Barriers to trade

Trade Barriers

• Types of barriers:
• Tariffs ➔ excise taxes on imports
• devices that protect domestic producers from foreign competition by raising import prices
• may be used for revenue purposes
• Import quotas ➔ the maximum amounts of imports allowed in a certain period of time
• Low import quotas may be a more effective protective device than tariffs, which do not limit the amount of goods entering a country.
• Nontariff barriers
• licensing requirements
• unreasonable standards
• bureaucratic red tape in customs procedures.
• Voluntary export restrictions ➔ agreements by foreign firms to “voluntarily” limit their exports to a particular country.
• Japan has voluntary limits on its auto exports to the United States.

Trade Barriers

• Four effects of Tariffs (S_d + Q)
• domestic consumption declines to c as the price rises to Pt.
• Domestic production will rise to b because the price has risen.
• Imports fall to bc from ad.
• Government tariff revenue will represent a transfer of income from consumers to government.
• One indirect effect also may occur in that relatively inefficient industries are expanding and relatively efficient industries abroad have been made to contract.

S_w

Trade Barriers

• The economic impact of quotas
• Worse than tariffs because no revenue is generated for the government
• the higher price results in more revenue per unit for the foreign producer.
• After the quota, the price will rise to Pt [as with the tariff]
• entire amount of revenue generated by the higher price will go to the foreign and domestic producers supplying the product at price Pt.
• There is no possibility for consumers to obtain more than the allowed quota, even at higher prices.

Activity 7-2

1. Use Figure 7-2.2 to show the effect of an import tariff of $T per unit. Graph the “Total Supply with Tariff ” curve, and indicate the amount of the tariff on the graph. Label the equilibrium price and quantity after the tariff as PT and QT on the graph.

Price

Quantity

Domestic Demand

Domestic Supply

Total Supply w/ Tariff

Total Supply

Q2 Q QT Q1

P

PT

P1

• The imposition of a tariff causes the total supply to decrease b/c the tariff has caused the price to increase at every level of output.
• Q2 is the amount of domestic production after the tariff.
• The tariff is the vertical distance between the Total Supply & the Total Supply w/ Tariff curves indicated by an arrow on the graph.

Tariff=$T

5. What is the effect of the tariff on the equilibrium price and quantity for domestic consumers compared with the free trade levels?

• The equilibrium quantity decreases to QT, and the equilibrium price increases to PT.
• Note that domestic firms are producing, whereas under the free trade equilibrium price of P1, the domestic industry is not producing.
• How far the curve shifts (how large the tariff is) determines whether domestic firms are producing any output.

3. Identify the arguments frequently used to impose some type of trade barrier. Discuss the pros and cons of three arguments.

• National Defense, infant industry, dumping, preservation of domestic jobs, maintaining a diverse and stable economy, prevention of exploitation

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The Case for Protection

• Military self‑sufficiency
• political‑economic argument for protecting industries that are critical to national defense.
• Problem:
• nearly every industry is critical to national defense in one way or another.
• It is difficult to select strategic industries to protect.
• most goods are produced in many places, so dependency on one nation is not likely.

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• Increasing domestic employment
• most popular reason for protection, but...
• Imports may eliminate some jobs, but they create others in the sales and service industries for these products.
• The fallacy of composition applies
• Retaliation
• 1930s Smoot‑Hawley Tariff Act of 1930.
• Protectionism against American goods will hurt our export industries.
• Such trade wars still erupt today although the WTO helps to eliminate the problem.
• Long‑run feedbacks
• continued excess of exports over imports leads to a shortage of dollars abroad
• foreigners need dollars to purchase more American goods and services
• a nation must import in order to export

The Case for Protection

• Diversification for stability
• protect certain industries until they become viable.
• For example, Saudi Arabia may not always be able to depend on oil exports nor Cuba on sugar exports. They need to develop other industries.
• Does not apply to the U.S. or other diversified economies.
• The economic costs of diversification may be great and not worth the protection.

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• The infant‑industry argument
• New industries allegedly may need “temporary” protection to gain productive efficiency.
• It is difficult to determine which industries are the best to protect.
• Protection may persist after industrial maturity is realized.
• Direct subsidies may be preferable to international protection.

The Case for Protection

• Strategic trade policy
• Some success in Japan and South Korea,
• Danger of retaliation by affected nations.

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• Protection against “dumping” (when nations “dump” excess products onto U.S. markets at below cost.)
• These firms may be trying to drive out U.S. competition.
• Dumping can be a form of price discrimination.
• Dumping is a legitimate concern and is prohibited under U.S. trade law.

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• Protection against cheap foreign labor
• This argument is not valid.
• It is mutually beneficial for rich and poor to trade with one another.
• By not trading, we don’t raise our living standards at all
• We will decrease them by shifting labor into inefficient areas where the foreign labor could have produced the items more efficiently.

The Case for Protection

• Only two arguments for protection are valid
• The infant‑industry argument
• Military self‑sufficiency argument may be justifiable on political grounds.

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• Most other arguments are based on emotional half‑truths or outright fallacies.
• Evidence of the results of protectionism shows that it has not had positive effects.

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FACTS OF PROTECTIONISM

• Within the U.S., the Constitution says states cannot prevent trade, so we have a prosperous, huge free‑trade area.
• The European Union has prospered as trade barriers have been eliminated.
• The world economy has grown under the trend toward more tariff reduction since the mid‑1930s.
• High tariffs were a factor in causing the Great Depression.
• Nations with high protectionist policies have slower growth than those with no barriers.

The World Trade Organization

• Inefficiencies of protectionism have led nations to seek ways to promote free trade.
• In 1994 the more than 120 member nations of the World Trade Organization (WTO) agreed to implement several policies by 2005.
• Reducing tariffs worldwide.
• Adopting new rules to promote service trade.
• Reducing in agricultural subsidies that protect less-efficient farmers.
• Providing new protection for intellectual property.
• Phasing out of quotas on textiles and clothing, replacing them with gradually declining tariffs.
• These policies are predicted to boost trade by 8% or $6 trillion
• WTO today:
• 145 nations belong as of late 2001.
• The organization oversees provisions of agreement and resolves disputes.
• It has become a protest target of groups who are against various aspects of globalization.
• Economists favor free trade with labor and environmental regulations