AEM Chapter 6

Factors Influencing the Success of Sanctions

(1) the number of nations imposing sanctions, (2) the degree to which the target nation has economic and political ties to the imposing nation(s), (3) the extent of political opposition in the target nation, and (4) cultural factors in the target nation. The more nations imposing the sanction the more effective it is.

Differences between the old GATT and the new WTO

-WTO is a far wider scope w more members - WTO brings in multilateral trading system for the first time trade in services, intellectual property, and investment. - uniform agreements in WTO while there were side agreements in GATT - WTO is more secure and aware/ strict: embers are also required to update various trade measures and statistics that are maintained by the WTO in a large database. - binding of tariffs makes global trade very predicable - settling trade disputes

WTO policies and harming the environment

1. If some countries have low environmental standards, industry is likely to shift production of environmentally intensive or highly polluting products to such pollution havens. 2. Social preferences. Example: US won't buy Mexican tuna that killed dolphins in the process Lower tariffs result in higher demand and thus more environmental degradation to meet his new demand "Race to the bottom" to have the lowest costs and thus the best competitive low price

What were the goals of the GATT?

1. non-discrimmination 2. elimination of non-tarriff trade barriers 3. encourage the resolution of trade disputes.. however no system in place until the formation of the WTO.

WTO policies and enhancing the environment

1. trade stimulates economic growth, and growing prosperity is one of the key factors in societies' demand for a cleaner environment. Now we have the money to impose these new laws 2. trade and growth can encourage the development and dissemination of environment-friendly production techniques as the demand for cleaner products grows and trade increases the size of markets.

What is the average industrial tariff rate in the US?

2 percent

Kennedy Round

A multilateral meeting of GATT participants occurred at which the form of negotiations shifted from a product-by-product format to an across-the-board format. Tariffs were negotiated on broad categories of goods and a given rate reduction applied to the entire group a more streamlined approach. The Kennedy Round cut tariffs on manufactured goods by an average of 35 percent to an average ad valorem level of 10.3 percent.

Tokyo Round

Accomplishments included tariff reductions and reductions in non tariff barriers. Codes of conduct were established in six areas: customs valuation, import licensing, government procurement, technical barriers to trade (such as product standards), antidumping procedures, and countervailing duties.

Does the WTO Reduce National Sovereignty?

America retains full sovereignty in its decision of whether or not to implement a panel recommendation. WTO agreements do not preclude the United States from establishing and maintaining its own laws or limit the ability of the United States to set its environmental, labor, health, and safety standards at the level it considers appropriate. The WTO does not allow a nation to use trade restrictions to enforce its own environmental, labor, health, and safety standards when they have selective and discriminatory effects against foreign producers. Objective of panels is to assure that governments don't pass laws that violate international agreements with which they have already agreed Economists generally contend that the WTO puts some constraints on the decision making of the private and public sectors, but the costs of these constraints are outweighed by the economic benefits that citizens derive from freer trade.

Protection against Foreign Export Subsidies

As viewed by the WTO, export subsidies constitute unfair competition. Importing countries can retaliate by levying a countervailing duty. The size of the duty is limited to the amount of the foreign export subsidy. Its purpose is to increase the price of the imported good to its fair market value.

Upstream versus Downstream

Example: here are benefits to consumers if imports are finished goods and to consuming industries that use imports as intermediate inputs into their own production (downstream industry). Conversely, there are costs to the import-competing industry, its workers, and other domestic industries selling intermediate inputs to production of the import-competing industry (upstream industry).

WTO Settling trade disputes

It guarantees the formation of a dispute panel once a case is brought and sets time limits for each stage of the process.

Smoot-Hawley Act

In 1930, under which U.S. average tariffs were raised to 53 percent on protected imports. Smoot-Hawley Act tried to divert national demand away from imports and toward domestically produced goods. This led to retaliation by other nations and Within two years after the Smoot-Hawley Act, U.S. exports decreased by nearly two-thirds. As trade deteriorated, The Smoot-Hawley approach was discredited, and the United States pursued trade liberalization via reciprocal trade agreements.

WTO Rules against China's Hoarding of Rare Earth Metals

In 2011, the WTO ruled that China had no legal right to impose export restrictions on nine rare earth metals. China had been using export tariffs and export quotas to reduce overseas sales of these essential resources. China is a "large country" in rare earth metals, accounting for almost 97 percent of the world's output. (Export limitations on raw materials would increase the domestic manufacturers' access to raw materials needed in production and also hold down the cost of these inputs, giving them a competitive advantage in global markets.) The United States and other complainants in the natural resource case maintained that China's export restrictions were a discriminatory protectionist policy. The effect of these restrictions was to reduce the supply of key resources abroad and drive up world prices higher than China's domestic prices.

