Principles of International Principles of International and - - PowerPoint PPT Presentation

Principles of International Principles of International and Interregional Trade and Interregional Trade

Part II Part II

Econ Dept, UMR Presents

The Forces of Protectionism

Starring Starring

Featuring Featuring

• 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 Restrictions Restrictions

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 Industry

To Protect Industry

• To Protect Workers

To Protect Workers

• To Protect the Good Old USA

To Protect the Good Old USA

• To Protect Free Trade

To Protect Free Trade

To Protect Industry To Protect Industry

• The Infant Industry Argument

The Infant Industry Argument--

• -”Protect

”Protect us until we get our act together” us until we get our act together”

• The Cushion Argument

The Cushion Argument--

• -”Give use time

”Give use time to upgrade and we’ll kick butt” to upgrade and we’ll kick butt”

Protect Industry Protect Industry-

• Rejoinder

Rejoinder

• First, industry doesn’t have standing,

First, industry doesn’t have standing,

• nly people do
• nly people do
• Second, these infants don’t seen to

Second, these infants don’t seen to grow up grow up

• Third, which industries deserve the

Third, which industries deserve the protection? protection?

In sum: Save your sympathy for people who need it

Protect Workers Protect Workers

• Which 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 lost in exports. Jobs saved vs. jobs lost

• Jobs saved are likely to be costly

Jobs 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/job an annual cost of $10b, or $178,000/job

• In motor vehicles, 3,400 jobs saved at a

In motor vehicles, 3,400 jobs saved at a yearly cost of $925m, or $270,000/job yearly 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, 1996 1996

Protect Workers Protect Workers-

• Rejoinder

Rejoinder

• Again, the problem of deciding which

Again, the problem of deciding which workers to protect workers to protect

• Trade restrictions are too costly

Trade restrictions are too costly

• Retraining, relocation, through Trade

Retraining, relocation, through Trade Adjustment funds are warranted Adjustment funds are warranted--

• -a

a redistribution from those that gain from redistribution from those that gain from free trade to those that lose free trade to those that lose

Protect the Good Old USA Protect 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 guns a creek if we need more guns

• Production abroad will hurt the

Production abroad will hurt the environment environment

• Production abroad will subject our

Production abroad will subject our consumer to dangerous products consumer to dangerous products

Protect the USA Protect the USA-

• Rejoinder

Rejoinder

• 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 restrictions materials than trade restrictions

• Evidence 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 trade trade-

• off of more pollution for a higher
• ff of more pollution for a higher

standard of living standard of living

Protect Free Trade Protect 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

• vercome their special interests and
• vercome their special interests and

promote free trade promote free trade

Protect Free Trade Protect Free Trade-

• Rejoinder

Rejoinder

• 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 Policy Policy

• Tariffs

Tariffs

• Quotas or VERs

Quotas or VERs (voluntary export

(voluntary export restrictions) restrictions)

• Other Restrictions

Other Restrictions

• We use comparative

We use comparative analysis analysis

• The situation with trade restrictions

The situation with trade restrictions

• And, the situation without restrictions

And, the situation without restrictions

Market Restricted to Market Restricted to Domestic Suppliers Domestic Suppliers

S SUS

US

Q2 P0 P3 P Q/t D Q2 Quantity bought and sold P3 Price

Market Unrestricted Market Unrestricted

S SUS

US

S Srow

row

S STotal

Total

Q0 Q4 P0 P1 P Q/t D Q4 Quantity bought and sold Q0 Domestic Supply Q4 - Q0 Imports

S Stotal

total = S

= Sus

us + S

+ Srow

row

P1 Price P3 Q2 row: rest of world

Gains and Losses from Gains and Losses from Unrestricted Trade Unrestricted Trade

• Consumers gain from lower price and

Consumers gain from lower price and greater quantity to consume greater quantity to consume

• U.S. producers lose from lower price

U.S. producers lose from lower price and less sales and less sales

• Consumer 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 Trade Gain from Unrestricted Trade

S SUS

US

S Srow

row

S STotal

Total

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 Tariff Restricting Trade by a Tariff

• A tariff is a tax on imports

A tariff is a tax on imports

• A tariff is also called a custom duty

A tariff is also called a custom duty

• The U.S. imposes tariffs on about 70%

The U.S. imposes tariffs on about 70%

• f our imports
• f our imports
• Average tariff rates

Average tariff rates

• Currently averages about 3.7%

Currently averages about 3.7%

• Peaked in 1930 with passage of the Smoot

Peaked in 1930 with passage of the Smoot-

• Hawley Act that imposed an average tariff

Hawley Act that imposed an average tariff

• f 59%
• f 59%

Market With Tariff Market With Tariff

S SUS

US

S Srow

row

S STotal

Total

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 Loss Tariff and Consumer Loss

S SUS

US

S Srow

row

S STotal

Total

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 Gain Gain

S SUS

US

S Srow

row

S STotal

Total

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 Gain Gain

S SUS

US

S Srow

row

S STotal

Total

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 Loss Tariff and Society’s Loss

• Society’s Loss equals:

Society’s Loss equals:

• Consumer’s Loss

Consumer’s Loss

• minus

minus

• US Producer’s Gain

US Producer’s Gain

• minus

minus

• Taxpayer’s Gain

Taxpayer’s Gain

• Society’s Loss is due to

Society’s Loss is due to

• Lost benefits from what we want: Area A

Lost benefits from what we want: Area A

• Higher cost of increased domestic

Higher cost of increased domestic production: Area B production: Area B

• For Areas A and B, see next slide

For Areas A and B, see next slide

Tariff and Society’s Loss Tariff and Society’s Loss

S SUS

US

S Srow

row

S STotal

Total

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.

