Transcript Lecture21(Ch18)

I bet you wonder how I knew
about your plans to make me blue
with some other guy you knew before.
Between the two of us guys
you I love you more.
It took me by surprise
(drive me crazy),
when I found out yesterday.
Don’t you know that ...
I heard it through the grapevine.
How much longer would you be mine?
Oh I heard it through the grapevine,
and I’m just about to lose my mind.
Honey, Honey, Yea.
Heard it through the grapevine, how
much longer would you be mine, baby
oooo oooo oo oo
I know a man ain’t supposed to cry,
but these tears I can’t hold inside.
Losing you would end my life you see,
‘cause you mean that much to me.
You could have told me yourself
that you love someone else.
Instead...
I heard it through the grapevine.
How much longer would you be mine?
Oh I heard it through the grapevine,
and I’m just about to lose my mind.
Honey, Honey, Yea.
Heard it through the grapevine, how
much longer would you be mine, baby
oooo oooo oo oo
People say beware of what you see,
supply and demand are what you hear.
I can’t hide being confused.
If it is true please tell me dear.
Do you plan to let me go
for that other guy you loved before?
Don’t you know...
A Trade Policy Puzzle
• Gains from trade arguments (such as
comparative advantage) suggest removing
trade barriers, a policy of free trade
– wide agreement among economists
• Yet, we see many trade barriers--tariffs,
quotas, and less visible barriers
• Let’s look at the
– effects
– reasons
– remedies
Effect of a tariff
Effect of a Quota
18_02
PRICE
Shaded area equals
profits from quota that
go to quota holder.
Export
supply curve
Price paid
by U.S.
consumers
Price without
quota
Price
received
by foreign
producers
Quota: Imports
cannot exceed
this amount.
Import
demand curve
QUANTITY
Effect of a Voluntary Restraint
Agreement (VRA)
18_03
PRICE
Profits of foreign
producers increase
by this amount.
Export
supply curve
Price paid
by U.S.
consumers
Price at which
foreign
producers
would sell
VRA amount
VRA: The foreign
government agrees
to keep its firms'
exports below
this amount.
Import
demand curve
QUANTITY
Equivalence of Tariff, Quota, VRA
• All reduce quantity imported
• All raise the price consumers pay by the
same amount
• Differences
– for tariff, revenue goes to government
– for quota, that revenue goes to quota holder
– for VRA, that revenue goes to foreign firms as
profit
Mini History of
U.S. Trade Policy
• Before the income tax, tariffs were the
major source of revenue to the U.S.
government
• Tariffs have fluctuated greatly reflecting
internal political conflicts (abominations),
trade wars (Smoot-Hawley), and new
techniques to remove trade barriers (GATT)
18_05
TARIFFS AS A SHARE OF
TOTAL FEDERAL RECEIPTS
(PERCENT)
100
75
50
25
0
1800
1900
2000
(est.)
18_06
DUTIES CALCULATED AS A
PERCENTAGE OF
DUTIABLE IMPORTS
70
60
50
“Tariff of abominations”
(1828)
Smoot-Hawley
tariff (1930)
Civil War
tariffs
Reciprocal Trade
Agreement Act (1934)
40
30
20
10
Compromise
tariff (1833)
and subsequent
tariff reductions
Underwood
Tariff Act
(1913)
General Agreement
on Tariffs and Trade
created (1947)
Uruguay Round
completed (1993)
0
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
Contracting Spiral of World Trade
18_07
April
March
May
1930
1931
February
1932
June
1933
January
1,206
2,739
1,839
July
992
August
December
September
November
October
Economic and other arguments
against free trade
• Infant industry argument
– due to Alexander Hamilton
– industry needs protection until it gets big
enough to keep costs low
– but
• protection usually lasts well beyond infancy
• not clear which industry to protect
national security argument
• certain goods or services are needed in time
of war
– shipping: Jones Act (shipping between U.S.
ports must be on U.S. ships)
– VRA on machine tools
– rice!!!!!
– textiles needed for military uniforms!!!!!
• Alternatives
– stockpile crucial materials
retaliation argument
• use threat of a trade barrier as a bargaining
instrument
• but
– can cause trade war
– is usually used as a specious argument for
protection
monopoly power argument
• hold back exports to exploit other countries
– OPEC cartel
• beggar thy neighbor
Argument against reducing trade
barriers because of costs during
transition to free trade
• True, we do not instantly move to the
benefits of free trade and some people can
be harmed during the transition
• But better to
– phase out barriers slowly (10 years)
– give assistance (unemployment compensation,
welfare)
• Analogy with new technological innovation
Argument that other countries are
subsidizing their industries
• But they are giving U.S. consumers a good
deal; why complain?
• Most difficult to deal with in practice
because it does not seem fair
Policies to Remove Trade
Barriers (Traditional)
• Unilateral Disarmament
– Smith, Ricardo, Repeal of corn laws in England
– rarely works, example of textile quota (Poland)
• Multilateral-- Reciprocal Tariff Reduction
(GATT, WTO)
– Most Favored Nation (MFN) approach
– has worked very well--tariffs way down since
WWII
Policies to remove trade
barriers (newer)
• Regional--NAFTA, fast track for Chile
– trade creation versus trade distortion
– free trade area versus common market
• rules of origin (15 pound agreement)
• Bilateral dealings
– U.S. - Japan
– U.S.- China
– quiet now because of Asian financial crisis,
(let’s get on to macro to find out why).