160 Chapter 8

CHAPTER OUTLINE
I. Introduction
II. The Political Economy of Protectionism
A.
Protectionism and Public Choice

public choice

rent seeking
B.
The Structure of Protection

industry size

industry concentration

intermediate products

number of employees

unionization

regional concentration

comparative disadvantage

PASSPORT: The Complexity of Fruit Juice Table 8.1

PASSPORT: Uniform Tariffs in Chile

III. The Evolution of U.S. Trade Policy

tariff history Figure 8.1

infant industry protection

Tariff of Abominations Table 8.2

revenue tariffs Figure 8.2

Smoot-Hawley Tariff 1930

Reciprocal Trade Agreements Act 1934

reciprocity

Congress to President

most favored nation (MFN)

IV. Antidumping, Countervailing Duties, and the Escape Clause
A.
Antidumping
1.
Types of Dumping
2.
History of Antidumping Law in the United States
B.
Countervailing Duties
C.
The Escape Clause

PASSPORT: Harley-Davidson and the Escape Clause

V.
The General Agreement on Tariffs and Trade (GATT)
A.
GATT and Multilateral Trade Negotiations (MTNs) Table 8.3

PASSPORT: Who Makes U.S. Trade Policy

VI.
The World Trade Organization (WTO)
VII. The Future of Trade Negotiations: The Doha Round
A.
The Future of MTNs

161 Chapter 8

TEACHING NOTES AND TIPS

I.

Introduction

Notes
Chapters 6 and 7 show the effects of tariffs and NTBs. Chapter 8 does three things. First, the
reason for the existence of barriers to trade is covered. This is followed by a history of
protectionism in the U.S. and administered protection. This leads to the relationship of the U.S.
to the WTO and the role of the latter in the world economy.
Teaching Tip
Ask your students how often they have heard terms like WTO, fast track, Seattle, Doha, trade
negotiations, etc. Now ask them to explain what any of these terms mean. There is a reason they
need to learn this material.
II.

The Political Economy of Protectionism

Notes
The section starts by defining the role of special interest groups in protectionism. From there the
section moves to showing how public choice would lead certain groups to engage in rent-seeking
behavior. The final part of the section shows how rentseeking coupled with vote maximization
behavior leads to the complicated tariff schedule illustrated in Table 8.1.
Teaching Tip
The chapter talks about public choice and rentseeking just in terms of protectionism. Point out
that what the students have learned will help them understand a lot of what goes on in
Washington.
III.

The Evolution of U.S. Trade Policy

Notes
Current U.S. trade policy did not just materialize but has been a work in progress for nearly 200
years. Figure 8.1 synthesizes the ebb and flow of U.S. trade policy from the late eighteenth
century to the present. The second part of the section shows how the Reciprocal Trade
Agreements Act fundamentally changed U.S. policy with the introduction of MFN. The boxed
feature "PASSPORT: Who Makes U.S. Trade Policy" is a useful way to wrap up the discussion.
Teaching Tip
Ask the students to consider a world without MFN. Tariffs could be changed by product and by
country at the whim of any government. There would be far less trade in such a world.

IV.

Antidumping, Countervailing Duties, and the Escape Clause

International Trade Policy 162

Notes
Industries find it impossible to get the tariff raised without some excuse. This section describes
the three major forms of administered protection: antidumping, countervailing duties, and the
escape clause. The main focus of the section is on antidumping, which is the biggest problem in
the U.S. and is spreading in the world economy.
Teaching Tip
The U.S. is the world's highest income country and tradable goods command higher prices there
than in many other countries. What would be the implications for U.S. exporters if a large
number of our trading partners adopted price-based antidumping laws? By the way, this is
already starting to occur.
V.

The General Agreement on Tariffs and Trade (GATT)

Notes
This section covers the history of GATT and considers how successful it really was over its 50
years of existence.
Teaching Tip
Part of the reason the U.S. government declined to participate in the original ITO was that it
covered trade in agricultural products as well as manufactured products. The U.S. government
was fearful that U.S. farmers could not compete with "low-wage" foreign farmers. It is ironic
that now one of the U.S. government's top priorities is to get agriculture included in trade
negotiations.
VI.

The World Trade Organization

Notes
This short section shows the WTO as a continuation of GATT.
Teaching Tip
It is important to discuss how the dispute settlement mechanism has changed under the WTO
versus GATT.
VII.

The Future of Trade Negotiations: The Doha Round

Notes
This section discusses the Agenda for the Doha Round and challenges and opportunities of future
MTNs.
Teaching Tip
It is important to discuss the areas for potential future trade negotiations, like agriculture and
trade in services while at the same time MTNs are a very slow process.

163 Chapter 8

BRIEF ANSWERS TO PROBLEMS AND QUESTIONS FOR REVIEW

1.

Public choice is the analysis of the government decision-making process in allocating

resources or developing economic policy. The premise underlying the theory of public
choice is that politicians attempt to maximize their utility. For a politician, utility
maximization may be congruent with maximizing the number of votes he or she will
receive in the next election. Politicians generally favor programs having immediate and
clear-cut benefits with vague, difficult to measure or deferred costs. They do not support
programs having future benefits that are vague and difficult to measure and have
immediate and easily identifiable costs.

2.

In a democracy, individuals have an incentive to form groups to attempt to influence the

government to pass laws that serve their collective interest. This behavior on the part of
individuals is called collective action. In our case, while any country benefits from free
trade, the gains to individual consumers per good consumed are relatively small.
Because an individual consumer cannot quantitatively feel the gains, they as a group do
not lobby the government for free trade. The firms in industries that have a comparative
advantage are attempting to influence the trade policy of foreign countries. The group
that will lobby the government concerning free trade is the group that ineffectively
competes with imports. This rent-seeking behavior by the import competing group may
also maximize the votes a politician receives in the next election. Voting for protection
may gain the politician a few additional votes from the industry, firms, and workers that
receive the protection.

3.

In the U.S. and in virtually all other countries, the tariff imposed on goods varies
considerably from one good to another. In fact, the tariff schedule of the U.S. is an
extremely complicated document. This occurs because tariffs are levied on very specific
goods or product categories. Details like this in a country's tariff schedule provides two
advantages: (1) 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. The reason why it's easier to
obtain protection is that consumers would most likely not notice a small increase in the
price of bacon due to a tariff. (2) A very detailed tariff schedule makes it possible for a
politician to pick up votes by protecting one specific good without inducing a protest
from the average consumer. This is why most countries have developed complicated
tariff schedules where the tariffs on very similar goods are dramatically different.

