FIN30013/FIN30015

International Trade and

Finance/International Finance

Dr Yii Kwang Jing

kyii@swinburne.edu.my
B341
 Trade Policy and Industry
Regulation
Topic 4
 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
• 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. 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
• But higher tariffs opposed by Southern states, which had no
manufacturing and imported many products with high tariffs

Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,or posted to a publicly accessible website, in whole or in part. ©derrek/GettyImages
 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 Morill Tariffs of 1861, 1862, and 1864
• Means of paying for the Civil War
● 1870, high tariffs returned
Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,or posted to a publicly accessible website, in whole or in part. ©derrek/GettyImages
 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%
● World War I
• Protectionist pressures returned
● Early 1920s, scientific tariff concept
• 1922, Fordney-McCumber Tariff
• Tariff rates 38%
Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,or posted to a publicly accessible website, in whole or in part. ©derrek/GettyImages
Figure 6.1: U.S. Tariff History: Average Tariff Rates

6
Smoot-Hawley Act
(1 of 2)
• 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 toaid 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
Figure 6.1: Smoot-Hawley Protectionism & World Trade, 1929-33

8
 Reciprocal Trade Agreements Act (1 of 3)
• 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 levelof 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
 General Agreement on Tariffs & Trade (GATT)
• 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)
• Two pillars of nondiscrimination principle
• Most Favored Nation principle (normal trade)
• National treatment principle
• MFN 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
 General Agreement
on Tariffs & Trade (GATT)
● Most Favored Nation Principle (cont.)

• 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
 General Agreement
on Tariffs & Trade (GATT)
● 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

● Promoting Freer Trade

• GATT also seeks to promote freer trade by settling trade disputes
• GATT has improved dispute resolution process by
• Formulating complaint procedures
• Providing conciliation panel
 General Agreement
on Tariffs & Trade (GATT)
● Promoting Freer Trade
• 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.

● Predictability: Through Binding & Transparency

• 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
General Agreement
on Tariffs & Trade (GATT)
● Multilateral Trade Negotiations
• 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
Figure 6.2: GATT Negotiating Rounds

15
General Agreement on Tariffs & Trade (GATT)
● Multilateral Trade Negotiations (cont.)
• 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%
• 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
● Multilateral Trade Negotiations (cont.)
• 1980s – GATT weakening
• Need to include protection of intellectual property, services, agriculture
• More attention needed to developing countries
● 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
General Agreement on Tariffs & Trade (GATT)

● Multilateral Trade Negotiations (cont.)

• 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
 From GATT to World Trade Organization (WTO)
Multilateral Trade Negotiations (cont.) 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
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
 World Trade Organization (WTO)
• WTO (cont.)
• 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
 World Trade Organization (WTO)
● WTO (cont.)
• 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
● Settling Trade Disputes
• 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
 World Trade Organization (WTO)
● 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
● 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
● 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
 World Trade Organization (WTO)
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

● WTO 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
Figure 6.2: China’s Export Restrictions on Raw Materials

23
 World Trade Organization (WTO)
● Future of the WTO
• Major barrier to multilateral trade deals is evolving balance of
world economic power
• Brazil, Russia, India, & China (BRICs) see themselvesas 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)
 Dumping
• Selling exports at less than normal value – a price lower than the
price in the home market or lower than the full average cost of
production.
• Firms unload excess production in foreign markets.
• Predatory Dumping – firm temporarily charges a low price in the
foreign market, which drives its foreign competitors out of business.
• With rivals gone, the firm will use its monopoly power to raise prices
and earn high profits.
• Antidumping policies are designed to punish foreign firms that
engage in dumping. The aim is to protect domestic producers from
unfair foreign competition.
 Antidumping Duties: Protection Against Foreign Dumping

• Antidumping Duty
• 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 Duty
• 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
FIGURE: 6.3
 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
FIGURE: 6.6
 Protection of Intellectual Property Rights
● Microsoft Scorns China’s Piracy of Software
• 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
Industrial Policies sponsored by nations of the U.S.
• 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 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
 Strategic Trade 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 of strategic trade policy

• 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 bepursued
 Economic Sanctions
• Economic sanctions
• 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
 Economic Sanctions

● Target nation affected by:

• Unused production capacity
• Inward shift of production possibilities curve
• Economic inefficiencies
• Hardship for the population and government
• Reduced growth rate
FIGURE: 6.5
 Economic Sanctions
● 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
Tariffs
• Free-Trade argument posits that open markets foster most
efficient use of world resources
• But free trade policies often meet resistance among companies
and workers who face losses in income and jobs because of
import competition
• Policymakers torn between global efficiency and needs of voting
public
 Other Nontariff Trade Barriers
● Sea transport and freight regulations
• U.S. shipping companies serving Japanese ports complained of
highly restrictive system of port services
• Required to clear every detail of visits with Japan’s
stevedore-company association
• Dockworkers available only 18 hours a day or less
• Made U.S. goods more expensive in Japan
• In 1997, U.S. and Japan, on brink of trade war, reached
agreement to liberalize port services in Japan
 Australia – Why trade matters*
Trade creates jobs
1 in 5 Australian jobs relies on exports.

Trade improves Australia’s living standards

Access to a wider range of products at lower prices

Trade benefits local communities

Exporting companies provide local communities with jobs, income and
infrastructure.

Trade benefits the nation

Exports account for nearly a quarter of Australia’s income. Provides
greater security against global economic conditions.
* Source: This section is based on: Australia’s trade Fast facts published on the Austrade website.
(2) Trade Facilitation

Aimed at making doing business in the region easier and less costly.

Progress made in areas such as standards, customs, business travel,

telecommunications, energy.

