CHAPTER 32

Ch 7 International Trade
Main points:

7.7 International Trade Restrictions

7.8 The Case Against Protection
7.9 Why Is International Trade Restricted?
7.10 Trade Barriers
7.11 Why the stress on free world trade?
7.12 How to prevent chaos happening again?
7.13 What do the IMF and World Bank do?
7.14 Why so much outrage over globalisation?
7.7 International Trade Restrictions

Governments restrict international trade to protect

domestic producers from competition by using two main
tools:
1. Tariffs
2. Nontariff barriers
A tariff is a tax that is imposed by the importing country
when an imported good crosses its international boundary.
A nontariff barrier is any action other than a tariff that
restricts international trade.
International Trade Restrictions

The History of
U.S. Tariffs
Figure 32.5 shows
the U.S. average
tariff rate since
1930.
International Trade Restrictions

General Agreement on Tariffs and Trade (GATT) is an

agreement between nations to have a series of trade
negotiations, or “rounds,” to reduce tariffs on international
trade.
Rounds of the GATT occurred in the 1960s, late 1970s,
1980s, and late 1990s and have resulted in gradual
decline in the average tariff rate. The current Doha Round
has made little progress.
The Uruguay round was the most ambitious and lead to
the creation of the World Trade Organization (WTO).
WTO membership brings greater obligations to follow the
GATT rules governing trade.
International Trade Restrictions

In 1994, the United States became party to the North

American Free Trade Agreement (NAFTA), under which
trade barriers between Canada, Mexico, and the United
States are to be virtually eliminated after 15 years.
The European Union (EU) is an organization of European
countries that have agreed to eliminate trade barriers
among them.
The Asia-Pacific Economic group (APEC) is another
agreement to reduce trade barriers among East Asian
countries, including China.
International Trade Restrictions

How Tariffs Work

Tariffs increase the price
that consumers of the
importing country must pay
for imported goods or
services.
Figure 32.6 uses the
Farmland and Mobilia
example to illustrate the
effects of a tariff on car
imports into Farmland.
International Trade Restrictions
The supply of cars to
Farmland decreases
because the tariff must be
added to the price at which
Mobilia is willing to supply a
given quantity.
The price rises, the quantity
falls,
the government collects the
tariff revenue.
Exports change by the
same amount as imports.
Winners, Losers, and the Social Loss
from a Tariff
A tariff on an imported good creates winners and losers
and we’re now going to identify the winners and losers.
When the U.S. government imposes a tariff on
an imported good,
■ U.S. consumers of the good lose.
■ U.S. producers of the good gain.
■ U.S. consumers lose more than U.S. producers
gain: society loses.
International Trade Restrictions

Nontariff Barriers
The two main types of nontariff barriers are:
A quota is a quantitative restriction on the import of a
particular good, which specifies the maximum amount of
the good that may be imported in a given period of time.
A voluntary export restraint (VER) is an agreement
between two governments in which the government of the
exporting country agrees to restrain the volume of its own
exports.
International Trade Restrictions

How Quotas and VERs

Work
Figure 32.7 illustrates the
effects of a quota on cars
imported into Farmland.
The quota limits the
quantity that may be
imported.
The domestic price rises.
Importers of cars make a
profit.
International Trade Restrictions

A quota can generate the

same outcome as a tariff
but with a quota, the
importer makes an
economic profit equal to
the tariff revenue that the
government receives with
a tariff.
A VER is similar to a quota
except that the exporter
captures the economic
profit.
Winners, Losers, and the Social Loss
from an Import Quota
An import quota creates winners and losers that are similar
to those of a tariff but with an interesting difference.
When the government imposes an import quota,
■ U.S. consumers of the good lose.
■ U.S. producers of the good gain.
■ Importers of the good gain.
■ Society loses.
7.8The Case Against Protection

Despite the fact that free trade promotes prosperity for all
countries, trade is restricted.
It is often argued that international trade should be
restricted to
 Protects national security
 Protect infant industries
 Punish dumping
The Case Against Protection

