Price discrimination is indistinguishable from dumping

Trade Regulations And Industrial Policies Discussion

Consider the effect of trade liberalization on agricultural markets. Using your weekly readings and additional research, discuss the challenges experienced by the Saudi Arabian agriculture industry.

What financial support does the KSA government provide for its agricultural sectors?

How could the KSA improve its agricultural sectors policies?

What types of results would you expect for these improvements?

Any foreseen consequences?

Embed course material concepts, principles, and theories, which require supporting citations along with at least one scholarly peer reviewed reference in supporting your answer unless the discussion calls for more. Keep in mind that these scholarly references can be found in the Saudi Digital Library by conducting an advanced search specific to scholarly references.
Use Saudi Electronic University academic writing standards and APA style guidelines.

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Chapter 6 Trade Regulations & Industrial Policies

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2

Chapter Outline (1 of 2)

U.S. Tariff Policies before 1930

Smoot-Hawley Act

World Trade Organization (WTO)

Trade Promotion Authority (Fast Track Authority)

Safeguards (The Escape Clause): Emergency Protection from Imports

Countervailing Duties: Protection against Foreign Export Subsidies

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Chapter Outline (2 of 2)

Antidumping Duties: Protection against Foreign Dumping

Section 301: Protection against Unfair Trading Practices

Protection of Intellectual Property Rights

Trade Adjustment Assistance

Industrial Policies of the United States

Strategic Trade Policy

Economic Sanctions

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U.S. Tariff Policies before 1930 (1 of 5)

U.S. Trade policy marked by fluctuations

Dominant motive behind early tariff laws was to provide tax revenue

First tariff law, 1789

Today, tariffs represent less than 1% of total federal revenues

As revenue argument for tariffs weakened, protective argument gained strength

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U.S. Tariff Policies before 1930 (2 of 5)

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; opposed by southern states

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U.S. Tariff Policies before 1930 (3 of 5)

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 surplus

Civil War–era Morrill Tariffs of 1861, 1862, and 1864 to pay for Civil War

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U.S. Tariff Policies before 1930 (4 of 5)

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%

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U.S. Tariff Policies before 1930 (5 of 5)

World War I

Protectionist pressures returned

Early 1920s, scientific tariff concept

1922, Fordney-McCumber Tariff

Tariff rates 38%

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Smoot-Hawley Act

Smoot-Hawley Act, 1930

At onset of Great Depression, attention to domestically produced goods

Average tariffs raised to 53%

Sparked retaliation by 25 trading partners

President Hoover ⎯ protectionist trap

President Roosevelt-dismantled Smoot-Hawley legislation with caution

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Reciprocal Trade Agreements Act

Reciprocal Trade Agreements Act, 1934

Transferred authority from Congress to President

President – tended to consider national interest in forming trade policy

Led to lower tariffs, trade liberalization

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”

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General Agreement on Tariffs & Trade (GATT) (1 of 4)

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

GATT became World Trade Organization (WTO) in 1995

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General Agreement on Tariffs & Trade (GATT) (2 of 4)

Two pillars of nondiscrimination principle

Most Favored Nation principle (normal trade)

National treatment principle

Promoting Freer Trade

Settling trade disputes

Improved dispute resolution process by formulating complaint procedures, providing conciliation panel

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General Agreement on Tariffs & Trade (GATT) (3 of 4)

Predictability: Through Binding & Transparency

Promising not to increase trade barrier as important as reducing one

Businesses had clearer view of future opportunities

Countries required to disclose trade policies

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General Agreement on Tariffs & Trade (GATT) (4 of 4)

Multilateral Trade Negotiations

Prior to GATT, negotiations bilateral, with GATT, negotiations multilateral

1964–67- Kennedy Round

1973–79 - Tokyo Round

1986–1993 - Uruguay Round

1999 – “Battle in Seattle”

2002 - Doha Round

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World Trade Organization (WTO) (1 of 8)

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

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World Trade Organization (WTO) (2 of 8)

164 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

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World Trade Organization (WTO) (3 of 8)

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 in nontariff barriers

Reverses policies of protection in certain “sensitive” areas

Settles trade disputes

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World Trade Organization (WTO) (4 of 8)

Settling Trade Disputes

Major objective of WTO is to strengthen GATT mechanism for settling trade disputes through:

Consultations

Dispute panel and appellate body

Retaliatory tariffs

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World Trade Organization (WTO) (5 of 8)

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

Are the specific obligations WTO imposes greater or less than the benefits U.S. receives?