4.

The research does indicate that an industry having one or more of these factors has a
higher probability of having a higher tariff. First, large industries that are important to a
country are more likely to be protected than small unimportant industries. Second, the
more concentrated the industry the more likely it is to have protection. Third, it is easier
for firms to obtain protection if they produce an intermediate product, such as steel,
where the voters are unlikely to notice price increases. Fourth, industries that have a
larger number of employees are more likely to gain protection than those that have fewer
employees. If the industry is regionally concentrated and/or unionized the workers are
able to lobby more effectively. Lastly, industries that have a comparative disadvantage
are more likely to be protected.

International Trade Policy 164

5.

Economists have long advocated a uniform tariff that would solve a number of problems
associated with a complicated tariff schedule. A uniform tariff becomes easy to
administer. Moreover, a uniform tariff makes lobbying for protectionism much harder for
several reasons: (1) A general increase in the tariff is unlikely to pass by consumers
completely unnoticed; (2) other industries with the capability to lobby the government
would likely spring into action. (3) Firms purchasing imported products would see the
increase in the tariff as a direct increase in their costs and would complain to the
government. The net result is that more firms may lose from the higher tariff than firms
that gain from it.

6.

Some industries have greater protection than others because of their relative size,
concentration, the type of product they produce, the number of workers within the
industry, and the degree to which the industry has a comparative disadvantage. Large
industries that are important to a country are more likely to be protected than small
unimportant industries. The more concentrated the industry the more likely it is to have
protection. If firms produce an intermediate product it is more likely to have protection.
Industries that have a larger number of employees are more likely to gain protection than
those that have fewer employees. Industries that have a comparative disadvantage are
more likely to be protected.

7.

Arguments justifying protection in the U.S. have resulted in several periods of very high
tariffs. Alexander Hamilton's "Report on Manufactures" recommended high tariffs on
manufactured goods as a means of developing U.S. industry capable of competing with
the British. This policy of infant-industry protection was gradually adopted and tariffs in
the U.S. were increased. Because the tariff was a major source of revenue for the U.S.
government, tariffs increased dramatically to finance the Civil War and remained high
until 1913. In the early 1920s Congress quickly raised tariffs to protect domestic
industry. Congress passed the famous Smoot-Hawley Tariff of 1930. This tariff law
resulted in the highest general tariff structure in U.S. history with average tariffs of
approximately 60 percent on dutiable imports. Other nations retaliated by raising their
tariffs against goods imported from the U.S. As a result of the Great Depression and the
tariff increases, the volume of world trade declined from nearly $3 billion in 1929 to less
than $500 million in 1933.

8.

In 1933, the Roosevelt Administration persuaded Congress to transfer the authority to

negotiate tariff reductions to the President of the U.S. In 1934 Congress passed the
Reciprocal Trade Agreements Act. This Act is the basis for current U.S. trade policy.
Three provisions of this Act are still important today. First, tariff reciprocity means that
the U.S. will negotiate tariff reductions only in return for tariff reductions by its trade
partners. Second, the Act transferred U.S. trade policy from Congress to the President by
giving the President authorization to negotiate trade agreements. Once an agreement has
been negotiated, Congress votes to approve the agreement in total, meaning the
agreement cannot be amended. Third, the Act, and all future trade legislation, is based on
the Most Favored Nation (MFN) principle, now called normal trade relations. This
nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country

165 Chapter 8

would apply to the products of all other trade partners that the U.S. government has
granted most-favored-nation status.
9.

This nondiscrimination principle means that any tariff cuts the U.S. agrees to with one
country would apply to the products of all other trade partners that the U.S. government
has granted most-favored-nation status. MFN is a very old trading principle and the first
trade treaty that the U.S. signed with France in 1778 contained this principle. MFN
makes administering tariffs much easier, and a world where tariffs could be changed on a
political whim would be a far riskier place to do business.

10.

The different forms of administered protection are the antidumping law, countervailing
duties, and the escape clause. The antidumping law does not allow an international firm
to sell its product in an export market for less than it is sold for in its home market. A
countervailing duty action is a tariff imposed by a country that is designed to increase the
price of the imported good by a certain amount. The escape clause is a provision in the
U.S. law that allows temporary protection for U.S. industries that are under pressure from
imports.

11.

The GATT began in 1947 with 23 contracting parties and grew until it comprised more
than 100 contracting parties. In total, the contracting parties (countries) covered more
than 90 percent of world trade. To become a contracting party of GATT, a country had to
give most-favored-nation status to all other contracting parties and had to eliminate any
quotas (quantitative restrictions on imports) that restricted international trade. GATT
primary objective was to reduce the high levels of tariffs remaining since the 1930s. Over
the next fifty years, a number of multilateral trade negotiations (MTNs) successfully
reduced tariff and nontariff barriers to trade.

12.

See Table 8.3 on page 195 of the text for a complete listing of the MTNs and the major
issues negotiated.

13.

There is one very important difference between GATT and the WTO. Under GATT, a
country could file a trade complaint against another country and the GATT Council
would investigate the complaint. However, the investigation was slow and the GATT
panels' findings were routinely ignored because GATT could not enforce them. Under
the WTO, a country can file a trade complaint against another country and a WTO panel
will investigate the complaint. The WTO panel will issue its findings within six months
and the offended country will legally be able to retaliate against the other country. Thus,
countries that are found to be guilty of breaking WTO rules can and will be legally
penalized via restrictions placed on that country's exports.

14.

The agenda for the Doha Round is complex. However, the agenda effectively provides a
roadmap of what remains to be completed in terms of modernizing WTO rules to fit the
more modern aspects of international trade. The following is a list of the major issues
facing the negotiators. International Trade in Agricultural Products, Market Access,
International Trade in Services, Trade Related Intellectual Property (TRIPS), and Trade
Related Investment Measures (TRIMS).

International Trade Policy 166

MULTIPLE-CHOICE QUESTIONS
1.
*

International trade maximizes world welfare as the gains from trade cause:
a.
A more efficient allocation of world resources.
b.
A decrease in price of nontradeable goods.
c.
More democracy in foreign countries.
d.
A decrease in overall world production.

