Playing the label game with trade, fair trade, free trade

1
Playing the label game with trade, fair trade,
free trade

• Everyone seems to favor free trade, as long as it
  is fair. But fairness is in the eye of the
  beholder, and to many economists, many of those
  who talk about fair trade are being disingenuous.
• They are actually talking about a comprehensive
  set of rules that would make trade very much not
  free. In trade discussions, fairness is often
  a pleasant way of saying that imports should be
  limited.
• This argument can be evaluated on its merits, but
  calling it fairness doesnt do much to settle
  it at all.

2
There are many potential gains or benefits from
trade

• Absolute advantage an absolute advantage refers
  to a situation where one country has higher
  productivity than another. Clearly, if there are
  two countries where each has an absolute
  advantage in one area, they can both benefit if
  they focus their resources on the area where they
  have the absolute advantage, and trade with each
  other, rather than each trying to be self
  sufficient. Two examples might be the United
  States in the farm equipment and Saudi Arabia in
  oil.
• Comparative advantage now imagine a case where
  one country has an absolute productivity
  advantage in all areas, and another country has
  an absolute disadvantage in all areas (e.g. the
  U.S. and Mexico). It is remarkable achievement
  of economics to find that even in this case, both
  nations can benefit from trade. In this case,
  each nation should either focus on where their
  absolute productivity advantage is highest, or on
  where its absolute productivity disadvantage is
  least. This is known as focusing on comparative
  advantage.
• The dynamic nature of advantage trading
  advantages are bound to shift somewhat over time,
  as new products are developed, workers learn new
  skills, and so on. This too can be a source of
  gains to an economy, since learning and competing
  in global markets provides pressure for
  productivity gains.

3
There are a variety of ways to shut out or
restrict imports, all termed protectionism.
The mechanics of protectionism can take many
forms, with positive and negative consequences
for the trading partners

• Protectionism is so named because it seeks to
  protect certain domestic industries against
  losses due to relative disadvantage. The common
  effect of all these measures is to reduce the
  supply of imports into a country and therefore to
  drive up prices, which helps the domestic
  industries.
• Quotas - put numerical on imports
• Tariffs - tax on imports
• Voluntary export restraints - when two countries
  negotiate and one agrees to reduce its exports
  such reductions are usually not very voluntary at
  all.
• Non- tariff barriers - bureaucratic or regulatory
  barriers set up for the purpose of restricting
  imports (the French are past masters at this
  method)

4
Who Profits and who pays by protectionism

• Helps the industry that is being protected
• They dont face competition from foreign
  competitors they can charge and make higher
  profits.
• Hurts the domestic consumer
• The consumer is the one who actually pays the
  higher prices.

5
Lets examine the impact of protectionism on
jobs, wages, stimulation of new industries, the
environment and other important economic factors.

• Loss of jobs no question protectionism is a
  subsidy that can protect a certain industry
• But does it increase overall employment for the
  economy?
• Protectionism doesnt address frictional,
  structural, or cyclical unemployment.
• It doesnt address demand pressure , except on an
  industry by industry basis.
• Protectionism limits what foreign countries will
  buy in the way of exports from the nation
  imposing protectionist barriers from investing in
  that country.

6
The impact of Protectionism on wages..

• Wages again protectionism is a subsidy that can
  raise wages in a certain industry.
• Great question.Can protectionism increase overall
  wages for an economy?
• Ultimately wages depend on productivity, and to
  an extent protectionism prevents the gains from
  trade, it will hold down productivity and wages.

7
Protectionism and Infant industries.

• It is sometimes argued that infant Industries
  need to be sheltered from foreign competition for
  a short time until they are ready to compete.
• In theory, this argument can make sense. In
  practice , infant industries often can become
  inefficient and and never able to compete.

8
Protectionism and environmental problems

• Foreign producer can have an advantage because
  their nations has lower environmental standards.
• Typically wealthier nations who are involved in
  trade have higher environmental standards and
  trade provides a means to pressure for higher
  standards.
• Keeping other nations poor by refusing to buy
  their products until they install U.S. level
  pollution equipment may make the environment and
  the economy worse.
• But there are certainly some cases where global
  environmental treaties are needed.

9
Predatory Pricing (dumping). A case for
Protectionism?

• You can easily find cases where foreign companies
  sold products below cost to drive U.S companies
  out of business.
• However it is difficult to find to find a case
  where the foreign firms were then able to raise
  prices and get monopolistic profits. After all
  they still have to compete with other foreign
  companies.
• The administering of antidumping laws has also
  been become an overt method of protectionism.

10
National Security. A case for Protectionism?

• Many claim that certain products are vital to
  national security, and so should not be imported
  from abroad.
• If the vital product is oil or a mineral it seams
  to make sense to import as much as possible and
  stockpile it and save the domestic supply for the
  future.
• If the vital product is new technology it makes
  more sense to to have the best technology
  possible and to focus on how to make it
  ourselves , rather than denying ourselves the
  best technology.
• This excuse is abused to protect inefficient
  industry.

11
Political forces that effect on trade.

• Why democracies are susceptible to protectionism?
• Votes
• Special interest groups influence trade policy to
  protect a certain industry at the expense of the
  consumer.
• Pharmaceutical companies.
• Agriculture industry
• No on budget costs. with high budget deficits
  politicians are more likely to protect an
  industry from foreign competition ( no tax
  involved) then to give a direct subsidy to help
  the industry (tax ).

12
GATT, NAFTA, WTO

• Trade treaties Why?
• Government can protect themselves from special
  interest we would love to but we cant.
• Trade is just another market force that should be
  allowed to act.