1、 CHAPTER 9 ARGUMENTS AGIANST FREE TRADEn Traditional Arguments against Free Traden New Protectionismn The Political Economy of Trade Policy1.Infant industry argument An argument in favor of protecting the domestic backward industries through government backing,help,and intervention.(valid as from th
2、e standpoint of enhancing the welfare of the world as a whole)The main motive is to create a level playing field.nHome country industry“late start”,often do not have the economies of scale(crux of the argument)nIf protection temporarily,firms realize sufficient economies of scale (internal or extern
3、al)nEventually per-unit costs fall,home industry becomes an exporter.nAt this point protection can be removed.nConsumers finance the expansion,but more than repaid when the industry grows.1 Traditional Arguments against Free TradeThe argument was first explicated by Alexander Hamilton in his 1790Rep
4、ort on Manufactures.The first US Secretary of the Treasury.Was later picked up by Friedrich List in his 1884 work The National System of Political EconomyA leading 19th century German Economist(1755 1804)nMany countries have successfully industrialized behind tariff barriers.For example,from 1816 th
5、rough 1945,tariffs in the USA were among the highest in the world.nAlmost all NDCs Newly Developed Countries had adopted some form of infant industry promotion strategy when they were in catching-up positions.”nBut it is controversial as a policy recommendation:Even when infant industry protection i
6、s well intentioned,infant industries may never grow up”.For example,during the 1980s Brazil enforced strict controls on the import of foreign computers in an effort to nurture its own infant“computer industry.This industry never matured.Two problems that come up with this argument:The identification
7、 of infant industry.The industries that are likely to become low-cost producers should be indentified.Costs amount of foreign exchange saved?(2)The form of protection.Tariff or subsidy？A subsidy has a lower welfare cost to the country than a tariff.nWhy not let the industry proceed on its own?(as En
8、trepreneurs in a market economy would undertake expansion on their own)nBuild efficient system in allocating funds through deregulation or government guarantees for the loans.2.Terms of trade argument(1)ArgumentA large country imposes a tariffWorld price of the imported goods fallPX/PM of the import
9、ing country improves(2)Problems:Fail to consider reduced level of home countrys welfare because of the countrys reduced consumption of low-cost imports.nThis additional consideration of forgone quantities is brought into the analysis through the concept of the optimum tariff rate.nThe optimum tariff
10、 rate is the rate that maximizes the countrys welfare.Conceptually,it is the tariff rate at which the positive difference between the gain from better prices and the loss from reduced quantity of imports is at a maximum.Optimum tariff,to Prohibitive tariff,tp Tariff rateFigure 8-1 The optimum tariff
11、National welfare1National welfareAt point 1,corresponding tothe optimum tariff t0,nationalwelfare is maximized.The optimum tariff rate isalways positive but less thanthe prohibitive rate(tp)thatwould eliminate all imports.(ii)Beggar-my-neighbor argument（gain at the expense of foreign countries）n Har
12、m the trading partner;n Trading partner will retaliate with a tariff of its own;n End up with reduced welfare;n Neither country may end up with better terms-of-trade.3.Balance of trade argument Balance of trade=value of exports value of importsProblems:(1)Retaliation by trading partners；(2)The reduc
13、ed ability of foreign countries to buy the home countrys products；Thus,no guarantee the improvement of BOT.Any other approaches to improve BOT?If the deficit is a macroeconomic problem,then increase Y,reduce spending(C+I+G)Y=C+I+G+(X-M)Y -(C+I+G)=X-M4.Tariff to Reduce Aggregate Unemployment Argument
14、 Tariff demand for home-produced goods rises more labor hired spendable income other industries expand add new jobs Several points raised:1.Multiplier effects come about in a beggar-my-neighbor manner because jobs lost abroad,retaliation.2.National income of foreign countries reduced,thus cut import
15、.Why not other policies:monetary and fiscal policy?4.Tariff to Reduce Aggregate Unemployment Argument Several points raised:1.Multiplier effects come about in a beggar-my-neighbor manner because jobs lost abroad,retaliation.2.National income of foreign countries reduced,thus cut import.Why not other
16、 policies:monetary and fiscal policy?Tariff demand for home-produced goods rises more labor hired spendable income other industries expand add new jobs5.Fair competition argument creating a level playing field To offset foreign dumping Dumping by foreign firms into the home country is in some sense
17、unfair and constitutes a threat to domestic producers because of the low import price;Therefore,this unfair behavior should be prevented through the imposition of a tariff,that is,an antidumping duty.(2)To offset a foreign subsidyn Foreign government subsidy awarded to a foreign import supplier cons
