Trade Barriers and Protectionism

1
Trade Barriers and Protectionism

• It is now two years after these trade ministers
  voiced their support for free trade and since
  that time there has been a flood of American food
  imports into Europe.

2
The Politics of Protectionism

• The European clothing industry has grown
  dramatically and is experiencing record profits
  because of heavy exports to America.

• Thousands of European farmers have been put out
  of work, provoking political unrest.

3
Throw the Rascals Out

• Newspapers have written scathing editorials.
• "Throw out the political rascals and replace them
  with leaders who will protect the European
  economy by supporting strict quotas on American
  food imports."

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An Age-Old Problem

• Even though free trade can provide benefits to
  all countries and create thousands of jobs in
  export industries, it can just as easily destroy
  jobs domestically in import-competing industries.

5
Tariffs and Quotas

• It is useful for us to analyze the two most
  common ways of restricting trade -- tariffs and
  quotas.

• Why, from a political perspective, are quotas
  often preferred to tariffs?

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D
S
The Domestic Market
A
8 4 0
Price of food in Europe (dollars per unit)
D
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100 200 300 400
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Quantity of food in Europe(units)
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D
S
The Domestic Market

• Suppose that food is available in an unlimited
  amount from the rest of the world at a price of
  four dollars.
• How might you represent this in our figure?

A
8 4 0
Price of food in Europe (dollars per unit)
D
S
100 200 300 400
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Quantity of food in Europe(units)
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D
The World Market
S

• What will be the price of food to European
  consumers, the quantity of American imports, the
  value of those imports, and the level of domestic
  production?

A
8 4 0
Price of food in Europe (dollars per unit)
D
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100 200 300 400
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Quantity of food in Europe(units)
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D
The World Market
S
8 4 0
Price of food in Europe (dollars per unit)
D
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100 200 300 400
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Quantity of food in Europe(units)
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D
The World Market
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A
8 4 0
Price of food in Europe (dollars per unit)
D
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B
D
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E
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Quantity of food in Europe(units)
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D
The Tariff Case
S
What happens to domestic production and imports
in this figure? Who wins and loses?
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Price of food in Europe (dollars per unit)
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B
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Quantity of food in Europe(units)
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D
The Tariff Case
S
8 6 4 0
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Price of food in Europe (dollars per unit)
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Quantity of food in Europe(units)
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D
The Tariff Case
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Who is the winner? Who is the loser? What do they
win and lose?
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D
The Tariff Case
S
The other big loser is the American food industry.
A
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D
The Tariff Case
S
The other big winner is the European governments
that imposed the tariff.
A
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From A Political Perspective

• A relatively small handful of people in one
  domestic industry -- farming -- has gained a
  considerable profit at the expense of a much
  larger but politically less powerful group,
  namely, food consumers.
• But also note that this protectionist tariff has
  also considerably harmed food producers in
  America, and this group is unlikely to remain
  silent on the tariff question.

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One Likely Result

• Pressure will build politically in America to
  retaliate against European food tariffs with
  protectionist tariffs of its own, say, on
  European clothing imports.

• Can you tell me why replacing the European tariff
  on food with an equivalent European quota might
  be a viable political solution?
• And, by the way, a quota is an explicit quantity
  limit on imports.

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Can you tell me why replacing the European tariff
on food with an equivalent European quota might
be a viable political solution? Think about how
one of our big losers from the tariff would
become a big winner with a quota.
D
A Quota
S
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Imports
Price of food in Europe (dollars per unit)
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Quantity of food in Europe(units)
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Under a quota, foreign exporters will capture
these revenues. These additional revenues will
largely offset their losses from selling fewer
exports. The result will be far less political
pressure from food producers for retaliatory
tariffs.
D
A Quota
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A
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Imports
Price of food in Europe (dollars per unit)
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Quantity of food in Europe(units)
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The Deadweight Loss
The loss is the same regardless of whether a
tariff or quota is used. Which areas of the
figure represent deadweight loss and why?
D
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Imports
Price of food in Europe (dollars per unit)
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The Deadweight Loss
Together, the two triangles measure the
deadweight loss.
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Price of food in Europe (dollars per unit)
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The Protectionist Arguments

• I've demonstrated to you that there are economic
  gains from trade.
• I have also shown you that there are efficiency
  losses from protectionism.
• Nonetheless, it is useful at this point to review
  some of the legitimate -- as well as arguably
  illegitimate -- arguments for protectionist trade
  barriers.

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National Defense orMilitary Self-SufficiencyArgu
ment

• This is not an economic argument but rather a
  political and strategic one.
• In particular, protective tariffs are needed to
  preserve or strengthen industries such as steel
  or motor vehicles producing goods and materials
  essential for defense or war.

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Unfortunately

• There is no objective criterion for weighing the
  worth of an increase in national security
  relative to a decrease in economic efficiency
  accompanying the reallocation of resources
  towards strategic industries.

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It Is Open To Abuse

• And although we might all agree that it is not a
  good idea to import our missile guidance systems
  from China, the self-sufficiency argument is
  nevertheless open to serious abuse since nearly
  every industry can directly or indirectly claim a
  contribution to national security.

