Lecture 28: Trade Policy

winners and losers from trade
tariffs
import quotas
other barriers to trade
arguments for protection


Winners and Losers from Trade

In the absence of trade, the domestic price is determined by the equilibrium between domestic supply and demand. Once a country opens up to trade, the price of an item becomes the world price. The world price is determined by world supply and demand.

For an import good, the price falls to the world price, making consumers better off. Domestic producers are worse off because the lower price leans less profits. Domestic production of the good falls.effects on price and production from imports
effects on price and production by exportsFor an export item, the domestic price rises to the world price, making consumers worse off. Domestic producers are better off because the higher price leans higher profits. Domestic production of the good rises.

Tariffs

A tariff is a tax on imports.

effects of a tariffThe tariff raises the domestic price above the world price. Consumers are losers because they pay a higher price and buy less of the product. Since the domestic price rises, domestic firms increase output and see their profits rise.

Import Quotas

A quota is a limit on the amount of imports. For example, the U.S. allows 1 million tons of sugar to be imported but no more than that.

effects of a quotaThe quota has the same effects on producers and consumers as a tariff. The domestic price rises above the world price.

Other Barriers to Trade


Arguments for Protectionism

  1. save and promote domestic jobs - although costs outweigh benefits
  2. infant industries - a subsidy is less costly
  3. national defense - ignores stockpiling and purchases from friendly countries
  4. "fair" trade - unlikely to force other countries to lower their trade barriers