A B B A

Restricting Trade by a Quota Restricting Trade by a Quota

• r VER
• r 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 imported good that can be imported

• A VER is a “voluntary” export restraint

A VER is a “voluntary” export restraint agreed to by an exporting country agreed to by an exporting country

• In 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 $660 cars by about $660

• About 12% of U.S. imports are subject

About 12% of U.S. imports are subject to Quotas or VERs to Quotas or VERs

Market With Quota or VER Market With Quota or VER

S SUS

US

S Srow

row

S STotal

Total

With Quota Without Quota Q0 Q1 Q3 Q4 P0 P1 P2 P Q/t D Q3 Quantity bought and sold Q1 Domestic Supply (Q3 - Q1) = Q0 = imports P2 Price w quota Q0 Imposed Quota

S Srow

row w quota

w quota

Quota (VER) and Consumer Loss Quota (VER) and Consumer Loss

S SUS

US

S Srow

row

S STotal

Total

With Quota Without Quota Q0 Q1 Q3 Q4 P0 P1 P2 P Q/t D

S Srow

row w quota

w quota

Consumer loss due to higher price Consumer loss due to lower quantity

Quota (VER) and US producer Quota (VER) and US producer gain gain

S SUS

US

S Srow

row

S STotal

Total

With Quota Without Quota Q0 Q1 Q3 Q4 P0 P1 P2 P Q/t D

S Srow

row w quota

w quota

US Producer gain due to higher price US Producer gain due to greater sales

Quota (VER) and Society’s Loss Quota (VER) and Society’s Loss

• Society’s Loss equals:

Society’s Loss equals:

• Consumer’s Loss

Consumer’s Loss

• minus

minus

• US Producer’s Gain

US Producer’s Gain

• Notice with a quota there is no

Notice with a quota there is no Taxpayer’s Gain Taxpayer’s Gain

• Society’s Loss is due to

Society’s Loss is due to

• Lost benefits from what we want: Area A

Lost benefits from what we want: Area A

• Higher cost of increased domestic

Higher cost of increased domestic production: Area B production: Area B

• Higher Import Prices: Area C

Higher Import Prices: Area C

• For Areas A, B, and C, see next slide

For Areas A, B, and C, see next slide

Quota (VER) and Society’s Loss Quota (VER) and Society’s Loss

S SUS

US

S Srow

row

S STotal

Total

With Quota Without Quota Q0 Q1 Q3 Q4 P0 P1 P2 P Q/t D

S Srow

row w quota

w 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 A B B C C

Other Restrictions Other Restrictions

• Trade embargoes, e.g., Cuba, Iraq for

Trade embargoes, e.g., Cuba, Iraq for political reasons political reasons

• To 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 nets Mexican ships using nets

• The World Trade Organization ruled the ban was an

The World Trade Organization ruled the ban was an illegal restriction on trade illegal 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 Mexico Mexico

The Cost of Protectionism to The Cost of Protectionism to Consumers Consumers

• In 1990, U.S. consumers incurred a cost

In 1990, U.S. consumers incurred a cost

• f about $70 billion. That’s about $270
• f 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 Society Society

• Most, but not all, consumer cost is a

Most, but not all, consumer cost is a transfer to US producers transfer to US producers

• Society’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 Protectionism Society’s Loss from Protectionism

S SUS

US

S Srow

row

S STotal

Total

With Protection Without Protection Q0 Q1 Q2 Q3 Q4 P0 P1 P2 P Q/t D

A B 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 Protectionism Protectionism

• Midpoint annual estimates for different

Midpoint annual estimates for different industries, in billions of 1985 $s industries, in billions of 1985 $s*

*

Industry

Auto Dairy Textiles & Apparel Steel Sugar

• Aver. Tariff

Total Loss A&B Loss C Total Loss

0.7 1.4 0.2 0.1 5.4 2.3 10.1 5.05 0.25 1.35 0.85 5.05 12.5 5.75 1.65 1.55 0.95 10.45 2.3 22.6 *Source: Feenstra, R., “How Costly is Protectionism?”, JEP, 6:3, 1992

Society’s Loss in Perspective Society’s Loss in Perspective

• $22.6 billion was about 0.75% of 1985

$22.6 billion was about 0.75% of 1985 Gross National Product Gross National Product

• Less than the loss to consumers since

Less than the loss to consumers since US producers gain is netted out US producers gain is netted out

• But this estimate is clearly a lower

But this estimate is clearly a lower bound bound

• Other 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 activities

those stemming from rent seeking activities

The End