[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

parent: everyone can see that it is a subsidy to producers. Economists criticize protection
because it is a hidden tax on consumers, with the proceeds transferred to
producers. The lack of transparency encourages industries to spend resources on
persuading government to impose these hidden taxes that benefit themselves.
STRATEGIC TRADE THEORY
Another argument for protection is that it can give a country a strategic trade advantage
over rivals by helping to reduce domestic costs. There may be economies of scale:
the larger the level of production, the lower the marginal costs. Protection ensures a
large domestic sales base, and therefore a low marginal cost. The instances in which
strategic trade theory might provide a rationale for protection appear relatively rare,
however. Even then, it tends to be effective only when foreign governments do not
retaliate by taking similar actions.
International Cooperation
Recognizing both the temptation of shortsighted trade policies and the potential
gains from trade, nations large and small have engaged since World War II in a
variety of efforts to reduce trade barriers.
GATT AND THE WTO
The General Agreement on Tariffs and Trade (GATT), an organization established
after World War II, was replaced in 1995 by the World Trade Organization (WTO).
GATT was founded on three guiding principles: reciprocity—if one country lowered
its tariffs, it could expect other countries in GATT to lower theirs; nondiscrimination—
no member of GATT could offer a special trade deal that favored only one or a few
other countries; and transparency—import quotas and other nontariff barriers to trade
should be converted into tariffs to allow their effective impact to be ascertained.
The lowering of trade barriers has proceeded in a number of stages, called rounds
(the Kennedy Round, completed in 1967; the Tokyo Round, completed in 1979;
the Uruguay Round, completed in 1994, and the Doha [Qatar] Round, currently
slated to be completed by the end of 2005). Collectively, the rounds have reduced
tariffs on industrial goods markedly, from an average of 40 percent in 1947 to less
than 5 percent today.
The Uruguay Round produced agreements to reduce agricultural subsidies and to
ensure that intellectual property rights—patents and copyrights—were respected. It
also created the WTO to help enforce the trade agreements. Previously, a country that
believed it was suffering from an unfair trade practice could bring a case to a GATT
panel that would examine the evidence. However, there was little in the way of effective
enforcement of subsequent decisions. Under the WTO, a country injured by an
unfair trade practice will be authorized to engage in retaliatory actions. For example,
INTERNATIONAL COOPERATION ∂ 445