Example: Microsoft Scorns China's Piracy of Software

In China, illegal copies of Microsoft's Office and Windows programs were sold on street corners for $2 to $3 each, a fraction of their retail price, despite attempts by the company to discourage illegal counterfeiting. Also, Microsoft's software revenue per PC sold in China was only about a sixth of the amount it earned in India. Nevertheless, analysts have estimated that about 78 percent of the PC software installed in China in 2011 was pirated. Indeed, China's counterfeit and piracy market is the biggest in the world

Protection of Intellectual Property Rights

Intellectual property is an invention, idea, product, or process that has been registered with the government and awards the inventor (or author) exclusive rights to use the invention for a given time period. Copyrights, trademarks and patents are used to protect them. Pirating is the main source of theft of intellectual property.

Filling out Complaint forms are beneficial

Just by filing unfair trade cases, the U.S. steel industry may win. Whatever it spends on legal fees, it may recoup many times over in extra revenue. That's the great thing about filing: Even if you lose, you still win.

Uruguay Round

Lack of representation of developing nations caused this. The Uruguay Round achieved across-the-board tariff cuts for industrial countries averaging 40 percent. Tariffs were eliminated entirely in several sectors, including steel, medical equipment, construction equipment, pharmaceuticals, and paper. More reductions in non tariff barriers. "Tarriffication" rather than other trade barriers. Can find the amount of the tariff needed by subtracting the new higher domestic price from the new lower world price from the quota. Services are now being traded. Protection of intellectual property through patents etc. reduced export subsidies in agriculture elimination of the multi-fiber agreement to limit the amount of imports of textiles and clothing to industrialized nations binding or "capping" of tariffs CREATION OF WTO!!!

Example: Russia Hit by Sanctions over Ukraine

Putin sent in troops to Ukraine After months of disjointed action, the United States, European Union, and other major nations came together to impose a coordinated package of economic sanctions against Russian individuals, entities, and sectors for Russia's role in the Ukrainian crisis. The sanctions were intended to convince Putin that his aggression against Ukraine would come at a high cost to Russia and that it must be ended. The sanctions began by imposing bans on travel to the United States, Canada, and the European Union by key Russian officials and politicians. Sanctions were also levied against Russian state-owned banks, which made it harder for these lenders to provide funds for investment throughout Russia. Also, the United States froze the financial assets of wealthy Russian businessmen, with holdings in the United States. Moreover, the sanctions included forbidding the export of technologies needed by Russia's oil and defense industries.

The Battle in Seattle

The participants established an agenda that included trade in agriculture, intellectual property rights, labor and environmental matters, and help for less developed nations. Believing that they had been taken to the cleaners in previous trade negotiations, developing nations were determined not to allow that to occur again. Disagreements among developing nations and industrial nations were a major factor that resulted in a breakdown of the meetings. The meeting became known as "The Battle in Seattle" because of the rioting and disruption that took place in the streets during the meeting.

Section 301: Protection against Unfair Trading Practices

Section 301 of the Trade Act of 1974 gives the U.S. trade representative (USTR) the authority, subject to the approval of the president, and the means to respond to unfair trading practices by foreign nations. Included among these unfair practices are foreign trade restrictions that hinder U.S. exports and foreign subsidies that hinder U.S. exports to third-country markets. If after investigation it is determined that a foreign nation is engaging in unfair trading practices, the USTR is empowered to (1) impose tariffs or other import restrictions on products and services and (2) deny the foreign country the benefits of trade agreement concessions. purpose of Section 301 is to obtain the successful resolution of conflicts.

Export-Import Bank (Eximbank)

The United States provides export subsidies to its producers to promote international sales, thus providing jobs for Americans. The Export-Import Bank (Eximbank) is the official export credit agency of the U.S. government. Founded in 1934, its purpose is to provide cheap credit for foreign customers who purchase American-made products. Such credit is provided through a variety of loan, loan guarantee, and insurance programs. The Eximbank does not compete with private sector lenders, but rather provides financing for transactions that would otherwise not occur because commercial lenders are either unable or unwilling to accept the risks inherent in the deal. Benefits Include: American manufacturers whose products constitute the bulk of the Eximbank's subsidies and can increase their sales abroad. Benefits are also extended to foreign purchasers who are granted loans and loan guarantees from the Eximbank in exchange for purchasing these goods. Furthermore, the beneficiaries include the private American banks who finance these export transactions and get to shift up to 85 percent of the risk onto American taxpayers. Costs Include: American taxpayers bear risks that private American lenders are unable or unwilling to bear. Also, American consumers must pay higher prices for goods that are made artificially expensive by the Eximbank's subsidies. Moreover, there are other American borrowers who lose out on investment capital because they are not fortunate enough to have the full faith and credit of the U.S. taxpayer standing behind them.

