Chapter 19 Trade, Free Trade and Protection Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Slides prepared by Muni Perumal, University of Canberra, Australia. Learning Objectives Assess the microeconomic impact of trade. Re-emphasise the case for free trade. Describe the most common forms of trade barriers used to provide protection to local industry. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Learning Objectives (cont.) Examine the consequence of trade barriers for achieving the goal of economic efficiency, using the examples of tariffs and quotas. Discuss the income distribution impact of tariffs and quotas. State and critically evaluate the arguments for protectionism. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Learning Objectives (cont.) Briefly summarise the evolution of Australia’s international trade policy and key international agreements. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

The Economic Basis for Trade Microeconomic effects of world trade: Resource allocation and output Product prices Resource prices Trade as a substitute for resource mobility Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

The Economic Basis for Trade (cont.) The case for free trade: Free trade fosters a more efficient allocation of resources and a higher standard of living Trade maximises the gains available through specialisation Catalyst for competition (reducing monopoly power) Promotes innovation Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

The Economic Basis for Trade (cont.) Barriers to free trade: Tariffs excise taxes on imported goods can be either revenue tariffs or protective tariffs Import quotas restrictions on the amount of foreign product imported over a specific period zero quota indicates complete prohibition Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

The Economic Basis for Trade (cont.) Barriers to free trade: (cont.) Non-tariff barriers licensing standards or procedures designed with the primary purpose of protecting local production against foreign competition Voluntary export restrictions negotiated restrictions on the level of exports to a particular country Motivations: special-interest effect need to protect the interest of special groups, like Australian clothing industry Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Economic Impact of Tariffs Sd D Price Pd g f h i Sw + t Pt e j Pw Sw Quantity a b q c d Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Economic Impact of Tariffs (cont.) Consumption loss a measure of the benefit lost to consumers that is not captured by other elements in society Production loss the value of production lost to society Deadweight loss the reduction in the total level of welfare (or real incomes) across society due to tariff protection Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Economic Impact of Tariffs (cont.) Effects on foreign producers income of foreign producers will fall Government revenue the government gains by obtaining tariff revenue tariff revenue is essentially a transfer of income from consumers to government and does not represent any net change in the nation’s economic wellbeing Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Economic Impact of Quotas Sd Price Pd f i PQ e j g h Pw Sw Dd Quantity a b q c d Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Slides prepared by Muni Perumal, University of Canberra, Australia. Tariffs vs Quotas Tariffs distort the operation of the price mechanism, but demand and supply still determine the quantity of imports Quotas are more restrictive and break the link between domestic and foreign prices completely Tariffs provide revenue to the government, while quota rents accrue to the protected industry Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Arguments for Protection Military self-sufficiency argument Increase domestic employment Diversification for stability Infant-industry argument Cheap foreign labour argument Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Australia’s International Trade Policies Industry protection Australia is a relatively high-tariff nation ‘Lyne tariff’: first protective tariff, introduced in 1908 ‘Greene tariff’ (1921): to protect wartime industries Tariff Board was established in 1968 to examine applications for new or increased tariffs Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Review of Industry Assistance Industry Commission (IC) established in 1990; replaced the Industries Assistance Commission of 1974. Productivity Commission established in 1996 Nominal and Effective Rate of Assistance Effective Rate of Assistance (ERA) is the percentage increase in the value added per unit of output, brought about by the economy-wide structure of industry assistance Reform Process (Crawford Report) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

International Negotiations GATT and the WTO General agreement on tariffs and trade equal, non-discriminatory treatment for all member nations the reduction of tariffs by multilateral negotiations the elimination of import quotas World Trade Organisation forum for the negotiation of reduction in tariff barriers Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

International Negotiations (cont.) The Kennedy round of tariff negotiations The Tokyo round and non-tariff barriers The Uruguay round commenced in 1986 Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Slides prepared by Muni Perumal, University of Canberra, Australia. Economic Integration North American Free Trade Agreement (NAFTA) Canada, Mexico, United States ASEAN Free Trade Area (AFTA) European Union (EU) Asia-Pacific Economic Cooperation (APEC) group Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.

Slides prepared by Muni Perumal, University of Canberra, Australia. End of Chapters Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia.