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20.E: Globalization and Protectionism (Exercises)

  • Page ID
    4371
  • Key Concepts

    20.1 Protectionism: An Indirect Subsidy from Consumers to Producers

    There are three tools for restricting the flow of trade: tariffs, import quotas, and nontariff barriers. When a country places limitations on imports from abroad, regardless of whether it uses tariffs, quotas, or nontariff barriers, it is said to be practicing protectionism. Protectionism will raise the price of the protected good in the domestic market, which causes domestic consumers to pay more, but domestic producers to earn more.

    20.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions

    As international trade increases, it contributes to a shift in jobs away from industries where that economy does not have a comparative advantage and toward industries where it does have a comparative advantage. The degree to which trade affects labor markets has much to do with the structure of the labor market in that country and the adjustment process in other industries. Global trade should raise the average level of wages by increasing productivity. However, this increase in average wages may include both gains to workers in certain jobs and industries and losses to others.

    In thinking about labor practices in low-income countries, it is useful to draw a line between what is unpleasant to think about and what is morally objectionable. For example, low wages and long working hours in poor countries are unpleasant to think about, but for people in low-income parts of the world, it may well be the best option open to them. Practices like child labor and forced labor are morally objectionable and many countries refuse to import products made using these practices.

    20.3 Arguments in Support of Restricting Imports

    There are a number of arguments that support restricting imports. These arguments are based around industry and competition, environmental concerns, and issues of safety and security.

    The infant industry argument for protectionism is that small domestic industries need to be temporarily nurtured and protected from foreign competition for a time so that they can grow into strong competitors. In some cases, notably in East Asia, this approach has worked. Often, however, the infant industries never grow up. On the other hand, arguments against dumping (which is setting prices below the cost of production to drive competitors out of the market), often simply seem to be a convenient excuse for imposing protectionism.

    Low-income countries typically have lower environmental standards than high-income countries because they are more worried about immediate basics such as food, education, and healthcare. However, except for a small number of extreme cases, shutting off trade seems unlikely to be an effective method of pursuing a cleaner environment.

    Finally, there are arguments involving safety and security. Under the rules of the World Trade Organization, countries are allowed to set whatever standards for product safety they wish, but the standards must be the same for domestic products as for imported products and there must be a scientific basis for the standard. The national interest argument for protectionism holds that it is unwise to import certain key products because if the nation becomes dependent on key imported supplies, it could be vulnerable to a cutoff. However, it is often wiser to stockpile resources and to use foreign supplies when available, rather than preemptively restricting foreign supplies so as not to become dependent on them.

    20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally

    Governments determine trade policy at many different levels: administrative agencies within government, laws passed by the legislature, regional negotiations between a small group of nations (sometimes just two), and global negotiations through the World Trade Organization. During the second half of the twentieth century, trade barriers have, in general, declined quite substantially in the United States economy and in the global economy. One reason why countries sign international trade agreements to commit themselves to free trade is to give themselves protection against their own special interests. When an industry lobbies for protection from foreign producers, politicians can point out that, because of the trade treaty, their hands are tied.

    20.5 The Tradeoffs of Trade Policy

    International trade certainly has income distribution effects. This is hardly surprising. All domestic or international competitive market forces are disruptive. They cause companies and industries to rise and fall. Government has a role to play in cushioning workers against the disruptions of the market. However, just as it would be unwise in the long term to clamp down on new technology and other causes of disruption in domestic markets, it would be unwise to clamp down on foreign trade. In both cases, the disruption brings with it economic benefits.

    Questions

    1. Explain how a tariff reduction causes an increase in the equilibrium quantity of imports and a decrease in the equilibrium price. Hint: Consider the Work It Out "Effects of Trade Barriers."

    2. Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar.

    3. Explain how trade barriers save jobs in protected industries, but only by costing jobs in other industries.

    4. Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.