2.

Which of the following is not a benefit of international trade?

a.
a larger selection of products
b.
increased production efficiencies
c.
more efficient allocation of resources
d.
a re-distribution of income from scarce to abundant factors of production

*
3.

*
4.
*

Regulation of business by government is designed to aid in all of the following areas

except:
a.
strengthening the operation of the economy.
b.
modifying the operation of the economy.
c.
enhancing the operation of the economy.
d.
concentrating the operation of the economy.
In economics the term policy usually means:
a.
the action that is taken by each specific company during its term.
b.
the duration of a specific action for which goods are traded internationally.
c.
an action or actions taken by the government.
d.
none of the above

5.
*

The theory of public choice is based on the premise that:

a.
politicians attempt to maximize their utility.
b.
politicians attempt to maximize the country's utility.
c.
politicians attempt to keep neutral on unpopular subjects.
d.
politicians attempt to minimize their utility.

6.

The branch of economics that applies economic analysis to voting behavior is known as:
a.
public finance.
b.
negative political science.
c.
public choice.
d.
economic analysis of DUP.

*
7.
*

The branch of economics that deals with governmental decisionmaking is:

a.
civics.
b.
public finance.
c.
public choice.
d.
economic/politics.

167 Chapter 8

8.

*
9.

*
10.
*

11.

The study of politics within a country like the U.S. by economists is called:
a.
public economy.
b.
political economy.
c.
political choice.
d.
public choice.
The activity of a group that seeks to gain from changes in government policy is known
as:
a.
public policy.
b.
directly productive activities.
c.
rentseeking.
d.
broad focus tariff policy.
The use of resources to convince a government to restrict trade in a particular product is
called:
a.
rentseeking.
b.
rent takers.
c.
monopolizing the market.
d.
monopoly power.
The group that would most likely lobby to influence the international trade policy of a
country is:
a.
the industry group that has a comparative advantage.
b.
foreign investors.
c.
individual private citizens, as they benefit from trade through lower product
prices.
d.
the industry group that has a comparative disadvantage.

12.
*

The fact that there are very different tariffs on different products is known as:
a.
the structure of protection.
b.
public choice.
c.
positive choice.
d.
rent seeking.

13.

Which of the following would mostly likely not receive protection?

a.
Industries with a comparative disadvantage
b.
Industries that are regionally concentrated
c.
Industries that employ a large number of workers
d.
Industries that have a large number of firms

*
14.
*

Which of the following increases the likelihood of protectionism for a particular

industry?
a.
The industry produces an intermediate product.
b.
The industry consists of many small firms.
c.
The industry is not unionized.
d.
The industry is geographically dispersed.

International Trade Policy 168

15.

16.

*
17.

*
18.
*

19.

*
20.
*

21.

Which of the following statements is false?

a.
Large industries tend to get more protection than small ones.
b.
Concentrated industries tend to get more protection than industries that have a
large number of small firms.
c.
Intermediate products tend to get less protection than final products.
d.
Industries that are not very concentrated geographically tend to receive lower
levels of protection than industries that are regionally concentrated.
Which of the following is more likely to be protected by trade barriers in the U.S.?
a.
jump ropes
b.
apple juice
c.
wheat
d.
steel
Which of the following industries are more likely to be protected?
a.
industries with few firms
b.
industries that produce an intermediate product
c.
industries with a comparative disadvantage
d.
all of the above
The benefits of a very detailed tariff schedule include:
a.
the uniformity of tariffs for all products.
b.
an increased public awareness of price changes caused by changes in tariffs.
c.
the ability of government to provide protection on a specific product.
d.
the ability of government to provide a transparent level of protection for domestic
producers.
Which of the following is the only country in the world with a uniform tariff?
a.
Switzerland
b.
Mexico
c.
Nigeria
d.
Chile
The Constitution of the U.S. stipulates that the authority to regulate commerce and tariffs
is given to:
a.
the President.
b.
Congress.
c.
the individual States.
d.
the U.S. Supreme Court.
Which of the following statements is false?
a.
The Tariff of Abominations of 1828 led to a large increase in the U.S. tariff.
b.
Tariffs were increased in the 1860s to help the government pay for the Civil War.
c.
Before the Civil War tariff policy was a source of friction between the Northern
and Southern parts of the U.S.
d.
The Smoot-Hawley Tariff of 1930 led to a large reduction in the U.S.
tariff.

169 Chapter 8

22.
*
23.
*

24.

*
25.
*

26.

*
27.

The Tariff of Abominations:

a.
led to the Revolutionary War.
b.
led to World War I.
c.
led to a large increase in U.S. tariffs in 1828.
d.
led to a large increase in U.S. tariffs in 1930.
The Tariff of _____ was passed in _____ over the strong objections of the Southern
states.
a.
Waste, 1840
b.
Abominations, 1828
c.
Revenue, 1870
d.
New York, 1990
The now infamous legislation of 1930 that imposed a very high tariff structure on goods
imported into the U.S. was the:
a.
Reciprocal Trade Agreements Act.
b.
Trade and Tariff Act.
c.
Omnibus Trade and Competitiveness Act.
d.
Smoot-Hawley Tariff
The Smoot-Hawley Tariff of 1930:
a.
restricted the President to negotiate tariff reductions.
b.
increased tariffs to their highest levels of the twentieth century.
c.
provided a stimulus to the U.S. economy.
d.
began the process of the worldwide lowering of tariffs.
Which of the following pieces of legislation is the foundation of modern U.S.
international trade policy?
a.
The Tariff Act of 1828
b.
The Smoot-Hawley Tariff of 1930
c.
The Reciprocal Trade Agreements Act of 1934
d.
The Trade and Tariff Act of 1958
Which of the following pieces of legislation made MFN an integral part of U.S.
international trade policy?
a.
The Tariff of Abominations Act of 1834
b.
The Smoot-Hawley Tariff of 1930
c.
The Reciprocal Trade Agreements Act of 1934
d.
The Dillon Act of 1958

International Trade Policy 170

28.

*
29.

*
30.

*
31.
*

32.

*
33.

