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Chapter 33

ECON 208 Chapter 33: ECON 208 Chapter 33

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Economics (Arts)
ECON 208
Paul Dickinson

Trade Policy 33.1 Free Trade or Protection? Tariff: a tax applied on imports of goods or services Non-tariff barriers (NTBs): restrictions other than tariffs designed to reduce imports The Case for Free Trade • Free trade makes the country as a whole better off, even though it may not make every individual in the country better off • Tariffs may make firms complacent and not adopt new technologies The Case for Protection Protection: any government policy that interferes with free trade in order to protect domestic firms and workers from foreign competition • Promoting diversification • Protecting specific groups o Social and distributional concerns may lead to the rational adoption of protectionist policies but the cost of such protection is a reduction In the country's average living standards • Improving the terms of trade o Large countries can sometimes improve their terms of trade (and thus increase their national income) by levying tariffs on some imported goods; small countries cannot o With market power, countries can change the price • Protecting infant industries o Infant industry argument: the argument that new domestic industries with potential for economies of scale or learning by doing need to be protected from competition from established, low-cost foreign producers so that they can grow large enough to achieve costs as low as those of foreign producers • Earning economic profits in foreign markets o A country can potentially increase its national income by protecting infant industries and by subsidizing 'strategic' firms. Unless carefully applied, however, such policies can end up being redistributions from consumers and taxpayers to domestic firms without any benefit to overall standards Invalid Arguments for Protection • Keep the money at home • Protect against low-wage foreign labour • Exports are good; imports are bad o Standards of living rely on consumption, not income • Create domestic jobs o Will just result in employment redistribution (export industries to import industries) 33.2 Methods of Protection Tariffs • Raises the domestic price of the imported product above its world price, imports fall, price on domestically produced unit rises as does quantity produced domestically --> domestic producers earn more at the expense of domestic consumers • Tariffs impose a deadweight loss for the importing country
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