Transcript Welfare effects of trade barriers

Welfare effects of trade barriers
Outline
1. Protectionist measures
2. Economic effect of an embargo
3. Economic effect of a tariff
4. Economic effect of a quota
5. Arguments for protectionism
Protectionism
The term “protectionism” refers to any
measure that has the effect of reducing
the quantity of imported goods or
services.
Commercial policy: Government policy that
influences international trade flows.
Protectionist measures
•Trade embargos: Prohibitions on the importation
(or exportation) of goods and services. Examples:
1973 Oil embargo, trade embargo with Iraq,
embargo on imported sugar from Cuba.
•Tariffs: Taxes imposed on imported goods.
•Quotas: Limits on the quantity or value of goods or
services that can be imported or exported.
Examples: The textile quota, the sugar quota,
export quota on raw timber.
•Subsidies: payments by government to exporters.
These stimulate trade by allowing the exporter to
charge a lower price.
•Government procurement: Most nations require their
governments to buy from domestic producers. Example: the
Protectionism,
2
1933
“Buy American” part
Act applicable
to federal agencies.
•Non-tariff trade barriers: Other policies that have the effect of
reducing the flow of imports or exports. Example: Health and
safety standards, import licensing, product design standards,
bureaucratic red tape.
The Japanese trade ministry
(MITI) decided that snow skis
made in the U.S. were not safe
enough for Japanese ski
enthusiasts
Other examples: European ban on hormone
treated beef and genetically-modified soybeans
Effect of tariffs and quotas on
imports, domestic production, and
prices
•PW is the world price—that is, the price of the good that
world be established in a global market without trade
barriers.
•Pd is the domestic price—that is, the price in the domestic
market if imports were equal to zero.
•Qd is the domestic output of a good if imports are zero.
•T is a tariff (measured in dollars, yen, lira, peseta’s, etc.) per
unit, ton, pound, etc.
•Pq is the domestic price under the imposition of a quota.
Figure 8.8a: Effect of an embargo on Japanese watches
(a) Price
U.S. demand
U.S. supply
$15.00
•World price is $12.50
A
12.50 B
E
C
D
U.S. imports
•Embargo pushes price
paid by domestic buyers
to $15.00
•Loss of CS = BDEA
•CDE is the “dead
weight loss.”
15
20
25
Quantity of Digital Watches
effect of a tariff on oranges
Price ($)
S
Imports with
tariff
Pd
PW + T
•Domestic
production
increases from q1
to q2.
•The domestic
price of oranges
increases.
PW
D
Free trade imports
0
q1
q2
qd
q4
q5
Quantity (tons)
effect of a Quota on oranges
Price ($)
S
S + Quota
Pd
Pq
Import quota
= 100 tons
PW
Free trade imports
= 300 tons
0
100
200 250 300
400
D
•Domestic
production
increases from
100 to 200 tons..
•The domestic
price of oranges
increases.
Quantity (tons)
Arguments for protectionism
•Save domestic jobs
•Create a “level playing field.”
•Government revenue creation.
•National security
•Infant industries
President Clinton’s
trade representative,
Carlene Barshevsky,
use to say “The U.S.
wants fair trade.”
Costs of protecting U.S. jobs from foreign
competition
Industry
Autos
Cost to Consumers
Per Job Saved
$105,000
Color TVs
420,000
Motorcycles
150,000
Athletic Footwear
30,000
Apparel
37,000
Specialty Steel
1,000,000
Glassware
200,000
Sugar
60,000
Ball Bearings
90,000
Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986.
Tariffs as a percentage of total government revenue
Country
U.K.
Japan
U.S.
Costa Rica
Ghana
Dominican
Republic
Lesotho
Source: World Bank
Tariffs as a % of
Government Revenue
0.1%
1.2
1.5
16.1
31.2
44.2
55.1