micro Economics Unit 12 Slide 1 Created: Jan 2007 by Jim Luke. Free trade consists simply in letting people buy and sell as they want to buy and sell. Protective tariffs are as much applications of force as are blockading squadrons, and their objective is the same: to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people form trading. -Henry George, 1886

micro Economics Unit 12 Slide 2 Created: Jan 2007 by Jim Luke. International Trade and Policy Comparative Advantage Review and Extensions World Production Possibility Frontier Effects of Trade

micro Economics Unit 12 Slide 3 Created: Jan 2007 by Jim Luke. Common Trade Restrictions Tariffs – tax on transaction Specific tariffs Specific tariffs Ad valorem tariffs Ad valorem tariffs Revenue vs. Prohibitive Tariffs Revenue vs. Prohibitive TariffsQuotas Loan Subsidies Domestic Content Limits Unique product/process regulations

micro Economics Unit 12 Slide 4 Created: Jan 2007 by Jim Luke. Effects of trade restrictions inefficient welfare programs for the domestic producers Consumers Suffer & pay Suffer & pay Costs spread-out Costs spread-out Politically quiet Politically quietProducers Large & focused benefits Large & focused benefits Political horse-trading & lobbying Political horse-trading & lobbying

micro Economics Unit 12 Slide 5 Created: Jan 2007 by Jim Luke. Quotas in Practice Producers lobby Congress for quotas Reward domestic producers with higher prices Reward domestic producers with higher prices Reward foreign producers with the right to sell goods in US Reward foreign producers with the right to sell goods in US Lack of opposition from consumers Diffuse benefits Diffuse benefits

micro Economics Unit 12 Slide 6 Created: Jan 2007 by Jim Luke. Tarriffs vs. Quotas Tariff and quotas identical effects on price identical effects on price same change in quantity demanded same change in quantity demanded U.S. consumers suffer loss of consumer surplus U.S. producers gain Who gets the additional revenue? Tariff: government Tariff: government Quota: producer w/ rights Quota: producer w/ rights

micro Economics Unit 12 Slide 7 Created: Jan 2007 by Jim Luke. Other Trade Restrictions Export Subsidies Low-interest loans Domestic Content Limits Unique industry/product regulations Health Health Safety Safety technical standards may discriminate against foreign goods technical standards may discriminate against foreign goods

micro Economics Unit 12 Slide 8 Created: Jan 2007 by Jim Luke. Free-trade & Agreements Free Trade Zones European Union European Union Bilaterals BilateralsAgreements GATT & WTO GATT & WTO NAFTA NAFTA Paris Convention Paris Convention FTAA FTAA CAFTA CAFTA

micro Economics Unit 12 Slide 9 Created: Jan 2007 by Jim Luke. Rhetoric & Trade Supporters of Protectionism: Rarely say so Rarely say so Fair Trade Fair Trade Competitiveness Competitiveness Much so-called Free Trade isnt

micro Economics Unit 12 Slide 10 Created: Jan 2007 by Jim Luke. Arguments Supporting Trade Restrictions National Defense Argument Infant Industry Argument Antidumping Argument Jobs and Income Argument Declining Industries Argument

micro Economics Unit 12 Slide 11 Created: Jan 2007 by Jim Luke. Additional Problems with Trade Restrictions Often requires protecting downstream stages of production Wasted resources seeking favored protections Other countries often retaliate, reducing gains from trade reducing gains from trade Costs of enforcment Costs of enforcment Social & Political Risks