Econ Dept, UMR Presents Principles of International Principles of International and Interregional Trade and Interregional Trade Part II Part II
Starring Starring � The Forces of Protectionism
Featuring Featuring Answers to: If free trade is so good, � Answers to: If free trade is so good, � why are so many concerned? why are so many concerned? Tariffs/Quotas and Other � Tariffs/Quotas and Other � Restrictions Restrictions
As we saw earlier, by trade, countries are able to consume more than they can produce. Graphically we showed this for two countries by locating consumption point to the right of their production possibilities curve. This can only be done because they are specializing and trading for the other goods they consume.
So, if Free Trade is so Good, So, if Free Trade is so Good, Why So Many Restrictions? Why So Many Restrictions? To Protect Industry � To Protect Industry � To Protect Workers � To Protect Workers � To Protect the Good Old USA � To Protect the Good Old USA � To Protect Free Trade � To Protect Free Trade �
To Protect Industry To Protect Industry The Infant Industry Argument-- --”Protect ”Protect � The Infant Industry Argument � us until we get our act together” us until we get our act together” The Cushion Argument-- --”Give use time ”Give use time � The Cushion Argument � to upgrade and we’ll kick butt” to upgrade and we’ll kick butt”
Protect Industry- -Rejoinder Rejoinder Protect Industry First, industry doesn’t have standing, � First, industry doesn’t have standing, � only people do only people do Second, these infants don’t seen to � Second, these infants don’t seen to � grow up grow up Third, which industries deserve the � Third, which industries deserve the � protection? protection? In sum: Save your sympathy for people who need it
Protect Workers Protect Workers Which workers? A reduction of � Which workers? A reduction of � imports will be followed by a reduction imports will be followed by a reduction in exports. Jobs saved vs. jobs lost in exports. Jobs saved vs. jobs lost Jobs saved are likely to be costly * * � Jobs saved are likely to be costly � � In textiles and apparel, 56,000 jobs saved at In textiles and apparel, 56,000 jobs saved at � an annual cost of $10b, or $178,000/job an annual cost of $10b, or $178,000/job � In motor vehicles, 3,400 jobs saved at a In motor vehicles, 3,400 jobs saved at a � yearly cost of $925m, or $270,000/job yearly cost of $925m, or $270,000/job * An update of * An update of The Economic Effects of Significant U.S. Import The Economic Effects of Significant U.S. Import Restraints, Restraints, 1996 1996
Protect Workers- -Rejoinder Rejoinder Protect Workers Again, the problem of deciding which � Again, the problem of deciding which � workers to protect workers to protect Trade restrictions are too costly � Trade restrictions are too costly � Retraining, relocation, through Trade � Retraining, relocation, through Trade � Adjustment funds are warranted-- --a a Adjustment funds are warranted redistribution from those that gain from redistribution from those that gain from free trade to those that lose free trade to those that lose
Protect the Good Old USA Protect the Good Old USA If we import all our guns, we will be up � If we import all our guns, we will be up � a creek if we need more guns a creek if we need more guns Production abroad will hurt the � Production abroad will hurt the � environment environment Production abroad will subject our � Production abroad will subject our � consumer to dangerous products consumer to dangerous products
Protect the USA- -Rejoinder Rejoinder Protect the USA Who decides what industry is strategic? � Who decides what industry is strategic? � There are cheaper ways to stockpile � There are cheaper ways to stockpile � materials than trade restrictions materials than trade restrictions Evidence is clear: Environmental � Evidence is clear: Environmental � quality is a normal good. Countries quality is a normal good. Countries with less income are apt to make the with less income are apt to make the trade- -off of more pollution for a higher off of more pollution for a higher trade standard of living standard of living
Protect Free Trade Protect Free Trade We need to have a credible threat of � We need to have a credible threat of � restricting imports in order for other restricting imports in order for other countries to take the necessary steps to countries to take the necessary steps to overcome their special interests and overcome their special interests and promote free trade promote free trade
Protect Free Trade- -Rejoinder Rejoinder Protect Free Trade As with many of the other arguments: � As with many of the other arguments: � Yes, but . . . Yes, but . . . When should the threat be carried out? � When should the threat be carried out? � Is this argument just another veiled � Is this argument just another veiled � reason for special interest protection? reason for special interest protection?
