International Trade - Theory and Policy, 2010a

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Recent opposition to trade liberalization is seen in national responses to the financial crisis, the protest movement at the Seattle Ministerial and other venues, and the failure in the United States to grant trade promotion authority to the president. EXERCISE 1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?” 1. This branch of the U.S. government is given the authority to make trade policy. 2. This theory suggests why continual negotiations are needed to assure long-term progress toward trade liberalization. 3. This WTO ministerial meeting in 1999 began a wave of protests around the world against globalization initiatives. 4. The term used to describe the U.S. presidential authority that includes expedited approval procedures in the U.S. Congress. 5. The names of three countries with which the United States has implemented free trade areas. 6. The name of the WTO round of trade liberalization talks begun in 2001. 7. The term used to describe the economic sector in which goods and services are produced and traded, in contrast to the monetary sector. 1.4 The Great Depression, Smoot-Hawley, and the Reciprocal Trade Agreements Act (RTAA) LEARNING OBJECTIVE 1. Understand the trade policy effects of the Great Depression. Perhaps the greatest historical motivator for trade liberalization since World War II was the experience of the Great Depression. The Depression ostensibly began with the crash of the U.S. stock market in late Saylor URL: http://www.saylor.org/books Saylor.org 25
1929. Quite rapidly thereafter, the world economy began to shrink at an alarming pace. In 1930, the U.S. economy shrank by 8.6 percent and the unemployment rate rose to 8.9 percent. With the contraction came a chorus of calls for protection of domestic industries facing competition from imported products. For U.S. workers, a tariff bill to substantially raise protection was already working its way through the legislature when the economic crisis hit. The objective of higher tariffs was to increase the cost of imported goods so that U.S. consumers would spend their money on U.S. products instead. By doing so, U.S. jobs could be saved in the import-competing industries. Many economists at the time disagreed with this analysis and thought the high tariffs would make things worse. In May 1930, 1,028 economists signed a petition protesting the tariff act and beseeched President Hoover to veto the bill. Despite these objections, in June of 1930 the Smoot-Hawley Tariff Act (aka the Tariff Act of 1930), which raised average tariffs to as much as 60 percent, was passed into law. However, because higher U.S. tariffs also injured the foreign companies that were exporting into the U.S. market and because the foreign economies were also stagnating and suffering from rising unemployment, they responded to the Smoot-Hawley tariffs with higher tariffs of their own in retaliation. Within several months, numerous U.S. trade partners responded by protecting their own domestic industries with higher trade barriers. The effect was a dramatic drop in international trade flows throughout the world and quite possibly a deepening of the economic crisis. In subsequent years, the Depression did get much worse. The U.S. economy continued to contract at double-digit rates for several more years, and the unemployment rate peaked in 1933 at 24.9 percent. When Franklin Roosevelt ran for president in 1932, he spoke against the high tariffs. By 1934, a new attitude accepting the advantages of more liberal trade took hold in the U.S. Congress, which passed the Reciprocal Trade Agreements Act (RTAA). The RTAA authorized the U.S. president to negotiate bilateral tariff reduction agreements with other countries. In practice, the president could send his agents to another country, say Mexico, to offer tariff reductions on a collection of imported items in return for tariff reductions by Mexico on another set of items imported from the United States. Once both sides agreed to the quid pro quo, the agreements would be Saylor URL: http://www.saylor.org/books Saylor.org 26
Page 2 and 3: This text was adapted by The Saylor
Page 4 and 5: Chapter 1 Introductory Trade Issues
Page 6 and 7: However, rapid growth in the value
Page 8 and 9: As of 2009, 153 countries were memb
Page 10 and 11: International trade is a field in e
Page 12 and 13: imported, the U.S. government colle
Page 14 and 15: Kenya 12.7 Ghana 13.1 Generally spe
Page 16 and 17: Average tariffs can be measured as
Page 18 and 19: When the bubble bursts, the demand
Page 20 and 21: missed deadlines are commonplace in
Page 22 and 23: a well-known “bicycle theory” a
Page 24 and 25: But at the same time that many deve
Page 28 and 29: ought back to the United States and
Page 30 and 31: conference attended by the main all
Page 32 and 33: One of the key principles of the GA
Page 34 and 35: arriers. [1] The trade remedy laws
Page 36 and 37: ound tariff rate the country reache
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Page 40 and 41: 5. The WTO principle to treat an im
Page 42 and 43: subsidies. Recall that export subsi
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Page 46 and 47: Agreement, or TRIPS. The TRIPS inte
Page 48 and 49: 1.7 The World Trade Organization LE
Page 50 and 51: 1. Consultations. The DSB first dem
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Page 56 and 57: 0806.10.20 $1.13/m 3 (Feb. 15-Mar.
