Governments and

Trade
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2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
5-2
Session Focus
The political reality of free trade is that while nations
are nominally committed to it, they intervene and take
actions to protect the interests of politically important
groups.
This session explores the political and economic
reasons for intervention; to restrict imports and
expand exports, but, more recently, for social
reasons.
The session describes the range of intervention
instruments used by governments and considers the
case for free trade in light of government actions.

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5-3
The 7 Instruments of Trade Policy
Antidumping
Duties
Local
Content
Requirements
Tariffs
Voluntary
Exports
Restraints
Subsidies
Administrative
Policies
Import
Quotas
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Tariffs
Tariffs
Specific
Fixed charge
per unit
Ad Valorem
Charge is
a proportion of the
goods value
Oldest form of protection.
Good for the Government.
Good for producers.
Leads to inefficiency.
Bad for consumers.
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Subsidies
Government
payment to a
domestic producer
Cash Grants
Tax Breaks
Low Interest
Loans
Government
Equity
Participation
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Subsidies
Agriculture

1.Keeps inefficient
farmers in business.
2.Encourages production
of subsidized products.
3.Produce products grown
more cheaply elsewhere.
4.Reduces agriculture
trade.
Helps domestic
producers to
compete internationally.

Paid by taxing
individuals
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Import Quotas and Voluntary Export
Restraints

Direct restriction
on the quantity of a
good that can
be imported into
a country.
Import Quotas

Quota on trade imposed
by the exporting
country at the request
of the importing
countrys government.
VERs
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p
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Quota
rent
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5-8
Local Content Requirements
A specific
fraction of a
good must be
domestically
produced.
A specific
fraction of a
good must be
domestically
produced.
Physical
amount
Value
Widely used
by developing
countries to
develop their
manufacturing
base.
Used by developed
countries to
protect local jobs
and industry from
foreign competition.
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Administrative Policies
Bureaucratic rules designed to make it difficult for imports
to enter a country.
Japanese masters in imposing rules.
Tulip bulbs.
Federal Express.
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Antidumping Policies
Selling goods into a foreign market below production
costs, or
Selling below fair market value.
Used to unload excess production.
Or, predatory pricing.
Antidumping policies are used to punish foreign firms.
Protect local industry from unfair practices.
Impose countervailing duties.
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5-11
Political Arguments for Intervention
Further
Foreign Policy
Objectives
Protect
Industry
and Jobs.
National
Security
Retaliation
Protect
Consumers
Protect
Human
Rights
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Protect
Industry
and Jobs.
Most common political argument.
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Retaliation
Risky strategy. If government
fails to heed warnings and
imposes its own higher tariffs,
the result is higher tariffs all
around and a corresponding
economic loss.
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5-14
Retaliation
US Trade Sanctions
0
5
10
15
20
25
1993 95 97 99
New
Sanctions
Afghanistan Italy
Burma Libya
Canada Nigeria
China N. Korea
Cuba Pakistan
India Saudi Arabia
Iran Sudan
Iraq Syria
Yugoslavia
Partial List
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Protect
Consumers
Battleground for biotechnology
such as hormone-treated
beef and genetically altered crops.

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Further
Foreign Policy
Objectives
Used to build relations with
another country or punish it
(so-called rogue states). Policy
is unilateral and easily defeated
by other countries ignoring it.
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Protect
Human
Rights
Basis for the use of Most
Favored Nation status to
persuade China to change its
positions on human rights.
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Economic Arguments for Intervention
Infant
Industry
Strategic
Trade
Policy
Infant industry is the oldest economic
argument for government intervention,
dating to 1792 and Alexander Hamilton.
Protect developing countrys new industry
from developed countries better
established industries. Recognized by
GATT.
Strategic trade policy can help a
firm gain first mover advantages
or overcome barriers created by a
different (foreign) first mover.
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Revised Case for Free Trade
Paul Krugman, MIT economist, argues that strategic
trade policies can lead to trade wars. The best way to
handle disputes is to work to establish rules that minimize
trade-distorting subsidies - a function of the World
Trade Organization.

He also argues that government intervention usually favors
special interest groups that distort the subsidy to their
own ends.

