5. Explain the arguments used to justify trade restrictions and show how
they are flawed.
6. Explain why we have trade restrictions.
3. Outline
IV. Trade
Restrictions
A. Tariffs and nontariff barriers are two
methods the government uses to restrict international trade.
B. A tariff is a tax imposed on an imported product.
1. Since 1930, U.S. tariffs have tended to fall.
2. The General Agreement on Tariffs and Trade (GATT) is an international treaty
signed in 1947 designed to limit tariffs and promote free trade.
3. In 1994 the latest round of GATT negotiations created the World Trade
Organization (WTO).
4. The United States, along with Canada and Mexico, is a member of the North
American Free Trade Agreement (NAFTA). NAFTA phases out barriers to trade among these
three countries.
C. A tariff shifts the supply curve for the product leftward, as foreigners must pay
an additional tax. This situation is illustrated in Figure 35.1, wherein the amount of the
tariff equals the length of the arrow.
1. A tariff raises the price that domestic consumers must pay for the good (fromtoand decreases the quantity
purchased (fromto
2. The government receives revenue from the tariff, as shown.
3. A tariff reduces the gains from international trade and hence creates inefficiency.
4. Trade remains balanced; that is, a tariff does not lead to an export surplus
for the nation imposing the tariff because that nation’s exports decrease. Thus the
tariff harms the country’s export industries.
a) Exports decrease because foreigners can sell less to the domestic nation and so can
afford to purchase less of the nation’s exports.
D. Nontariff barriers are any actions other than tariffs that restrict
international trade. Quotas and voluntary export restraints are the two most prevalent
nontariff barriers.
1. A quota is a quantitative restriction on the amount of a product that may be
imported; a voluntary export restraint, VER, is an agreement between governments
whereby the government of the exporting country agrees to limit the amount of its exports.
E. Quotas and VERs both restrict the supply of imported goods, resulting in a
higher price and a decreased quantity consumed.
1. With a quota, the importers get the added revenue between the (relatively high)
domestic price and the (relatively low) foreign price; with a VER, the foreign exporters
get this added revenue; with a tariff, the domestic government collects this difference as
tax revenue.
V. The Case Against Protection
A. Several common arguments in favor of
protection (and the flaw in each) are as follows.
1. National security. Industries vital to national defense should be protected.
Flaws: All industries contribute to defense; granting direct subsidies to targeted
industries is more efficient.
2. Infant-industry argument. Protection is needed to allow an industry
time to gain a comparative advantage by learning-by-doing. Flaws: This argument is
not valid if the learning-by-doing benefits accrue only to the industry being protected;
giving the industry a direct subsidy is more efficient than granting protection from
foreign competition.
3. The dumping argument. Protection is needed to prevent dumping (when a
good is sold in a foreign market at a price lower than its cost of production), especially
when dumping is designed to drive rivals out of business. Flaws: Determining when a
firm is selling below its cost is difficult; virtually no market is a global natural
monopoly, so even if a firm is dumping, it will face competition from businesses in other
countries; and, if a product is a global natural monopoly, regulation is a more efficient
method of handling the problem.
4. Protection saves jobs. Imports cost U.S. jobs. Flaws: Free trade
actually reallocates jobs, away from import-competing industries toward exporting
industries; limiting imports limits exports and hence eliminates jobs in these sectors.
5. Cheap foreign labor. Protection is necessary to compete against cheap
foreign labor. Flaws: The United States can successfully compete against cheap
foreign labor in industries in which U.S. workers are relatively most productive compared
to foreign workers and are therefore industries in which this country has a comparative
advantage.
6. Diversity and stability. Protection helps a nation produce a variety of
products and thus makes the economy more stable. Flaws: This argument does not
apply to an already diversified economy such as that of the United States. Nations with a
comparative advantage in only a limited number of products are better off producing these
goods and then diversifying by investing in various other nations.
7. Lax environmental standards. If nations are not punished for weak
environmental standards, those with high standards cannot compete against the cost
advantage these weaker standards give firms in less developed countries. Flaws: Not
all poorer nations have weak environmental standards, and higher incomes in poor nations
resulting from international trade increase the demand in those nations for a cleaner
environment.
8. Protect national culture. Free trade in books, magazines, movies, and
television programs will create U.S. domination of culture. Flaws: Limiting imports
of U.S. cultural products is rent seeking on the part of foreign creators of culture;
national culture is not in danger; and, many U.S. producers of these products are
foreigners, promoting their national culture in Hollywood.
9. Prevent rich nations from exploiting developing nations. International trade
forces workers in poor nations to work for slave wages. Flaws: International trade
increases the demand for labor in these countries and raises their workers’ wage
rates.
VI. Why Is International Trade Restricted?
A. The government gains revenue from
tariffs, so restricting trade is a source of revenue.
1. For governments in developing nations, tariffs are an attractive source of revenue
because records of such trade exist and are easily accessed.
B. Free trade benefits some people and costs others. The total benefits exceed the
total costs, but the gain per person overall is small compared to the cost per person
directly affected.
1. This difference in benefits and costs per person means that the group harmed by
free trade finds that lobbying for barriers to trade is more profitable per person than do
other groups. (That is, the lobbyists are rent seeking.)
2. In theory the winners from free trade could compensate the losers so that everyone
is made better off, but in practice such compensation is uncommon.
1. Review Helpful Hints in your study guide.
2. Complete even-numbered Questions in your study guide and
check your answers.
3. If not done in class, complete a Two-Minute-Feedback.
7.
Summary (Macroeconomics text page 460 or Microeconomics text page 492)
Trade Restrictions
1. Countries restrict international trade by imposing
tariffs and quotas.
2. Trade restrictions raise the price of imported goods, lower the volume of
imports, and reduce the total value of imports.
3. Trade restrictions also reduce the total value of exports by the same amount as
the reduction in the value of imports.
The Case Against Protection
4. Arguments that protection is necessary for national
security, to allow infant industries the chance to grow, and to prevent dumping are weak.
5. Arguments that protection saves jobs, allows us to
compete with cheap foreign labor, makes the economy diversified and stable, protects
national culture, and is needed to offset the costs of environmental policies are fatally
flawed.
Why is International Trade Restricted?
6. Trade is restricted because tariffs
raise government revenue and because protection brings a small loss to a large number of
people and a large gain per person to a small number of people.
8.
Preview
This concludes Part 1 of our study. Use these web materials
stored for week 5 to help you achieve a score that reflects your desired level of mastery
of Making and Using Graphs, Markets in Action, Organizing Production, and Trading with the
World.
In Part 2 of our study we'll discover how firms maximize profits
in environments known as Competition, Monopoly, Monopolistic Competition and Oligopoly.
But before we can focus on profit maximizing behavior, we spend a chapter
discovering how to measure Output and Costs.
9.
Two Minute Feedback
Take a minute and jot down the problem, idea, or concept that was
most interesting to you from this chapter.
Take another minute and jot down the problem, idea, or concept with which you struggled
the most.
to
and decreases the quantity
purchased (from
to
