Economic Review ECONOMIC INTERDEPENDENCE &

LESSONS FROM FREE TRADE POLICY

MINJUNG KIM

Copyright ©(2016-2018) MJ KIM.

The Effects of Tariffs

Deadweight loss effect Excessive burden/Allocative Inefficiency Harberger’s Triangle/Welfare’s Trap When services or goods are not allocated in Pareto, economic

losses are experienced.

The Effects of Tariffs Beyond tariffs, import quotas reduce the quantity of imports, raise the domestic price of the good, decrease the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses.

A tariff raises revenue for the government, whereas an import quota creates surplus for those who obtain the license to import. The profit for the holder of an import license is the difference between the domestic price.

Lessons From Free Trade Economy

Free trade of textile economy raises the total welfare of Turkey.

New York Times, January 16, 2008

By Steven E. Landsburg, “What to Expect When You’re Free Trading.”Does winners-and-losers create a moral mandate for the taxpayer?

[ Point Z is tangent to the Social Indifference Curve (SI) ]

[ Social Utility Maximization ]

Lessons From Free Trade Economy

Enhanced Flow through Economies of Scale.

The transfer of technological ad-vances around the world is often linked to the trading of the goods.

The Washington Post, Friday 20, 2004. The Economies of Progress. By George F. Will

The National-Security Argument The Infant-Industry Argument The Unfair-Competition Argu-

ment The Protection Argument

The Protection-Bargaining-Chip (1)

Strategy of bargaining as an argument for trade restrictions Protectionism and bargaining can improve the foreign trade re-

strictions? No, Trade restriction will lower the economic welfare. Yes, Non-trade restrictions lower prestige in international affairs.

The Unfair-Competition Argument (2)

Free trade is desirable because different companies are subject to different laws and regulations of the countries. Producers may suffer while consumers benefit. Subsidization of price depends on the free trade and economies of scale.

The Infant-Industry Argument (3)

Temporary trade restriction help industries get started and adjust to the new environment. Companies may go through temporary losses to obtain the eventual profits. Therefore, protection is not necessary for an infant industry to grow.

The National-Security Argument (4)

Companies have an incentive to exaggerate their role in national defense to obtain protection from foreign competition. Free trade would allow companies to be dependent on foreign countries to supply.

Enhancing Free Trade, RECAP NAFTA GATT Biggest growth in imports has come from countries with low wages. The sources of U.S. imports have shifted in 1990 to Mexico, where wages were only

11 percent of the U.S. level, and China, where only about 3 to 4 percent. Paul Krugman is claimed to be a non-protectionist. Effects of free trade can be determined by comparing the domestic price without

trade to the world price. A low domestic price indicates the country has a compar-ative advantage in producing the goods.

A tariff moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade.

Restrictions to trade include protectionist policy, defending national security, help-ing infant industries, preventing unfair competition and responding to foreign trade restrictions.

Questions & Answers

Suppose that the government of the U.S. is an importer of telecommunications and there are no trade restrictions.

U.S. consumers buy 1 million televisions per year of which 400,000 are produced domestically and 600,000 are imported. If the Japanese telecommunication importers cause the world price to fall by $100, then how does this affect the welfare of the U.S. consumers and the U.S. producers. To sum up, how does this af -fect the total surplus in the United States?

Questions & Answers

Suppose that a pro-trade government decides to subsidize the export by paying a certain amount of teach ton sold abroad. How does this export subsidy affect the domestic price? The quantity of production, and the quantity exported? What about consumer surplus, producer surplus and total surplus?

Is this a good policy for economic efficiency?

End of Session

Copyright ©(2016-2018) MJ KIM.

Thank you for listening.