just a little read from my bases of world economics class i am taking right now about free trade and tariffs.
The case for free trade and arguments for protection
Case for free trade
• Comparative advantage shows that trade benefits overall economy
• Some economists reserve support of free trade based on certain conditions
– Departure of actual markets from conditions of perfect competition
– Absence of any relation between higher income and higher welfare at national and international levels
Protectionism
• Protection is a policy prescriptive to overcome the defects of imperfect competition in international markets
• Protection is oriented to favor particular industries
• The difference between interregional and international trade is politics
Keep the money at home
• Domestic residents buy the imported goods
• The country gets the goods but the foreigner gets the money
• In domestic trade, the country gets the product and keeps the money
• Fallacious argument:
– Money and wealth are not synonymous
– Money is a means of exchange
– Money for imports must return to the country as payment for exports or as investment
• Foreign exchange redemption value only in country of issue
Home market argument
• Domestic producer has a right to the domestic market
• Reducing or eliminating imports will lead to more goods produced at home, and more jobs will be created
• Problem: any shift from imports means a contraction of production for export
• Leads to a real decline in purchasing power
– Weakens the domestic economy
Equalization-of-costs argument
• Use a so-called scientific basis for assigning tariffs to equalize cost structures between economies
• Recently presented as the “fairness” doctrine
• Problem of differing and constantly changing costs facing producers in different countries
– What costs are to form the frame of reference?
• This is an intractable solution, and carried to an extreme, would prohibit international trade
Low-wage argument
• High-wage countries cannot trade with low-wage countries without risk of lowering their wages and decreasing their standard of living
• Alleged that a country can only lose when trading with a low-wage country
• Some domestic industries with relatively low productivity will feel wage pressures
– This is a signal for reallocation of labor and capital to different production regime based on comparative advantage
– Protection is not the answer for domestic industries facing pressures from sagging productivity gains
Prevention-of-injury argument
• Willingness to lower and reduce tariffs so long as domestic industries are not harmed
• Appears reasonable and moderate
• However, related to the home market and equalization-of-costs arguments
• Likely to encourage the perpetuation of static and regressive industries
Employment argument
• Use tariffs to limit imports during periods of higher unemployment
• Unemployment justifies import restrictions and the development of any domestic industry
• Questionable policy response to cyclical unemployment
– More problematic to use to remedy structural unemployment
Antidumping argument
• Dumping of goods into import market at prices below prevailing prices in the exporting country
• Action required in predatory dumping
• Antidumping provisions are important aspects of trade agreements
• Governments will use antidumping policies just for protection
Bargaining-and-retaliation argument
• Argument that it is ok to install protective barriers to trade for the benefit of a better bargaining position with other countries
• Free-trade (i.e., low-tariff) countries should adopt non-tariff protection for better bargaining position
• May have some political value, but has no economic validity
Reciprocity argument
• Raise restrictions on trade with countries that refuse to lower their own protection barriers
• Sometimes presented as a policy in support of further free trade
• US, for example, seeks “reasonable” and “equal access” to foreign markets
• Problems of measuring policy goals and execution of this policy
National security argument
• Nations need to limit dependence upon foreign sources for strategically important industries in the production of national defense
• Free trade does not mean a nation deny its ability to defend itself
Infant industry argument
• Infant industries require some start-up time before they are swallowed by foreign competition
• Not all new industries require protection
• Risk that protections afforded these industries will persist
– Some mistakes are irreversible
• Woolen-worsted industry afforded protection in early years of US, still protected to this day
Diversification argument
• Import protection to bring about export diversification
• Import protection to achieve diversification in the domestic economy
• Single commodity economies vulnerable to diversification problems
– Overspecialization
• Problems with this policy when principles of comparative advantage ignored
– Example of post-WWII Latin America
Optimal tariffs and terms-of-trade argument
• Sophisticated argument for establishing tariff structure based on import demand elasticities
• Terms of trade: exporter is expected to absorb part of duty
– Extreme case where tariff-levying country is a monopsony
• Overall, difficult policy to enact, manage, and administer
• Raises prices for domestic producers at the cost of consumers
The theory of second best
• Protection is a second-best policy because optimality of ideal free trade is unachievable
• Not an argument for protection per se
• Theory of second best says any policy that improves economic efficiency and reduces the margins of social cost to benefit is useful
– Regional trade arrangements and regional tariff reductions
