Chapter 7
Commercial Policy
◼ Outline
Introduction: Commercial Policy Tariffs, and Arguments for Protection
Tariff Rates in the World’s Major Traders
The Costs of Protectionism
The Logic of Collective Action
Case Study: Agricultural Subsidies
Why Nations Protect Their Industries
Revenue
The Labor Argument
The Infant Industry Argument
The Politics of Protection in the United States
Countervailing Duties
Antidumping Duties
Escape Clause Relief
Section 301 and Special 301
Case Study: Economic Sanctions
◼ What Students Should Know after Reading Chapter 7
In the sixth edition, Chapter 7 is focused on protection in three sectors—agriculture, clothing, and
textiles—by China, the European Union, the United States, and Japan. These sectors are chosen because
they are among the most highly protected industries in nearly all industrial regions and because this
protection potentially harms developing countries. Chapter 7 begins with a look at tariff rates in general
40 Gerber • International Economics, Sixth Edition
Trade barriers are an inefficient policy for addressing employment issues, as illustrated by the high cost
per job saved. The point is not to downplay the issue of economic restructuring and job losses, but rather
show that trade policies are too indirect a mechanism to address labor market issues and unemployment,
and that alternative policies (macro and labor market policies) must be used in their place. Students are
◼ Assignment Ideas
1. This material lends itself to case studies of whatever issue is currently getting the most attention
politically and in the media. In the past that has included: patent protection for pharmaceuticals in
developing countries, U.S. steel tariffs, agricultural subsidies when Doha negotiations and development
2. I have students research trade disputes and look up information on the WTO Web site related to those
3. The current status of the Doha Round might be interesting to monitor. While the Doha round seems
Chapter 7 Commercial Policy 41
◼ Answers to End-of-Chapter Questions
1. Which industries are more heavily protected in the United States and Japan? Are high-income or
low-income nations more affected by American and Japanese trade barriers? Explain.
Answer: In the United States, the most heavily protected industries are textile and apparel
2. What new areas of trade and investment received coverage under the agreement signed in the
Uruguay Round of the General Agreement on Tariffs and Trade?
Answer: The Uruguay Round extended the GATT and created several new agreements. GATT
now covers agriculture, textiles, and apparel, and new agreements were signed for the
3. Given that tariffs and quotas cost consumers and that they are grossly inefficient means for creating
or preserving jobs, why do citizens allow these policies to exist?
4. What are the main arguments used by nations to justify protection for particular industries? Which
are economic, and which are noneconomic?
Answer: The arguments are (1) revenue, (2) the labor argument, (3) the infant industry argument, (4)
5. Evaluate the labor and infant industry arguments for protection.
Answer: The labor argument is based on the false assumption that lower wages automatically
6. Are tariffs justified as a retaliatory measure against other nations? Justify your answer.
Answer: There is no agreement among economists on this issue. One school says that tariffs make
us less efficient, so they are unwarranted. If others choose to hurt their own economies,
7. What are the four legal procedures that American firms have at their disposal for seeking protection?
What are the conditions that would generate a request for each kind of protection?
Answer: The four procedures are (1) countervailing duties, (2) antidumping duties, (3) escape