1、 CHAPTER 9 ARGUMENTS AGIANST FREE TRADE Traditional Arguments against Free Trade New Protectionism 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 t

2、he standpoint of enhancing the welfare of the world as a whole) The main motive is to create a level playing field. Home country industry “l(fā)ate start”, often do not have the economies of scale (crux of the argument)If protection temporarily, firms realize sufficient economies of scale (internal or e

3、xternal)Eventually per-unit costs fall, home industry becomes an exporter.At this point protection can be removed.Consumers 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 179

4、0Report 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)Many countries have successfully industrialized behind tariff barriers. For example, from 18

5、16 through 1945, tariffs in the USA were among the highest in the world.Almost all NDCs Newly Developed Countries had adopted some form of infant industry promotion strategy when they were in catching-up positions.”But it is controversial as a policy recommendation: Even when infant industry protect

6、ion is 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 id

7、entification 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. Why not let the industry proceed

8、on its own? (as Entrepreneurs in a market economy would undertake expansion on their own )Build 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 fa

9、llPX/PM of the importing country improves(2) Problems:Fail to consider reduced level of home countrys welfare because of the countrys reduced consumption of low-cost imports.This additional consideration of forgone quantities is brought into the analysis through the concept of the optimum tariff rat

10、e. The optimum tariff 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 rateFig

11、ure 8-1 The optimum tariffNational 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

12、expense of foreign countries）Harm the trading partner;Trading partner will retaliate with a tariff of its own;End up with reduced welfare;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 b

13、y trading partners； (2) The reduced 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 +

14、 G) = X - M4. Tariff to Reduce Aggregate Unemployment Argument 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, retaliati

15、on. 2. National income of foreign countries reduced, thus cut import. 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

16、. National income of foreign countries reduced, thus cut import. Why not other 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

17、foreign dumping Dumping by foreign firms into the home country is in some sense 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

18、 foreign subsidyForeign government subsidy awarded to a foreign import supplier constitutes unfair trade and disturbs the “l(fā)evel playing field” in international trade. Subsidy generates a distortion from the free-trade allocation of resources when the foreign country does not have a comparative adva

19、ntage in this good. An imposition of tariff can offset the distortion and aid the restoration of the trade pattern to a more efficient one.6. National security argumentTo assure continued domestic production in the event of a war.If imports are not restricted during normal times, they may capture th

20、e lions share of the market .A cutoff may occur if normal trade patterns are disrupted.To prevent this threat from becoming a reality in the future, the industry must be protected now. Problems:How to identify the industry? Agriculture. Steel? Ships? Planes? (at one time or another) watch industryPo

21、licies other than tariffs? e.g. Goods could be stockpiled, like the U.S. oil with the Strategic 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

22、 of products make it possible for any firms in any countries to obtain monopoly forces to some extent; 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; To help home firms to

23、acquire more market shares so that they can realize economies of scale in production and thus obtain 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 t

24、o the countryIf TConsumer suplus loss, then successfulRRectangle C1P1RF: monopolists profit H G SRectangle 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 ration

25、al choice issurely not produce(the upper-right portion); The outcome: (0, 100), (100, 0)The one who takes the lead 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.Bo

26、eing gives up.Outcome: (0, 110)Both companies will produce.Outcome: (5, 5).But government Expendituresoutweigh theprofits 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

27、 by those who seek to maximize economic efficiency.1. Median voter model (Median voter theory) A voting model positing that in 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 polic

28、y position preferred by the median voter, the voter in the middle of distribution on the single dimension. Median voter VotersFigure 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

29、 DemocraticThe Progressive partyIf Progressive Party: 5%Then No.1-5 will support and theRepublic will onlyhave one supporter,No. 6.A two-party democracy shouldenact trade policybased on how manyvoters it pleases. 2. Collective action theory In many cases, the minority is protected. Mancur Olson deve

30、loped the theory. The theory challenged wisdom (說(shuō)法) in his day that: (1) If anyone in a group has interests in common, then they will act collectively to achieve them; and(2) In a democracy, the greatest concern is that the majority will tyrannize (tirnaiz; 橫行霸道) and exploit the minority.1932-2019 The collective action theory argues that Individuals in any group attempting collective action will have incentives to “free ride” on the efforts of others if the group is working to provide public goods. Individuals will