International

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International Trade Policy
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I bet you wonder how I knewabout your plans to
make me bluewith some other guy you knew
before.Between the two of us guysyou I love you
more.It took me by surprise(drive me
crazy),when I found out yesterday.Dont you
know that ...
3
I heard it through the grapevine.How much longer
would you be mine?Oh I heard it through the
grapevine,and Im just about to lose my mind.
Honey, Honey, Yea.Heard it through the
grapevine, how much longer would you be mine,
baby oooo oooo oo oo
4
I know a man aint supposed to cry,but these
tears I cant hold inside.Losing you would end
my life you see,cause you mean that much to
me.You could have told me yourself that you
love someone else.Instead...
5
I heard it through the grapevine.How much longer
would you be mine?Oh I heard it through the
grapevine,and Im just about to lose my mind.
Honey, Honey, Yea.Heard it through the
grapevine, how much longer would you be mine,
baby oooo oooo oo oo
6
People say beware of what you see, supply and
demand are what you hear.I cant hide being
confused.If it is true please tell me dear.Do
you plan to let me go for that other guy you
loved before?Dont you know...
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I Heard It Through the Grapevine Comparative
Advantage and the California Raisin
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A Trade Policy Puzzle

• Gains from trade arguments (such as comparative
  advantage) suggest removing trade barriers, a
  policy of free trade
• wide agreement among economists
• Yet, we see many trade barriers--tariffs, quotas,
  and less visible barriers
• Lets look at the
• effects
• reasons
• remedies

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Effect of a tariff
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Effect of a Quota
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Effect of a Voluntary Restraint Agreement (VRA)
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Equivalence of Tariff, Quota, VRA

• All reduce quantity imported
• All raise the price consumers pay by the same
  amount
• Differences
• for tariff, revenue goes to government
• for quota, that revenue goes to quota holder
• for VRA, that revenue goes to foreign firms as
  profit

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Mini History of U.S. Trade Policy

• Before the income tax, tariffs were the major
  source of revenue to the U.S. government
• Tariffs have fluctuated greatly reflecting
  internal political conflicts (abominations),
  trade wars (Smoot-Hawley), and new techniques to
  remove trade barriers (GATT)

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Economic and other arguments against free trade

• Infant industry argument
• due to Alexander Hamilton
• industry needs protection until it gets big
  enough to keep costs low
• but
• protection usually lasts well beyond infancy
• not clear which industry to protect

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national security argument

• certain goods or services are needed in time of
  war
• shipping Jones Act (shipping between U.S. ports
  must be on U.S. ships)
• VRA on machine tools
• rice!!!!!
• textiles needed for military uniforms!!!!!
• Alternatives
• stockpile crucial materials

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retaliation argument

• use threat of a trade barrier as a bargaining
  instrument
• but
• can cause trade war
• is usually used as a specious argument for
  protection

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monopoly power argument

• hold back exports to exploit other countries
• OPEC cartel
• beggar thy neighbor

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Argument against reducing trade barriers because
of costs during transition to free trade

• True, we do not instantly move to the benefits of
  free trade and some people can be harmed during
  the transition
• But better to
• phase out barriers slowly (10 years)
• give assistance (unemployment compensation,
  welfare)
• Analogy with new technological innovation

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Argument that other countries are subsidizing
their industries

• But they are giving U.S. consumers a good deal
  why complain?
• Most difficult to deal with in practice because
  it does not seem fair

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Policies to Remove Trade Barriers (Traditional)

• Unilateral Disarmament
• Smith, Ricardo, Repeal of corn laws in England
• rarely works, example of textile quota (Poland)
• Multilateral-- Reciprocal Tariff Reduction (GATT,
  WTO)
• Most Favored Nation (MFN) approach
• has worked very well--tariffs way down since WWII

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Policies to remove trade barriers (newer)

• Regional--NAFTA, fast track for Chile
• trade creation versus trade distortion
• free trade area versus common market
• rules of origin (15 pound agreement)
• Bilateral dealings
• U.S. - Japan
• U.S.- China
• quiet now because of Asian financial crisis,
  (lets get on to macro to find out why).

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End of Lecture
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