Comparative advantage, the case for free trade and arguments for protection

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Comparative advantage, the case for free trade
and arguments for protection
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• Learning objectives
• Upon completing this lesson, students will be
  able to
• Understand the case for free trade as illustrated
  by Ricardos theory of trade
• Describe and discuss the standard arguments for
  protection
• Identify non-Tariff barriers to trade

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• Ricardos Theory of Trade
• Assumptions of the basic Ricardian model
• Each country has fixed endowment of resources
• The factors of production are completely mobile
  between alternative uses
• The factors of production are completely immobile
  externally. They do not move between countries
• The relative value of commodity is based only on
  its relative labor content
• Ricardo focused on labor productivity (or
  resource productivity more generally) for
  different products in different countries.
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• Example Cloth and wine

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Comparative AdvantageRicardos Theory of Trade

• Comparative advantage
•  A country will export products that it can
  produce at a low opportunity cost (in terms of
  other goods that could be produced within the
  country).
•  A country will import products that it would
  otherwise produce at a high opportunity cost.
•  Basis for trade
• Relative differences in labor (resource)
  productivity.

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• Standard arguments for protection
• The infant industry argument for protection
• The terms-of-trade argument for protection
• Tariffs to reduce aggregate unemployment
• Tariffs to increase employment in a particular
  industry
• Tariffs to offset foreign dumping
• Tariffs to offset a foreign subsidy
• National defense argument
• Tariff to improve the balance of trade

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• Non-tariff barriers to trade
• Import quotas
• Voluntary export restraints (VERs)
• Government procurement provisions
• Domestic contracts provisions