Welfare effects of trade barriers

1. Welfare effects of trade barriers • Outline • Protectionist measures • Economic effect of an embargo • Economic effect of a tariff • Economic effect of a quota • Arguments for protectionism

2. Protectionism The term “protectionism” refers to anymeasure that has the effect of reducing the quantity of imported goods or services. Commercial policy: Government policy that influences international trade flows.

3. 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 the exporter to charge a lower price.

4. Government procurement: Most nations require their governments to buy from domestic producers. Example: the 1933 “Buy American” 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 tape. Protectionism, part 2 The Japanese trade ministry (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

5. Effect of tariffs and quotas on imports, domestic production, and prices • PW is the world price—that is, the price of the good that world be established in a global market without trade barriers. • Pd is the domestic price—that 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, peseta’s, etc.) per unit, ton, pound, etc. • Pq is the domestic price under the imposition of a quota.

6. Figure 8.8a: Effect of an embargo on Japanese watches • 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.”

7. effect of a tariff on oranges Price ($) S • Domestic production increases from q1 to q2. • The domestic price of oranges increases. Imports with tariff Pd PW + T PW D Free trade imports 0 q1 q2 qd q4 q5 Quantity (tons)

8. effect of a Quota on oranges Price ($) S S + Quota Pd • Domestic production increases from 100 to 200 tons.. • The domestic price of oranges increases. Import quota = 100 tons Pq PW Free trade imports = 300 tons D 0 100 200 250 300 400 Quantity (tons)

9. Arguments for protectionism • Save domestic jobs • Create a “level playing field.” • Government revenue creation. • National security • Infant industries President Clinton’s trade representative, Carlene Barshevsky, use to say “The U.S. wants fair trade.”

10. Industry Cost to ConsumersPer Job Saved Autos $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 Costs of protecting U.S. jobs from foreign competition Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986.

11. Tariffs as a percentage of total government revenue Source: World Bank