Welfare effects of trade barriers Outline 1.Protectionist measures 2.Economic effect of an embargo 3.Economic effect of a tariff 4.Economic effect of a quota 5.Arguments for protectionism

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

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.

Protectionism, part 2 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. 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

Effect of tariffs and quotas on imports, domestic production, and prices P W is the world price—that is, the price of the good that world be established in a global market without trade barriers. P d is the domestic price—that is, the price in the domestic market if imports were equal to zero. Q d 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. P q is the domestic price under the imposition of a quota.

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.”

effect of a tariff on oranges 0 Price ($) Quantity (tons) D S PWPW P W + T PdPd Free trade imports Imports with tariff q1q1 q5q5 q4q4 qdqd q2q2 Domestic production increases from q 1 to q 2. The domestic price of oranges increases.

effect of a Quota on oranges 0 Price ($) Quantity (tons) D S PWPW PqPq PdPd Import quota = 100 tons Domestic production increases from 100 to 200 tons.. The domestic price of oranges increases. Free trade imports = 300 tons S + Quota

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.”

Industry Cost to Consumers Per Job Saved Autos$105,000 Color TVs420,000 Motorcycles150,000 Athletic Footwear30,000 Apparel 37,000 Specialty Steel1,000,000 Glassware200,000 Sugar60,000 Ball Bearings90,000 Costs of protecting U.S. jobs from foreign competition Source: Coughlin, et al. (1988) and Hufbauer, et al

Country Tariffs as a % of Government Revenue U.K. 0.1% Japan 1.2 U.S. 1.5 Costa Rica 16.1 Ghana 31.2 Dominican Republic 44.2 Lesotho 55.1 Tariffs as a percentage of total government revenue Source: World Bank