Page 58 and 59: Tariffs vary according to time of e
Page 60 and 61: 1.9 Appendix B: Bound versus Applie
Page 62 and 63: EXERCISE 1. Jeopardy Questions. As
Page 64 and 65: 2.1 The Reasons for Trade LEARNING
Page 66 and 67: For example, the Ricardian model of
Page 68 and 69: 2. Learn the major historical figur
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Page 72 and 73: The primary issue in the analysis o
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he begins planting seeds in the sec
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In this way, we might raise the wel
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2.3 Ricardian Model Assumptions LEA
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Utility Maximization and Demand In
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United States L C + L W = L France
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2. Suppose that the unit labor requ
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KEY TAKEAWAYS The equation aLC QC
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comparative advantage in newspaper
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−aLCaLW⎡⎣⎢hrslbhrsgal=gallb
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KEY TAKEAWAYS Labor productivity i
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2.6 A Ricardian Numerical Example L
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With full employment of labor, prod
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At this point, we can already see a
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The answer to some of these questio
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wC=PCaLC. If production occurs in t
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Thus a good way to think about how
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Similarly, by rearranging the above
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production. But where will they fin
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The focus on real wages allows us t
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Real Wages in Autarky To calculate
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exchange. Thus the real wage of che
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2.11 The Welfare Effects of Free Tr
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Free trade will raise aggregate wel
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Chapter 3 The Pure Exchange Model o
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A Simple Example of Trade Suppose t
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3.2 Determinants of the Terms of Tr
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Persuasion The art of persuasion ca
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KEY TAKEAWAY The terms of trade is
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two individuals make a voluntary ex
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3.4 Three Traders and Redistributio
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is not motivated by profit but inst
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The changes described above assume
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3.6 The Nondiscrimination Argument
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clothing worker. The same applies i
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the page, scroll down to the “Bou
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4.1 Factor Mobility Overview LEARNI
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argument that free trade can only b
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them, but only if the prices are ve
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4.3 Time and Factor Mobility LEARNI
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EXERCISE 1. Jeopardy Questions. As
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factor to be moved and become produ
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KEY TAKEAWAY The immobile factor m
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wine workers and cheese workers. Th
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In autarky, the quantity demanded o
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4.7 Depicting a Free Trade Equilibr
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0 the variable does not change A th
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Thus cheese workers are most likely
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Real Wage of Wheat Workers in Terms
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wages. However, these extra profits
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French production and consumption i
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5.1 Chapter Overview LEARNING OBJEC
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less-developed countries have much
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would rise, while the wage rate wou
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Ricardian model, then factor prices
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4. This is by which industries diff
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where KC and KS are the quantities
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Let aLC[labor−hrsrack] represent
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The capital-labor ratio in an indus
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that would employ all the capital i
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The Relationship between Endowments
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Suppose the exogenous variables of
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Adding these two equations vertical
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3. Write the magnification effect f
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tariffs or other government regulat
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If the price of clothing had risen,
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Table 5.6 Numerical Values for Exog
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w∧>PC∧>PS∧>r∧. The effect i
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2. Suppose the price of cheese fall
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this requires a fair amount of adva
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workers per unit of capital in the
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of quantities CS″/CC″. Since CS
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In Figure 5.8 "Free Trade Equilibri
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5.11 National Welfare Effects of Fr
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calculating changes in real income
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who has deposits in a pension plan
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export industry in order to benefit
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Income is redistributed among indiv
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Thus it is always possible to find
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affects the capital-labor ratios in
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1. Describe the pattern of factor f
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assumed to be freely and costlessly
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expansion of output in the export s
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[1] See R. W. Jones, “A Three-Fac
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product line for a representative t
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The total amount of revenue earned
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The horizontal length of Figure 5.1
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Our prime concern, however, is the
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An alternative version of the magni
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8. The magnification effect for pri
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can be used to transport tomatoes o
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esponds to the excess supply of wor
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The effect on workers is, in genera
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Factor Rewards over Time Now let’
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Figure 5.20 Dynamic Import-Capital
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In summary, the models suggest that
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[1] See J. P. Neary, “Short-Run C
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6.2 Economies of Scale and Returns
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produced and if the costs of this e
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6.3 Gains from Trade with Economies
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United States aLC = 1 L = 100 Franc
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thirty racks of clothing, then each
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model best describes markets in whi
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2. Each firm produces a product tha
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2. The demand assumption in which e
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Keep in mind that this is the equil
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KEY TAKEAWAYS A market equilibrium
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1. If the product is such that an i
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varieties may increase aggregate we
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7.1 Basic Assumptions of the Partia
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2. The term used to describe a coun
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where XSUS(.) is the export supply
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This implies also that world supply
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1. The price that equalizes one cou
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The price that ultimately prevails
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Surplus", some firm would be willin
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Changes in Producer Surplus Suppose
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2. The term used to describe a meas
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the same price for their product re
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to purchase the Mexican wheat at $1
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The effect on the foreign price is
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The quantity of imports and exports
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the sum of the gains exceeds the su
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indicate the effect of each policy
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7.6 The Optimal Tariff LEARNING OBJ
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zero. Somewhere between a zero tari
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3. The tariff rate that corresponds
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KEY TAKEAWAYS An import tariff wil
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7.8 Import Tariffs: Small Country W
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3. The tariff causes a redistributi
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1. Where on the graph is the level
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We examine the effects of optimal t
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3. Given player one’s optimal pol
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The goal of a cooperative equilibri
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1. Use the information provided in
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7.10 Import Quotas: Large Country P
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An import quota will reduce the qua
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KEY TAKEAWAYS To administer a quot
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demand is equal to the quota level.
