Government Intervention into Trade

1. Government Intervention into Trade Kenneth R. Szulczyk

2. Free Trade • Law of Absolute Advantage • Not in notes • Countries specialize in goods that it can produce the cheapest • Then trade goods with other countries • World production increases • Free trade increases the wealth of all countries

3. Free Trade • What if a country can produce the ALL products cheaper than other countries? • This country could still benefit from free trade • However, we need another law

4. Free Trade • Law of Comparative Advantage • Country specializes in the production of products that it has the greatest relative advantage • Country produces products relatively more cheaply • Then trade products with other countries

5. Free Trade • Country A produces everything cheaply • That country specializes in production that has the lowest relative costs • Country B specializes in another product that it has the relative lowest costs • Countries A and B can still trade

6. Free Trade • Important Assumption • Country A does not have the resources to produce all products • Trade allows Country A to consume more

7. Free Trade • A country opening its borders to free trade • Adjustment process • The competitive industries expand • The inefficient industries contract • Unemployed workers • Lower tax collections

8. Government Intervention 1. Protect an Eroding Comparative Advantage • Country A has a relative advantage in producing and exporting a product.  • Country B comes along and gain the comparative advantage, taking trade away from Country A.

9. Government Intervention 2. Achieve Domestic Policy Goals • Free trade can bankrupt inefficient industries, • Causes unemployment • Lower tax collections • Government may impose trade restrictions to keep inefficient industries in business.

10. Government Intervention 3. Protect National Security • Some commodities • Natural gas and petroleum • Many Asian countries, like Japan, have little energy resources • Are vulnerable, if imported energy is blocked

11. Government Intervention 4. Protect “Infant Industry” • A country's industry may be relative new • Could not compete with foreign industries.  • Government protects an industry, in order for the industry to become large enough to compete. 

12. Government Intervention • When the United States became independent of England • The new U.S. government restricted trade • Encourage the growth of U.S. industries. • Most manufacturing was in Europe at that time • England wanted to manufacture all goods and sell the goods to the United States • Causes an inflow of money into England • Creates jobs

13. Government Intervention 5. Protect National Health • Government restricts trade of a product, if the product may be harmful.  • For example, Europe does not import beef from the United States.  • Europeans claim beef contains growth hormones, which are harmful to humans. • They may be right!

14. Government Intervention 6. Government Protects or Retaliates Against Policies of Other Trading Countries • One country imposes a trade restriction.  • Other countries may retaliate against that country.  • For example, one country weakens its currency • Boost its industries • Other countries may weaken their currencies to nullify the first country

15. Government Intervention 7. Correct Foreign Exchange Rate • Government views its currency as being either too strong or too weak.  • Government imposes trade restrictions to correct the currency problem.  

16. Government Intervention • Usually Asian countries want their currencies to be weak.  • A weak currency • Boosts a country's exports • Decreases its imports • Causes its industries to expand and create jobs.

17. Government Intervention • A strong currency makes a country's exports expensive and its imports cheap • I have no ideal why the U.S. government pursues a strong dollar.  The United States is losing industries to China and other countries.

18. Government Intervention 8. Balance-of-Payment Problems • Balance of payments is the total inflow minus the total outflow of money into a country • The problem is when more money flows out than in.  • Usually the central bank or government has to finance the outflow, if it is large.  • Government can impose trade restrictions to reduce a balance-of-payment problem.

19. Government Intervention • United States – not in notes • U.S. has large trade deficit • U.S. dollars flow out and products flow in. • Foreign countries increase U.S. dollar holdings • Some countries are worried about U.S. trade deficits (and U.S. government debt) • U.S. currency has to depreciate

20. Government Intervention 9. Generate Revenues for the Government • Government can impose • Import tariffs • Export taxes • A government may have better control over its ports • Easier to collect than income taxes 

21. Government Intervention 10.  Prevent export of technology – not in notes • Some countries ban or restrict exports of technology • These countries do not want other countries to benefit from technology • Become future competitors

22. Conclusion • Government wants to export products to foreign countries • Expands industries and creates jobs • More money flows into country than out   • However, government wants to restrict imports

23. Conclusion • Government could lie and make one of the above claims in order to protect its industries