Economic Analysis of Trade restrictions Flashcards
Popular Arguments for Restricting Trade
Governments implementing restrictions on free trade (especially imports) might have various objectives
Political motives (restricting trade)
-To stay self-sufficient for reasons of national security
-To gain political influence over some countries e.g. by trade embargos like with Cuba
-To gain bargaining power in international negotiations
-To gain internal political support by offering protection to firm owners/workers/regions in declining industries which are under pressure of imports
Sociocultural motives (restricting trade)
-To protect traditional ways of life and production (national identity)
-To reduce foreign influence (ads) on domestic consumer tastes
-To protect the domestic language against the inclusion of foreign phrases
-To prevent the importation of harmful goods such as drugs or ill live animals
-To protect natural environment and bio-diversity
Economic arguments for trade restrictions
-Fiscal argument (To generate revenue for the government, drought tariffs)
-Balance-of-payments (to improve net exports)
-Job argument (To keep jobs in the import-competing industry)
-Senile (sunset) industry argument (Protecting declining industries during the restructuring process until they become sufficiently competitive)
-Retaliation argument (Protect domestic producers from unfair trade practices of a foreign country (such as export subsidies or import protection).
-Diversifying argument (Limit over-specialisation and spread the risk of price fluctuations of export products through the diversity of national production)
-Export upgrading argument (To reduce reliance on goods with little dynamic potential like good and natural resources )
-infant (To protect domestic emerging industries (with potential economies of scale))
-competition argument (To support domestic firms in an imperfectly competitive industry with increasing returns to scale, where mature foreign competitors already possess monopoly power)
Strategic Trade Policy
a government policy to give a domestic firm in an imperfectly competitive industry a strategic advantage in production.
what kind of strategic trade policy do they do?
use of trade barriers and government subsidies can increase long- run competition and shift excess profits from a foreign firm to a domestic firm in the long run.
example : EU support to the European aircraft manufacturer Airbus
what it brings (strategic trade policy)
to exploit a comparative advantage that they could not have done otherwise.
Why the overall positive welfare effect of the strategic trade policy is unclear?
-Complicated information requirement in the selection process
-Positive effects spill over globally
-Beggar-thy-neighbour policy (politique de chacun pour soi), threat of retaliation
negative effects of protection from imports (relative to free trade)
-Higher prices for domestic consumers and producers
-Lower availability and diversity of final goods and intermediate inputs
-Lower domestic exports and income (lower income of the trade partners)
-Threat of retaliation and trade wars further reducing trade and welfare of all involved countries
-Lower overall efficiency of the domestic economy
world multiplier effect
an injection of new spending (exports, government spending or investment) can lead to a larger increase in final national income (GDP)
Problem with protection: Lower overall efficiency of the domestic economy because ..
-Lower reallocation of resources towards sectors with comparative advantage and economic of scale
-Lower technological progress
-Bureaucracy, large administrative costs
-Corruption
-Rent seeking: An (unproductive) activity, such as lobbying, by individuals, firms, or special interests to alter the distribution of income in their favor
Welfare Effects of Protection from Imports (effect of a tariff on imports)
Import protection creates inefficiency because it prevents mutually beneficial trade from occurring (voir graphic page 139)
Why do these sectors (agriculture, cloth) enjoy the highest level of protection against foreign competition?
For groups that would suffer large losses from free trade (jobs, income, wealth), each individual has a strong incentive to advocate restricted trade. The cost and time required to advocate protectionism are small compared to the cost of, say, being unemployed.
The Collective-Action Problem
While consumers as a group have an incentive to advocate free trade, each individual consumer has no incentive because his benefit is not large compared to the cost and time required to advocate free trade.
Free riders are part of the collective-action problem
Since the benefits of free trade are spread to all consumers, nobody can be excluded from them, even when she was not ready to actively oppose protection. This reduces incentives to individuals for personal engagement in favor of free trade.
