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FREE TRADE & PROTECTIONISM

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Todd Cota

on 7 September 2015

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Transcript of FREE TRADE & PROTECTIONISM

FREE TRADE & PROTECTIONISM
FREE TRADE:
The absence of government intervention of any kind in international trade.
No restrictions or barriers between individuals or firms in different countries.
ARGUMENTS FOR PROTECTIONISM
QUALIFIED ARGUMENTS:
1. PROTECTING AN INFANT (SUNRISE) INDUSTRY
2. NEED TO DIVERSIFY & AVOID RISKS OF OVER-SPECIALIZATION
3. STRATEGIC TRADE POLICY
4. NATIONAL DEFENSE
5. PROTECT PRODUCT STANDARDS

QUESTIONABLE ARGUMENTS:
1. TARIFFS AS A SOURCE OF GOVERNMENT REVENUE
2. MEANS TO OVERCOME BALANCE OF PAYMENTS DEFICIT
3. ANTI-DUMPING
4. PROTECTION OF DOMESTIC EMPLOYMENT

INCORRECT ARGUMENTS:
1. WAGE PROTECTION ARGUMENT

ARGUMENTS FOR PROTECTIONISM
QUALIFIED ARGUMENTS:
1. PROTECTING AN INFANT (SUNRISE) INDUSTRY
2. NEED TO DIVERSIFY & AVOID RISKS OF OVER-SPECIALIZATION
3. STRATEGIC TRADE POLICY
4. NATIONAL DEFENSE
5. PROTECT PRODUCT STANDARDS

QUESTIONABLE ARGUMENTS:
1. TARIFFS AS A SOURCE OF GOVERNMENT REVENUE
2. MEANS TO OVERCOME BALANCE OF PAYMENTS DEFICIT
3. ANTI-DUMPING
4. PROTECTION OF DOMESTIC EMPLOYMENT

INCORRECT ARGUMENTS:
1. WAGE PROTECTION ARGUMENT
PROTECTIONISM
Government intervention in international trade through the imposition of trade restrictions/barriers to prevent the free entry of imports into a country.
Policies that aim to protect the domestic economy from foreign competition.
PROTECT NEW DOMESTIC INDUSTRY
UNABLE TO COMPETE WITH MORE MATURE FOREIGN FIRMS
LACK ECONOMIES OF SCALE -- SO HAVE HIGHER AVERAGE COSTS
INEFFICIENT DUE TO SUNRISE STATUS
ALLOWS TIME FOR ABSOLUTE ADVANTAGE TO BECOME COMPARATIVE ADVANTAGE

DANGERS:
DIFFICULT TO KNOW WHICH INDUSTRIES HAVE POTENTIAL TO BECOME EFFICIENT & COMPETITIVE
PROTECTIONISM = DISINCENTIVE TO BECOME EFFICIENT
GOVT MAY PROTECT EVEN AFTER MATURITY = INEFFICIENCY
PROTECTING AN INFANT INDUSTRY
NEED TO DIVERSIFY & AVOID RISKS OF OVER-SPECIALIZATION
INCREASING VARIETY OF G&S PRODUCED
IMPORTANT FOR DEVELOPING COUNTRIES WITH HIGH LEVELS OF COMMODITY PRODUCTION
CUBA=SUGAR
ECUADOR=BANANAS
BEST TO DIVERSIFY FROM PRIMARY PRODUCTS TO VALUE-ADDED GOODS

DANGERS:
PRICE FLUCTUATIONS IN GLOBAL D&S OF PRIMARY COMMODITIES
UNSTABLE EXPORT REVENUES
ECONOMIC INSTABILITY


STRATEGIC TRADE POLICY
SIMILAR TO INFANT INDUSTRY ARGUMENT
APPLICABLE FOR DEVELOPED COUNTRIES
PROTECT HIGH TECH INDUSTRIES
ALLOW GROWTH OF ECONOMIES OF SCALE
GAIN COMPARATIVE ADVANTAGE
OFTEN INCLUDES:
SUBSIDIES
GOVT LOANS
TAX BREAKS
GOVT R&D FINANCING
DANGERS TO THIS POLICY???
NATIONAL DEFENSE

PROTECTION OF INDUSTRIES RELATED TO NATIONAL DEFENSE
AIRCRAFT
WEAPONS
CHEMICALS
CERTAIN MINERALS
NON-ECONOMIC POLICY -- A MILITARY POLICY
QUESTIONABLE APPLICATION
IN THE U.S. -- CANDLES, UMBRELLAS, PLASTICS, GLOVES INDUSTRIES RECEIVE PROTECTION (???)
PROTECT PRODUCT STANDARDS
MEET REQUIREMENTS OF SAFETY, HEALTH AND ENVIRONMENTAL STANDARDS OF DOMESTIC PRODUCT REQUIREMENTS
EQUALIZES COSTS TO DOMESTIC FIRMS TO MEET SAFETY STANDARDS
MAY COST MORE TO DEVELOPING COUNTRIES
DUE TO:
RED-TAPE REQUIREMENTS
DOCUMENTATION
APPROVAL LICENSE
DEGRADES COMPARATIVE ADVANTAGE



