Welfare effects of trade barriers Outline 1. Protectionist

Welfare effects of trade barriers Outline 1. Protectionist

Welfare effects of trade barriers Outline 1. Protectionist measures 2. Economic effect of an embargo 3. Economic effect of a tariff 4. Economic effect of a quota 5. Arguments for protectionism Protectionism The term protectionism refers to any measure that has the effect of reducing the quantity of imported goods or services. Commercial policy: Government policy that influences international trade flows. Protectionist measures Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba.

Tariffs: Taxes imposed on imported goods. Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber. Subsidies: payments by government to exporters. These stimulate trade by allowing Government procurement: Most nations require their governments to buy from domestic producers. Protectionism, Example: the 1933 part Buy2American Act applicable to federal agencies. Non-tariff trade barriers: Other policies that have the effect of reducing the flow of imports or exports. Example: Health and safety standards, import licensing, product design standards, bureaucratic red The Japanese trade ministry tape. (MITI) decided that snow skis made in the U.S. were not safe

enough for Japanese ski enthusiasts Other examples: European ban on hormone treated beef and genetically-modified soybeans Effect of tariffs and quotas on imports, domestic production, and prices PW is the world pricethat is, the price of the good that world be established in a global market without trade barriers. Pd is the domestic pricethat is, the price in the domestic market if imports were equal to zero. Qd is the domestic output of a good if imports are zero. T is a tariff (measured in dollars, yen, lira, pesetas, etc.) per unit, ton, pound, etc. Pq is the domestic price under the imposition of a quota. Figure 8.8a: Effect of an embargo on Japanese watches (a) Price U.S. demand U.S. supply

$15.00 A 12.50 B E C D U.S. imports World price is $12.50 Embargo pushes price paid by domestic buyers to $15.00 Loss of CS = BDEA CDE is the dead weight loss. 15 20 25 Quantity of Digital Watches

effect of a tariff on oranges Price ($) S Imports with tariff Pd PW + T PW q1 q2 qd q4 The domestic price of oranges increases.

D Free trade imports 0 Domestic production increases from q1 to q2. q5 Quantity (tons) effect of a Quota on oranges Price ($) S Pd Pq S + Quota

Import quota = 100 tons PW Free trade imports = 300 tons 0 100 200 250 300 400 D Domestic production increases from 100 to 200 tons.. The domestic

price of oranges increases. Quantity (tons) Arguments for protectionism Save domestic jobs President Clintons Create a level playing field. trade representative, Carlene Barshevsky, Government revenue creation. use to say The U.S. wants fair trade. National security Infant industries Costs of protecting U.S. jobs from foreign competition Industry Autos Cost to Consumers Per Job Saved

$105,000 Color TVs 420,000 Motorcycles 150,000 Athletic Footwear 30,000 Apparel 37,000 Specialty Steel 1,000,000 Glassware

200,000 Sugar 60,000 Ball Bearings 90,000 Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986. Tariffs as a percentage of total government revenue Tariffs as a % of Country Government Revenue U.K. 0.1% Japan

1.2 1.5 16.1 31.2 44.2 U.S. Costa Rica Ghana Dominican Republic Lesotho Source: World Bank 55.1

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