Welfare effects of trade barriers

Outline 1. Protectionist measures

2. Economic effect of an embargo

3. Economic effect of a tariff 4. Economic effect of a quota 5. Arguments for protectionism

Protectionism

The term protectionism refers to any measure that has the effect of reducing the quantity of imported goods or services.

Commercial policy: Government policy that influences international trade flows.

Protectionist measures
Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba. Tariffs: Taxes imposed on imported goods. Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber. Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.

Government procurement: Most nations require their governments to buy from domestic producers. Example: the Protectionism, 2 1933 Buy American part Act applicable to federal agencies. Non-tariff trade barriers: Other policies that have the effect of reducing the flow of imports or exports. Example: Health and safety standards, import licensing, product design standards, bureaucratic red tape. The Japanese trade ministry (MITI) decided that snow skis made in the U.S. were not safe enough for Japanese ski enthusiasts Other examples: European ban on hormone treated beef and genetically-modified soybeans

Effect of tariffs and quotas on imports, domestic production, and prices

PW is the world pricethat is, the price of the good that world be established in a global market without trade barriers.
Pd is the domestic pricethat is, the price in the domestic market if imports were equal to zero. Qd is the domestic output of a good if imports are zero. T is a tariff (measured in dollars, yen, lira, pesetas, etc.) per unit, ton, pound, etc. Pq is the domestic price under the imposition of a quota.

Figure 8.8a: Effect of an embargo on Japanese watches

(a) Price U.S. demand U.S. supply $15.00
World price is $12.50

E C D U.S. imports

12.50 B

Embargo pushes price paid by domestic buyers to $15.00 Loss of CS = BDEA CDE is the dead weight loss.

15 20 25 Quantity of Digital Watches

effect of a tariff on oranges Price ($)

Pd
PW + T PW

Imports with tariff

Domestic production increases from q1 to q2.

The domestic price of oranges increases.

D
Free trade imports

q1

q2

qd

q4

q5

Quantity (tons)

effect of a Quota on oranges Price ($)

S
S + Quota Pd Pq PW
Free trade imports = 300 tons
Domestic production increases from 100 to 200 tons.. The domestic price of oranges increases.

Import quota = 100 tons

100

200 250 300

400

Quantity (tons)

Arguments for protectionism

Save domestic jobs
Create a level playing field. Government revenue creation. President Clintons trade representative, Carlene Barshevsky, use to say The U.S. wants fair trade.

National security
Infant industries

Costs of protecting U.S. jobs from foreign competition

Industry Autos Color TVs Motorcycles Athletic Footwear Cost to Consumers Per Job Saved $105,000 420,000 150,000 30,000 37,000

Apparel
Specialty Steel
Glassware Sugar

1,000,000
200,000 60,000

Ball Bearings

90,000

Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986.

Tariffs as a percentage of total government revenue Tariffs as a % of Government Revenue

Country U.K.

0.1%

Japan
U.S. Costa Rica

Ghana
Dominican Republic

1.2 1.5 16.1 31.2 44.2 55.1

Lesotho Source: World Bank