Other common arguments for protection are that it

 Saves jobs
 Allows us to compete with cheap foreign labor
 Brings diversity and stability to our economy
 Penalizes nations with lax environmental standards
 Protects national culture
 Prevents rich nations from exploiting poor ones
The Case Against Protection

The National Security Argument

The idea that a country must protect the industries that
produce defense equipment and supply raw material to
these industries.
This argument does not withstand close scrutiny.
In time of war, no industry does not contribute to national
defense.
The Case Against Protection

The Infant-Industry Argument

The infant-industry argument is that it is necessary to
protect a new industry from import competition to enable it
to grow into a mature industry that can compete in world
markets.
This argument is based on the concept of dynamic
competitive advantage, which can arise from learning-by-
doing.
Learning-by-doing is a powerful engine of productivity
growth, but this fact does not justify protection.
The Case Against Protection

The Dumping Argument

Dumping occurs when foreign a firm sells its exports at a
lower price than its cost of production.
Dumping is seen as a justification for a tariff to prevent a
foreign firm driving domestic firms out of business and
then raising its price.
This argument does not justify protection because:
 It is virtually impossible to determine a firm’s costs;
 If there was a natural global monopoly, it would be more
efficient to regulate it than to impose a tariff against it.
The Case Against Protection

Saves Jobs
The idea that buying foreign goods costs domestic jobs is
wrong.
Free trade destroys some jobs and creates other better
jobs.
Free trade also increases foreign incomes and enables
foreigners to buy more domestic production.
Protection to save particular jobs is very costly.
The Case Against Protection

Allows us to Compete with Cheap Foreign Labor

The idea that a high-wage country cannot compete with a
low-wage country is wrong.
Low-wage labor is less productive than high-wage labor.
And wages and productivity tell us nothing about the
source of gains from trade, which is comparative
advantage.
The Case Against Protection

Brings Diversity and Stability

The idea that protection brings diversity of production and
greater stability of income is wrong.
A nation can achieve diversity and stability through its
international investments
The Case Against Protection

Penalizes Lax Environmental Standards

The idea that protection is good for the environment is
wrong.
Free trade increases incomes and poor countries have
significantly lower environmental standards than rich
countries.
These countries cannot afford to spend as much on the
environment as a rich country can and sometimes they
have a comparative advantage at doing “dirty” work, which
helps the global environment achieve higher
environmental standards.
The Case Against Protection

Protects National Culture

The idea that trade restrictions protect the national culture
is wrong.
This argument is heard in Canada and European
countries.
Many countries are afraid of the “Americanization” of their
culture through the prominence of American films,
television programs, art, literature, and even cuisine in
world markets.
Protecting “cultural” industries is a form of rent seeking
and the surest way to eliminate a national culture.
The Case Against Protection

Prevents Rich Countries from Exploiting Poorer

Countries
The idea that trade restrictions prevent rich countries from
exploiting poorer countries is wrong.
Free trade is the best way of raising wages and improving
working conditions in poor countries.
The Case Against Protection

The most compelling argument against protection is that it

invites retaliation.
We saw retaliation to the Smoot-Hawley Act in the United
States during the Great Depression.
And we see it today as the world reacts to high U.S. tariffs
on steel and agriculture.
7.9 Why Is International Trade
Restricted?
The two key reasons why international trade is restricted
are
 Tariff revenue
 Rent seeking
Why Is International Trade Restricted?

Tariff Revenue
It is costly for governments to collect taxes on income and
domestic sales.
It is cheaper for governments to collect taxes on
international transactions because international trade is
carefully monitored.
This source of revenue is especially attractive to
governments in developing nations.
Why Is International Trade Restricted?

Rent Seeking
Rent seeking is lobbying and other political activities that
seek to capture the gains from trade.
Despite the fact that protection is inefficient, governments
respond to the demands of those who gain from protection
and ignore the demands of those who gain from free trade
because protection brings concentrated gains and diffused
losses.
Why Is International Trade Restricted?

