Econ Dept, UMR Presentsweb.mst.edu/~rrbryant/econ121/Slides/ch4b.pdf · Microsoft PowerPoint -...
Transcript of Econ Dept, UMR Presentsweb.mst.edu/~rrbryant/econ121/Slides/ch4b.pdf · Microsoft PowerPoint -...
Principles of International Principles of International and Interregional Tradeand Interregional TradePart IIPart II
Econ Dept, UMR
Presents
The Forces of Protectionism
StarringStarring
FeaturingFeaturing
Answers to: If free trade is so good, Answers to: If free trade is so good, why are so many concerned?why are so many concerned?
Tariffs/Quotas and Other Tariffs/Quotas and Other RestrictionsRestrictions
As we saw earlier, by trade, countries are able to consume more than they can produce. Graphically we showed this for two countries by locating consumption point to the right of their production possibilities curve. This can only be done because they are specializing and trading for the other goods they consume.
So, if Free Trade is so Good, So, if Free Trade is so Good, Why So Many Restrictions?Why So Many Restrictions?
To Protect IndustryTo Protect IndustryTo Protect WorkersTo Protect WorkersTo Protect the Good Old USATo Protect the Good Old USATo Protect Free Trade To Protect Free Trade
To Protect IndustryTo Protect Industry
The Infant Industry ArgumentThe Infant Industry Argument----”Protect ”Protect us until we get our act together”us until we get our act together”The Cushion ArgumentThe Cushion Argument----”Give use time ”Give use time to upgrade and we’ll kick butt”to upgrade and we’ll kick butt”
Protect IndustryProtect Industry--RejoinderRejoinderFirst, industry doesn’t have standing, First, industry doesn’t have standing, only people doonly people doSecond, these infants don’t seen to Second, these infants don’t seen to grow upgrow upThird, which industries deserve the Third, which industries deserve the protection?protection?
In sum: Save your sympathy for people who need it
Protect WorkersProtect WorkersWhich workers? A reduction of Which workers? A reduction of imports will be followed by a reduction imports will be followed by a reduction in exports. Jobs saved vs. jobs lostin exports. Jobs saved vs. jobs lostJobs saved are likely to be costlyJobs saved are likely to be costly**
In textiles and apparel, 56,000 jobs saved at In textiles and apparel, 56,000 jobs saved at an annual cost of $10b, or $178,000/joban annual cost of $10b, or $178,000/jobIn motor vehicles, 3,400 jobs saved at a In motor vehicles, 3,400 jobs saved at a yearly cost of $925m, or $270,000/jobyearly cost of $925m, or $270,000/job
**An update of An update of The Economic Effects of Significant U.S. Import The Economic Effects of Significant U.S. Import Restraints, Restraints, 19961996
Protect WorkersProtect Workers--RejoinderRejoinderAgain, the problem of deciding which Again, the problem of deciding which workers to protectworkers to protectTrade restrictions are too costlyTrade restrictions are too costlyRetraining, relocation, through Trade Retraining, relocation, through Trade Adjustment funds are warrantedAdjustment funds are warranted----a a redistribution from those that gain from redistribution from those that gain from free trade to those that losefree trade to those that lose
Protect the Good Old USAProtect the Good Old USA
If we import all our guns, we will be up If we import all our guns, we will be up a creek if we need more gunsa creek if we need more gunsProduction abroad will hurt the Production abroad will hurt the environmentenvironmentProduction abroad will subject our Production abroad will subject our consumer to dangerous productsconsumer to dangerous products
Protect the USAProtect the USA--RejoinderRejoinder
Who decides what industry is strategic?Who decides what industry is strategic?There are cheaper ways to stockpile There are cheaper ways to stockpile materials than trade restrictionsmaterials than trade restrictionsEvidence is clear: Environmental Evidence is clear: Environmental quality is a normal good. Countries quality is a normal good. Countries with less income are apt to make the with less income are apt to make the tradetrade--off of more pollution for a higher off of more pollution for a higher standard of living standard of living
Protect Free TradeProtect Free Trade
We need to have a credible threat of We need to have a credible threat of restricting imports in order for other restricting imports in order for other countries to take the necessary steps to countries to take the necessary steps to overcome their special interests and overcome their special interests and promote free tradepromote free trade
Protect Free TradeProtect Free Trade--RejoinderRejoinder
As with many of the other arguments: As with many of the other arguments: Yes, but . . .Yes, but . . .When should the threat be carried out?When should the threat be carried out?Is this argument just another veiled Is this argument just another veiled reason for special interest protection?reason for special interest protection?