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World Trade Organization (WTO) (6 of 8)

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)

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World Trade Organization (WTO) (7 of 8)

Does Trade Liberalization Improve the Environment?

Trade stimulates economic growth, demand for cleaner environment, tougher environmental laws

Trade and growth lead to development and dissemination of environmentally friendly production techniques

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World Trade Organization (WTO) (8 of 8)

Future of the 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)

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Trade Promotion Authority (Fast-Track Authority)

Trade promotion authority (fast-track authority) granted to President

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

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Safeguards (The Escape Clause): Emergency Protection from Imports (1 of 3)

In addition to WTO rules re: unfair trade practices, U.S. has trade remedy laws

Escape clause – temporary safeguard

President may terminate trade or modify agreement to prevent injury to U.S. firms

Initiated by petition from an American industry to the U.S. International Trade Commission (USITC), which investigates and recommends response to president

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Safeguards (The Escape Clause): Emergency Protection from Imports (2 of 3) Table 6.4

Trade Remedy Law Provisions

Statute Focus Criteria for Action Response
Fair trade (escape clause) Increasing imports Increasing imports are substantial cause of injury Duties, quotas, tariff-rate quotas, orderly marketing arrangements, adjustment assistance
Subsidized imports (countervailing duty) Manufacturing production, or export subsidies Material injury or threat of material injury Duties
Dumped imports (antidumping duty) Imports sold below cost of production or below foreign market price Material injury or threat of material injury Duties
Unfair trade (Section 301) Foreign practices violating a trade agreement or injurious to U.S. trade Unjustifiable, unreasonable, or discriminatory practices, burdensome to U.S. commerce All appropriate and feasible action
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Safeguards (The Escape Clause): Emergency Protection from Imports (3 of 3)

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

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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

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Antidumping Duties: Protection against Foreign Dumping (1 of 4)

Antidumping Duty

Rather than seek countervailing duties, U.S. firms have recently found it easier to convince U.S. government to impose antidumping duties

Offsets

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

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Antidumping Duties: Protection against Foreign Dumping (2 of 4)

Antidumping Duty (cont.)

Antidumping investigations seek:

Evidence of dumping

Evidence of material injury

Link between the dumped imports and the alleged injury

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Antidumping Duties: Protection against Foreign Dumping (3 of 4)

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)

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Antidumping Duties: Protection against Foreign Dumping (4 of 4)

Remedies against Dumped & Subsidized Imports (cont.)

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

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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 can impose tariffs/import restrictions on products and services or deny foreign country trade-agreement concessions

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Protection of Intellectual Property Rights (1 of 3)

Intellectual property right (IPR) awards inventor or author exclusive rights to use the invention for a certain time period

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Protection of Intellectual Property Rights (2 of 3)

Copyrights

Protect works of original authorship for remainder of author’s life plus 50 years

Trademarks

Grant manufacturers exclusive rights to a distinguishing name or symbol

Patents

Provide inventors ⎯ for a certain term (15 years or more) ⎯ exclusive rights to make, use, or sell inventions

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Protection of Intellectual Property Rights (3 of 3) Table 6.7

Examples of Intellectual Property Right Violations in China

Affected Firm Violation in China
Epson Copying machines and ink cartridges are counterfeited.
Microsoft Counterfeiting of Windows and Windows NT, with packaging virtually indistinguishable from the real product and sold in authorized outlets.
Yamaha 5 of every 6 JYM150-A motorcycles and ZY125 scooters bearing Yamaha’s name are fake in China. Some state-owned factories manufacture copies for months following the introduction of a new model.
Gillette Up to one-fourth of its Parker pens, Duracell batteries, and Gillette razors sold in China are pirated.
Anheuser-Busch Some 640 million bottles of fake Budweiser beer are sold annually in China.
Bestfoods Bogus versions of Knorr bouillon and Skippy Peanut Butter lead to tens of millions of dollars in forgone sales each year.
Source: From U.S. Trade Representative, National Trade Estimate Report on Foreign Trade Barriers, various issues, available at http://www.ustr.gov.