TARIFFS AS A SOURCE OF GOVERNMENT REVENUE
MORE FREQUENT IN DEVELOPING COUNTRIES
IMPORTANT SOURCE OF GOVT REVENUE
EASY COLLECTION COMPARED TO DOMESTIC SALES & INCOME TAX
LARGE % OF POPULATION IS SELF-EMPLOYED
LARGE % ARE LOW INCOME
HIGH TAX EVASION RATES
DANGERS:
REGRESSIVE TAX (NEG IMPACTS ON INCOME DISTRIBUTION)
NEGATIVE IMPACTS ON ALLOCATIVE EFFICIENCY
MEANS TO OVERCOME BALANCE OF PAYMENTS DEFICIT
BOP DEFICIT = OUTFLOW OF MONEY FROM A COUNTRY IS GREATER THAN THE INFLOW
EXCESS CONSUMPTION OF IMPORTS OVER EXPORT SALES (NET EXPORTS)
MAY CAUSE RETALIATORY PROTECTIONIST MEASURES FROM TRADING PARTNERS


ANTI DUMPING
DUMPING = SELLING A GOOD IN INTRL MKTS AT A PRICE THAT IS BELOW THE COST OF PRODUCTION
VIA GOVT ISSUED SUBSIDIES
UNFAIR TRADING PRACTICE
ILLEGAL (WTO TRADE AGREEMENTS)

DANGER:
USED AS AN EXCUSE FOR DOMESTIC FIRM/INDUSTRY PROTECTION
HARD TO PROVE
PROTECTION OF DOMESTIC EMPLOYMENT
CAUSES CONSUMERS TO SHIFT FROM IMPORTS TO DOMESTICALLY PRODUCED GOODS
INCREASED DEMAND FOR DOMESTIC G&S
DECREASE IN UNEMPLOYMENT

DANGERS:
RETALIATORY TRADE RESTRICTIONS FROM TRADING PARTNERS

WHAT MAY BE BETTER POLICIES TO DECREASE DOMESTIC UNEMPLOYMENT???
WAGE PROTECTION ARGUMENT
COUNTRIES THAT PRODUCE GOODS AT VERY LOW COSTS (DUE TO CHEAP LABOR)
USED OFTEN BY DEVELOPED COUNTRIES TO RESTRICT TRADE
GOES AGAINST THE COMPARATIVE ADVANTAGE THEORY
COUNTRIES SHOULD SPECIALIZE
DEVELOPED = HIGH WAGE G&S
DEVELOPING = LOW WAGE G&S
WHAT ARE SOME
QUALIFIED
ARGUMENTS IN FAVOR OF PROTECTIONISM?

UNDER WHAT SPECIAL CIRCUMSTANCES ARE THEY CONSIDERED TO BE VALID?

WHAT PROBLEMS CAN THEY GIVE RISE TO?
WHAT ARE SOME
QUESTIONABLE
ARGUMENTS IN FAVOR OF PROTECTIONISM?

EXPLAIN WHY THEY ARE CONSIDERED TO BE QUESTIONABLE.
WHAT IS ONE
INCORRECT
ARGUMENT IN FAVOR OF PROTECTIONISM?

EXPLAIN WHY IT IS INCONSISTENT WITH ECONOMIC REASONING.
ARGUMENTS AGAINST PROTECTIONISM
RAISE PRICES TO CONSUMERS & PRODUCERS
LESS CHOICE FOR PRODUCERS/CONSUMERS
DECREASE IN COMPETITION = INEFFICIENCY = DECREASE IN INNOVATION
DISTORTS COMPARATIVE ADVANTAGE = INEFFICIENT USE OF WORLD'S RESOURCES = DECREASE IN POTENTIAL OUTPUT
HINDER ECONOMIC GROWTH
TYPES OF PROTECTIONISM
TARIFFS

SUBSIDIES

QUOTAS
TARIFF:
A tax that is charged on an imported good.
SUBSIDIES:
The amount of money paid by a government, to a firm, per unit of output.
QUOTA:
A government imposed limit on the number or value of goods that can be imported into a country.
Non-Tariff
Barriers
NTB's
FREE TRADE:
Unrestricted purchase of G&S between countries where no barriers exist.
What is the WTO?
Full transcript