Therefore, a blanket policy of free trade, with exceptions
granted only under extreme pressure may be the best
policy that the country is likely to get.
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Development of the World Trading
System
Intellectual arguments for free trade:
Adam Smith and David Ricardo.
Free trade as government policy:
Britains (1846) repeal of the Corn Laws.
Britain continued free trade policy.
Fear of trade war.
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World War I to World War II
1918 - 1939
Great Depression
US stock market collapse
Smoot-Hawley Act (1930)
US had positive trade balance with world
Act imposes tariffs to protect U.S. firms.
Foreign response was to impose own barriers
US exports tumbled

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General Agreement on Tariffs and
Trade
WWII allies wanted international organization in trade arena
similar to UN in political arena.
GATT proposed by US in 1947 as step toward ITO.
1948: Havana Conference.
Failed charter for the International Trade Organization.
GATT
19 original members grew to 120 nations by the time it was
superceded by the WTO.
GATT members agreed not to raise tariffs above negotiated
rates.
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GATT Negotiating Rounds
Geneva 1947 23
Annecy 1949 13
Torquay 1950-51 38
Geneva 1956 26
Dillon 1960-62 45
Kennedy 1964-67 62
Tokyo 1973-79 99
Uruguay 1986-94 117
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
World Trade
World Income
1953-63 1963-73
Annual Growth Under
GATT %
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Average Reduction in US Tariff Rates
1947 - 85
0
20
40
60
80
100
120
P
r
e
-
G
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n
e
v
a
G
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a
A
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y
T
o
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q
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G
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a
D
i
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l
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n
K
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n
e
d
y
T
o
k
y
o
Index
Pre-Geneva
Tariff = 100
GATT Negotiating Rounds
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1980-1993: Disturbing Trends
Pressures for greater protectionism:
Japans economic success.
Worlds second largest economy.
Worlds largest exporter.
The U.S.s persistent trade deficit.
Many countries had found ways to avoid GATT
restrictions.
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Most comprehensive trade agreement in history.
Created the World Trade Organization.
Impacted:
Agriculture subsidies (stumbling block:
US/EU).
Applied GATT rules to services and
intellectual property.
Strengthened GATT monitoring and
enforcement.
Uruguay Round
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Umbrella organization for:
GATT
Services
Intellectual property
Responsibility for trade arbitration:
Reports adopted unless specifically rejected.
After appeal, fail to comply can result in compensation to
injured country or trade sanctions.
World Trade Organization
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WTO
145 members.
Between 1995 and 2000, 213 disputes brought before
the WTO.
Significant victories:
Telecommunications
68 countries (90%) of world
telecommunications revenues
Pledged to open their markets
to fair competition
Financial Services
95% of financial services market
102 countries will open, to varying
degrees, their markets.
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WTO
Cancun
Failure of Countries to Agree on Goals
Private Groups & Unions Oppose faceless Organization
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STRUCTURE OF WTO
The Ministerial
Conference
The General Council
The Dispute
Settlement Body
The Trade Policy
Review Body
Councils for Trade in
Goods,Services &
TRIPS
Subsidiary Bodies
Committees on
Trade and
Development, BOP
restrictions,Budge
t, Finance &
Administration

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THE SECRETARIAT
Headed by Director General
D-G to be appointed by Ministerial Conference
Other appointments by D-G in accordance with
rules framed by Ministerial Conference
Responsibility of the Secretariat to be
International in character.No authority external
to WTO to direct the activities of the staff
including Governments of the nations they are
citizens of.
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Salient Features of Uruguay Round
Formation of WTO
Industrial
Products(Market access)
Agricultural Products
Services
Textiles & Clothing
Intellectual Property
Subsidies
Technical Barriers
Anti-Dumping rules

Trade Related Investment
Measures
Government Procurement
Safeguard Actions
Balance of Payments
Provisions
Dispute Settlement
Coherence in Global Policy
Making
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Subsidies
Prohibited-Contingent upon export performance
Actionable-Adverse effect on other countries
Non actionable-Industrial research, Pre-
competitive development

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Intellectual Property
To grant national treatment
To provide certain minimum standards of
protection
Institute procedures and remedies under national
laws