*
34.
*

The act which was passed to mitigate the Smoot-Hawley Tariff and which is still the
cornerstone of American trade policy is:
a.
the GATT Act.
b.
the Omnibus Trade and Competitiveness Act.
c.
the Smoot-Hawley Tariff.
d.
the Reciprocal Trade Agreements Act.
Which of the following is not a key provision of the Reciprocal Trade Agreement Act?
a.
The president is allowed to negotiate tariff reductions without Congressional
involvement.
b.
The tariff reductions are made on a most favored nation basis.
c.
The U.S. would reduce tariffs for tariff reductions by other countries.
d.
Congress can amend a negotiated trade agreement.
Which of the following transferred power for trade negotiations from Congress to the
President?
a.
Smoot-Hawley Act
b.
The Trade Expansion Act of 1962
c.
The Trade Expansion Act of 1974
d.
The Reciprocal Trade Agreements Act of 1934
Since World War II, tariffs in general have:
a.
increased.
b.
decreased.
c.
remained constant.
d.
disappeared.
The current average U.S. tariff rate is:
a.
15%.
b.
24%.
c.
42%.
d.
4%.
The concept whereby all trading parties that were contracting parties to GATT or new
members of the WTO are treated the same with respect to tariffs is known as:
a.
ITO.
b.
CIF.
c.
FOB.
d.
MFN.
Which of the following is not a form of administered protection?
a.
Antidumping duties
b.
Countervailing duties
c.
Specific duties
d.
Escape clause actions

171 Chapter 8

35.

*
36.

*
37.
*
38.

Which of the following is not a form of administered protection?

a.
Antidumping duties
b.
Countervailing duties
c.
The escape clause
d.
Offshore assembly
Dumping by a firm can be defined as:
a.
a firm selling a product at a price below its cost of production in a foreign market.
b.
a firm selling a product in a foreign market at a price lower than the price charged
in its home market.
c.
the discharge of waste products into the environment.
d.
both a and b
Which of the following is not a type of dumping?
a.
Sporadic dumping
b.
Predatory dumping
c.
Complex dumping
d.
Persistent dumping
Dumping occurs when a firm:
a.
sells too much of a good in a foreign country.
b.
sells in a foreign country at prices that are below true value.
c.
sells in its home market at prices that are below the average price charged by its
competitors.
d.
sells in a foreign market at prices that are below the price charged in the
home market.

39.
*

Which of the following does not cause lasting damage to the domestic industry?
a.
Sporadic dumping
b.
Persistent dumping
c.
Predatory dumping
d.
All of the above

40.

Which of the following is the term that refers to a situation where a country exports a
good at a lower price than it sells for domestically?
a.
Voluntary export restraint
b.
International commodity agreements
c.
Dumping
d.
Autarky

*
41.

Resolution of dumping cases in the U.S. involves investigations by:

a.
the Justice Department and the International Trade Commission.
b.
the Justice and Commerce Departments.
c.
the Justice Department only.
d.
the International Trade Administration and the International Trade
Commission.

International Trade Policy 172

42.
*

Antidumping duties:
a.
are used to offset the effects of imports being sold at a price lower than
that charged in the country of origin.
b.
are illegal under U.S. trade law.
c.
are administered by the Antitrust Division of the Justice Department.
d.
all of the above

43.

Which of the following statements is true?

a.
U.S. antidumping law only prohibits predatory dumping.
b.
U.S. antidumping law is completely consistent with WTO rules.
c.
In an antidumping case, the ITA determines if the foreign product is being
dumped in the U.S. market.
d.
In an antidumping case, the ITC does not participate in the investigation.

44.
*

45.
*

46.
*
47.
*
48.
*

Countervailing duty cases involve:

a.
foreign monopoly pricing.
b.
foreign subsidies.
c.
foreign tariffs on U.S. exports.
d.
foreign VERs.
Payment by government to a firm for each unit of output that it exports is known as a(n)
_____.
a.
export subsidy
b.
direct tax rebate
c.
GATT/WTO
d.
local content requirement
A countervailing duty is a tariff that is levied to:
a.
counteract the dumping of goods in the domestic market by foreign firms.
b.
counteract a sudden surge of imports that threaten to harm a domestic industry.
c.
counteract subsidies given to foreign firms by their own governments.
d.
counteract the tariff on domestic goods that are enacted by foreign governments.
Countervailing duty cases involve allegations of:
a.
foreign monopoly pricing.
b.
foreign barriers to U.S. exports.
c.
foreign export subsidies.
d.
foreign import subsidies.
The application of countervailing duties against subsidized exports:
a.
does not require evidence of international price discrimination.
b.
is handled only by the International Trade Commission.
c.
is handled only by the Department of Commerce.
d.
only applies to developing countries.

173 Chapter 8

49.
*

The escape clause:

a.
can be used to restrict the import of fairly traded goods.
b.
only applies to import competition from allegedly low-wage countries.
c.
involves the total prohibition of goods imported from some countries.
d.
is imposed hundreds of times a year on thousands of different types of imports.

50.

In the U.S. raising tariffs on a fairly traded imported product that causes harm to a
domestic industry is what type of action?
a.
Anti-dumping
b.
Fair trade
c.
Escape clause
d.
Countervailing

*
51.
*
52.

*
53.

*
54.
*

55.
*

Which of the following companies filed a famous escape clause case in the early 1980s?
a.
General Motors
b.
U.S. Steel
c.
Harley-Davidson
d.
Microsoft
When the Allied powers met at a conference in 1944, what international organizations
were developed?
a.
The International Monetary Fund
b.
The International Bank for Reconstruction and Development (World Bank)
c.
The World Trade Organization
d.
Both a and b
GATT was:
a.
part of the International Monetary Fund.
b.
part of the World Bank.
c.
part of the United Nations.
d.
the interim committee designed to implement the International Trade
Organization.
From the late 1940s until the creation of the WTO, the treaty (organization) that was
primarily responsible for conducting multilateral trade negotiations was the:
a.
World Bank.
b.
GATT.
c.
ITO.
d.
United Nations.
Which of the following statements is false?
a.
GATT was a replacement for the failure of the U.S. to participate in the proposed
ITO.
b.
The ITO was a substitute for GATT.
c.
GATT was a treaty and technically was not an organization.
d.
Under GATT the explicit use of quotas to protect domestic industries was illegal
in most cases.

International Trade Policy 174

56.
*
57.
*

58.
*

59.
*

60.
*
61.

