political economy of trade © 2015 melvin jameson
TRANSCRIPT
© 2015 Melvin Jameson
Political Economy of Trade
© 2015 Melvin Jameson
1. Political Consequences of the Economics of Trade
© 2015 Melvin Jameson
Why trade increases welfare
Because of the differences between countries, reallocating production to increase specialization increases total output.
© 2015 Melvin Jameson
Sources of GainsLocal prices converge toward a world priceProduction is reallocated
Each region specializes in its comparative advantage
Permits an increase in production of both products
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Factor-Price Equalization: Consequences for trade policy
“Stolper-Samuelson Theorem” extends theory of factor price equalization.A country has a comparative advantage in
products that intensively utilize abundant factors.
Trade increases the (domestic) price of these products and thus the wage of the abundant factor.
Thus owners of the relatively abundant factor favor free trade and those of scarce factors oppose it. Particularly when the factors are specialized or
immobile.Despite net benefit resulting from trade
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Winners and Losers from TradeWinners:
Producers in exporting countryConsumers in importing country
LosersProducers in importing countryConsumers in exporting country
Total gains exceed total losses
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A tariff reduces the effects of trade
Volume of tradeDegree of price convergenceGains of winnersLosses of losersNet benefit of trade
Partial transfer to government collecting tariff
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Effect of a Tariffprice
Quantity
P*
P*+T
Domestic Demand
S S’ D’ D
AB
C D
Domestic Supply
P* = world price
T = Tariff
A = Gain to Suppliers
C = Tariff Revenue
A+B+C+D = Loss to Consumers
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Application:Trans-Pacific Partnership: reaction of
Japanese farmersAmerican farmersJapanese automobile manufacturersAmerican automobile manufacturersPharmaceutical manufacturers
Background reference (from last session) Pacific Deal Rewrites Rules on Trade in Autos, Patented Drugs
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Political Economy of Trade Policy
Arguments for Trade RestrictionsJob protection (disregards export industriesInfant industryFairness in trade (foreign aid to industries)National security (protect essential
industries)Retaliation
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Political Economy of Trade Policy
Typically dominated by producers:Well organized, well defined groups that are
very aware of their economic interests.ConsumersEconomic losses, although large in total, are
widely dispersed and individually small.Generally not organized or well-informed
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2. Trade and Trade-policy games
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Dynamic effects of trade barriersReduced competitiveness of domestic
industryForeign competitors adjust
Direct foreign investmentChange product types
Substitute more expensive products Seek loopholes in tariff
Trade retaliation
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Application: Responses to trade barriers
Wall St. Journal Sept. 22, 2009 p. A1
“Ford Strips Its Own Vans” – UNLV Library Link
Or see separate posting.
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Non-tariff BarriersAlternative means to limit tradeThe effects are generally similar to tariffs and
natural impediments to trade (transportation)But can be some nuance regarding
distribution of cost and gainsdynamic responsedomestic politics and international relations
surrounding their implementation
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Types of non-tariff BarriersQuotasTariff-rate quotaExport quotas (“voluntary” export restraint)Domestic content requirementsSubsidiesGovernment procurement policiesSocial Regulations
health, safety, environmentSea transport and freight regulations
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Effects of Import QuotasStatic effects same as an equivalent tariffBut no tariff revenue is for the government.
That benefit accrues to whoever receives quotaDynamic effects differ
Quota less responsive to changing domestic demand or supply
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Tariff-rate quotasA two-part tariff
A set amount may be imported duty free or at a lower “within quota” tariff.
Any further imports must pay a higher, “over quota” tariff.
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SubsidiesAdditional payment to producer above world price.Export subsidy – raises total output
Exports increase, domestic sales reducedRaises domestic price, may lower world price
General subsidy – all productionRaises total output, creates deadweight lossCost borne by taxpayers
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Other types of non-tariff Barriers
Domestic content requirementsGovernment procurement policiesSocial Regulations
health, safety, environmentSea transport and freight regulations
can be costly and restrictive
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Regional Trade Agreements
Building blocks or stumbling blocks?
“Game of Zones” Economist March 21, 2015
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Regional Trade AgreementsTypes
Preferential trade area – reduced tariffs for members
Free trade area- zero tariff for membersCustoms union – common external tariff policyCommon market – all factors mobile withinComplete economic integration – common
currency, regulation, tax policy etc.