1. Understanding Global Trade Politics

2. Why Trade Increases Welfare
Because of the differences between countries, reallocating production to increase specialization increases total output.

3. Why Trade Increases Welfare Theoretical Background
Absolute Advantage (Adam Smith)

4. Why Trade Increases Welfare Theoretical Background
2. Comparative Advantage (David Ricardo)
Trade between two countries is beneficial even if one
of the countries is inferior in producing all products
as long as the degree of inferiority is not exactly the
same for all products.

5. Sources of Gains Local prices converge toward a world price
Production is reallocated
Each region specializes in its comparative advantage
Permits an increase in production of both products

6. Winners and Losers from Trade
Producers in exporting country
Consumers in importing country
Losers
Producers in importing country
Consumers in exporting country
Total gains exceed total losses

7. Political Economy of Trade Policy
Typically dominated by producers:
Well organized, well defined groups that are very aware of their economic interests.
Consumers
Economic losses, although large in total, are widely dispersed and individually small.
Generally not organized or well-informed

8. America’s economy has been benefitting from trade
lower U.S. prices of clothes; home furnishings etc. “trade with China alone put $250/year into the pocket of every American”
But its costs have been amplified by policy failures
wages squeezed for those whose skills are abundant abroad (less-skilled workers) consistent with economic theory. “a sharp rise in the college premium … from around 30% in 1979 to almost 50% by 2000”
Those who lost out from increased trade tended to be least prepared for major career change (retraining) or relocation “trade-induced job losses, while relatively small, are particularly painful.”
Meanwhile government support for those impacted has been minimal and ineffective “Even for those workers who did qualify for TAA (trade-adjustment assistance), support was woefully inadequate.”

9. Effect of a Tariff A C D B P* = world price T = Tariff
A = Gain to Suppliers
C = Tariff Revenue
A+B+C+D = Loss to Consumers
price
Domestic Supply
P*+T A C D B
Domestic Demand P*
Quantity S S’ D’ D

10. A tariff reduces the effects of trade
Volume of trade
Degree of price convergence
Gains of winners
Losses of losers
Net benefit of trade
Partial transfer to government collecting tariff

11. Other direct trade restrictions
Quotas
Tariff-rate quota
Export quotas (“voluntary” export restraint)
Subsidies

12. Other types of non-tariff Barriers
Domestic content requirements
Government procurement policies
Social Regulations
health, safety, environment
Sea transport and freight regulations
can be costly and restrictive