Trade Policy

Dr. Katherine Sauer

Global Economic Issues
ECON 241
Governments often manipulate trade to achieve various economic,
political, and diplomatic objectives.

Types of Trade Barriers

1) tariff : tax on imports

specific tariff = fixed tax per unit of good imported
ex: $1 per pair of sunglasses imported

ad valorem tariff = percentage tax applied to the total value

of imports
ex: a 5% ad valorem tax on sunglasses means
if import $1000 worth of sunglasses, then
the tariff is $50
2) export subsidies : involves a transfer of funds from the
government to an export producer
- encourages exports
- helps domestic industry (props up domestic price)

3) non-tariff measures for restricting imports

a. quantitative restrictions (quota): a limit on the quantity
of a good that can be imported
- the government grants licenses to certain firms
allowing them to import a certain quantity

b. tariff rate quota: a tariff with two levels

- lower tariff for imports within the quota
- higher tariff for imports that exceed the quota
c. trigger price mechanism: the government sets a price floor
(legal minimum price) that “triggers” government
intervention to reduce imports if the world price falls too low
- low world price hurts domestic firms because
more is imported --- a price too low may wipe out
the domestic industry

d. technical barriers: barriers imposed on imports for health

or safety reasons

e. anti-dumping duties: tariff-like charges imposed on imports

that are sold at “less than fair value” by the exporter

f. countervailing duties: tariff-like charges imposed on

imports that are “unfairly subsidized” by the exporter
government
 g. Voluntary Export Restraints (VER): an export quota
voluntarily imposed by the exporter country at the
“request” (threat) of the importing country

h. other: anything else that the government can think of

ex: require disassembling of an item before it can
be imported

Free Trade: goods and services can flow freely between nations
without government imposed barriers like tariffs, quotas,
VERs, etc.

Analysis of a Tariff
 Japan’s domestic rice market: with imports and a tariff
price
1) tariff raises the price in
S Japan from Pw to
Pw + t

2) at the new higher price,

Pw + t
Qd falls to Qdt and Qs
Pw
rises to Qst
D - imports decrease

Qs Qst Qdt Qd quantity 3) the government collects

revenue equal to the
tariff times the number
consumer surplus of imports
producer surplus
government revenue 4) CS falls
deadweight loss PS rises
total surplus falls
Example of a tariff: The Catfish Wars

Background:

For generations, the traditional means of livelihood in the Mekong

Delta of Vietnam has been raising catfish.
- catfish are the primary source of protein in diet

- catfish and catfish products are an important source of

income for rural families

- catfish farming is done on a small scale (artisan) by

each family
Catfish farming is the sole occupation option for many in the
Mekong Delta.
- their land isn’t suitable for other agriculture
- they don’t possess the skills for other jobs
- there aren’t other job options

In the late 1980s / early 1990s, communist Vietnam began trying

some market-oriented reforms.
- became the 2nd largest exporter of rice
- force to reckon with in the coffee market
- emerging catfish exporter
It is relatively cheap to produce catfish in Vietnam.
- 4 major exporters own all stages of production
- generally favorable supply conditions
- production is not subsidized

Quickly, Vietnamese farmers had 1/5 of the US frozen catfish

market.
- estimated 0.5 million Vietnamese live of the catfish
trade
The US catfish industry, was hurt by the cheap imports from
Vietnam.
- roughly 13,000 employees in MS, AL, AR, LA

They lobbied Congress for protection.

Congress obliged by:

1. Renaming the good
2. Placing high tariffs on catfish imports
1. Renaming the good (2001)

Traditionally, “catfish” referred to any of 1,000s of bottom-dwelling

fish with whiskers.
- amendment attached to a Senate appropriations bill stated
only the US strain of catfish could be called “catfish”

- Vietnamese catfish would have to be labeled “tra” or “basa”

It turns out that US consumers prefer the Vietnamese varieties to the

US variety and the name change didn’t stop imports.
2. Placing high tariffs on catfish imports (2003)

By alleging that Vietnamese catfish prices were “unfairly low”, an

anti-dumping case was made by the US against Vietnam.

- declared Vietnam a “non-market economy” so by

definition it is deemed to be anti-competitive and tariffs
are justified to “level the playing field”

- 37% – 64% tariff rates applied

As it turns out, American consumers still prefer the Vietnamese
varieties, even with the higher prices.
AL and LA have banned Vietnamese catfish imports entirely on
the basis that they constitute a “bioterrorism” threat. (Aug. 2005)

US consumers are not as well off as they could be.

US producers’ jobs are protected.
Vietnamese catfish producers are not as well off as they could be.
Free Trade Agreements (FTAs)

Often times countries will agree to reduce or eliminate trade

barriers with each other.