*
62.
*

A principle problem associated with GATT was that:

a.
it was not really a formal international organization.
b.
the U.S. was not a member.
c.
it had no enforcement mechanism.
d.
it was part of the World Bank.
Most favored nation (MFN) status means that a country treats another country:
a.
better than its other trading partners.
b.
the same as its other trading partners.
c.
worse than its other trading partners.
d.
any way it chooses since it is the "most favored nation."
When using the most favored nation principle in international trade, this means that:
a.
we prefer a foreign country's production to domestic production.
b.
the lowest MFN negotiated tariff rate would apply to all WTO members
countries.
c.
the lowest negotiated tariff rate would apply to some countries.
d.
the countries have come close to a free trade agreement.
The most favored nation principle of the WTO means that a tariff concession granted by
one member country to another member country will:
a.
be extended to all other countries without exception.
b.
be extended to all other countries that are WTO members.
c.
be extended to all WTO member countries that make a similar concession.
d.
be extended to those WTO member countries that the country making the
concession designates.
Which of the following is an exception to the most favored nation principle?
a.
Trade in petroleum
b.
Trade with Japan
c.
A free-trade area or a customs union
d.
Trade in services
Which of the following was not a multilateral trade negotiation conducted under GATT?
a.
The Tokyo Round
b.
The Kennedy Round
c.
The Uruguay Round
d.
The NAFTA Round
Which of the following was not an MTN?
a.
The Seattle Round
b.
The Kennedy Round
c.
The Tokyo Round
d.
The Uruguay Round

175 Chapter 8

63.
*

64.
*
65.
*

66.

67.

*
68.

*
69.

The international organization that serves as a forum for trade discussions and the
development of trade rules is called the:
a.
WTO.
b.
World Bank.
c.
United Nations.
d.
International Trade Commission.
The current round of multilateral trade negotiations is known as:
a.
the Bush Round.
b.
the Uruguay Round.
c.
the Doha Round.
d.
the Tokyo Round.
The WTO was established in which round of trade negotiations?
a.
The Kennedy Round
b.
The Uruguay Round
c.
The NAFTA Round
d.
The Tokyo Round
The General Agreement of Trade in Services is:
a.
an agreement among countries on the services that the WTO will offer.
b.
a general agreement among countries that services will be regulated
independently within each country.
c.
an agreement among countries that trade in services should be regulated
by agreed upon rules.
d.
a general agreement among countries that eliminates the Multi-Fibre Agreement.
Both the WTO and GATT have worked to:
a.
reduce the indebtedness of developing countries.
b.
reduce large fluctuations in exchange rates.
c.
reduce trade barriers among countries on a bilateral basis.
d.
reduce trade barriers among countries on a multilateral basis.
Which organization has procedures for settling international trade disputes?
a.
The World Bank
b.
The International Monetary Fund
c.
The World Court of Appeals
d.
The World Trade Organization
Which of the following countries is not currently a member of the WTO?
a.
France
b.
Canada
c.
Germany
d.
Iraq

International Trade Policy 176

70.

Why do domestic firms and foreign countries find it difficult to interact with U.S. trade
policy?
a.
Congress has to approve everything so it is a slow process.
b.
The President has to decide what U.S. trade policy will be.
c.
No one agency or person is responsible for U.S. trade policy.
d.
The USTR conducts U.S. trade policy through constant and slow negotiations.

TRUE FALSE QUESTIONS

1. F

A country's international trade policy is specifically designed measures that do not affect
trade relations with the rest of the world.

2. F

The theory of public choice assumes that politicians seek to maximize the amount of
campaign contributions they receive.

3. F

Government can never improve economic welfare.

4. F

Business can never benefit from government regulation since it distorts market efficiency.

5. T

Individuals within a country who band together in an attempt to influence the government
to pass laws are participating in a collective action.

6. F

Individuals within a democracy have an incentive to band together and pass laws that are
in their collective or society's best interest.

7. T

In the 1970s the American automobile manufacturers banded together to petition the
government not to lower tariffs on Japanese-made automobiles. This action was a form of
rent-seeking.

8. T

The amount of business regulation is determined by the business demand for regulation
and the supply of regulation by the government.

9. F

Rent-seeking behavior enhances the welfare of society at the expense of a small group.

10. F International trade decreases world welfare, as the gains from trade are a result of losses
to particular factors of production.
11. T In the late eighteenth century the U.S. government imposed tariffs as a means of raising
revenue for the national government.
12. T Today, many developing countries still use tariffs as a major source of government
revenue.
13. T The structure of protection refers to the fact that tariffs vary from zero to very high levels
depending on the product in question.

177 Chapter 8

14. T Larger industries are more likely to receive protection than smaller industries.
15. F The more concentrated an industry is the less likely it is that it will be protected.
16. T Tariffs on intermediate products tend to be higher than tariffs on final products.
17. F Regionally concentrated industries usually have a zero tariff.
18. T Industries that do not have many voters tend to have a lower tariff.
19. T Industries that are qualitatively important to a country are more likely to be protected
than those that are not.
20. F Industries that have a large number of firms are more likely to receive tariff protection.
21. F Domestic industries that have a comparative advantage are very likely to request and
receive protection in the form of a higher tariff.
22. T U.S. tariffs are assessed on very narrowly defined product categories in order to both
accommodate rent-seeking behavior and reduce the damage tariffs do to the overall
welfare of the country.
23. F The Tariff of Abominations was passed by the U.K. and caused the Revolutionary War.
24. T During the nineteenth century, tariffs were the major source of revenue of the U.S.
government.
25. F In 2001, the amount of money the U.S. government collected in the form of tariff revenue
was the largest source of revenue for the government.
26. F The most widely imposed protective measure is the quota, which restricts imports into a
country.
27. T The Confederate States of America had a uniform tariff.
28. F According to the Constitution, the President sets tariff rates.
29. F Congress has played no role in U.S. trade policy since it passed the Smoot-Hawley Tariff.
30. T After the disastrous effects of the Smoot-Hawley Tariff, Congress gave the President the
authority to negotiate tariff reductions with the Reciprocal Trade Agreements Act of
1934.
31. T The cornerstone of U.S. commercial policy is the Reciprocal Trade Agreements Act.
32. T If a country is not a member of the WTO, then the U.S. government is free to apply the
Smoot-Hawley Tariff if it feels it is appropriate.

