settlement procedure in the WTO, the US has reduced its use of Section 301.

In January 2009, “Less than a week before it leaves office, the Bush administration has sparked anger across the Atlantic by tripling the import duty rate on Roquefort cheese to 300%, a move which the US hopes will "shut down trade" in the sheep's milk product by making it prohibitively expensive. The decision, part of Washington's attempts to force the EU into dropping its ban on hormone-treated beef, was greeted with disbelief by the French government and by farmers in the south-western Aveyron region who depend on the industry for their livelihoods.” (http://www.guardian.co.uk/world/2009/jan/17/france-america-import-tariffs ) These changes were scheduled to go into effect on March 23, 2009.

The EU claimed this action constituted an “escalation” of the dispute and was “more punitive” than current trade sanctions. The EU decided to hold off further action until the Obama Administration reviewed the decision. The Administration delayed implementing the changes, pending further negotiations with the EU. In May 2009, following a series of negotiations, the United States and the EU agreed to a settlement that could resolve this longstanding trade dispute. The terms of this agreement will be phased in over the next few years.

Trade adjustment assistance

• Trade adjustment assistance (TAA) was introduced in the Trade Expansion Act (1962).

• TAA means that, if a tariff reduction injures workers or industries by causing an inflow of imports, displaced workers can petition for additional unemployment compensation or for help in retraining for other types of jobs.

Trade adjustment assistance• Recently, the Trade Adjustment Assistance

Reform Act (2002) created an additional program for a health coverage tax credit and added a new benefit for older workers. Workers who lost their jobs because their companies shifted production abroad to countries that were part of a free trade agreement with the US, or to some African and Western Hemisphere countries, were also made eligible for TAA.

TAA: Arguments in favor• To most economists, the introduction of TAA

in 1962 was a marked step forward for public policy, because previously the only alternative considered was to reimpose the tariff (the “escape clause”). Adjustment assistance is better than using a tariff or nontariff barrier to limit imports and resist shrinking the domestic industry. And politically, it can reduce the pressure to enact these import barriers.

TAA: Arguments against• Some people think that TAA is discriminatory

because special assistance is given to workers displaced by imports while workers displaced by domestic competition receive no such special favors. Workers are faced with the need to relocate and develop new skills for a variety of reasons – not only increased imports but also changing technologies. There is nothing special about increasing imports, and workers affected by increasing imports deserve no special treatment.

TAA: Arguments against

• In fact, offering adjustment assistance could encourage workers to take jobs in import-competing industries that are shrinking, because they have the social insurance offered by adjustment assistance. In addition, adjustment assistance is not that effective. It does offer temporary income assistance to those who qualify, but it is much less successful at effective retraining and smooth relocation.

Export promotion and financing• Go to the Export-Import Bank website

http://www.exim.gov/ and learn about the ExIm Bank products for exporters: (a) click on “Learn About Export Credit Insurance,” then click on “Video Resources” under the “Shortcuts” title on the left, then click on “ExIm Bank Products for Exporters: Video”, watch the video. (b) click on “Products & Policies” on the upper horizontal toolbar.

• Go to the Foreign Credit Insurance Association (FCIA) website http://www.fcia.com/ and learn about their products (click on the “Our Products” link on the upper horizontal toolbar).

Export promotion and financing

Strategic trade policy

• Strategic trade policy – government assists domestic companies in capturing economic profits from foreign competitors.

• Typically, “strategic” industries that are important to future domestic economic growth and that provide widespread benefits to society.

• Influential since the 1980s.

Economic sanctions

• Economic sanctions – government-mandated limitations placed on customary trade or financial relations among nations.

• The nation initiating the economic sanctions, the imposing nation, hopes to impair the economic capabilities of the target nation to such extent that the target nation will succumb to its objectives.

Determinants of the success of economic sanctions:

• The number of nations imposing sanctions.• The degree to which the target nation has

economic and political ties to the imposing nation(s).

• The extent of political opposition in the target nation.

• Cultural factors in the target nation.