Trade Protection AP Macroeconomics Brooms: 32% tariff

Gains from International Trade Lower prices Gains from International Trade

Gains from International Trade Greater choice Lower prices Gains from International Trade

Gains from International Trade Differences in resources Greater choice Lower prices Gains from International Trade

Gains from International Trade Economies of scale Differences in resources Greater choice Lower prices Gains from International Trade

Gains from International Trade Increased competition Economies of scale Differences in resources Greater choice Lower prices Gains from International Trade

Gains from International Trade Source of foreign exchange Increased competition Economies of scale Differences in resources Greater choice Lower prices Gains from International Trade

S(Domestic) D S(World) P W P e Price of wheat ($ per ton) Q1 Qe Q2 Quantity of wheat (000s tons)

S(Domestic) D S(World) P W P e Price of wheat ($ per ton) Q1 Qe Q2 Quantity of wheat (000s tons)

S(Domestic) D S(World) P W P e Price of wheat ($ per ton) Q1 Qe Q2 Quantity of wheat (000s tons)

Arguments for Protectionism Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Strategic reasons Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Prevent dumping Strategic reasons Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Protect product standards Prevent dumping Strategic reasons Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Raise government revenue Protect product standards Prevent dumping Strategic reasons Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Arguments for Protectionism Correct balance of payments deficit Raise government revenue Protect product standards Prevent dumping Strategic reasons Avoid risk of over-specialization Protect an infant (sunrise) industry Protect economy from low-cost labor Protect domestic employment Arguments for Protectionism

Government Intervention in International Trade Tariffs Quotas Regulations to limit trade Government Intervention in International Trade

P W P e Price of wheat ($/ton) S(Domestic) D S(World) P W P e Price of wheat ($/ton) Q1 Qe Q2 Quantity of wheat (000s tons) S(World) + tariff Pw+t Q3 Q4 Increase domestic Decrease domestic production consumption

Consumer Surplus Before & After Tariff Price Consumer Surplus S PW + T a b c d PW Q1 D Quantity Q3 Q4 Q2 Change in consumer surplus = - a - b - c - d

Producer Surplus Before & After Tariff Price S PW + T a PW Q1 D Quantity Q3 Q4 Q2 Change in producer surplus = + a

Summarize to this Point … Price Consumer Surplus S PW + T a b c d PW Q1 D Quantity Q3 Q4 Q2 Change in consumer surplus = - a - b - c - d Loss in Total Surplus = ????? Change in producer surplus = + a = (b + c + d)

Net Change in Society Wealth with Tariff Price Consumer Surplus T · (Q4 – Q3) S Net change in welfare? Net loss: b + d PW + T “Deadweight loss” a b c d PW Q1 D Quantity Q3 Q4 Q2 Change in consumer surplus = - a - b - c - d Change in producer surplus = + a + c Change in government revenue =

S(Domestic) D S(World) P W P e Price of wheat ($/ton) Q1 Qe Q2 Quantity of wheat (000s tons) S(World) + tariff Pw+t Q3 Q4

Illustrate and Explain… Draw your own copy of the tariff diagram, with semi-conductors in Japan as the example. Make a table with two columns: Winners and Losers. List stakeholders who win or lose by the imposition of the tariff and give a brief explanation in each case of why. Consider possible international implications. Use the letters in the diagram to specifically identify the costs and benefits.