I bet you wonder how I knew about your plans to make me blue with some other guy you knew before. Between the two of us guys you I love you more. It took me by surprise (drive me crazy), when I found out yesterday. Dont you know that...

I heard it through the grapevine. How much longer would you be mine? Oh I heard it through the grapevine, and Im just about to lose my mind. Honey, Honey, Yea. Heard it through the grapevine, how much longer would you be mine, baby oooo oooo oo oo

I know a man aint supposed to cry, but these tears I cant hold inside. Losing you would end my life you see, cause you mean that much to me. You could have told me yourself that you love someone else. Instead...

I heard it through the grapevine. How much longer would you be mine? Oh I heard it through the grapevine, and Im just about to lose my mind. Honey, Honey, Yea. Heard it through the grapevine, how much longer would you be mine, baby oooo oooo oo oo

People say beware of what you see, supply and demand are what you hear. I cant hide being confused. If it is true please tell me dear. Do you plan to let me go for that other guy you loved before? Dont you know...

A Trade Policy Puzzle Gains from trade arguments (such as comparative advantage) suggest removing trade barriers, a policy of free trade –wide agreement among economists Yet, we see many trade barriers--tariffs, quotas, and less visible barriers Lets look at the –effects –reasons –remedies

Effect of a tariff

Effect of a Quota

Effect of a Voluntary Restraint Agreement (VRA)

Equivalence of Tariff, Quota, VRA All reduce quantity imported All raise the price consumers pay by the same amount Differences –for tariff, revenue goes to government –for quota, that revenue goes to quota holder –for VRA, that revenue goes to foreign firms as profit

Mini History of U.S. Trade Policy Before the income tax, tariffs were the major source of revenue to the U.S. government Tariffs have fluctuated greatly reflecting internal political conflicts (abominations), trade wars (Smoot-Hawley), and new techniques to remove trade barriers (GATT)

Economic and other arguments against free trade Infant industry argument –due to Alexander Hamilton –industry needs protection until it gets big enough to keep costs low –but protection usually lasts well beyond infancy not clear which industry to protect

national security argument certain goods or services are needed in time of war –shipping: Jones Act (shipping between U.S. ports must be on U.S. ships) –VRA on machine tools –rice!!!!! –textiles needed for military uniforms!!!!! Alternatives –stockpile crucial materials

retaliation argument use threat of a trade barrier as a bargaining instrument but –can cause trade war –is usually used as a specious argument for protection

monopoly power argument hold back exports to exploit other countries –OPEC cartel beggar thy neighbor

Argument against reducing trade barriers because of costs during transition to free trade True, we do not instantly move to the benefits of free trade and some people can be harmed during the transition But better to –phase out barriers slowly (10 years) –give assistance (unemployment compensation, welfare) Analogy with new technological innovation

Argument that other countries are subsidizing their industries But they are giving U.S. consumers a good deal; why complain? Most difficult to deal with in practice because it does not seem fair

Policies to Remove Trade Barriers (Traditional) Unilateral Disarmament –Smith, Ricardo, Repeal of corn laws in England –rarely works, example of textile quota (Poland) Multilateral-- Reciprocal Tariff Reduction (GATT, WTO) –Most Favored Nation (MFN) approach –has worked very well--tariffs way down since WWII

Policies to remove trade barriers (newer) Regional--NAFTA, fast track for Chile –trade creation versus trade distortion –free trade area versus common market rules of origin (15 pound agreement) Bilateral dealings –U.S. - Japan –U.S.- China –quiet now because of Asian financial crisis, (lets get on to macro to find out why).