International Trade Policy 178

33. F In order for a country to legally trade with the U.S., it must first obtain most favored
nation status.
34. F The principle of most favored nation was first developed in the U.S. in 1994 for trade
between the U.S. and Mexico.
35. F In general, since World War II the level of trade barriers in most countries has risen.
36. T U.S. trade policy is based on the principle of most favored nation.
37. T Administered protection by the U.S. government is nominally sanctioned by WTO.
38. T The two U.S. government agencies that investigate antidumping cases are the ITA and the
USITC.
39. T Antidumping laws in the U.S. are based on both cost-based dumping and price-based
dumping.
40. F Price-based dumping is defined as a firm selling a product at a price well above the actual
cost of production.
41. T Predatory dumping is a foreign firm pricing its product in such a manner so as to drive
domestic firms out of business.
42. T Countervailing duties are used to offset the effects of foreign government subsidies to
exporters.
43. F The use of the escape clause allows foreign firms to escape tariffs on goods exported to
the U.S.
44. T In U.S. trade law, the escape clause allows for the imposition of restrictions on fairly
traded imports that cause or threaten harm to domestic industry.
45. T The escape clause allows domestic industries to obtain temporary protection from
imports even if the foreign firms have committed no violations of international trade law.
46. F In the early 1980s, Harley-Davidson filed a countervailing duty case claiming that the
Japanese government was subsidizing the export of motorcycles to the U.S.
47. F The General Agreement on Tariffs and trade (GATT) was established in 1973.
48. T GATT governed international trade because the U.S. Congress did not ratify the proposed
ITO.
49. T Since GATT technically was a treaty and not an organization, countries that were
included in GATT were known as contracting parties.

179 Chapter 8

50. F The Nixon Round, the Taipei Round, and the Paraguay Round were GATT-sponsored
multilateral trade negotiations.
51. F The Uruguay Round took only two years to negotiate because there were so few issues
for the small number of countries in GATT to negotiate.
52. T The Uruguay Round of multilateral trade negotiations created the World Trade
Organization.
53. T As a result of the Uruguay Round, the Multifibre Arrangement is supposed to be
gradually phased out through the year 2005.
54. F The MFA is used to limit and regulate the exportation and importation of grain and
foodstuffs on a worldwide basis.
55. T The WTO is an international organization that sets rules of conduct for international
commerce.
56. F The WTO is clearly the best international forum for discussing the issues of labor and the
environment in the world economy.
57. F The WTO has approximately 26 members.
58. T The members of the WTO are currently engaged in a new round of trade negotiations in
Doha, Qatar.
59. F U.S. trade policy is very well organized because it is completely clear which government
agency is responsible for all of the international trade functions of the U.S. government.
SHORT ANSWER ESSAY
1.

Describe the market for government regulation.

2.

How does collective action lead to protectionism?

3.

Why is the tariff schedule of most countries so complicated?

4.

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

5.

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

6.

Discuss the advantages of a country having a uniform tariff.

7.

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

International Trade Policy 180

8.

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

9.

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

10.

List and describe the three forms of administered protection.

11.

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

12.

What is a countervailing duty case?

13.

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

14.

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

15.

Describe what the term GATT means.

16.

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

17.

Describe who makes U.S. international trade policy.

18.

In what respects is the WTO different from GATT?

BRIEF ANSWERS TO SHORT ANSWER ESSAY

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.

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

181 Chapter 8

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.
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.

4.

Researchers have studied why the tariff is low on one good and high on another. This
analysis of variation in tariffs by product for a country is called the structure of
protection. In general, this research indicates several results. First, large industries that
are important to a country are more likely to receive protection than are small
unimportant industries. Second, the more concentrated the industry, the more likely it is
to have protection because it is easier for the firms to organize to lobby for protection
when there are fewer firms in the industry. Third, it is easier for firms to obtain
protection if they produce an intermediate product, such as steel, where the voters are
unlikely to notice price increases. Fourth, the potential voting strength of the industry's
employees seems to make a difference. In addition, if the industry is regionally
concentrated and/or unionized, the workers are able to lobby more effectively. Finally,
industries that have a comparative disadvantage are more likely to be protected. This
research indicates that an industry characterized by one or more of these factors does not
guarantee it will be protected. However, the research does indicate that an industry
having one or more of these factors increases the probability that it will have a higher
tariff.

5.

The structure of protection in the U.S. is influenced by several factors. First, large
industries that are important to the U.S. are more likely to receive protection than are
small unimportant industries. Second, the more concentrated the industry, the more
likely it is to have protection because it is easier for the firms to organize to lobby for
protection when there are fewer firms in the industry. Third, it is easier for firms to
obtain protection if they produce an intermediate product, such as steel, in which the
voters are unlikely to notice price increases. Fourth, the potential voting strength of the
industry's employees seems to make a difference. In addition, if the industry is regionally

International Trade Policy 182

concentrated and/or unionized, the workers are able to lobby more effectively. Finally,
industries that have a comparative disadvantage are more likely to be protected. This
research indicates that an industry characterized by one or more of these factors does not
guarantee it will be protected. However, the research does indicate that an industry
having one or more of these factors increases the probability that it will have a higher
tariff.
6.

Economists have long advocated a uniform tariff that would solve a number of problems
associated with a complicated tariff schedule. One, the tariff becomes easy to administer
because customs officials would not have to worry about classifying a product into
whatever category it might best fit. Two, a uniform tariff makes lobbying for
protectionism much harder. If an import-competing industry wants an increase in the
tariff, the tariff would have to increase on all imports. This is likely to create some
resistance for several reasons: 1) a general increase in the tariff is unlikely to pass by
consumers completely unnoticed; 2) other industries capable of lobbying the government
would likely do so; 3) firms purchasing imported intermediate products would see the
increase in the tariff as a direct increase in their costs and would complain to the
government; 4) the same would be true of firms that are purchasing imports for final sale
to the consumer; and 5) consumer preferences for lower tariffs would lead to the optimal
public choice strategy for a politician to lower tariffs.

7.

