1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. Economic Impact of TariffsSd 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.

10. 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.

11. 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.

12. Economic Impact of QuotasSd
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.

13. 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.

14. 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.

15. 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.

16. Review of Industry Assistance
Industry Commission (IC) established in 1990; replaced the Industries Assistance Commission of 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.

17. 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.

18. 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.

19. 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.

20. 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.