Edited by William A. Kerr and James D. Gaisford
Chapter 2: Theory and Practice in the Conduct of Trade Policy
Sidney Weintraub Introduction Trade practice draws its legitimacy from trade theory, but by no means does it mimic theory. There are legitimate reasons for this: theory changes and it takes time for practice to catch up (and sometimes practice does not catch up); policies of sovereign countries are rarely based on economic theory alone, but rather on political economy; governance, particularly in democratic societies, must reﬂect the diverse interests of diﬀerent regions and sectors; countries do not rely solely on market signals in their trade policy, but also on state trading that is guided by its own objectives; trade practice is heavily determined by the extent of a country’s economic development. (Rich developed countries do not seek ‘special and diﬀerential treatment’, but poor developing countries do.1) The authors of the General Agreement on Tariﬀs and Trade (GATT), which was written toward the end of World War II, were trade specialists from market economies and the agreement reﬂects their views.2 There are important examples of trade theory that found their way into the GATT at that time but probably would not be written into trade agreements in the same way today. Dominant theory at that time was that direct taxes (income taxes) were not passed forward to the purchaser of goods, but rather absorbed by the seller, whereas indirect taxes (value added and sales taxes) were passed forward to consumers. Hence, the GATT rule was that the seller could obtain a drawback for indirect taxes paid...
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