Welfare effects of trade barriers

1
Welfare effects of trade barriers

• Outline
• Protectionist measures
• Economic effect of an embargo
• Economic effect of a tariff
• Economic effect of a quota
• Arguments for protectionism

2
Protectionism
The term protectionism refers to anymeasure
that has the effect of reducing the quantity of
imported goods or services.
Commercial policy Government policy that
influences international trade flows.
3
Protectionist measures

• Trade embargos Prohibitions on the importation
  (or exportation) of goods and services. Examples
  1973 Oil embargo, trade embargo with Iraq,
  embargo on imported sugar from Cuba.
• Tariffs Taxes imposed on imported goods.
• Quotas Limits on the quantity or value of goods
  or services that can be imported or exported.
  Examples The textile quota, the sugar quota,
  export quota on raw timber.
• Subsidies payments by government to exporters.
  These stimulate trade by allowing the exporter to
  charge a lower price.

4
Protectionism, part 2

• Government procurement Most nations require
  their governments to buy from domestic producers.
  Example the 1933 Buy American Act applicable
  to federal agencies.
• Non-tariff trade barriers Other policies that
  have the effect of reducing the flow of imports
  or exports. Example Health and safety standards,
  import licensing, product design standards,
  bureaucratic red tape.

The Japanese trade ministry (MITI) decided that
snow skis made in the U.S. were not safe enough
for Japanese ski enthusiasts
Other examples European ban on hormone treated
beef and genetically-modified soybeans
5
Effect of tariffs and quotas on imports, domestic
production, and prices

• PW is the world pricethat is, the price of the
  good that world be established in a global market
  without trade barriers.
• Pd is the domestic pricethat is, the price in
  the domestic market if imports were equal to
  zero.
• Qd is the domestic output of a good if imports
  are zero.
• T is a tariff (measured in dollars, yen, lira,
  pesetas, etc.) per unit, ton, pound, etc.
• Pq is the domestic price under the imposition of
  a quota.

6
Figure 8.8a Effect of an embargo on Japanese
watches

• World price is 12.50
• Embargo pushes price paid by domestic buyers to
  15.00
• Loss of CS BDEA
• CDE is the dead weight loss.

7
effect of a tariff on oranges
Price ()
S

• Domestic production increases from q1 to q2.
• The domestic price of oranges increases.

Imports with tariff
Pd
PW T
PW
D
Free trade imports
0
q1
q5
q4
qd
q2
Quantity (tons)
8
effect of a Quota on oranges
Price ()
S
S Quota
Pd

• Domestic production increases from 100 to 200
  tons..
• The domestic price of oranges increases.

Import quota 100 tons
Pq
PW
D
Free trade imports 300 tons
0
100
400
300
250
200
Quantity (tons)
9
Arguments for protectionism

• Save domestic jobs
• Create a level playing field.
• Government revenue creation.
• National security
• Infant industries

President Clintons trade representative, Carlene
Barshevsky, use to say The U.S. wants fair
trade.
10
Costs of protecting U.S. jobs from foreign
competition
Source Coughlin, et al. (1988) and Hufbauer, et
al. 1986.
11
Tariffs as a percentage of total government
revenue
Country Tariffs as a of Government Revenue
U.K. 0.1
Japan 1.2
U.S. 1.5
Costa Rica 16.1
Ghana 31.2
Dominican Republic 44.2
Lesotho 55.1
Source World Bank