A Look at Trade Restriction A Look at Trade Restriction PolicyPolicy
TariffsTariffsQuotas or VERs Quotas or VERs (voluntary export (voluntary export restrictions)restrictions)
Other RestrictionsOther RestrictionsWe use comparative We use comparative analysisanalysis
The situation with trade restrictionsThe situation with trade restrictionsAnd, the situation without restrictionsAnd, the situation without restrictions
Market Restricted to Market Restricted to Domestic SuppliersDomestic Suppliers
SSUSUS
Q2
P0
P3
P
Q/t
D
Q2 Quantity bought and sold P3 Price
Market UnrestrictedMarket Unrestricted
SSUSUSSSrowrow
SSTotalTotal
Q0 Q4
P0
P1
P
Q/t
D
Q4 Quantity bought and sold
Q0 Domestic Supply Q4 - Q0 Imports
SStotal total = S= Susus + S+ SrowrowP1 Price
P3
Q2
row: rest of world
Gains and Losses from Gains and Losses from Unrestricted TradeUnrestricted Trade
Consumers gain from lower price and Consumers gain from lower price and greater quantity to consumegreater quantity to consumeU.S. producers lose from lower price U.S. producers lose from lower price and less salesand less salesConsumer gain exceeds U.S. producer Consumer gain exceeds U.S. producer loss therefore removing trade loss therefore removing trade restrictions is efficient, restrictions is efficient, c.p.c.p.
Gain from Unrestricted TradeGain from Unrestricted TradeSSUSUSSSrowrowSSTotalTotal
Q0 Q4
P0
P1
P
Q/t
D
P3
Q2
Consumers gain due to lower price, (P3 -P1)Q2, and greater quantity, (P3 - P1)(Q4 -Q2)/2. US producers loss due t o fewer sales (P3 - P1)Q0 + (P3 -P1)(Q2 - Q0)/2
Society’s gain = consumers gain minus US suppliers loss =
a b
c
c
a b - a
b c=
Restricting Trade by a TariffRestricting Trade by a Tariff
A tariff is a tax on importsA tariff is a tax on importsA tariff is also called a custom dutyA tariff is also called a custom dutyThe U.S. imposes tariffs on about 70% The U.S. imposes tariffs on about 70% of our importsof our importsAverage tariff ratesAverage tariff rates
Currently averages about 3.7%Currently averages about 3.7%Peaked in 1930 with passage of the SmootPeaked in 1930 with passage of the Smoot--Hawley Act that imposed an average tariff Hawley Act that imposed an average tariff of 59%of 59%
Market With TariffMarket With Tariff
SSUSUSSSrowrowSSTotalTotal
With Tariff
Without Tariff
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
Q3 Quantity bought and sold
Q1 Domestic Supply Q3 - Q1 Imports
P2 Price
Tariff and Consumer LossTariff and Consumer Loss
SSUSUSSSrowrowSSTotalTotal
With Tariff
Without Tariff
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
Consumer loss due to higher price and reduced quantity
(See Ch. 5)
a
a
b
b
Tariff and Domestic Supplier Tariff and Domestic Supplier GainGain
SSUSUSSSrowrowSSTotalTotal
With Tariff
Without Tariff
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
US Producer gain due to higher price and increased quantity
(See Ch. 6)
Tariff and Treasury Revenue Tariff and Treasury Revenue GainGain
SSUSUSSSrowrowSSTotalTotal
With Tariff
Without Tariff
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
Tax revenue brought in due to the tariff = tariff * Imports
Tariff and Society’s LossTariff and Society’s Loss
Society’s Loss equals:Society’s Loss equals:Consumer’s LossConsumer’s Loss
minusminusUS Producer’s GainUS Producer’s Gain
minusminusTaxpayer’s GainTaxpayer’s Gain
Society’s Loss is due toSociety’s Loss is due toLost benefits from what we want: Area ALost benefits from what we want: Area AHigher cost of increased domestic Higher cost of increased domestic production: Area Bproduction: Area BFor Areas A and B, see next slideFor Areas A and B, see next slide
Tariff and Society’s LossTariff and Society’s Loss
SSUSUSSSrowrowSSTotalTotal
With Tariff
Without Tariff
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
Society’s Loss is the sum of the loss to consumers minus the gains to domestic producers and to the treasury. The loss is due to the higher cost of Q1 - Q0 and to the lost surplus on foregone trade.
