Chapter 7 Flashcards
Why do nations protect their industries?
Revenue
To protect jobs
Industrial targeting
National security
Cultural protection
Retaliation against unfair trade practices
Why is revenue protected?
A lot of economic activity is unrecorded - tariffs are easy to assess and collect - USA had tariff revenues be the greatest source of income
As countries become richer, they depend less on tariffs
Why are jobs protected?
Nations must protect their markets against imports from countries where wages are lower since the advantage of lower wages either wrecks domestic industry or will need to match it - NAFTA - Mexico had argument that there is unfair advantage in trade with the USA since Mexican firms pay workers a fraction of the wages paid in America - but there is also lower productivity since education is lower
What 2 things is the labour argument complicated by?
Workers lack bargaining power
Difficult to disentangle changes caused by tech than those cause by trade with lower wage countries - with product cycle, change from high skilled workers to lower skilled workers
How does fiscal policy change competition?
Spending on infrastructure leads to more efficient transportation - lowering costs
How does monetary policy change competition?
Change in interest rates affects the cost of borrowing and overall economic conditions
Will productivity increase with tariffs?
productivity = Q/L
Yes, with tariff L increases, with import substitution - M falls, Q increases relatively larger
What is import substitution?
Imported goods are substituted by domestically produced goods
Why are infant industries protected?
Market forces will not support the development of an industry since foreign competition is well established but also industry is risk
Spillover benefits that make the industry more valuable to the national economy than simply wages/profits it may generate
How can the validity of the infant industry be established?
Protection offered must be limited in time - ensures industry is not permanent recipient of transfers from consumers
Protected industry must experience falling costs - policy pays for itself and industry becomes competitive
Why is national security protected?
The government can give subsidies when national security is argued
What are 2 problems with the national security argument?
Countries refused to trade tech or weapons with potential adversaries - subsidies are efficient
Easily captured by special interests - never know why the country will say no - USA with Huawei - is it a threat or are domestic producers protected?
Why is cultural protection protected?
Culture like movies, theatre, etc. is protected - if country allows free trade, home country will be forgotten
Why is retaliation for unfair practices by other nations protected?
When a country decides that another country’s trade practices unfairly discriminate against it, a common response is to impose a trade barrier
Retaliatory tariffs and quotas can provide an incentive for negotiations, but they can also lead to trade wars
What are antidumping duties (ADD)?
Tariff levied on imports when foreign firms sell goods at a price below fair value - they are dumping
What is countervailing duties?
Tariff levied to an industry that has been hurt by foreign country subsidies of its national firms