Between 1792 and the Civil War, the average tariff varied from 10 to nearly 60 percent.
In the late eighteenth century, tariffs were a convenient way for countries to raise
revenue. There are two things to keep in mind about U.S. trade policy up to the
beginning of the twentieth century. First, Congress and the President could impose any
tariff on any narrowly defined good imported from any country. Second, a major source
of revenue for the federal government came from tariffs. In the years before the federal
government instituted an income tax, the "tariff bill" was a potential source of gain for
industries as well as the major source of government revenue. By the late eighteenth
century, governments recognized tariffs for their potential to protect domestic industries.
In the U.S., Alexander Hamilton's "Report on Manufactures" recommended high tariffs
on manufactured goods as a means of developing U.S. industry capable of competing
with the British. This policy of infant-industry protection was gradually adopted, and
tariffs in the U.S. were raised from 5 percent in 1792 to 12.5 percent by 1812. Tariffs
leveled off for a few years following the War of 1812 but took off again reaching a peak
of over 65 percent with the Tariff of Abominations of 1828. This high average rate of
tariff protection by the U.S. government provoked a strong reaction from the Southern
states. Northern states and Northern manufacturers favored high tariffs as a way of
protecting new industries allowing the entire country to industrialize through an increase
in firms' profits. The Southern states favored low tariffs to reduce the cost of the
manufactured goods they imported. The states' difference of opinion concerning tariffs
hampered the degree of solidarity within the country. The Southern states felt so strongly
about the tariff issue that the Confederate Constitution prohibited the protection of any
specific industry. Because tariff revenue was a major source of revenue for the U.S.
government, tariffs increased dramatically to finance the Civil War and remained high
until 1913.

183 Chapter 8

8.

In 1913, the U.S. reduced tariffs significantly to their lowest level since the Civil War.
However, in the early 1920s the Republican Party returned to power in Congress and the
White House and quickly raised tariffs to protect domestic industry. The last tariff bill
Congress passed was the famous Smoot-Hawley Tariff of 1930. This tariff law resulted
in the highest general tariff structure in U.S. history with average tariffs of approximately
60 percent on dutiable imports. Other nations retaliated by raising their tariffs against
goods imported from the U.S. While this tariff escalation did not cause the Great
Depression, it did not help. As a result of the Great Depression and the tariff increases,
the volume of world trade declined from nearly $3 billion in 1929 to less than $500
million in 1933. Since trade policy is in part a political process, in 1933 the Roosevelt
Administration persuaded Congress to transfer the authority to negotiate tariff reductions
to the President. In 1934 Congress passed the Reciprocal Trade Agreements Act. This
Act is the basis for current U.S. trade policy. Since World War II, the U.S. has reduced its
tariffs through several MTNs under the auspices of GATT.

9.

Three provisions of this the Reciprocal Trade Agreement Act are still important today.
First, tariff reciprocity means that the U.S. will negotiate tariff reductions only in return
for tariff reductions by its trade partners. This reciprocity principle is based on the idea
of fairness, as mutual tariff reductions benefit U.S. consumers and foreign producers
through an increase in U.S. imports while the increase in exports benefit U.S. producers
and foreign consumers. Reciprocity is still deeply embedded in current trade
negotiations. Second, the Act transferred U.S. trade policy from Congress to the
President by giving the President authorization to negotiate trade agreements. This
provision allows other countries to negotiate with the Executive branch of the U.S.
government without having to negotiate every detail of the agreement with Congress.
Once an agreement has been negotiated, Congress votes to approve the agreement in
total, meaning the agreement cannot be amended. Third, the Act, and all future trade
legislation, is based on the Most Favored Nation (MFN) principle. This
nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country
would apply to the products of all other trade partners that the U.S. government has
granted most-favored-nation status. The MFN is a very old trading principle and the first
trade treaty that the U.S. signed with France in 1778 contained this principle. MFN
makes administering tariffs much easier as approximately 140 countries have MFN
status. In addition, trade legislation based on MFN makes international trade far less
risky for businesses when compared to a world where tariffs could be changed on a
political whim.

10.

There are three different forms of administered protection, but they all involve increasing
the tariff on a particular good and these forms of administered protection are sanctioned
by the WTO. The first type of administered protection is called the antidumping law. An
antidumping law is a law that does not allow an international firm to sell its product in an
export market for less than it is sold for in its home market or below its cost of
production. The second form of administered protection is a countervailing duty. This is
a tariff designed to offset foreign government export subsidies. Lastly, the escape clause
allows a domestic industry to petition the government for temporary protection to allow
the industry a chance to adjust their operations to compete with more intense import
competition. The purpose of the escape clause is to protect domestic firms that might be

International Trade Policy 184

profitable in the long run, from being driven out of business due to an increase in imports
that has occurred in a short period of time.
11.

The original U.S. antidumping law passed in 1916 prohibited only predatory dumping.
This law simply extended the Sherman Antitrust Act to the activities of foreign firms.
The intent of the law was to create a legal level playing field for domestic and foreign
firms. The legislative changes that have followed the original antidumping law have
created a bias in favor of domestic firms. With the Antidumping Act of 1921, Congress
loosened the requirements on antidumping to permit federal government action to further
restrict imports. Foreign companies could now be charged with dumping even if there
was no proof of predatory pricing. It is this Act that forms the basis for the current
antidumping law in the U.S. The Antidumping Act was incorporated into the 1930 Tariff
Act and subsequently amended in 1979, 1984, and 1988. The result of these amendments
has been to make it easier to restrict foreign imports that are sold at lower prices than
similar U.S. goods. From its inception in 1948, the General Agreement on Tariffs and
Trade (GATT) sanctioned the concept of antidumping laws. The Kennedy Round of
GATT led to the adoption of the GATT Antidumping Code. This code provides
guidelines under which countries may act against foreign firms that engage in predatory
pricing that results in material injury to an industry based in the importing country. The
anti-dumping code creates the guidelines and countries can adopt their own anti-dumping
laws to prevent dumping. This code was amended during the Tokyo Round of the GATT
but only 25 countries have signed this amended code. According to the amended code,
each signatory country can legislate and administer its anti-dumping law as long as it
conforms to WTO standards. The WTO has ruled that the U.S. was violating the intent of
international guidelines to which the laws of signatory countries must conform.
Specifically, the WTO alleged that the U.S. antidumping law made it too easy for U.S.
firms to obtain punitive tariffs against imports. To date, the U.S. has ignored these
warnings concerning its antidumping law.

12.