Safeguards (the Escape Clause): Emergency Protection from Imports

The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to terminate or make modifications in trade concessions granted foreign nations and to levy trade restrictions. The most common form of relief is tariff increases, followed by tariff rate quotas and trade adjustment assistance. The temporary nature of safeguards is to give the domestic industry time to adjust to import competition.

Antidumping Duties: Protection against Foreign Dumping

The objective of U.S. antidumping policy is to offset two unfair trading practices by foreign nations: export sales in the United States at prices below the average total cost of production, and price discrimination in which foreign firms sell in the United States at a price less than that charged in the exporter's home market. Both practices can inflict economic hardship on U.S. import-competing producers; by reducing the price of the foreign export in the U.S. market, they encourage U.S. consumers to buy a smaller quantity of the domestically produced good. Antidumping investigations commonly involve requests that foreign exporters and domestic importers fill out detailed questionnaires. If these agencies determine that dumping is occurring and is causing material injury to the domestic industry, then the U.S. response is to impose an antidumping duty (tariff) on dumped imports equal to the margin of dumping. The effect of the duty is to offset the extent to which the dumped goods' prices fall below average total cost, or below the price at which they are sold in the exporter's home market. Economists generally consider antidumping duties appropriate only when they combat predatory pricing designed to monopolize a market by knocking competitors out of business.

Trade Adjustment Assistance

There are winners and losers of free trade. The underlying rationale comes from the notion that if society in general enjoys welfare gains from the increased efficiency stemming from trade liberalization, some sort of compensation should be provided for those who are injured by import competition. As long as freer trade generates significant gains to the nation, the winners can compensate the losers and still enjoy some of the gains from freer trade. The U.S. trade adjustment assistance program assists domestic workers displaced by foreign trade and increased imports. The program provides benefits such as extended income support beyond normal unemployment insurance benefits, services such as job training, and allowances for job search and relocation.

Small nations and WTO retaliation

Therefore, the limited market power of small countries makes them less likely to induce compliance to WTO rulings through retaliation.

Most favored nation clause or "normal trade relations"

This clause means that countries cannot normally discriminate between their trading partners: Grant one country a lower tariff rate for one of its products and you must do the same for all other countries. In general, MFN means that every time a country reduces a trade barrier or opens up a market, it must do so for the same goods or services from all of its trading partners whether rich or poor.

U.S. Tariff Policies before 1930

This revenue objective was the main reason Congress passed the first tariff law in 1789. This law allowed only the federal government to levy uniform tariffs, ranging from 5 to 15 percent, so the former system of separate state tariff rates disappeared. Tariffs were the largest source of federal revenue during this era, accounting for over 90 percent of federal revenue during the 1790s Walker taxes were especially high but were later followed by the Morill taxes that cut down the budget surplus

Example: countervailing duty involving the U.S. lumber industry.

U.S. lumber producers accuse their Canadian rivals of receiving government subsidies. In particular, they allege that the Canadians pay unfairly low tree cutting fees to harvest timber from lands owned by the Canadian government. In the United States, lumber producers pay higher fees for the right to cut trees in government forests. Canadian regulations permit provincial governments to reduce their tree cutting fees when lumber prices decline to keep Canadian sawmills profitable. To U.S. producers, this amounts to an unfair subsidy granted to their Canadian competitors.The complaint led to the imposition of a tariff-rate quota to protect U.S. producers.

U.S. Solar Industry Dims as China's Industrial Policy Lights Up

US solar panel producers could not compete with the low-cost Chinese. The bankruptcy of Solyndra Inc. in 2011, a California company making solar panels, received much publicity. In 2010, President Barack Obama visited Solyndra and touted it as a leading company in a growing industry. The company found that it could not compete with cheaper Chinese-manufactured solar panels, so it defaulted on its government-guaranteed loan of $535 million. This resulted in attacks by critics of Obama who tried to make the failed solar panel company both a symbol of the failure of industrial policy in solar energy and a club with which to beat alternative renewable energy of all kinds.

