B10 Flashcards
The political economy of trade policy
Explain a potential hidden loss associated with protectionism
If markets are isolated it pervents economies of scale and stops firms with a comparative advantage and higher productivity from reaching a wider market, thus decreasing the welfare for consumers beyond just the added cost of a tariff or quota rents. In the case of quotas it may also lead to unproductive investment to qualify for an import license.
A small tariff may improve the terms of trade for large countries and thus national welfare
true, although as the tariff increases the loss from efficiency loss increases faster than the welfare gain from terms of trade so the optimal tariff is a small one and relies on other large countries not taking retaliatory actions
What is the domestic market failures argument against free trade
When for some reason or another an unprotected domestic economy would not be able to realocate the resources to focuse on its strengths and thus a lack of protection wold lead to wide spread unemployment and wasted resources. Domestic production may also have other social benefits which are not captured by producer surplus such as keeping potential thieves occupied
What is the theory of the second best
The idea that government intervention on trade like tariffs might correct domestic market failures
What are the arguments against the theory of the second best
That 1 governments shoud deal with the problems where they are f.ex with a social safety net instead of helping unproductive industries and 2. that economists cannot diagnose market failures well enough to decide the apropriate size of an intervention
What is the political theory of the median voter and does it work for the question of trade
The theory of the median voter is that a party gains the most votes if it has opinions that benefit the median voter as it would give it the majority in an election however we see the oposite case in the question of trade as minorities are prioritized over majorities
what is the problem of collective action and when does it tend to be overvome
If a group gains from an action but the individual gain for doing that action is small the action tends to not be done and the group is worse off. However if the group is small it can become well organized and the individuals may gain more from doing the action and thus small groups win over large ones
Can a politician theoretically gain votes by taking an unpopular opinion
yes, by gaining funds from special interest groups they may reach a wider audience than they would with milktoast rethoric
Why do we need trade agreements
To avoid trade wars due to the priznors dilemma, the best is if no one has a tariff but if they fear that the other one will put on a tariff they might do it preventively. Exporters might also be a good political counterwight to those afraid of imports
what is binding in trade agreements
A promise not to raise tariffs any further in the forseable future
What is a trade round
A large gathering of countries where they negotiate about lowering tariffs
What happens if you violate the rules of GATT/WTO
while the world trade organization has no power the violating country will get a reputation as an unreliable partner and other countries may get the right to retaliate
Is the third world hurt by first world agricultural export subsidies
No they gain food for unnaturally low prices
Is preferential trade agreement allowed by the GATT
No not generally countries are not allowed to discriminate with their tariffs but with one exception, it is allowed for two countries to agree on free trade between eachother by creating a free trade area like NAFTA or a customs union like the EU
What is the difference between a free trade area and a customs union
A free trade area is politically simple but administratively complex while a customs union is the opposite. In the case of a customs union all parties must agree on tariffs together but then they only have one border to guard while a free trade area must still check all borders so no countries try to bypass potential tariffs through other countries in the area. This becomes especially complex when supply chains become involved what about a shirt from bangladesh with its buttons fitted in mexico, does it belong in nafta?
