Chapter 6 INT econ

U.S. Airlines & Boeing Spar Over Export-Import Bank Credit

- In 2014, U.S. airlines opposed cheap credit from Eximbank to foreign countries and companies • Credit extended at below market rates • Puts U.S. airline industry at cost disadvantage - Delta: export credit helps Boeing AND has negatively affects U.S. airline industry - Boeing: curtailing export credit would jeopardize U.S. aerospace competitiveness

REMEDIES Against Dumped & Subsidized Imports

• Direct effect of dumping and subsidizing imports is to lower prices, producing benefits and costs for the importing country - Benefits consumers, if imports are finished goods, and consuming industries that use imports as intermediate inputs (downstream industry) - Imposes costs on import-competing industry, its workers, and other domestic industries selling intermediate inputs of the import-competing industry (upstream industry) • Dumping at prices below fair market value and subsidizing exports are unfair trade practices under international trade law - Can be neutralized by imposition of antidumping or countervailing duties on dumped or subsidized goods

Section 301: Protection Against Unfair Trading Practices

*Section 301* of Trade Act of 1974 • Empowers U.S. Trade Representative (USTR) 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 third-country markets • USTR empowered to - Impose tariffs or other import restrictions on products and services - Deny foreign country the benefits of trade-agreement concessions

Protective Argument Alexander Hamilton (before 1930)

*The Protective Argument * • 1791, Alexander Hamilton, "Report on Manufacturers" proposed - Young industries of the United States be granted import protection until they could grow and prosper - the infant industry argument • By 1820s, protectionist sentiments in the U.S. well established in northern states • But higher tariffs opposed by Southern states, which had no manufacturing and imported many products with high tariffs

Trade Adjustment Assistance (US)

- Assists domestic workers displaced by foreign trade and increased imports • Extended income support beyond normal unemployment insurance benefits • Job training; allowances for job search/relocation - Assists businesses and communities • Technical aid in moving into new lines of production • Market research assistance; low-interest loans - Major beneficiaries - Apparel & Textile Industry • Typically assists older, less educated workers - Displaced workers likely to see wages decrease in new occupations - In 2009, trade adjustment assistance program expanded to include service industries besides manufacturing

Smoot-Hawley Act (1930)

- At onset of Great Depression, effort to divert national demand away from imports and toward domestically produced goods - Average tariffs raised to 53% - Sparked retaliation by 25 trading partners - Many nations ran surpluses by reducing imports - Breakdown of international trading system - U.S. exports decreased by nearly two-thirds • President Hoover, protectionist trap - Refused to veto the Smoot-Hawley Act Felt compelled to honor 1928 Republican platform proposing tariffs to aid weakened farm economy • President Roosevelt, 1932 - Democrats dismantled Smoot-Hawley legislation but with caution Pursued trade liberalization through reciprocal trade agreements rather than across-the-board tariff concessions

U.S. Solar Ind dims with china ind pol

- Bankruptcy of three American solar power companies leaves China in dominant position - Chinese government's effective industrial policy subsidizes production of solar panels - Glut of supply with weak demand depresses prices and profits - In 2010, President Obama visited Solyndra Inc.; as it defaulted on government guaranteed loan, was seen as symbol of failed industrial 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 *Critics*: - Political perspective • Special-interest groups may dictate who will receive government support - Worldwide retaliation and counter-retaliation • All nations worse off - Governments lack information to intervene intelligently in market • No guarantee that a strategic opportunity will be pursued

Economic Sanction

- Government-mandated limitations placed on customary trade and/or financial relations among nations (foreign policy tool); have been used to: • Protect domestic economy • Reduce nuclear proliferation • Set compensation for property expropriated by foreign governments • Preserve national security • Protect human rights - Imposing nation • Nation initiating economic sanctions - Trade sanctions • Boycotts on imposing-nation exports • Quotas on imposing-nation imports from target nation - Financial sanctions • Limitations on official lending or aid - Target nation • Unused production capacity • Inward shift of production possibilities curve • Economic inefficiencies • Hardship for the population and government • Reduced growth rate - Factors influencing success of sanctions • Number of nations imposing sanctions • Degree to which target nation has economic and political ties to imposing nation(s) • Extent of political opposition in target nation • Cultural factors in the target nation

