Digging Deeper into the Costs and Benefits of Free Trade Flashcards
Cases for Free Trade
(a) producers and consumers allocate resources most efficiently when governments do not distort market prices through trade policy
(a. i) overall country welfare is higher with free trade
(a. i) consumers pay lower prices
(b) allows firms or industries to take advantage of economies of scale (the more you produce, the lower your per unit cost)
(c) provides competition and opportunities for innovation
(d) free trade is the best feasible political policy, even though there may be better policies in principle –> other policies would be quickly manipulated by special interests, leading to decreased national welfare
(e) links countries together (countries have a vested interest in working together)
(f) moreover, the costs of protectionism are often understated because they do not include:
(f. i) secondary effect on other industries (ex: dock workers)
(f. ii) bureaucratic costs of enforcement, as well as costs of avoidance
(f. iii) reduction in exports due to the effect on foreign incomes
(f. iv) a welfare effect since low income categories are hurt more
Cases against Free Trade
(a) for a “large” country, a tariff/quote lowers the price of imports in world markets –> terms of trade gain –> may exceed losses to consumers and exporters, BUT:
(a. i) only one optimal tariff rate exists (a higher rate would mean that consumer costs would be greater than the terms of trade gain); this rate would have to be constantly adjusted according to market situation
(a. ii) need to be careful of retaliation from other countries
(b) domestic market failures may exist that cause free trade to be a sub-optimal policy:
(b. i) persistently high underemployment of labor
(b. ii) persistently high underutilization of capital
(b. iii) technological societal benefits not captured by firms
(b. iv) environmental societal costs not paid for by firms
(c) imperfectly competitive industries are generally dominated by a few firms with the potential to earn monopoly profits –> subsidies can shift these profits from a foreign firm to a domestic firm, BUT:
(c. i) requires detailed information about firms
(c. ii) foreign retaliation likely
(c. iii) can be manipulated by politically powerful groups
(c. iv) ex: Boeing and Airbus