The US has bi-lateral free trade agreements with

- Australia - Bahrain - Chile
- Israel - Jordan - Morocco
- Oman - Peru - Singapore

Pending bi-lateral free trade agreements:

- Colombia - Korea - Panama

http://www.trade.gov/fta/
The US has multi-lateral FTAs:

- CAFTA-DR (Dominican Republic – Central America FTA)

- US, Costa Rica, Dominican Republic, El Salvador,
Guatemala, Honduras, and Nicaragua

-NAFTA (North American FTA)

- US, Canada, Mexico
FTAs can be “trade creating” or “trade diverting”.

Trade Creating: When trade barriers are lowered, the volume of

trade increases.

Trade Diverting: If a high cost producer is part of a FTA while

a low cost producer faces a tariff, then the high cost producer will
end up producing more for export while the low cost producer
exports less. Resources will not be going to their best use
(inefficient).
The World Trade Organization

The WTO is the global organization dealing with the rules of

trade between nations.

These rules of trade are the result of negotiations between

member countries.

- 150 member countries

- HQ in Geneva, Switzerland
- a successor to the General Agreement on Tariffs and Trade
(GATT)
- formed on January 1, 1995
Objective

The main goal of the WTO is to help international trade to flow

smoothly, freely, fairly, and predictably.

This is accomplished by:

- administering trade agreements
- acting as a forum for trade negotiations
- settling trade disputes
- reviewing national trade policies
The Fundamental Principles of the Multi-lateral Trading System

A trading system should be …

1) without discrimination
Countries can’t discriminate between:
- trading partners (must treat all nations no worse
than their “most-favored nation”)
- domestic and foreign products (no national
treatment)

2) freer
Barriers to trade are reduced through negotiations.
3) predictable
Firms, investors, and governments should be confident
that trade barriers won’t be raised suddenly.

4) more competitive
Practices like export subsidies and “dumping” products
at below cost to gain market share are discouraged.

5) more beneficial for less developed countries

The developing nations should be given more time to
adjust, greater flexibility, and special privileges when
it comes to changes in trade barriers.
Types of Agreements
1) Goods
From 1947-1994, GATT spelled out the rules for
trade in goods (non-discrimination in particular).

Since 1995, the updated GATT has been the WTO’s

umbrella agreement for trade in goods.

2) Services
The General Agreement on Trade in Services (GATS)
spells out the rules for trade in services (1995).

Companies providing services like banks, insurance firms,

telecommunications companies, tour operators, hotel chains,
and transport companies that want to do business abroad enjoy
the same principles of freer and fairer trade that originally only
applied to trade in goods.
3) Intellectual Property
The agreement on Trade Related Aspects of Intellectual
Property (TRIPS) is the most comprehensive multi-lateral
agreement on intellectual property.

The rules state how

- copyrights
- patents
- trademarks
- industrial designs
- trade secrets

should be protected when trade is involved.

Some Benefits of the WTO

1) It helps keep the peace.

If trade flows smoothly and both sides have an amicable
commercial relationship, political conflict is less likely.

2) It is a “confidence builder”.
If a government is confident that the other country
won’t be raising tariffs, it is less likely to raise them itself.

Recall the nationalistic, protectionist policies of the 1930s…

- Countries failed to realize that protecting the domestic
economy from imports ends up harming the export sector as
well.
3) It allows disputes to be handled constructively.
As the volume of trade increases and more and more
products are being traded between more parties, the
chance for a dispute is very likely.
- over 300 disputes have been brought to the WTO
since 1995
- disputes are grounded in WTO agreements

4) It helps shield governments from narrow interests.

Once a liberalization commitment (barrier reduction) has
been made, it is very hard to reverse.

(WTO video)
 Fair Trade

Fair Trade: a social movement to ensure that producers of

exports in developing nations
- receive a fair price for their product
- have safe, healthy working conditions
- use environmentally sustainable practices

Background:
Competition in global commodity markets has decreased
prices over time.
- between 1970 and 2000, the main agricultural
exports for developing nations (sugar, cotton,
cocoa, coffee) fell in price by 30-60%

Prices for commodities are volatile in general.

- bumper crops, crop disasters, demand changes
The rural poor are the people who suffer when commodity prices
are low/volatile.

Proponents of Fair Trade

- support the theory and principles of free trade

- claim that in many cases, there are market “failures”

which prevent the benefits of free trade from working
- rural farmers don’t have good information
- rural farmers are at the mercy of the middlemen
- rural farmers don’t have access to credit

- argue that there should be a minimum price (price

floor)
for agricultural goods.
Critics of Fair Trade
- usually recognize the idea of Fair Trade is based on the
best of intentions

- argue that price floors cause market distortions

- a price floor holds the price artificially high
- this encourages more production
- more production can lead to excess supply
- excess supply leads to downward pressure on
price in the non Fair Trade market

- argue that Fair Trade is not a long term solution