US Industrial Policies

- Increase competitiveness of domestic firms - Offer tax incentives; loan guarantees; low interest loans - Agricultural policy - Support for shipping, shipbuilding, and energy industries - Defense spending - Manufacturing industry

Export-Import Bank (Eximbank)

- Independent agency of 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 - Direct loans to 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

Export Promotion

- Marketing information and technical assistance - Trade missions - Sponsorship of exhibits of U.S. goods at international trade fairs - Establishment of overseas trade centers - Export trade associations - Export trading companies - Export subsidies: low-cost credit

Antidumping Duties: Protection Against Foreign Dumping

- Rather than seek countervailing duties, U.S. firms have recently found it easier to convince U.S. government to impose *antidumping duties* - Objectives of antidumping policy: to offset • Export sales in U.S. at prices below average total cost of production; and • Price discrimination, where foreign firm sells in U.S. at price less than that in exporter's home market - *Antidumping investigations seek*: • Evidence of dumping • Evidence of material injury • Link between the dumped imports and the alleged injury - *Antidumping duty (tariff)* • Equal to margin of dumping • Increases prices of imported goods • Decreases consumer welfare

Reciprocal Trade Agreements Act (1934)

- Transferred authority from Congress to President • Congress - generally favored domestic import-competing producers • President - tended to consider national interest in forming trade policy - Led to lower tariffs and set stage for wave of trade liberalization - *Negotiating authority* • The President obtained unprecedented authority to negotiate bilateral tariff-reduction agreements with foreign governments without congressional approval • 1934 to 1947, negotiated 32 bilateral tariff agreements • Average level of tariffs fell to about half of 1934 level - Generalized tariff 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 made on a nondiscriminatory basis • In 1998, U.S. replaced term "most favored nation" with "normal trade relations"

COUNTERVAILING DUTIES: Protection Against Foreign Export Subsidies

- WTO views export subsidies as unfair competition - Importing countries can therefore retaliate by levying *countervailing duty* • Limited to amount of the foreign export subsidy • Objective is to increase price of imported good to its fair market value - In 1996, U.S. imposed tariff-rate quota on Canada to protect U.S. lumber producers, who alleged that Canadians paid unfairly low tree cutting fees; Canadian lumber exports to U.S. fell about 14% - Critics argued that the restriction harmed American lumber users and buyers of new homes • Claimed that trade restrictions increased price of lumber by 20 to 35% and cost of average new home by $800 to $1,300

ROUNDS of Multilateral Trade Negotiations (GATT)

1. *1964-67, Kennedy Round* - Focus shifted from product-by-product format to across-the-board format - Tariffs negotiated on broad categories of goods; rate reduction applied to entire group - Tariffs on manufactured goods cut by average of 35% to average ad valorem level of 10.3% 2. *1973-79, Tokyo Round* - Tariff rates cut across board from 7% to 4.7% - Tariffs so low that they are no longer a barrier to trade in industrial countries... • 1980s - GATT weakening • Need to include protection of intellectual property, services, agriculture • More attention needed to developing countries 3. *1986-1993 - Uruguay Round* - Tariff cuts for industrial countries averaging 40% - Tariffs eliminated entirely in several sectors - Many nations agreed for first time to bind or cap significant portion of their tariffs... • In 1999, members of WTO began a new round of trade negotiations in Seattle, Washington • Believing they had been "taken to the cleaners" in previous rounds, developing nations were determined achieve more favorable terms; disagreements between developing & industrial nations a major factor in breakdown of talks Dubbed "Battle in Seattle" because of rioting in streets outside meeting 4. *2002, the Doha Round* • Despite significant agenda, little progress • Developing countries refused to accept central bargain: - Large reductions in their industrial tariffs in exchange for greater access to agricultural markets of rich nations • Talks faltered in 2003, collapsed in 2008 • Now, more regional trade negotiation meetings

1. Does WTO Reduce National Sovereignty? 2. Should Retaliatory Tariffs Be Used for WTO enforcement? 3. Does the WTO Harm the Environment? 4. Two main arguments that trade liberalization improves environ.