AB
BA
Restricting Trade by a Quota Restricting Trade by a Quota or VERor VER
A quota is a limit of the amount of a A quota is a limit of the amount of a good that can be importedgood that can be importedA VER is a “voluntary” export restraint A VER is a “voluntary” export restraint agreed to by an exporting countryagreed to by an exporting countryIn 1984, VERs on autos by Japan In 1984, VERs on autos by Japan increased the price of Japanese cars by increased the price of Japanese cars by about $1,300 and the price of domestic about $1,300 and the price of domestic cars by about $660cars by about $660About 12% of U.S. imports are subject About 12% of U.S. imports are subject to Quotas or VERsto Quotas or VERs
Market With Quota or VERMarket With Quota or VER
SSUSUSSSrowrowSSTotalTotal
With Quota
Without Quota
Q0 Q1 Q3 Q4
P0
P1
P2
P
Q/t
D
Q3 Quantity bought and soldQ1 Domestic Supply (Q3 - Q1) = Q0 = imports
P2 Price w quotaQ0 Imposed Quota
SSrow row w quotaw quota
Quota (VER) and Consumer LossQuota (VER) and Consumer Loss
SSUSUSSSrowrowSSTotalTotal
With Quota
Without Quota
Q0 Q1 Q3 Q4
P0
P1
P2
P
Q/t
DSSrow row w quotaw quota
Consumer loss
due to higher price
Consumer loss
due to lower quantity
Quota (VER) and US producer Quota (VER) and US producer gaingain
SSUSUSSSrowrowSSTotalTotal
With Quota
Without Quota
Q0 Q1 Q3 Q4
P0
P1
P2
P
Q/t
DSSrow row w quotaw quota
US Producer gain
due to higher price
US Producer gain
due to greater sales
Quota (VER) and Society’s LossQuota (VER) and Society’s LossSociety’s Loss equals:Society’s Loss equals:
Consumer’s LossConsumer’s Lossminusminus
US Producer’s GainUS Producer’s GainNotice with a quota there is no Notice with a quota there is no Taxpayer’s GainTaxpayer’s GainSociety’s Loss is due toSociety’s Loss is due to
Lost benefits from what we want: Area ALost benefits from what we want: Area AHigher cost of increased domestic Higher cost of increased domestic production: Area Bproduction: Area BHigher Import Prices: Area CHigher Import Prices: Area CFor Areas A, B, and C, see next slideFor Areas A, B, and C, see next slide
Quota (VER) and Society’s LossQuota (VER) and Society’s Loss
SSUSUSSSrowrowSSTotalTotal
With Quota
Without Quota
Q0 Q1 Q3 Q4
P0
P1
P2
P
Q/t
DSSrow row w quotaw quota
Society’s Loss is the sum of the loss to consumers minus the gains to domestic producers. The loss is due to the higher cost of Q3 - Q2 and to the lost surplus on foregone trade Q4 - Q3
Q2
A
AB
B
C
C
Other RestrictionsOther RestrictionsTrade embargoes, e.g., Cuba, Iraq for Trade embargoes, e.g., Cuba, Iraq for political reasonspolitical reasonsTo prevent “dumping,” selling abroad at To prevent “dumping,” selling abroad at lower price than domestically lower price than domestically To protect the environment, e.g., the tuna To protect the environment, e.g., the tuna ban.ban.
