国际贸易理论与实务（英文版）Ch.8Argumentagainstfreetrade

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1、 CHAPTER 9 ARGUMENTS AGIANST FREE TRADEn Traditional Arguments against Free Traden New Protectionismn The Political Economy of Trade Policy 1. Infant industry argument An argument in favor of protecting the domestic backward industries through government backing, help, and intervention. (valid as fr

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

3、nal or external)n Eventually per-unit costs fall, home industry becomes an exporter.n At this point protection can be removed.n Consumers finance the expansion, but more than repaid when the industry grows. 1 Traditional Arguments against Free Trade The argument was first explicated by Alexander Ham

4、ilton in his 1790Report 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 Economy A leading 19th century German Economist(1755 1804) n Many countries have successfully industrialized behind tariff barriers.

5、For example, from 1816 through 1945, tariffs in the USA were among the highest in the world.n Almost all NDCs Newly Developed Countries had adopted some form of infant industry promotion strategy when they were in catching-up positions.”n But it is controversial as a policy recommendation: Even when

6、 infant industry protection 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 wi

7、th this argument: (1) The identification 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. n Why

8、 not let the industry proceed on its own? (as Entrepreneurs in a market economy would undertake expansion on their own )n 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 tariffWorl

9、d price of the imported goods fallP X/PM of the importing country improves (2) Problems:(i) Fail to consider reduced level of home countrys welfare because of the countrys reduced consumption of low-cost imports.n This additional consideration of forgone quantities is brought into the analysis throu

10、gh the concept of the optimum tariff rate. n 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

11、, to Prohibitive tariff, tp Tariff rateFigure 8-1 The optimum tariffNational welfare 1National welfare At 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. (i

12、i) Beggar-my-neighbor argument （gain at the expense of foreign countries）nHarm the trading partner;nTrading partner will retaliate with a tariff of its own;nEnd up with reduced welfare;nNeither country may end up with better terms-of-trade. 3. Balance of trade argument Balance of trade = value of ex

13、ports value of importsProblems: (1) Retaliation by 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 spen

14、ding (C+I+G) Y = C + I + G + (X - M) Y - (C + I + G) = X - M 4. 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-n

15、eighbor manner because jobs lost abroad, retaliation. 2. National income of foreign countries reduced, thus cut import. Why not other policies: monetary and fiscal policy?Several points raised:1.Multiplier ffects c me about in a beggar-my-neighbor man erbecause jobs lostabroad, retaliation.2.Nati na

16、l 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 jobs 5. Fair competition argument creating a level playing field (1)To offset forei

17、gn 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 fore

18、ign subsidyn Foreign government subsidy awarded to a foreign import supplier constitutes unfair trade and disturbs the “level playing field” in international trade. n Subsidy generates a distortion from the free-trade allocation of resources when the foreign country does not have a comparative advan

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

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

21、tch industry n Policies other than tariffs? e.g. Goods could be stockpiled, like the U.S. oil with the Strategic Petroleum Reserve 2 New ProtectionismAlso called strategic trade policy theories, emerged in the 1970s. Two distinguished features: It acknowledges:(1) The industrial product market is im

22、perfect. The varieties of products make it possible for any firms in any countries to obtain monopoly forces to some extent; (2) The production of many industrial products enjoy economies of scale. Thus, the protection policy has two new bases: (1) To impose tariffs to extract the foreign monopoly p

23、rofits; (2) To help home firms to 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 QPriceCost D（=AR）MRC1 MC F Q1P1 MC+t C2t Q2P2 TConsumer surplus loss T: tariff r

24、evenue, monopolists profit transferred to the countryIf TConsumer suplus loss, then successfulRRectangle C1P1RF: monopolists profit H G S Rectangle C2P2SG: monopolists profit 2. Export subsidy in duopoly Table 8-1 Hypothetical payoff matrix for Boeing and AirbusUnit: million dollarsBoeing AirbusProd

25、uces Does not produceProduces (-5, -5) (100, 0)Does not produce (0, 100) (0, 0) If Boeing takes the lead in enteringChinas market,Airbus only has twochoices: produce butsuffer loss and notproduce and no loss.The rational choice issurely not produce(the upper-right portion); The outcome: (0, 100), (1

26、00, 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). Table 8-2 Hypothetical payoff matrix for Boeing and Airbus when Airbus receives $10 million subsidiesUnit: million dollarsBoei

27、ng AirbusProduces Does not produceProduces (-5, 5) (110, 0)Does not produce (0, 110) (0,0) Airbus is sureto make profitif it produces.Boeing gives up.Outcome: (0, 110) Table 8-3 Hypothetical payoff matrix for Boeing and Airbus when each company receives $10 million subsidies Unit: million dollarsBoe

28、ing AirbusProduces Does not produceProduces (5, 5) (110, 0)Does not produce (0, 110) (0,0) 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 Econom

29、y of Trade Policy Policies are set in political contexts, not 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 el

30、ected by majority vote. Both parties will commit to the policy 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 model Politicalsupport 9 8 7 6 5 4 3 2 1 PreferredTariffRate The Republic:

31、6%(6 supporters )The Democratic: 7%(3 supporters)The RepublicThe DemocraticThe Progressive party If 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 t

32、heory In many cases, the minority is protected. Mancur Olson developed the theory. The theory challenged wisdom (说法) in his day that: n (1) If anyone in a group has interests in common, then they will act collectively to achieve them; andn (2) In a democracy, the greatest concern is that the majorit

33、y will tyrannize (tirnaiz; 横行霸道) and exploit the minority.1932-1998 The collective action theory argues that n 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. n Individuals will not “f

34、ree ride” in groups which provide benefits only to active participants. n Hence, without selective incentives to motivate participation, collective action is unlikely to occur even when large groups of people with common interests exist. n Large groups will face relatively high costs when attempting

35、 to organize for collective action while small groups will face relatively low costs. n Individuals in large groups will gain relatively less per capita of successful collective action; Conclusion: 1. Collective action by large groups is difficult to achieve even when they have interests in common;2

36、. The minority can dominate the majority. 3. Contribution in political campaignsn Politicians also require funds to run campaigns. These funds may especially come from groups who do not have a collective action problem and are willing to advocate a special interest policy. n Trade policy making is often influenced by supporters of each political party since the ultimate objective of the policy is to safeguard its political power.