1. *Does WTO Reduce National Sovereignty?* • Critics - yes; WTO settles disputes, not U.S. • Supporters - no; decision of WTO dispute panel cannot force U.S. to change laws 2. *Should Retaliatory Tariffs Be Used for WTO enforcement?* • Critics - system based on tariff retaliation places smaller countries at disadvantage • Relatively more costly for small nation to initiate retaliation because unable to obtain favorable movements in terms of trade 3. *Does the WTO Harm the Environment?* • Two arguments that trade liberalization harms environment • Fosters "race to the bottom" in environmental standards • Trade liberalization encourages some practices that are unacceptable to some people, e.g., catching dolphins in Tuna nets or intensification of logging that damages ecosystem 4. *Two main arguments that trade liberalization improves environment* • Trade stimulates economic growth, a key factor in societies' demand for cleaner environment, tougher environmental laws • Trade and growth leads to development and dissemination of environmentally friendly production techniques

2 pillars of nondiscrimination principle (GATT) 1. Most Favored Nation principle (normal trade) 2. National treatment principle

1. *Most Favored Nation principle* • If GATT member grants another member lower tariff rate, must do same for all GATT members Some exceptions allowed - Countries can establish free trade agreement that applies only to goods traded within the group, or - Can provide developing countries special access (low tariffs) - Can increase trade barriers against goods traded unfairly • Granting or denying MFN status used as instrument of foreign policy • U.S. has granted MFN status to most nations with which it trades • U.S. did not grant normal trade status to Cuba and North Korea; U.S. tariffs on imports from these countries 3-4 times higher • U.S. has granted temporary MFN to others, like Vietnam and Russia 2. *National treatment principle* • GATT members must treat imported & domestically produced goods equally, once imported goods have entered market • Domestic regulations and internal taxes cannot be biased against foreign products - Canadian periodicals industry illustrates use of discriminatory taxes; Canadian government protects Canadian culture and so levied steep tax on some U.S. magazines Ruled a violation of GATT

Protection of *Intellectual Property Rights*

• *Intellectual property*: invention, idea, product or process registered with government • *Intellectual property right (IPR)* awards inventor or author exclusive rights to use the invention for a certain time period - Counterfeiting common in industries such as auto parts, jewelry, sporting goods, watches, audio & videotapes, computer software & printed materials • *Copyrights* - Protect works of original authorship for remainder of author's life plus 50 years • *Trademarks* - Grants manufacturers exclusive rights to a distinguishing name or symbol • *Patents* - Provides inventors - for a term (15 years or more) - exclusive rights to make, use, or sell inventions

- Tariff of Abominations - Compromise Tariff - Walker tariffs - Morill Tariffs (before 1930)

• 1828, Tariff of Abominations, 45% duties -Provoked South - wanted low duties for its imported manufactured goods • Compromise Tariff of 1833, reducing tariffs • 1840s and 1850s, Walker tariffs, 23% -To eliminate budget deficit • Civil War era Morill Tariffs of 1861, 1862, and 1864 -Means of paying for the Civil War • 1870, high tariffs returned

General Agreement on Tariffs & Trade (GATT), 1947

• Agreement among member nations to decrease trade barriers and place all nations on equal footing in trade relations • In 1995, GATT transformed into World Trade Organization (WTO)

China Piracy of Microsoft

• China - Opportunities and Challenges • U.S. firms report losses from IPR infringement - Losses amounting to $48 billion • Microsoft rejects argument that Chinese consumers pirate software due to high cost • Despite problems, Microsoft continues to invest in China, as it is a large lucrative market • Microsoft has historically attempted cooperative strategy with Chinese government, with some success

Promoting Freer Trade (GATT)

• GATT also seeks to promote freer trade by settling trade disputes • GATT has improved dispute resolution process by - Formulating complaint procedures - Providing conciliation panel • GATT lacked authority to enforce the conciliation panel's recommendations; led to formation of WTO • GATT required members to use tariffs rather than quotas to protect domestic industry - Exceptions to promote economic development, etc.

Trade Promotion Authority (fast track)

• If international trade agreements were subject to congressional amendments, no agreement would be achieved. • To prevent this, *trade promotion authority (fast track authority)* granted to President - President notifies Congress of intent to enter trade negotiations with another country; Congress then has 60 legislative days to permit or deny "fast track" authority - If fast track authority approved, President has limited time to complete negotiations; extensions permissible • President actively consults with Congress and private sector throughout negotiations • When negotiations complete, outcome subject to up-or-down vote without amendment in both houses of Congress within 90 legislative days • Fast track authority instrumental to major trade agreements, but efforts to renew face stiff opposition - Congress: too much authority to President - Dispute over goals of U.S. trade negotiations