    5. How does international trade affect working conditions of low-income countries?

    6. Do the jobs for workers in low-income countries that involve making products for export to high-income countries typically pay these workers more or less than their next-best alternative?

    7. How do trade barriers affect the average income level in an economy?

    8. How does the cost of “saving” jobs in protected industries compare to the workers’ wages and salaries?

    9. Explain how predatory pricing could be a motivation for dumping.

    10. Why do low-income countries like Brazil, Egypt, or Vietnam have lower environmental standards than high-income countries like the Germany, Japan, or the United States?

    11. Explain the logic behind the “race to the bottom” argument and the likely reason it has not occurred.

    12. What are the conditions under which a country may use the unsafe products argument to block imports?

    13. Why is the national security argument not convincing?

    14. Assume a perfectly competitive market and the exporting country is small. Using a demand and supply diagram, show the impact of increasing standards on a low-income exporter of toys. Show the tariff's impact. Is the effect on toy prices the same or different? Why is a standards policy preferred to tariffs?

    15. What is the difference between a free trade association, a common market, and an economic union?

    16. Why would countries promote protectionist laws, while also negotiate for freer trade internationally?

    17. What might account for the dramatic increase in international trade over the past 50 years?

    18. How does competition, whether domestic or foreign, harm businesses?

    19. What are the gains from competition?

    20. Who does protectionism protect? From what does it protect them?

    21. Name and define three policy tools for enacting protectionism.

    22. How does protectionism affect the price of the protected good in the domestic market?

    23. Does international trade, taken as a whole, increase the total number of jobs, decrease the total number of jobs, or leave the total number of jobs about the same?

    24. Is international trade likely to have roughly the same effect on the number of jobs in each individual industry?

    25. How is international trade, taken as a whole, likely to affect the average level of wages?

    26. Is international trade likely to have about the same effect on everyone’s wages?

    27. What are main reasons for protecting “infant industries”? Why is it difficult to stop protecting them?

    28. What is dumping? Why does prohibiting it often work better in theory than in practice?

    29. What is the “race to the bottom” scenario?

    30. Do the rules of international trade require that all nations impose the same consumer safety standards?

    31. What is the national interest argument for protectionism with regard to certain products?

    32. Name several of the international treaties where countries negotiate with each other over trade policy.

    33. What is the general trend of trade barriers over recent decades: higher, lower, or about the same?

    34. If opening up to free trade would benefit a nation, then why do nations not just eliminate their trade barriers, and not bother with international trade negotiations?

    35. Who gains and who loses from trade?

    36. Why is trade a good thing if some people lose?

    37. What are some ways that governments can help people who lose from trade?

    38. Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference, then, between the two types of trade barriers? Hint: It is not something you can see from the graph.

    39. From the Work It Out "Effects of Trade Barriers," you can see that a tariff raises the price of imports. What is interesting is that the price rises by less than the amount of the tariff. Who pays the rest of the tariff amount? Can you show this graphically?

    40. If trade barriers hurt the average worker in an economy (due to lower wages), why does government create trade barriers?

    41. Why do you think labor standards and working conditions are lower in the low-income countries of the world than in countries like the United States?

    42. How would direct subsidies to key industries be preferable to tariffs or quotas?

    43. How can governments identify good candidates for infant industry protection? Can you suggest some key characteristics of good candidates? Why are industries like computers not good candidates for infant industry protection?

    44. Microeconomic theory argues that it is economically rationale (and profitable) to sell additional output as long as the price covers the variable costs of production. How is this relevant to the determination of whether dumping has occurred?

    45. How do you think Americans would feel if other countries began to urge the United States to increase environmental standards?

    46. Is it legitimate to impose higher safety standards on imported goods that exist in the foreign country where the goods were produced?

    47. Why might the unsafe consumer products argument be a more effective strategy (from the perspective of the importing country) than using tariffs or quotas to restrict imports?

    48. Why might a tax on domestic consumption of resources critical for national security be a more efficient approach than barriers to imports?