In 1972 the US banned use of tuna nets by US ships In 1972 the US banned use of tuna nets by US ships to protect dolphins and boycotted tuna caught by to protect dolphins and boycotted tuna caught by Mexican ships using netsMexican ships using netsThe World Trade Organization ruled the ban was an The World Trade Organization ruled the ban was an illegal restriction on tradeillegal restriction on trade
To protect consumers, e.g., US restrictions To protect consumers, e.g., US restrictions pre NAFTA of “small” tomatoes from pre NAFTA of “small” tomatoes from MexicoMexico
The Cost of Protectionism to The Cost of Protectionism to ConsumersConsumers
In 1990, U.S. consumers incurred a cost In 1990, U.S. consumers incurred a cost of about $70 billion. That’s about $270 of about $70 billion. That’s about $270 per person per year.per person per year.The largest costs are in the apparel The largest costs are in the apparel industry (about $84 per person) and in industry (about $84 per person) and in the textile industry (about $13 per the textile industry (about $13 per person)person)
Source: G. Hufbauer, et al., Source: G. Hufbauer, et al., Measuring the Cost of Measuring the Cost of Protectionism in the U.S.Protectionism in the U.S., 1994, 1994
The Cost of Protectionism to The Cost of Protectionism to SocietySociety
Most, but not all, consumer cost is a Most, but not all, consumer cost is a transfer to US producerstransfer to US producersSociety’s (US) loss is due to Society’s (US) loss is due to
the loss of benefits of foregone trade (A) the loss of benefits of foregone trade (A) the higher cost of increased US production the higher cost of increased US production (B)(B)and the higher price of imports due to and the higher price of imports due to quota (C)quota (C)
Society’s Loss from ProtectionismSociety’s Loss from Protectionism
SSUSUSSSrowrowSSTotalTotal
With Protection
Without Protection
Q0 Q1 Q2 Q3 Q4
P0
P1
P2
P
Q/t
D
AB C
A: Loss of benefits of foregone trade
B: Higher cost of US production
C: Higher cost of imports due to quota (with a tariff this is a transfer from consumers to government revenues, not a cost)
Estimates of Society’s Loss from Estimates of Society’s Loss from ProtectionismProtectionism
Midpoint annual estimates for different Midpoint annual estimates for different industries, in billions of 1985 $sindustries, in billions of 1985 $s**
IndustryAutoDairy
Textiles & Apparel
SteelSugar
Aver. Tariff
Total
Loss A&B Loss C Total Loss0.71.40.20.1
5.4
2.3
10.1
5.050.251.350.85
5.05
0
12.5
5.751.651.550.95
10.45
2.3
22.6
*Source: Feenstra, R., “How Costly is Protectionism?”, JEP, 6:3, 1992
Society’s Loss in PerspectiveSociety’s Loss in Perspective$22.6 billion was about 0.75% of 1985 $22.6 billion was about 0.75% of 1985 Gross National ProductGross National ProductLess than the loss to consumers since Less than the loss to consumers since US producers gain is netted outUS producers gain is netted outBut this estimate is clearly a lower But this estimate is clearly a lower boundboundOther costs not counted include (see Other costs not counted include (see chs. 9 & 10)chs. 9 & 10)
those stemming from increased market those stemming from increased market power by domestic producers power by domestic producers those stemming from rent seeking activitiesthose stemming from rent seeking activities
The End