International Business Chapter 16 Because Members Interest Groups The Numerical Minority Often Have More Intense Interest

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CHAPTER 16

POLITICAL ECONOMY AND U.S. TRADE POLICY

Learning Objectives:

■ Examine several basic concepts of the political economy of economic policy.

■ Summarize critical developments in the history of U.S. trade policy and multilateral trade

negotiations.

■ Identify the broad bases for the conduct of trade policy.

I. Outline

Introduction

– Contrasting Vignettes on Trade Policy

The Political Economy of Trade Policy

– The Self-Interest Approach to Trade Policy

– The Social Objectives Approach

A Review of U.S. Trade Policy and Multilateral Negotiations

– Reciprocal Trade Agreements and Early GATT Rounds

Summary

II. Special Chapter Features

In the Real World: World Attitudes toward Foreign Trade

In the Real World: U.S. Attitudes toward International Trade

III. Purpose of Chapter

The purpose of this chapter is two-fold. The first purpose is to introduce students to the

political economy of trade policy, and the second is to provide an overview of contemporary

U.S. trade policy, focusing on recent developments.

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IV. Teaching Tips

A. We have found that students are very interested in the current politics of trade policy and

in identifying which groups are currently actively lobbying for changes in trade policy.

B. It is worthwhile to spend some time brainstorming with the class on possible reasons why

U.S. citizens’ support of international trade is relatively low compared to other countries (as

reflected in Table 1 on page 362). However, the Gallup poll results on page 364 suggest that,

C. Since much of this chapter is primarily descriptive/historical in nature, it can be assigned

to provide some institutional background to the course and can be left primarily for the students

to read on their own.

D. If you have a particular interest in this topic area and wish to devote class time to it, a

more thorough and rigorous focus on one or two current trade policy issues will help the material

E. Supplementing the material in the chapter with current material from sources such as The

Wall Street Journal, the New York Times, the Washington Post, and The Economist is also a

good way to emphasize the relevance of the policy issues discussed in earlier chapters as they

relate to the evolution of U.S. trade policy in recent years.

V. Answers to End-of-Chapter Questions and Problems

1. Legislation favored by a minority may in fact be enacted if the majority simply does not

actively participate in the voting process. This may occur because the costs of acquiring

information and voting are sufficiently great so that a large group of voters simply chooses not to

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2. Bilateral trade negotiations are superior in that there is greater likelihood of two countries

reaching an agreement on reducing trade restrictions than for many countries reaching such an

agreement. It is also easier to target certain commodities or policy objectives and/or tailor the

3. The presence of protection on consumer goods such as textiles and clothing has

continued over the years even though it has been extremely costly to the consumer. This has

occurred for several reasons. First, the impact of protection on consumer prices is not

transparent, i.e., not clearly apparent to the consumer. The average consumer has little idea of

4. Concern by the government for the relative income position of a particular group or

segment of the economy can foster protection in several ways. First, the government may be less

willing to reduce protection on the products that are central to the income of these groups. This

is particularly true if there is little support for adopting a direct form of income transfers to these

groups if increased trade and the resulting structural change threaten their relative economic

well-being. Further, once it is observed that the government will step in with trade restrictions,

5. (a) From an economic perspective, TAA should facilitate the movement of resources

away from comparative disadvantage industries and towards comparative advantage industries.

Since this would make factors less “specific” in nature, it should enhance the short/medium-term

6. From a policy perspective, the impact of taxes such as tariffs is relatively well-known and

quite easily understood. There tends to be more general support for policy changes that clearly

7. (a) The case for nonreciprocity for the developing countries would logically be built

along the lines of an infant industry argument for protection. Until the industries gain experience

and sufficient scale economies, they should receive preferential treatment by the developed

8. If all intervention in agriculture were dropped, then trade and production would reflect

comparative advantage. Food prices would decline in those countries that previously had

protection and rise in free-trade countries. Agricultural income would decline in the protected

VI. Sample Exam Questions

1. Briefly describe the evolution of U.S. trade policy since the imposition of the famous

Smoot-Hawley tariff. What has happened to the level of tariffs over the period? To the level of

protection in general?

2. Compare and contrast “rules–based” trade policy with “results–based” trade policy. On

which type is the GATT based? Which type is consistent with the “new reciprocity” approach to

trade policy?

4. Since 1993, the U.S. and the European Union have had a number of disagreements over

5. Do you think that the developing countries should be given special, favorable treatment

in multilateral trade negotiations? Why or why not? Has such treatment been given to

developing countries in the past? Explain.