Download Trade Policy

Trade Policies
Free trade vs protectionism
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 This part is simple:
 Free trade makes the country as a whole better
off, even though it may not make every individual
in the country better off
 Winners gain more than the losers lose
 The tale of a great inventor
 Trade allows us to obtain the goods at lower cost just as
superior technology would allow us to obtain the goods
at lower cost
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 “Valid” arguments for protection
 Advantages of diversification
 What if we have a war?
 What if our staple industry becomes obsolete?
 May be valid for small countries
 Protection for specific groups
 Skilled workers vs unskilled workers (with factor
endowment induced comparative advantage)
 Increase incomes of a group at expense of lower
average income
 Could be done by other means, better?
 These arguments take sides in income vs other
objectives tradeoff
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 “Valid” arguments for protection
 Improving terms of trade
 Recall, terms of trade = 100 (index of export prices) / (index of
import prices)
 If a tariff increases export prices more than import prices, terms of
trade may improve
 May be valid only for large countries
 Protection of infant industries
 Large economies of scale
 Significant learning by doing
 Seems to have worked historically
 Or did it?
 Strategic trade policies
 Hoping to “break in” very profitable industries worldwide
 These arguments suggest economic gains to a country as
whole
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 Erroneous arguments for protection
 Keeping money at home
 But you don’t need to, the money always return anyway
 Protection against low-wage foreign labour
 But this is refusing to obtain goods at low cost
 Exports are “better” than imports
 Exports EX increase GDP, imports IM decrease GDP
 NX = (EX – IM)
 But this says income is more important than consumption
 Protection creates domestic jobs
 It may create jobs for some
 But it destroys jobs for others
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 How does protectionism work?
 Tariff (import duty)
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The price increases above the world price
Domestic quantity supplied increases
Domestic quantity demanded (consumed) decreases
Total surplus decreases => net effect is negative
 Producers gain less than consumers gain
 Quota
 Can import no more than set amount
 Quota reduces our surplus more than “equivalent” tariff does
 The difference is:
 With tariff, government receives revenue
 With quota, foreign producers receive that revenue
 Voluntary export restriction VER
 A country who sells may prefer self-imposed quota because
 With tariff, foreign government receives revenue
 With quota, Canadian producers receive that revenue
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 How does protectionism work?
 Tariff (import duty)




The price increases above the world price
Domestic quantity supplied increases
Domestic quantity demanded (consumed) decreases
Total surplus decreases => net effect is negative
 Producers gain less than consumers gain
 Quota
 Can import no more than set amount
 Quota reduces our surplus more than “equivalent” tariff does
 The difference is:
 With tariff, government receives revenue
 With quota, foreign producers receive that revenue
 Voluntary export restriction VER
 A country who sells may prefer self-imposed quota because
 With tariff, foreign government receives revenue
 With quota, Canadian producers receive that revenue
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 Current Trade Policies
 Read. NOT tested.
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