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market decreases producer surplus i
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Foreign National Welfare 2. Suppose
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This implies that, in the case of a
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Quota Rents National Welfare + C
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Import Quota (Administered by Givin
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to as tariffication. In this way, f
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Next, consider the effects in this
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In situations where market changes
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where S is the specific export subs
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7.17 Export Subsidies: Large Countr
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the subsidy payments are made, then
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An export subsidy of any size will
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2. Identify the effects of a counte
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Table 7.12 "Welfare Effects of the
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Consumer Surplus − (G + H + I + J
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KEY TAKEAWAYS An antisubsidy law,
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9. What is the change in government
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Notice that a unique set of prices
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in the import country and in the ca
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Figure 7.36 Welfare Effects of a VE
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the quota rents will benefit, but p
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A the variable change is ambiguous
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Mexico, and all wheat sold in Mexic
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7.23 Export Taxes: Large Country We
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Because there are both positive and
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− the variable decreases 0 the va
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If a domestic consumption tax is im
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Equivalency between Domestic and Tr
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An import tariff applied on an impo
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KEY TAKEAWAYS Domestic production
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a Domestic Production Subsidy", whi
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Domestic policies can affect trade
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+ the variable increases − the va
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Domestic consumption taxes are ofte
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Figure 8.3 Inducing Exports with a
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8.7 Consumption Tax Effects in a Sm
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Since the cost to consumers exceeds
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When a specific consumption tax “
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time of the founding of the nation,
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Chapter 9 Trade Policies with Marke
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Market imperfections or market dist
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firm’s welfare) by restricting su
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are neatly kept and homes are well
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Policy-Imposed Distortions Another
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In this section, we will provide an
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Welfare-Improving Policies in a Sec
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Summary of the Theory of the Second
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9.4 Unemployment and Trade Policy L
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Suppose that international market c
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9.2 "Welfare Effects of an Import T
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Begin with the same surge of import
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eliminate the same unemployment imp
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A the variable change is ambiguous
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their own production efficiency imp
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Suppose that the infant industry ar
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This means that in the second perio
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The Economic Argument against Infan
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world efficiency standards, protect
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9.6 The Case of a Foreign Monopoly
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Assuming the monopolist maximizes p
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Import tariff effects on the import
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This shows that although a tariff c
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2. Recognize that a trade policy ca
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consider a large importing country
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the subsidy is set too high, the lo
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9.8 Public Goods and National Secur
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nonexcludable because once it is th
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efficiency loss. Nevertheless, the
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5. The term describing a ìgoodî l
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the environment. On the other hand,
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Pollution Effect National Welfare
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Govt. Revenue Pollution Effect + e
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A Source of Controversy For many en
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This statement points out that many
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noneconomists, providing permits th
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[4] World Trade Organization, “Tr
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product categories. This type of tr
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The key question of interest concer
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Figure 9.10 "Harmful Trade Diversio
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Free trade area effects on Country
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We assume that A has a specific tar
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The simple way to do that is to ima
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Chapter 10 Political Economy and In
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do indeed seek to maximize national
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a representative democracy, governm
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3. This type of lobbying does not i
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much larger than the number of firm
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We can now ask whether a household
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Large groups are much less effectiv
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Because the per-producer benefit of
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clearly he or she would vote for th
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10.7 The Lobbying Problem in a Demo
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Chapter 11 Evaluating the Controver
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the results from any one model. Ins
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increase in national welfare. This
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4. The enhancement of this is what
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of the real world. The real world c
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Another way to deflect the concern
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For example, an optimal tariff or o
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Stuart Mill in hisPrinciples of Pol
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11.5 The Economic Case against Sele
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to eliminate some of the inefficien
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effects, it would then need to meas
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to avoid the use of any such policy
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Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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