A Look at Trade Restriction A Look at Trade Restriction Policy Policy Tariffs � Tariffs � Quotas or VERs (voluntary export � Quotas or VERs � (voluntary export restrictions) restrictions) Other Restrictions � Other Restrictions � We use comparative � We use comparative � analysis analysis � The situation with trade restrictions The situation with trade restrictions � � And, the situation without restrictions And, the situation without restrictions �
Market Restricted to Market Restricted to Domestic Suppliers Domestic Suppliers D P S US S US P 3 P 0 Q/t Q 2 Q 2 Quantity bought and sold P 3 Price
Market Unrestricted Market Unrestricted D P S US S US S row S P 3 row row: rest of world P 1 S Total S Total P 0 Q/t S total = S us + S row S total = S us + S Q 0 Q 4 Q 2 row Q 4 Quantity bought and sold P 1 Price Q 0 Domestic Supply Q 4 - Q 0 Imports
Gains and Losses from Gains and Losses from Unrestricted Trade Unrestricted Trade Consumers gain from lower price and � Consumers gain from lower price and � greater quantity to consume greater quantity to consume U.S. producers lose from lower price � U.S. producers lose from lower price � and less sales and less sales Consumer gain exceeds U.S. producer � Consumer gain exceeds U.S. producer � loss therefore removing trade loss therefore removing trade restrictions is efficient, c.p. c.p. restrictions is efficient,
Gain from Unrestricted Trade Gain from Unrestricted Trade D S US S P US S row S row P 3 S Total S c b a Total P 1 Consumers gain due P 0 to lower price, (P 3 - P 1 )Q 2 , and greater Q 0 Q 4 Q 2 Q/t quantity, (P 3 - P 1 )(Q 4 - Society’s gain = consumers gain Q 2 )/2. US producers minus US suppliers loss = loss due t o fewer sales - a a b c (P 3 - P 1 )Q 0 + (P 3 - P 1 )(Q 2 - Q 0 )/2 = b c
Restricting Trade by a Tariff Restricting Trade by a Tariff A tariff is a tax on imports � A tariff is a tax on imports � A tariff is also called a custom duty � A tariff is also called a custom duty � The U.S. imposes tariffs on about 70% � The U.S. imposes tariffs on about 70% � of our imports of our imports Average tariff rates � Average tariff rates � � Currently averages about 3.7% Currently averages about 3.7% � � Peaked in 1930 with passage of the Smoot Peaked in 1930 with passage of the Smoot- - � Hawley Act that imposed an average tariff Hawley Act that imposed an average tariff of 59% of 59%
Market With Tariff Market With Tariff D P S US S US With Tariff S row S row P 2 S Total S Total P 1 Without Tariff P 0 Q/t Q 0 Q 1 Q 2 Q 3 Q 4 Q 3 Quantity bought and sold P 2 Price Q 1 Domestic Supply Q 3 - Q 1 Imports
Tariff and Consumer Loss Tariff and Consumer Loss D P S US S US With Tariff S row S row P 2 S Total S a b Total P 1 Without Tariff P 0 Q/t Q 0 Q 1 Q 2 Q 3 Q 4 Consumer loss due to higher price a and reduced quantity b (See Ch. 5)
Tariff and Domestic Supplier Tariff and Domestic Supplier Gain Gain D P S US S US With Tariff S row S row P 2 S Total S Total P 1 Without Tariff P 0 Q/t Q 0 Q 1 Q 2 Q 3 Q 4 US Producer gain due to higher price and increased quantity (See Ch. 6)
Tariff and Treasury Revenue Tariff and Treasury Revenue Gain Gain D P S US S US With Tariff S row S row P 2 S Total S Total P 1 Without Tariff P 0 Q/t Q 0 Q 1 Q 2 Q 3 Q 4 Tax revenue brought in due to the tariff = tariff * Imports
Tariff and Society’s Loss Tariff and Society’s Loss Society’s Loss equals: � Society’s Loss equals: � � Consumer’s Loss Consumer’s Loss � minus � minus � � US Producer’s Gain US Producer’s Gain � minus � minus � � Taxpayer’s Gain Taxpayer’s Gain � Society’s Loss is due to � Society’s Loss is due to � � Lost benefits from what we want: Area A Lost benefits from what we want: Area A � � Higher cost of increased domestic Higher cost of increased domestic � production: Area B production: Area B � For Areas A and B, see next slide For Areas A and B, see next slide �
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