3.4 Fostering Global Trade

Antidumping Laws

U.S. firms don’t always get to compete on an equal basis with foreign firms in international trade. To level the playing field, Congress has passed antidumping laws. Dumping is the practice of charging a lower price for a product (perhaps below cost) in foreign markets than in the firm’s home market. The company might be trying to win foreign customers, or it might be seeking to get rid of surplus goods.

When the variation in price can’t be explained by differences in the cost of serving the two markets, dumping is suspected. Most industrialized countries have antidumping regulations. They are especially concerned about predatory dumping, the attempt to gain control of a foreign market by destroying competitors with impossibly low prices.

For example, assume that a country was found to be pricing lumber nearly 10 percent below their costs to try to gain control of the market. The United States could respond with imposing a tariff on lumber from that country. Those tariffs could be as high as 30 percent, depending on the business, as a punitive measure against the country for their predatory dumping practices.²⁰

From our discussion so far, it might seem that governments act only to restrain global trade. On the contrary, governments and international financial organizations work hard to increase it, as this section explains.

Trade Negotiations and the World Trade Organization

The Uruguay Round of trade negotiations is an agreement that dramatically lowers trade barriers worldwide. Adopted in 1994, the agreement was signed by 123 nations and is now observed by the WTO's 166 participant countries. One of the more ambitious global trade agreements, the Uruguay Round reduced tariffs by one-third worldwide, a move that increased access for both consumers and producers to industrial goods. Perhaps the most notable aspect of the agreement is its recognition of new global realities. For the first time, an agreement covered services, intellectual property rights, and trade-related investment measures such as exchange controls.

As a follow-up to the Uruguay Round, a negotiating round started in the capital of Qatar in 2001 is called the Doha Round. The negotiations were not successful, and the Doho Round was ended by 2017 after years of back-and-forth discussions. Some nations continue to advocate for trade reform, especially in the agriculture sector. These lower-income countries say that policies such as farm subsidies abroad stimulate overproduction, which drives down global agricultural prices. Because emerging-market nations’ primary exports are agricultural commodities, low prices mean that they cannot compete in the global marketplace. On the other hand, the United States and Europe are interested in bringing down trade barriers in services and manufacturing. The continuing talks have sustained the concerns of protesters, who claim that the World Trade Organization (WTO) serves the interests of multinational corporations, promotes trade over preserving the environment, and treats low-income nations unfairly.²¹

The World Trade Organization replaces the old General Agreement on Tariffs and Trade (GATT), which was created in 1948. The GATT contained extensive loopholes that enabled countries to evade agreements to reduce trade barriers. Today, all WTO members must fully comply with all agreements under the Uruguay Round. The WTO also has an effective dispute settlement procedure with strict time limits to resolve disputes.

The WTO has emerged as the world’s most powerful institution for reducing trade barriers and opening markets. The advantage of WTO membership is that member countries lower trade barriers among themselves. Countries that don’t belong must negotiate trade agreements individually with all their trading partners. Only a few countries, such as North Korea, Turkmenistan, and Eritrea, are not members of the WTO.²²

The United States has had mixed results in bringing disputes before the WTO. To date, it has won about 70 percent of the cases it has presented to the WTO, but it has only won about 20 percent of the cases brought against it by other countries. One of America’s losses came in a ruling where the U.S. claimed that tuna imported from Mexico was not meeting the “dolphin safe” criteria that protects them during the commercial fishing of tuna. The United States has also filed cases against European countries, South Korea, India, Canada, and Argentina. The disputes ranged from European aviation practices to Indian trade barriers affecting U.S. automakers.

One of the larger and longest disputes that was brought before the WTO involved the United States and the European Union. The dispute was filed in 2004 and lasted nearly 20 years. The United States claimed that Europe gave Airbus $15 billion in aid to develop airplanes. The European Union in response claimed that the U.S. government provided $23 billion in military research that has benefited Boeing's commercial aircraft business. It also claimed that the state of Washington (headquarter location of Boeing) has given the company over $3 billion in unfair tax breaks. There were retaliatory measures enacted on both sides during the dispute. The case was finally resolved with a negotiated settlement that included a commitment to work together on issues surrounding the large aircraft sector.²³

The World Bank and International Monetary Fund

Two international financial organizations are instrumental in fostering global trade. The World Bank offers low-interest loans to developing nations. Originally, the purpose of the loans was to help these nations build infrastructure such as roads, power plants, schools, drainage projects, and hospitals. Now the World Bank offers loans to help developing nations relieve their debt burdens. To receive the loans, countries must pledge to lower trade barriers and aid private enterprise. In addition to making loans, the World Bank is a major source of advice and information for developing nations. The United States has granted the organization millions to create knowledge databases on nutrition, family planning, engineering and technology, product development, and business management practices.

The International Monetary Fund (IMF) was founded in 1945, one year after the creation of the World Bank, to promote trade through financial cooperation and eliminate trade barriers in the process. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses. It operates as a lender of last resort for troubled nations. In exchange for these emergency loans, IMF lenders frequently extract significant commitments from the borrowing nations to address the problems that led to the crises. These steps may include curtailing imports or even devaluing the currency.

Some global financial problems do not have a simple solution. One option would be to pump a lot more funds into the IMF, giving it enough resources to bail out troubled countries and put them back on their feet. In effect, the IMF would be turned into a real lender of last resort for the world economy.

The danger of counting on the IMF, though, is the “moral hazard” problem. Investors would assume that the IMF would bail them out and would therefore be encouraged to take bigger and bigger risks in emerging markets, leading to the possibility of even deeper financial crises in the future.