Deck 9: International Trade Policy

Question 1

Describe the market for government regulation.

Answer 1

Not all government regulation of industries and firms works to the benefit of society as a whole; some regulation favors one segment of society. Industries and firms that benefit from regulation favor it. For example, it's illegal for firms to conspire to fix or raise prices. However, firms can legally raise prices if the government regulates and enforces minimum prices for an industry. Firms within this industry may find it in their own interest to accept regulation if it can enhance their profits. Under these circumstances, industries and firms have a demand for government regulation, and that means that there is a market for government regulation. One area where a market for government regulation exists is international trade. Imports of goods and services have conflicting effects. Consumers want the benefits that come from free trade, but firms and workers in the industries that compete with imports want to restrict trade. In the U.S., special interest groups lobby for changes in laws and regulations that will benefit them, although not society as a whole. Lobbying to restrict trade has a long history in the U.S. and most other countries.

Question 2

How does collective action lead to protectionism?

Answer 2

In a democracy, individuals have an incentive to form groups designed to influence the government to pass laws that serve their collective interest. This behavior is called collective action. In the case of trade policy, while any country benefits from free trade, the gains to individual consumers are relatively small per good consumed. Because an individual consumer cannot quantitatively feel the gains, individuals don't form groups to lobby the government for free trade. The firms within the economy's industries that have a comparative advantage find it difficult to lobby their own government for freer trade since they are concerned about the trade policies of foreign governments. The group that will lobby the domestic government concerning free trade is the group that ineffectively competes with imports and lobbies for protection from imports. Although protection is not in the country's interest, it is in the interest of this special interest group. Activities that are designed to benefit a special interest group are called rent-seeking activities. Requesting that the government raise or not lower a tariff on a particular good is a form of rentseeking. A special interest group's rent-seeking behavior may also maximize the votes a politician receives in the next election. In addition, voting for protection may gain the politician a few additional votes from the industry, firms, and workers that receive the protection.

Question 3

Why is the tariff schedule of most countries so complicated?

Answer 3

Complexity in a country's tariff schedule provides two advantages. First, a producer of a good that competes with imports can focus its lobbying efforts for protection on a particular good. For example, it is easier to gain protection for a product like imported bacon than for all imported food. Second, a detailed tariff schedule makes it possible for a politician to pick up votes by protecting one specific good without inducing protests from the average consumer. This is why most countries have developed complicated tariff schedules, where tariffs on very similar goods may be dramatically different.

Question 4

List the factors that cause the tariff on some products to be higher than other products.

Question 5

Describe the factors that tend to influence the structure of protection in the U.S.

Question 6

Discuss the advantages of a country having a uniform tariff.

Question 7

Describe the evolution of U.S. trade policy during the nineteenth century.

Question 8

Describe the evolution of U.S. trade policy during the twentieth century.

Question 9

What are the important components of the Reciprocal Trade Agreements Act? Why is this act so important?

Question 10

List and describe the three forms of administered protection.

Question 11

Explain the history of antidumping duties in the U.S.

Question 12

What are the differences and similarities in the way the U.S. government handles antidumping and countervailing duty cases.

Question 13

What is an escape clause case? Use the Harley-Davidson case to show how an escape clause case should work.

Question 14

Describe what the term GATT means.

Question 15

What is an MTN? How do these negotiations work to reduce trade barriers?

Question 16

Describe who makes U.S. international trade policy.

Question 17

In what respects is the WTO different from GATT?