    49. Why do you think that the GATT rounds and, more recently, WTO negotiations have become longer and more difficult to resolve?

    50. An economic union requires giving up some political autonomy to succeed. What are some examples of political power countries must give up to be members of an economic union?

    51. What are some examples of innovative products that have disrupted their industries for the better?

    52. In principle, the benefits of international trade to a country exceed the costs, no matter whether the country is importing or exporting. In practice, it is not always possible to compensate the losers in a country, for example, workers who lose their jobs due to foreign imports. In your opinion, does that mean that trade should be inhibited to prevent the losses?

    53. Economists sometimes say that protectionism is the “second-best” choice for dealing with any particular problem. What they mean is that there is often a policy choice that is more direct or effective for dealing with the problem—a choice that would still allow the benefits of trade to occur. Explain why protectionism is a “second-best” choice for:
    1. helping workers as a group
    2. helping industries stay strong
    3. protecting the environment
    4. advancing national defense
    54. Trade has income distribution effects. For example, suppose that because of a government-negotiated reduction in trade barriers, trade between Germany and the Czech Republic increases. Germany sells house paint to the Czech Republic. The Czech Republic sells alarm clocks to Germany. Would you expect this pattern of trade to increase or decrease jobs and wages in the paint industry in Germany? The alarm clock industry in Germany? The paint industry in Czech Republic? The alarm clock industry in Czech Republic? What has to happen for there to be no increase in total unemployment in both countries?

    55. Assume two countries, Thailand (T) and Japan (J), have one good: cameras. The demand (d) and supply (s) for cameras in Thailand and Japan is described by the following functions:

    \[
    \begin{gathered}
    \mathrm{Qd}^{\mathrm{T}}=60-\mathrm{P} \\
    \mathrm{Qs}^{\mathrm{T}}=-5+\frac{1}{4} \mathrm{P} \\
    \mathrm{Qd}^{\mathrm{J}}=80-\mathrm{P} \\
    \mathrm{Qs}^{\mathrm{J}}=-10+\frac{1}{2} \mathrm{P}
    \end{gathered}
    \]

    P is the price measured in a common currency used in both countries, such as the Thai Baht.

    1. Compute the equilibrium price (P) and quantities (Q) in each country without trade.
    2. Now assume that free trade occurs. The free-trade price goes to 56.36 Baht. Who exports and imports cameras and in what quantities?
    56. You have just been put in charge of trade policy for Malawi. Coffee is a recent crop that is growing well and the Malawian export market is developing. As such, Malawi coffee is an infant industry. Malawi coffee producers come to you and ask for tariff protection from cheap Tanzanian coffee. What sorts of policies will you enact? Explain.

    57. The country of Pepperland exports steel to the Land of Submarines. Information for the quantity demanded (Qd) and quantity supplied (Qs) in each country, in a world without trade, are given in Table \(\PageIndex{1}\) and Table \(\PageIndex{2}\).

    Price ($) Qd Qs
    60 230 180
    70 200 200
    80 170 220
    90 150 240
    100 140 250

    Table \(\PageIndex{1}\) Pepperland

    Price ($) Qd Qs
    60 430 310
    70 420 330
    80 410 360
    90 400 400
    100 390 440

    Table \(\PageIndex{2}\) Land of Submarines

    1. What would be the equilibrium price and quantity in each country in a world without trade? How can you tell?
    2. What would be the equilibrium price and quantity in each country if trade is allowed to occur? How can you tell?
    3. Sketch two supply and demand diagrams, one for each country, in the situation before trade.
    4. On those diagrams, show the equilibrium price and the levels of exports and imports in the world after trade.
    5. If the Land of Submarines imposes an anti-dumping import quota of 30, explain in general terms whether it will benefit or injure consumers and producers in each country.
    6. Does your general answer change if the Land of Submarines imposes an import quota of 70?
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