1. Political Economy of Trade © 2015 Melvin Jameson

2. 1. Political Consequences of the Economics of Trade © 2015 Melvin Jameson

3. Why trade increases welfare Because of the differences between countries, reallocating production to increase specialization increases total output. © 2015 Melvin Jameson

4. 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 © 2015 Melvin Jameson

5. Factor-Price Equalization: Consequences for trade policy “Stolper-Samuelson Theorem” extends theory of factor price equalization. A country has a comparative advantage in products that intensively utilize abundant factors. Trade increases the (domestic) price of these products and thus the wage of the abundant factor. Thus owners of the relatively abundant factor favor free trade and those of scarce factors oppose it. Particularly when the factors are specialized or immobile. Despite net benefit resulting from trade © 2015 Melvin Jameson

6. Winners and Losers from Trade Winners: Producers in exporting country Consumers in importing country Losers Producers in importing country Consumers in exporting country Total gains exceed total losses © 2015 Melvin Jameson

7. 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 © 2015 Melvin Jameson

8. Effect of a Tariff © 2015 Melvin Jameson price Quantit y P* P*+T Domestic Demand SS’D’ D A B C D Domestic Supply P* = world price T = Tariff A = Gain to Suppliers C = Tariff Revenue A+B+C+D = Loss to Consumers

9. Application: Trans-Pacific Partnership: reaction of Japanese farmers American farmers Japanese automobile manufacturers American automobile manufacturers Pharmaceutical manufacturers Background reference (from last session) Pacific Deal Rewrites Rules on Trade in Autos, Patented DrugsPacific Deal Rewrites Rules on Trade in Autos, Patented Drugs © 2015 Melvin Jameson

10. Political Economy of Trade Policy Arguments for Trade Restrictions Job protection(disregards export industries Infant industry Fairness in trade (foreign aid to industries) National security (protect essential industries) Retaliation © 2015 Melvin Jameson

11. 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 © 2015 Melvin Jameson

12. 2. Trade and Trade-policy games © 2015 Melvin Jameson

13. Dynamic effects of trade barriers Reduced competitiveness of domestic industry Foreign competitors adjust Direct foreign investment Change product types Substitute more expensive products Seek loopholes in tariff Trade retaliation © 2015 Melvin Jameson

14. Application: Responses to trade barriers Wall St. Journal Sept. 22, 2009 p. A1 “Ford Strips Its Own Vans” – UNLV Library LinkUNLV Library Link Or see separate posting. © 2015 Melvin Jameson

15. Non-tariff Barriers Alternative means to limit trade The effects are generally similar to tariffs and natural impediments to trade (transportation) But can be some nuance regarding distribution of cost and gains dynamic response domestic politics and international relations surrounding their implementation © 2015 Melvin Jameson

16. Types of non-tariff Barriers Quotas Tariff-rate quota Export quotas (“voluntary” export restraint) Domestic content requirements Subsidies Government procurement policies Social Regulations health, safety, environment Sea transport and freight regulations © 2015 Melvin Jameson

17. Effects of Import Quotas Static effects same as an equivalent tariff But no tariff revenue is for the government. That benefit accrues to whoever receives quota Dynamic effects differ Quota less responsive to changing domestic demand or supply © 2015 Melvin Jameson

18. Tariff-rate quotas A two-part tariff A set amount may be imported duty free or at a lower “within quota” tariff. Any further imports must pay a higher, “over quota” tariff. © 2015 Melvin Jameson

19. Subsidies Additional payment to producer above world price. Export subsidy – raises total output Exports increase, domestic sales reduced Raises domestic price, may lower world price General subsidy – all production Raises total output, creates deadweight loss Cost borne by taxpayers © 2015 Melvin Jameson

20. 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 © 2015 Melvin Jameson

21. Regional Trade Agreements Building blocks or stumbling blocks? “Game of Zones” Economist March 21, 2015 © 2015 Melvin Jameson

22. Regional Trade Agreements Types Preferential trade area – reduced tariffs for members Free trade area- zero tariff for members Customs union – common external tariff policy Common market – all factors mobile within Complete economic integration – common currency, regulation, tax policy etc. © 2015 Melvin Jameson