GATT Goal: Predictability through binding and transparency

Under GATT, when countries agreed to open their markets for goods or services, they would "bind" their commitments. These bindings amounted to ceilings on import tariff rates.A country could change its bindings but only after negotiating with its trading partners; that meant compensating them for a loss of trade. The result of this was a much higher degree of market security for traders and investors. Also, the GATT system tried to improve predictability and stability by making countries' trade rules as clear and public (transparent) as possible. Countries were required to disclose their trade policies and practices publically within the country or by notifying the GATT secretariat.

national treatment principle.

Under this principle, GATT members had to treat imported and domestically produced goods equally, once the foreign goods entered the market

U.S. Safeguards Limit Surging Imports of Textiles from China

United States and Europe negotiated a system of rules to restrict competition from developing exporting countries employing low-cost labor. Known as the Multifiber Arrangement (MFA), quotas were negotiated each year on a country-by-country basis, assigning the quantities of specific textile and apparel items that could be exported from developing countries to the industrial countries. When a quota was removed for China, the US implemented safeguards to protect the new world demand surge of Chinese textiles

Example: Sanctions, Nuclear Weapons, and Iran

United States and the United Nations have imposed economic sanctions against countries that have been implicated in the use of terrorism and the development of chemical, biological, and nuclear weapons. Among the sanctions that have been used are bans on the export of materials, equipment, and technology that could contribute to Iran's nuclear program, bans on imports of oil from Iran, and the freeing of assets of key Iranian individuals and companies related to the country's nuclear program. contributed to a sharp drop in the value of Iran's currency, an increase in the rate of inflation to over 50 percent, a dramatic decline in Iran's gross domestic product, and an unemployment rate of 20 percent. Iran has agreed to make adjustments in order to remove the sanction

General Agreement on Tariffs and Trade (GATT) transformed into the WTO

a set of agreements among countries around the world to reduce trade barriers and establish broad rules for commercial policy. It was later renamed the WTO and was given the added purpose of resolving trading issues

Doha Round

decrease trade-distorting subsidies on farm goods; slash manufacturing tariffs by developing countries; cut tariffs on textiles and apparel products that poor countries especially cared about; free up trade in services; and negotiate global rules in four new areas—competition, investment, government procurement, and trade facilitation. This round was unsuccessful because developing countries refused to accept the central bargain: large reductions in their industrial tariffs in exchange for greater access to the agricultural markets of the rich nations. major unresolved issues: agricultural subsidies of industrialized countries, anti-dumping policies, industrial subsidies "Bali Package" - Dec. 2013 agreement to reduce some tariffs and trade costs, reduce "hard quotas" on ag; could decrease costs of trade by 10%, and ↑ global income $400+ billion "Nairobi Package" - Dec. 2015 agreement, abolishing agr'l export subsidies, expanding market access for developing cos., etc.

Strategic Trade Policy

government can assist domestic companies in capturing economic profits from foreign competitors.Footnote Such assistance entails government support for certain "strategic" industries (such as high technology) that are important to future domestic economic growth and provide widespread benefits (externalities) to society. The key aspect of this is IMPERFECT COMPETITION where a few small companies have market influence. According to the strategic trade policy argument, government policy can alter the terms of competition to favor domestic companies over foreign companies and shift economic profits in imperfectly competitive markets from foreign to domestic companies.

Economic Sanctions

government-mandated limitations placed on customary trade or financial relations among nations. They have been used to protect the domestic economy, reduce nuclear proliferation, set compensation for property expropriated by foreign governments, combat international terrorism, preserve national security, and protect human rights. The nation initiating the economic sanctions, the imposing nation, hopes to impair the economic capabilities of the target nation to such an extent that the target nation will succumb to its objectives. Trade sanctions: restrict imports from foreign nations financial sanctions: restrict lending and aid Demonstrated by an inward shift of the production possibilities curve

Trade Promotion Authority (Fast Track Authority)

president must formally notify Congress of his/her intent to enter trade negotiations with another country. This notification starts a clock in which Congress has 60 legislative days to permit or deny "fast track" authority. If fast track authority is approved, the president has a limited time period to complete the trade negotiations

Reciprocal Trade Agreements Act

transferring authority from the Congress, which generally favored domestic import-competing producers, to the president, who tended to consider the national interest when forming trade policy. This change tipped the balance of power in favor of lower tariffs and set the stage for a wave of trade liberalization. Specifically aimed at tariff reduction, the act contained two features: negotiating authority and generalized reductions.