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 National Security Argument
The Cultural Protection Argument
The Retaliation Argument
Case Study: Traditional Knowledge and Intellectual Property
The Politics of Protection in the United States
Antidumping Duties
Countervailing Duties
Escape Clause Relief
Section 301 and Special 301
Case Study: Economic Sanctions
44 Gerber • International Economics, Seventh Edition
◼ Learning Objectives
After studying this chapter, students will be able to:
7.1 Describe the differences in tariffs across economic sectors and over time.
7.2 Cite at least three reasons why economists favor trade openings.
7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
7.4 Analyze the economic validity of common justifications for protectionism.
7.5 Define each form of legal protection granted by the U.S. government.
◼ What Students Should Know after Reading Chapter 7
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 and then proceeds to estimates
of the costs based on mid-1990s data, when tariff rates were somewhat higher. From Chapter 6, students
should have a theoretical basis for understanding the costs of protection. This introduction puts real
numbers on the costs of protection. Perhaps for students these costs are just areas on a graph—the real
magnitude should be eye-opening for many.
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
likely hearing more in the media about the loss of U.S. manufacturing jobs than about how U.S. cotton
subsidies hurt U.S. consumers and African farmers.
Chapter 7 Commercial Policy 45
◼ 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
conferences are taking place, and the loss of U.S. manufacturing jobs or “exporting America.” (Note
that Chapter 13 has a time series graph of the real value added in U.S. manufacturing which clearly
shows an ever-onward and upward trend, except during periods of recession. For convenience, the
number of workers in manufacturing is also plotted for the same time period. It may be useful to refer
2. I have students research trade disputes and look up information on the WTO Web site related to those
cases. The huge number of dumping cases relative to other disputes is quite clear with a quick tour
◼ 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
producers and, to a lesser degree, agriculture. In Japan, protection is concentrated on
agriculture and the food and beverage industry. Protection in both countries is in older,
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
first time in the areas of trade in services, treatment of foreign investment, and the
46 Gerber • International Economics, Seventh Edition
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?
Answer: The costs of tariffs and quotas are diffused throughout an entire nation, while the benefits
are concentrated. This creates an asymmetric set of incentives to organize around the
4. What four main groups of arguments do nations use 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)
the national security argument, (5) cultural protection, and (6) the retaliation argument.
5.Evaluate the labor and infant industry arguments for protection.
Answer: The labor argument is based on the false assumption that lower wages automatically
confer a competitive advantage to a nation. Lower wages are the most visible indicator
of lower productivities. The proponents of the pauper labor argument fail to completely
consider the causes of lower wages and their consequences for trade. The advantages of
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,
why should we follow suit? Another school says tariffs are justified if they cause the
Chapter 7 Commercial Policy 47
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
clause relief, and (4) Section 301 retaliation. Countervailing duties are granted in
response to foreign subsidies; antidumping duties are granted when a foreign firm sells