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8/9/2019 6313 Trade Barriers
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Welfare effects of trade barriers
Outline
1. Protectionist measures
2. Economic effect of an embargo
3. Economic effect of a tariff
4. Economic effect of a quota
5. Arguments for protectionism
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Protectionism
The term protectionism refers to any
measure that has the effect of reducing
the quantity of imported goods or
services.
Commercial policy: Government policy thatinfluences international trade flows.
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Protectionist measuresTrade 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 orservices 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.
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Protectionism, part 2
Government procurement: Most nations require theirgovernments 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 ofreducing the flow of imports or exports. Example: Health andsafety 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 skienthusiasts
Other examples: European ban on hormone
treated beef and genetically-modified soybeans
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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.
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Figure 8.8a: Effect of an embargo on Japanese watches
(a)
12.50
$15.00
Price
Quantity of Digital Watches252015
E
U.S. imports
D
U.S. supply
U.S. demand
A
B C
World price is $12.50
Embargo pushes pricepaid by domestic buyers
to $15.00
Loss of CS = BDEA
CDE is the deadweight loss.
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effect of a tariff on oranges
0
Price ($)
Quantity (tons)
D
S
PW
PW + T
Pd
Free trade imports
Imports with
tariff
q1 q5q4qdq2
Domestic
production
increases from q1to q2.
The domestic
price of oranges
increases.
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effect of a Quota on oranges
0
Price ($)
Quantity (tons)
D
S
PW
Pq
PdImport quota
= 100 tons
100 400300250200
Domestic
production
increases from
100 to 200 tons..
The domestic
price of oranges
increases.
Free trade imports
= 300 tons
S + Quota
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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.
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Industry
Cost to Consumers
Per Job Saved
Autos $105,000
Color TVs 420,000
Motorcycles 150,000
Athletic Footwear 30,000
Apparel 37,000
Specialty Steel 1,000,000
Glassware 200,000
Sugar 60,000
Ball Bearings 90,000
Costs of protecting U.S. jobs from foreign
competition
Source: Coughlin, et al. (1988) andHufbauer, et al. 1986.
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Country
Tariffs as a % of
Government Revenue
U.K. 0.1%
Japan 1.2U.S. 1.5
Costa Rica 16.1
Ghana 31.2
Dominican
Republic44.2
Lesotho 55.1
Tariffs as a percentage of total government revenue
Source: World Bank
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