World Trade Organization (WTO)

• In 1995, GATT transformed into World Trade Organization (WTO) - Governs conduct of trade relations among members - WTO members bind their commitments; adhere to: GATT rules Broad range of trade pacts that have been negotiated under GATT auspices in recent decades - Database - trade measures and statistics • 159 nations, 97% of world trade • International organization, headquartered in Geneva, Switzerland - established in 1995 • Multilateral trading system - Trade in services, intellectual property, and investment • Administers a unified package of agreements to which all members are committed • Watchdog of international trade • WTO is not a government - Individual nations free to set own appropriate levels of environmental, labor, health, and safety protections • Oversees implementation of tariff cuts and reductions of in non-tariff barriers • Reverses policies of protection in certain "sensitive" areas • Settles trade disputes

Safeguards (ESCAPE CLAUSE): Emergency Protection from Imports

• In addition to WTO rules re unfair trade practices, U.S. has *trade remedy laws* - *Escape clause* - temporary *safeguard* Temporary relief; President may terminate trade or modify agreement to prevent injury to U.S. firms - *Countervailing duties* - Antidumping duties - Protection against unfair trading practices (Section 301) • U.S. Safeguards Limit Surging Imports of Textiles from China - *Multifiber Arrangement (MFA)* restricted competition from developing exporting countries with low cost labor to industrialized nations - Negotiated each year on per country basis - As the arrangement ended in 2005, China gained unfair advantage due to low costs - To protect domestic production, U.S. imposed safeguard quotas restricting Chinese imports

Evolution of tariffs - McKinley and Dingley Tariffs - Payne-Aldrich - Underwood (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% • World War I - Protectionist pressures returned • Early 1920s, scientific tariff concept - 1922, Fordney-McCumber Tariff - Tariff rates 38%

Future of WTO

• Major barrier to multilateral trade deals is evolving balance of world economic power - Brazil, Russia, India, & China (BRICs) see themselves as poor enough to need protection - Rich countries consider BRICs major competitors • Trade liberalization proceeds along 2 tracks: - With trade, attempts to enforce environmental, labor, & I.P. protections (favored by U.S.) - Emphasizes decreasing tariffs outside sensitive sectors (favored by China)

Settling Trade Disputes (WTO)

• Major objective of WTO is to strengthen GATT mechanism for settling trade disputes - GATT dispute mechanism characterized by delays, blocking decisions of GATT panels, inadequate enforcement - WTO dispute mechanism Guarantees formation of dispute panels, sets time limits Decision of panel may be appealed but not blocked Important to U.S. because U.S. most frequent user of GATT dispute mechanism

Multilateral Trade Negotiations (GATT)

• Prior to GATT, negotiations bilateral, between 2 countries • With GATT, negotiations multilateral, with all involved members participating in negotiations • GATT sponsored series of negotiations to reduce tariffs & nontariff trade barriers - 1st round - 1947, tariffs reduced an average of 21% - Through 1940s and 50s, protectionist pressures due to reconstruction following WWII; little reduction in tariffs

Predictability: Through Binding & Transparency (GATT)

• Promising not to increase trade barrier as important as reducing one - Businesses had clearer view of future opportunities • When GATT members opened their markets for trade, they would agree to "bind" their commitments - Bindings acted as ceiling, changed only after negotiation • Countries required to disclose trade policies

WTO Rules Against China's Hoarding of Rare Earth Minerals

• U.S. & others complained that by restricting exports of nine Rare Earth Metals, China was engaging in discriminatory protectionism - China contended that export restrictions were intended to conserve a natural resource • In 2011, WTO ruled that China has no legal rights to impose these restrictions

U.S. Tariff Policies Before 1930

• U.S. Trade policy marked by fluctuations • Dominant motive behind early tariff laws was to provide tax revenue - First tariff law, 1789 - Followed by 12 more tariff laws by 1812 - Today, tariffs represent less than 1% of total federal revenues • As revenue argument for tariffs weakened, protective argument gained strength

U.S. Steel Companies Lose an Unfair Trade Case and Still Win

• U.S. steel industry has swamped the USITC with petitions, alleging that foreign steel has been subsidized or dumped into U.S. market • Part of its competitive strategy; filing complaint decreases imports from target company, allows U.S. steel firms to gain market share & raise prices • Even if USITC rules against them, market has time to recover during year or so while case pending