18、titutes unfair trade and disturbs the“level playing field”in international trade.n Subsidy generates a distortion from the free-trade allocation of resources when the foreign country does not have a comparative advantage in this good.n An imposition of tariff can offset the distortion and aid the re
19、storation of the trade pattern to a more efficient one.6.National security argumentnTo assure continued domestic production in the event of a war.nIf imports are not restricted during normal times,they may capture the lions share of the market.nA cutoff may occur if normal trade patterns are disrupt
20、ed.nTo prevent this threat from becoming a reality in the future,the industry must be protected now.Problems:nHow to identify the industry?Agriculture.nSteel?Ships?Planes?(at one time or another)watch industrynPolicies other than tariffs?e.g.Goods could be stockpiled,like the U.S.oil with the Strate
21、gic Petroleum Reserve2 New ProtectionismAlso called strategic trade policy theories,emerged in the 1970s.Two distinguished features:It acknowledges:The industrial product market is imperfect.The varieties of products make it possible for any firms in any countries to obtain monopoly forces to some e
22、xtent;The production of many industrial products enjoy economies of scale.Thus,the protection policy has two new bases:To impose tariffs to extract the foreign monopoly profits;(1)To help home firms to acquire more market shares so that they can realize economies of scale in production and thus obta
23、in competition advantages in the market.1.Tariff to extract foreign monopoly profit 0 QPriceCostD（=AR）MRC1MC F Q1P1 MC+t C2tQ2P2TConsumer surplus lossT:tariff revenue,monopolists profit transferred to the countryIf TConsumer suplus loss,then successfulRRectangle C1P1RF:monopolists profit H G SRectan
24、gle C2P2SG:monopolists profit2.Export subsidy in duopoly If Boeing takes the lead in enteringChinas market,Airbus only has twochoices:produce butsuffer loss and notproduce and no loss.The rational choice issurely not produce(the upper-right portion);The outcome:(0,100),(100,0)The one who takes the l
25、ead wins.If Airbus enters themarket first,there arealso two choices forBoeing and theoutcome is to giveup the market(the lower-left portion).Airbus is sureto make profitif it produces.Boeing gives up.Outcome:(0,110)Both companies will produce.Outcome:(5,5).But government Expendituresoutweigh theprof
26、its earned.Case 2:Collision Course in Commercial Aircraft:Boeing-Airbus-Mcdonnell Douglas1991(A)3 The Political Economy of Trade Policy Policies are set in political contexts,not by those who seek to maximize economic efficiency.1.Median voter model(Median voter theory)A voting model positing that i
27、n a majority election:(1)There are two competing political parties;(2)The objective of each party is to get elected by majority vote.Both parties will commit to the policy position preferred by the median voter,the voter in the middle of distribution on the single dimension.Median voter VotersFigure
28、 8-3 An example of median voter modelPoliticalsupport 9 8 7 6 5 4 3 2 1PreferredTariffRateThe Republic:6%(6 supporters)The Democratic:7%(3 supporters)The RepublicThe DemocraticThe Progressive partyIf Progressive Party:5%Then No.1-5 will support and theRepublic will onlyhave one supporter,No.6.A two-
29、party democracy shouldenact trade policybased on how manyvoters it pleases.2.Collective action theory In many cases,the minority is protected.Mancur Olson developed the theory.The theory challenged wisdom(说法说法)in his day that:n(1)If anyone in a group has interests in common,then they will act collec
30、tively to achieve them;andn(2)In a democracy,the greatest concern is that the majority will tyrannize(tirnaiz;横行霸道横行霸道)and exploit the minority.1932-2019 The collective action theory argues that n Individuals in any group attempting collective action will have incentives to“free ride”on the efforts
31、of others if the group is working to provide public goods.n Individuals will not“free ride”in groups which provide benefits only to active participants.n Hence,without selective incentives to motivate participation,collective action is unlikely to occur even when large groups of people with common i
32、nterests exist.nLarge groups will face relatively high costs when attempting to organize for collective action while small groups will face relatively low costs.n Individuals in large groups will gain relatively less per capita of successful collective action;Conclusion:Collective action by large gr
33、oups is difficult to achieve even when they have interests in common;2.The minority can dominate the majority.3.Contribution in political campaignsn Politicians also require funds to run campaigns.These funds may especially come from groups who do not have a collective action problem and are willing to advocate a special interest policy.n Trade policy making is often influenced by supporters of each political party since the ultimate objective of the policy is to safeguard its political power.