Compensating Losers
The gains from free trade exceed the losses, and
sometimes free trade agreements address the issue of the
distribution of gains from trade by compensating those
who lose from free trade.
1. The cost of identifying the losers form free trade and
compensating them would be enormous.
2. Difficult to know if the person is a loser from free trade
or some other reason.
Because we do not compensate losers, protectionism
remains popular.
7.10 Trade Barriers

the EU’s internal market is removing barriers to free

movement of goods, services, people and capital
the flow of goods and services
in the world economy is also important
organisations have been set up
to encourage the removal of barriers
to free global trade
7.11 Why the stress on free world trade?

The world economy went into a deep depression in

the 1930s, as many countries closed their barriers
to trade with other states. This led to:
Mass unemployment
Social upheaval
Rise of fascism and the Second World War
7.12 How to prevent chaos happening
again?

Global powers set up bodies

to support international trade
International Monetary Fund
World Bank
All countries encouraged to join these organisations, or face
exclusion from benefits of free world trade
 General Agreement on Trade and Tariffs, GATT (1947)
 Multi-lateral commitment to reducing trade barriers, sponsored
 Kennedy Round (1962 – 67)
 Tariffs reduced average 35% on 2/3 of manufactured goods.
 Tokyo Round (1974 – 79)
 Tariffs fall 1/3 on manufactures, restrict NTB’s,
 Non-reciprocity principle for developing countries.
 Uruguay Round (1986 – 93)
 Tariffs fall 34% on manufactures, agricultural subsidies cut 36%, textile quotas
(MFA) phased out, Nat'l treatment for services under GATS, establish WTO to
replace GATT.
 Doha Round (2001-present)
 As of 2008, talks have stalled over a divide on major issues, such as
agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
7.13 What do the IMF and World Bank
do?

IMF:
Lends to countries with balance
of payments problems
Pushes for economic reforms
Reports on policies in member states
What do the IMF and World Bank do?

World Bank:
Aims to help development by advising and lending – with
many conditions
Countries encouraged to lift import and export barriers, cut
subsidies and remove price controls
Criticisms of IMF

IMF only lends money if countries agree to:

Sell their resources cheaply
Cut public spending
Critics say this serves to increase the problems of poverty
in poor member countries
Criticisms of World Bank

Loans depend on countries agreeing

a ‘Structural Adjustment Programme’
Leads to rapid increase in price
of goods in country
Increases poverty
Lower investment and cut social spending
Little evidence that these policies work
What about the World Trade
Organisation (WTO)?

The WTO deals with the rules of trade between countries

It developed from the General Agreement on Tariffs and
Trade (GATT)
WTO agreements set the ground rules for international
commerce
7.14 Why so much outrage over
globalisation?

Other than the criticisms raised earlier, opponents

of globalisation point to:
Falling share of world trade taken
by developing countries
Subsidies and tariffs set by rich developed
economies: USA steel tariffs, EU agricultural
subsidies are two of the culprits
THE END
Questions on ch 7:
If egypt imposes a 100 percent tariff on imports of toys from China.
a. Explain how the tariff on toys will change the price that egyptian buyers pay
for toys , the quantity of toys imported, and the quantity of toys produced in
egypt.

b. Explain how the egyptian and Chinese gains from trade will change. Who in
egypt will lose and who will gain?
“ EU will open its market to egyptian agricultural exports after a one year banning due
to some enveronimental considerations” El Ahram May , 2018.
a) If trade liberalization raises economic growth, would all sectors of the economy
benefit? Why or why not?
b) What is the principle of comparative advantage? What is the difference between
absolute advantage and comparative advantage?
c) Which country, egypt or E.U , has a comparative advantage in producing
agricultural products ? What fact in the news clip did you use to answer this
question?
d) Explain how EU import ban on egyptian agricultural products affected agricultural
products producers and consumers in EU.
e) Identify the EU winners and losers from the open policy. Is this policy in EU’s
social interest?
f) How do you think egypt should react to any tariffs imposed on her exports from
other countries?
g) What do you expect the reaction of other agricultural exporters from other countries
concerning their share of exports to E.U during the banning period on egyptian
exports?