International Economics

TOPIC 6
Trade Policies PK:ch.8,9,10 Husted/Melvin:7,10

Topic 6 Outline
Analytical and Practical Effects of Protection: Arguments and Cases Political Sense behind Trade Policy How Trade Policy Affect LDCs

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TOPIC 6

Trade Policies

Arguments for Protectionism Infant industry protection Definition: weak but growing industry

which needs to be temporarily protected so as to overcome the initial import competition and be prosperous.

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Debate:
Questions need to be answered:

grow or never grow up? Government or Market pick up the Industry? Better confined to DCs or LDCs or all of them? Production subsidy or Direct control?

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Some valid arguments

Government revenue
But it differs from country to country

Domestic distortions
Because the market is not perfect A second best way of alleviating problems

Protecting the Environment

Negative externality

Strategic Trade Policy

Few number of firms for increasing return
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The Famous Payoff Matrix

Assume: Two big firms in one industry

Before subsidy A P N P ( -5,-5) (100,0) N (0,100) (0,0)

After subsidy by one side with 10 A P B N (0,110) (0,0) N P ( -5, 5) (100,0)

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Non-economic Goals
National defense
Some industries are vital to national defense

Patriotism
USA: the stickers labeled Be American Buy American Australia: Whenever You Trade,Buy Australian Made

Fairness for home industry and market

Fair play; preservation
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The Optimum Tariff

a tariff rate is justified to increase the welfare of the nation and achieve the height of it before declining.
National Welfare

Optimum Tariff
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Prohibited

Tariff Rate
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Why Free Trade

Efficiency
P S

Pw+ t World Price D A small economy will gain from efficient production and consumption!
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The Politics of Trade Policy

National welfare and welfare of particular groups
Voting by judging the preferred tariff policy:
Preferred Tariff Political support

Voters
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Median voters

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The Politics of Trade Policy

Who gets protected Some industries like agriculture, clothing;
Working class Producers

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How Trade Policy Affect LDCs

75% of the low and mid income countries of the whole world
Characterized by:low per capita income; high rate of illiteracy; high birth rate;

They tend to protect a variety of industries for economic development. Two major types of policies
outward looking trade policies; inward looking trade policies
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Discussion Topic:
What types of trade strategies should be practiced by China currently in a Global trade system? Please Note:
1. 2. 3. 4. 5. Team work: 5 teams, each team of 4-5 1-2 Clearly Delivery of team arguments Debating on related issues rising from the presentation PPT tech is encouraged to use 5 minutes for main speakers
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TOPIC 6
Further Reading for knowing questions 1. The PNTR: Background and prospect 2. Doha Round Negotiation 3. TBTs 4. Non-economic considerations in 2013/4/12 Business Services Trade

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