(3) Economic and Technical Cooperation

Ecotech

Not development assistance, rather attain sustainable growth and equitable

development, reduce economic disparities, improve economic and social
well-being of the people, and deepen the spirit of community in APEC.
 Benefits forAustralia

• Cutting costs of doing business in the region.

• Helping to open up markets for Australian exporters.

• Helping to build stronger, more robust markets in the region.

• Help to create jobs for Australians and improve our living standards.

• Strategic importance for Australia and has helped create a more secure,
stable region.
 The Cairns Group
Formed in 1986.

Comprises 17 agricultural exporting countries.

Believe that reforming agricultural trade will bring benefits in terms of

economic growth, improved welfare, food security and sustainable
development.

Aims to achieve fair trade in agricultural exports via:

• Elimination of all export subsidies.
• Market access for all agricultural products.
• Reduce domestic support for all agricultural goods.
 A brief history of Australian protectionism
• Australia has been a heavily regulated nation, especially from its early colonial beginnings.

• It has had a tradition of heavy regulation since Federation in 1901:

• Australia possessed ‘all the restrictive practices known to man’ (Barnard, Butlin & Pincus 1982).

• Policy making, after the war, was centralised.

• Source: Lloyd, P., 2016, The First 100 Years of Tariffs in Australia: the Colonies. Range 5-18%
A brief history of Australian protectionism -1822-1897

Source: Lloyd, P., 2016, The First 100 Years of Tariffs in Australia: the Colonies.
 Australian tariffs …
• The first tariffs introduced in New South Wales were duties on alcoholic beverages. Then
in New South Wales taxes on tobacco were added.
• Other colonies similarly started their taxation of imported goods, either wholly or largely,
with these two groups of goods.

• These product groups accounted for more than 50 per cent of total customs revenue in all
four colonies until well after 1850. in 1900 the group of “narcotics and stimulants” still
accounted for 48 per cent of the total customs revenue of all colonies.

• Colonial tariffs in the 19th century were mostly taxes to raise revenue for the colonies
whereas throughout the 20th century the protection motive was dominant. T
• The protective effect of colonial tariffs increased steadily throughout the 19th century as
manufacturing and agricultural production grew and diversified.
 Tariffs …
• The structure of tariffs imposed changed qualitatively from the first half of the
century to the second half.
• First, tariff rates were close to uniform across the territory of modern
Australia in the first half of the century, apart from rates in Western
Australia which were higher than those in the large dominant colony of New
South Wales.
• Second, there were in the first half, preferences for imports of goods
manufactured in Great Britain over imports of like goods from the rest of
the world for the period 1802 to 1843, although the preference margins were
small.
• By contrast, during the whole of the second 50 year period, for each tariff
item in all colonies, there was only a single rate applied to imports from all
sources.
• Third, there were no export duties in any of the colonies in the first half of the
century.
 Tariffs …
• 1901 first federal government formed by the Protectionist Party.
• 1900-1939: STRONG PRTECTIONISM - Trade protection, particularly from tariffs
implemented by governments at the time were instrumental to the prosperity of the
manufacturing sector.
• Liberal Party: During the 1960s an increase in tariff protection for new industries
protected jobs and profits, but lowered the need for productivity and innovation, and by
1966 foreign investment was shifting to the less heavily regulated mining and pastoral
sectors.
• 1970s till now – demise of protection and tariffs decline.
• Tariffs were progressively cut, the Australian dollar was floated (1983), and the financial
system deregulated.
• Tariff rate, applied, simple mean, manufactured products (%) in Australia was 3.07 as
of 2014. Its highest value over the past 23 years was 14.52 in 1991, while its lowest
value was 3.01 in 2013.
 Australian trade regulations: Tariffs…
• Australia is considered one of the most open economies in the world, having made much
progress since the 1980s in reversing the restrictive trade regime once characterised by
substantial tariff protection for industries such as automobiles and textiles.
Import Controls
• There are no special requirements for applying an import licence, nor are there any quotas on
imports.
• Under the Customs (Prohibited Imports) Regulations, controls take the form of
a)an absolute prohibition, which means that import of these goods is banned in any
circumstances; and b) a restriction, where imports are allowed only if written authorisation is
obtained from the relevant authorities, or if compliance with certain regulations is met.
• For some commodities, import permits are required to facilitate clearance of goods.
• Source: http://hong-kong-economy-research.hktdc.com/business-news/article/Small-Business- Resources/Trade-Regulations-
of-Australia/sbr/en/1/1X000000/1X006MWA.htm, accessed 2/11/2017
 Australian trade regulations: Tariffs…
Customs Valuation and Tariff
• Australia adopts the Harmonised Commodity Description and Coding System (HS).
It is a dual-column schedule listing general duty rates and preferential duty rates for
developing countries. The average applied Most-Favoured-Nation (MFN) tariff rate
was 2.5% in 2015.
Australian tariffs …

• According to the WTO, “Australia’s trade and trade-

related policies as well as their formulation are, by
and large, highly transparent.”
• The Australian Customs Tariff Classification is
based on the International Convention on the
Harmonised Commodity Description and Coding
System (2002).
Subsidies
• Subsidies
• May take form of outright cash disbursements, tax breaks, insurance arrangements,
and subsidized loans
• Are given to producers to improve market position
• Provide domestic firms cost advantage (domestic production subsidies)
• Allow firms to sell goods at prices below cost (export subsides)

• Domestic Production Subsidy

• Results in
• Higher output
• Redistributive effects – increase in producer surplus for more efficient producers
• Deadweight loss - protective effect
• Lower welfare losses than a tariff/quota
• Financed by taxpayers