While countervailing duties are conceptually clear, determining the size of government
subsidies is quite difficult in practice. There are two problems that arise in countervailing
duty cases. First, there is the difficult issue of which government subsidies can be
countervailed. This leads to the second problem with countervailing duty cases. The
problem is one of trying to disentangle a country's trade policy from its industrial policy.
For a variety of reasons governments subsidize one industry or another. This
encouragement or industrial policy may take the form of direct subsidies, partial or total
government ownership, and tax relief. However, there is a potential conflict between a
government's ability to pursue active industrial policy and a level playing field in
international markets. This conflict is not yet severe but it is unlikely to go away.

13.

Generally, once a case is filed, a regulatory process is set in motion that can take from 20
days to over a year to complete. Simply put, there are two investigations that the U.S.
government conducts. First, the International Trade Administration (ITA) conducts an
investigation to determine if the imports in question are being "dumped" and if so, by
how much. Second, the USITC conducts an investigation to determine if the alleged
dumping is harming the domestic industry or firm. If an affirmative preliminary decision
is reached by both investigations, then a tariff equivalent to the difference between the

185 Chapter 8

U.S. market price and the foreign market value (called the dumping margin) is ordered.
Both agencies continue their investigations in order to make a final determination on the
question of injury and the exact dumping margin. Many antidumping cases are
"terminated" at one point or another in the process. What occurs, in many cases, is that
the foreign firms have simply agreed to raise prices in order to avoid explicit tariffs. Alas
the shoe is increasingly on the other foot. U.S. exporters are now finding that foreign
governments are adopting similar antidumping laws and U.S. firms are increasingly
having antidumping cases filed against them overseas.
14.

Occasionally a country's comparative advantage can shift more quickly than the domestic
industry can adjust. This situation leads to the final type of administered protection, the
escape clause. The escape clause allows a domestic industry to petition the government
for temporary protection to allow the industry a chance to adjust their operations to
compete with the more intense import competition. The purpose of the escape clause is to
protect domestic firms, which might be profitable in the long run, from being driven out
of business due to an increase in imports that has occurred in a short period of time. In
the early 1980s, the classic American motorcycle firm, Harley-Davidson, was on the
brink of bankruptcy. The firm was in dire straights due to a combination of adverse
factors. First, by its own admission, Harley-Davidson had been poorly managed in the
1970s. Second, the firm was facing a flood of cheaper, higher-quality imports from
Japan. Japanese firms were obviously intent on penetrating the U.S. market, but a
Japanese recession was giving them even more incentive to export than usual. Third, the
U.S. was also just emerging from a recession in the early 1980s, so domestic sales were
below average even without imports. Finally, the dollar was becoming increasingly
overvalued making it even easier for Japanese firms to sell in the U.S. market at very
competitive prices. Harley-Davidson filed a petition for escape clause relief arguing that
the firm could survive and compete with the Japanese given some time to adjust. In 1983
the USITC recommended to President Reagan that the firm be granted relief. Tariffs
were increased to 45 percent from 4 percent the first year and were to decline
progressively to 10 percent in 1987. A year ahead of schedule, Harley-Davidson notified
the government that it was now competitive and did not need the final year of protection.

15.

The General Agreement on Tariffs and Trade (GATT) was an interim committee of the
ITO that was authorized by an administrative agreement between the countries. This
administrative agreement did not require U.S. Congressional ratification. As a result,
GATT remained in existence for nearly 50 years. Headquartered in Geneva, Switzerland,
GATT had a Director-General, a staff of 350 individuals, and an annual budget of $40
million. Its purpose was to operate as an interim committee until the ITO was established.
Since GATT was not an official international organization, countries that joined GATT
were called contracting parties.

16.

The first goal of GATT was to reduce the high levels of tariffs remaining since the 1930s.
Over the next fifty years, a number of multilateral trade negotiations (MTNs)
successfully reduced tariffs. A multilateral trade negotiation proceeds as follows. First,
there would be a GATT ministerial meeting of the trade ministers from the contracting
parties to set up a proposed agenda for what was to be negotiated. Next, the trade
ministers of each country would then request authorization from their government to

International Trade Policy 186

participate in the multilateral trade negotiations. The U.S. government's position

concerning the multilateral trade negotiations was critical. Given the size of the U.S.
economy, the negotiations could not proceed without U.S. participation. Also, the other
contracting parties did not want to enter into negotiations with the U.S. government
without assurances that it would honor the negotiated agreement. Embodied within the
U.S. legislation was a statement that the U.S. Congress would vote to ratify the
negotiated trade agreement without modifying or amending the trade agreement. This
statement is called Congressional fast track approval. The multilateral trade negotiations
between the contracting parties began and continued over a period of years. Several
MTNs occurred from 1958 through 1994. Once a trade agreement was reached, the U.S.
Congress would then decide whether to accept or reject the agreement without
modification. The tariff cuts mandated by a multilateral trade negotiation would then be
phased in over a number of years. To keep the process of tariff reductions moving
forward, a subsequent multilateral trade negotiation would be planned and started as soon
as possible.
17.

Most countries have a ministry or department that is exclusively charged with setting
international trade policy for the country. In the U.S. things work differently because
there is no Department of International Trade. The closest equivalent in the U.S. is the
Office of the United States Trade Representative (USTR). The Trade Expansion Act of
1962 created this office. As part of the Trade Act of 1974, the Office was established as a
Cabinet-level agency within the Executive Office of the President. It has responsibility
for coordinating and administering U.S. trade policy. The trade representative is a
Cabinet-level official with the rank of Ambassador. The agency provides trade policy
leadership and negotiating expertise in its major areas of responsibility. More than 17
federal agencies and offices are involved in international trade issues, not including input
from Congress and representatives of various interests in the private sector. The
combination of the U.S. form of government and the diffusion of responsibility on
international trade issues around the government is what makes trade policy very
complicated.

18.

The Uruguay Round's most important achievement was the creation of the World Trade
Organization (WTO). Essentially the ITO's Interim Committee, GATT, simply became a
reality. There is one very important difference between GATT and the WTO. Under
GATT, a country could file a trade complaint against another country and the GATT
Council would investigate the complaint. However, the investigation was slow and the
GATT panel's findings were routinely ignored because GATT could not enforce them.
Under the WTO, a country can file a trade complaint against another country and a WTO
panel will investigate the complaint. The WTO panel will issue its findings within six
months and the offended country will legally be able to retaliate against the other country.
Thus, countries that are found to be guilty of breaking WTO rules can and will be legally
penalized via restrictions placed on that country's exports.