33.1 Free Trade or Protection? Flashcards
What is a tariff?
tariff
A tax applied on imports of goods or services.
What are non-tariff barriers?
Non-tariff barriers (NTBs) are policies other than tariffs designed to reduce the flow of imports; examples are import quotas and customs procedures that are deliberately more cumbersome than necessary.
How does free trade affect a country?
Free trade makes the country as a whole better off, even though it may not make every individual in the country better off.
What is Protection in terms of international trade?
protection
Any government policy that interferes with free trade in order to protect domestic firms and workers from foreign competition.
What are five valid arguments for protection?
- promoting diversification
- protecting specific groups
- improving the terms of trade
- protecting infant industries
- earning economic profits in foreign markets
Note that the first two arguments generally involve achieving some worthy objective at the cost of a reduction in national income. The last three arguments are reasons for protection as a means of increasing a country’s national income.
How can protectionist policies help countries small countries that only specialized in a few products?
By using protectionist policies, the government can encourage the creation of some domestic industries that may otherwise not exist. The cost is the loss of national income associated with devoting resources to production in industries in which there is no domestic comparative advantage. The benefit is that overall national income and employment become less volatile.
How can protectionist policies protect unskilled workers?
Protectionist policies may raise the incomes of unskilled Canadian workers, giving them a larger share of a smaller total GDP. The conclusion is that trade restrictions can improve the earnings of one group whenever the restrictions increase the demand for that group’s services. This benefit for one group is achieved, however, at the expense of a reduction in overall national income and hence the country’s average living standards.
Social and distributional concerns may lead to the rational adoption of protectionist policies. But the cost of such protection is a reduction in the country’s average living standards.
What kind of countries can improve their terms of trade by levying tariffs?
Large countries can sometimes improve their terms of trade (and thus increase their national income) by levying tariffs on some imported goods; small countries cannot.
Note that not all countries can improve their terms of trade by levying tariffs on imported goods. A necessary condition is that the importing country has market power—in other words, that its imports represent a large proportion of total world demand for the good in question, so that its restrictive trade policies lead to a decline in the world price of its imports.
What is the infant industry argument?
infant industry argument
The argument that new domestic industries with potential for economies of scale or learning by doing need to be protected from competition from established, low-cost foreign producers so that they can grow large enough to achieve costs as low as those of foreign producers
What is a problem that may occur with the infant industry argument?
One practical problem with the infant industry argument for protection is that some infants “never grow up.” Once the young firm gets used to operating in a protected environment, it may resist having that protection disappear, even though all economies of scale may have been achieved.
What is the general idea of strategic trade policy?
Another argument for protectionist policies is to help create an advantage in producing or marketing some product that is expected to generate economic profits through its sales to foreign consumers. If protection of the domestic market, which might include subsidizing domestic firms, can increase the chance that one of the domestic firms will become established and thus earn high profits, the protection may pay off. The economic profits earned in foreign markets may exceed the cost to domestic taxpayers of the protection. This is the general idea of strategic trade policy.
How can a country potentially increase its national income?
A country can potentially increase its national income by protecting infant industries and by subsidizing “strategic” firms. Unless carefully applied, however, such policies can end up being redistributions from consumers and taxpayers to domestic firms, without any benefit to overall living standards.
What are some invalid arguments for Protectionism?
Some invalid protectionist arguments are that (a) buying abroad sends our money abroad, while buying at home keeps our money at home; (b) our high-paid workers must be protected against the competition from low-paid foreign workers; (c) imports are to be discouraged because they reduce national income; and (d) trade protection increases domestic employment.
Explain the misconception of “Keeping the money at home”
This argument says that if I buy a foreign good, I have the good and the foreigner has the money, whereas if I buy the same good locally, I have the good and our country has the money, too. This argument is based on a common misconception. It assumes that domestic money actually goes abroad physically when imports are purchased and that trade flows only in one direction. But when Canadian importers purchase Japanese goods, they do not send dollars abroad. They (or their financial agents) buy Japanese yen and use them to pay the Japanese manufacturers. They purchase the yen on the foreign-exchange market by giving up dollars to someone who wants to use them for expenditure in Canada.