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Trade Adjustment Assistance

U.S. Trade Adjustment Assistance (TAA) program

Rationale = if society enjoys welfare gains from increased efficiency from trade liberalization, some sort of compensation should be provided for those who are injured by import competition.

Is TTA necessary?

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Industrial Policies of the U.S. (1 of 7)

Industrial policies

Increase competitiveness of domestic firms

Offer tax incentives; loan guarantees; low-interest loans

Export-Import Bank (Eximbank)

Independent agency of U.S. government that guarantees working capital loans for U.S. exporters, credit insurance that protects U.S. exporters, & commercial loans to creditworthy foreign buyers of U.S. goods and services

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Industrial Policies of the U.S. (2 of 7) Table 6.8

Examples of Loans Provided by Eximbank of the United States

Foreign Borrower/U.S. Exporter Purpose
Banco Santander Noroeste of Brazil/General Electric Locomotives
Government of Bulgaria/Westinghouse Instruments
Air China/Boeing Aircraft
Government of Croatia/Bechtel International Highway construction
Government of Ghana/Wanan International Electrical equipment
Government of Indonesia/IBM Computer hardware
Japan Airlines/Boeing Aircraft
Fevisa Industrial of Mexico/Pennsylvania Crusher Inc. Glass manufacturing equipment
Delta Communications of Mexico/Motorola Communications equipment
Source: From Export-Import Bank of the United States, Annual Report, various issues, http://www.exim.gov.

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Industrial Policies of the U.S. (3 of 7) Figure 6.4

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Industrial Policies of the U.S. (4 of 7)

Figure 6.4:

Quantity of loanable funds is horizontal axis

Price of a loan (the interest rate) is vertical axis

Demand curve (D) for loanable funds is underlaid by JAL’s demand for investment capital; curve’s downward slope implies borrowing increases as interest rate decreases

Supply of loanable funds offered by Bank of America is denoted by S; its upward slope reflects the law of supply.

Bank offers more funds to borrowers when the price (interest rate) increases

In absence of loan guarantee, market equilibrium occurs at point A, where $20M is lent at 6% interest rate

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Industrial Policies of the U.S. (5 of 7)

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 negatively affects U.S. airline industry

Boeing: Curtailing export credit would jeopardize U.S. aerospace competitiveness

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Industrial Policies of the U.S. (6 of 7)

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

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

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Industrial Policies of the U.S. (7 of 7)

Carrier Inc. Agrees to Keep Jobs in Indiana

In December 2016, President Trump convinced Carrier Inc. to keep 1,000 jobs at its Indianapolis factory from moving to Mexico

In exchange, Carrier would get a $7 million tax break over 10 years from Indiana and policy

U.S. won’t become more prosperous by forcing businesses to make noneconomic investments

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Strategic Trade Policy (1 of 2)

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

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Strategic Trade Policy (2 of 2)

Critics of strategic trade policy

Special-interest groups may dictate who will receive government support

Worldwide retaliation and counterretaliation

Governments lack information to intervene intelligently in market

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Economic Sanctions (1 of 6)

Economic Sanctions

Government-mandated limitations placed on customary trade and/or financial relations among nations; used to

Protect domestic economy

Reduce nuclear proliferation

Set compensation for property expropriated by foreign governments

Combat international terrorism

Preserve national security

Protect human rights

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Economic Sanctions (2 of 6)

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

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Economic Sanctions (3 of 6)

Target nation

Unused production capacity

Inward shift of production possibilities curve

Economic inefficiencies

Hardship for the population and government

Reduced growth rate

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Economic Sanctions (4 of 6)

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

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Economic Sanctions (5 of 6)

Sanction and Nuclear Weapons:

1976 (and 2006) in response to Iran’s continued pursuit of nuclear programs, the U.S./others levied economic sanctions

1950 (when North Korea invaded South Korea) the U.S. and U.N have imposed sanctions, justified on the grounds that North Korea is a threat to global security

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Economic Sanctions (6 of 6)

Russia Hit by Sanctions over Ukraine

Putin sent troops to Ukraine to support pro-Russian supporters

U.S./others imposed economic sanctions against Russia

Sanctions hurt Russia, but have not (yet) effected desired change

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