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26
The "Save Jobs" Argument

• Often becomes politically fashionable when a
  country enters a recession.
• It is also an argument that is often made in the
  context of discussions of "cheap foreign labor."
  
• As the argument goes, more highly paid workers
  such as in the United States must be protected
  from countries like Mexico and China which pay
  workers a few dollars a day.

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The Fallacy Of Composition

• In particular, all nations cannot simultaneously
  succeed in import restrictions so that what may
  be true for one nation can not be true for all
  nations

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Economies Are Interrelated

• The exports of one nation must necessarily be the
  imports of another.
• To the extent that one country is able to
  stimulate its economy through an excess of
  exports over imports, another economy's
  unemployment problem may be worsened by the
  resulting excess of imports over exports.

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Beggar Thy Neighbor

• It is no wonder then that the use of tariffs and
  quotas to achieve domestic full employment are
  termed beggar thy neighbor policies.
• They may achieve short-run domestic goals but
  they do so only by making trading partners
  poorer.

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Dumping

• Closely related to the jobs argument and beggar
  thy neighbor problem is the dumping argument.
• Dumping occurs when foreign producers sell their
  exports at a price less than the cost of
  production.
• Why might they do this?

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One Possible Reason

• Is to drive competitors out of a market, seize
  that market, and then use their new-found
  monopoly power to later raise prices.
• In such a case, the long term economic profits
  resulting from this dumping strategy may more
  than offset the earlier losses which accompany
  the dumping.

32
A Legitimate Concern

• Because dumping is a legitimate concern, it is
  prohibited under American trade law.
• Where dumping occurs and is shown to injure
  American firms, the Federal government can impose
  tariffs called "anti-dumping duties" on the
  specific goods.

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33
Retaliation

• The fact that one country may use protectionism
  or dumping to create jobs raises a fourth
  argument for protectionism--to retaliate against
  another nation that engages in such protectionist
  practices.
• Unfortunately, it is through such retaliatory
  measures that trade wars are born.

34
Smoot-Hawley Tariff Act

• A graphic case in point is the Smoot-Hawley
  Tariff Act of 1930 approved by the American
  Congress which imposed some of the highest
  tariffs ever enacted.
• While it was designed to protect American jobs
  during the onset of a severe recession, it
  backfired miserably.
• As one nation after another retaliated with its
  own restrictions, the resultant trade war helped
  push the entire global economy into the Great
  Depression.

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The Infant Industry Argument

• The idea here is that temporarily shielding young
  domestic firms from the severe competition of
  more mature and more efficient foreign firms will
  give infant industries a chance to develop and
  become efficient producers.

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A Warning

• Studies of successful newly industrialized
  countries such as Singapore and South Korea show
  that they have often protected their
  manufacturing industries from imports during the
  early stages of industrialization.
• But the history of tariffs reveals even more
  contrary cases like steel, sugar, and textiles in
  which perpetually protected infants have not
  shed their diapers.

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Non-tariff Barriers to Trade

• Many nations also use so-called nontariff
  barriers or NTBs.
• NTBs, which include quotas, also consist of
  formal restrictions or regulations that make it
  difficult for countries to sell their goods in
  foreign markets.

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For Example

• A country such as Japan might restrict the import
  of all vegetables grown where certain pesticides
  are used, knowing full well that all other
  countries use these pesticides.
• The effect of such a regulation would be to halt
  the import of vegetables.

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In recent years, NTBs have effectively doubled
the protection found in the tariff codes.
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The primary vehicle for these negotiations has
been the General Agreement of Tariffs and Trade
or GATT.
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GATT

• The GATT was established at the end of World War
  II
• At the beginning of 1995, it became the World
  Trade Organization or WTO.
• Every few years, representatives of the major
  industrialized countries meet together for a
  round of trade talks aimed at reducing both
  tariffs and NTBs.

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NAFTA

• In addition to the GATT, the United States has
  also negotiated a number of other important trade
  agreements.
• Perhaps the most widely debated agreement has
  been NAFTA -- the North American Free Trade
  Agreement.
• NAFTA, which took effect in 1994, eliminates
  tariffs and NTBs between Mexico, Canada, and the
  United States over a 15-year period.

44
Supporters Argue

• NAFTA will allow a more efficient pattern of
  specialization a la the theory of comparative
  advantage -- and thus enable American firms to
  compete more effectively against firms in other
  countries.

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Opponents Argue

• Opponents -- particularly labor groups -- argue
  that NAFTA will increase the supply of goods
  produced by low-skilled labor and thereby both
  reduce jobs and depress the wages of workers in
  the affected industries.
• At the same time, environmentalists have
  criticized NAFTA on the grounds that it will
  allow Mexico to produce goods at lower
  environmental standards than the U.S. and thereby
  encourage additional pollution.

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To Date

• Economic studies have been inconclusive as to
  whether NAFTA provides the United States with a
  net benefit.

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The European Union

• This common market has few barriers to either
  trade amongst its members or the movement of
  factors of production throughout Europe.
• At the same time, the European Union is moving
  towards the introduction of a common currency --
  the Eurodollar.

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Conclusion

• Well, that completes our discussion of
  internation trade and protectionism.

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End Of Lesson
Lecturer Peter Navarro Multimedia Designer Ron
Kahr Female Voice Ashley West Leonard