free trade vs. protectionism
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Free Trade vs. Protectionism. Frederick University 2012. Free Trade vs. Protectionism. “If there were an Economist’s Creed it would surely contain the affirmations: ‘I understand the principle of comparative advantage’ and ‘I advocate free trade’” Paul Krugman. - PowerPoint PPT PresentationTRANSCRIPT
Free Trade vs. Protectionism
Frederick University
2012
Free Trade vs. Protectionism
“If there were an Economist’s Creed it would surely contain the affirmations: ‘I understand the principle of comparative advantage’ and ‘I advocate free trade’”
Paul Krugman
Free Trade vs. Protectionism
Trade Protection (Protectionism) - Policies that limit imports, usually with the goal of protecting domestic producers in import-competing industries from foreign competition
Free Trade vs. Protectionism
Showing that free trade is better than no trade is not the same thing as showing that free trade is better than sophisticated government intervention
Trade Restrictions
Tariffs - taxes levied basically on imported goods. They are imposed as an attempt to raise foreign exchange revenue and increase the welfare at the expense of other nations.
Nontariff barriers - all forms of trade restrictions other than tariffs.
Tariffs ad valorem import tariff - expressed as a
percentage of the invoice value of the imported good
specific tariff - a fixed sum levied on a physical unit of the good no matter what its invoice price is
compound duty - a combination of ad valorem and specific duties
variable levy - calculated daily official prices - a basis for ad valorem duty
calculations
The Effect of a Tariff
P
Q
D
S
Pd
Pw
Sd Dd}
M
} tPt
a
a – producer gain
c
a + b + c + d – consumer loss
St Dt
b d
c – government collection
b + d – deadweight loss
b – consumer loss due to thedemand shift to domestic supply
- production effect
d –consumer loss due to the reduction in consumption consumption effect
}
Nontariff barriers quantitative restrictions
Quotas - numerical limits for a specific kind of good that a country will permit to be imported without restriction during a specified period
Voluntary export restraints Tariff quotas -permit a stipulated amount to enter
the country duty free or at a low rate, but when that quantity is reached, a much higher duty is charged for subsequent importations
technical regulations administrative regulations other regulations of imports
The Import QuotaP
Q
SdDd
Pw }
q
Sq
Pq
QsqQs QdQdq
a
a – producer gain
b c d
a + b + c + d – consumer loss
b + d – a loss to the country
c – transfer from domesticconsumers to someone else
Arguments for trade restrictions The need of protection of domestic labour markets
against cheap foreign labour The desire to reduce domestic unemployment The need to counteract dumping in international trade The need to protect the infant industries Protect industries important for national defence Decrease the national balance of payments deficit Improve the nation’s terms of trade and welfare Strategic trade policies The scientific tariff The need to protect national health and safety
standards
Strategic Trade Policies economies of scale justify the operation of just
one firm in the world market as a whole lucky firms in the industry may be able
generate returns higher than the opportunity costs of the resources they employ
the country can raise its national income at other countries’ expense if it can somehow ensure that the lucky firm that gets to earn excess returns is domestic rather than foreign
Strategic Trade Policies – an exampleAssumptions: Two companies from two countries are capable
of producing a good Neither country has any domestic demand for
the good – the good is intended solely for export The producer surplus coincides with the national
interest Each firm faces only a binary choice – either to
produce or not to produce The market is profitable for either firm if it
enters alone, unprofitable for both if both enter
Strategic Trade Policies – an example The good is a 150 – seat passenger aircraft The firms are Boeing and Airbus The countries are the U.S. and the EU
The Payoff Matrix
Airbus
P N
P -5 0
Boeing -5 100
100 0
N 0 0
Strategic Trade Policies – an example Boeing has some kind of head start that
allows it to commit itself to produce before Airbus’s decision
Boeing earns 100 while deterring entry by Airbus
The EU decides to subsidize Airbus at a point before Boeing is committed to produce
The EU pays a subsidy of 10 to Airbus if it produces the plain, regardless of what Boeing does
Strategic Trade Policies – an example
The Payoff Matrix after European Subsidy
Airbus
P N
P 5 0
Boeing - 5 100
110 0
N 0 0