Slide 1Slide 2International Trade and Public PolicyBENEFITS FROM SPECIALIZATION AND TRADEPROTECTIONIST POLICIESSlide 6Slide 7Slide 8Slide 9WHAT ARE THE RATIONALES FOR PROTECTIONIST POLICIES?Slide 11Slide 12A BRIEF HISTORY OF INTERNATIONAL TARIFF AND TRADE AGREEMENTSRECENT POLICY DEBATES AND TRADE AGREEMENTSSlide 151 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.2 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.3 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.International Trade andPublic PolicyFERNANDO QUIJANO, YVONN QUIJANO, AND XIAO XUAN XUP R E P A R E D B YEver since World War II, the nations of the world have regularly negotiated trade agreements with each other that have successively reduced barriers to global trade.Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 18International Trade andPublic Policy4 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.BENEFITS FROM SPECIALIZATION AND TRADE18.1How Free Trade Affects EmploymentUnder free trade, each nation will begin to specialize in a single good, causing considerable changes in the country’s employment in different industries.Switching from self-sufficiency to specialization and trade increases consumption in both nations, so on average, people in each nation benefit from free trade.C H A P T E R 18International Trade andPublic Policy5 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.PROTECTIONIST POLICIES18.2Import Bans FIGURE 18.3Effects of an Import BanIn the free-trade equilibrium, demand intersects the total supply curve at point c, with a price of $12 and a quantity of 80 shirts. If shirt imports are banned, the equilibrium is shown by the intersection of the demand curve and the domestic supply curve (point a). The price increases to $23.C H A P T E R 18International Trade andPublic Policy6 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.PROTECTIONIST POLICIES18.2Quotas and Voluntary Export Restraints● import quotaA government-imposed limit on the quantity of a good that can be imported.● voluntary export restraint (VER)A scheme under which an exporting country voluntarily decreases its exports.C H A P T E R 18International Trade andPublic Policy7 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.PROTECTIONIST POLICIES18.2Quotas and Voluntary Export Restraints FIGURE 18.4Market Effects of a Quota, a VER, or a TariffAn import quota shifts the supply curve to the left. The market moves upward along the demand curve to point d, which is between point c (free trade) and a (an import ban). We can reach the same point with a tariff that shifts the total supply curve to the same position.C H A P T E R 18International Trade andPublic Policy8 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.PROTECTIONIST POLICIES18.2Quotas and Voluntary Export Restraints● import licensesRights, issued by a government, to import goods.● tariffA tax on imported goods.Responses to Protectionist PoliciesA restriction on imports is likely to lead to further restrictions on trade.Many import restrictions have led to retaliatory policies and substantially lessened trade. The most famous was the Smoot-Hawley Tariff Act of 1930. When the United States increased its average tariff on imports to 59 percent, its trading partners retaliated with higher tariffs on U.S. products. The resulting trade war reduced international trade and deepened the worldwide depression of the 1930s.C H A P T E R 18International Trade andPublic Policy9 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.Economists have found that tariffs in the United States fall most heavily on lower-income consumers.Footwear accounts for:•1.3 percent of the expenditure of lower-income households.•0.5 percent of the expenditure of higher-income households.The highest tariffs fall on the cheapest products—precisely those that will be purchased by lower-income consumers.•Low-price sneakers face a 32 percent tariff.•Expensive track shoes face only a 20 percent tariff.To protect U.S. industries, tariffs are highest on labor-intensive goods. But these goods tend to be lower priced. That is why tariffs do fall disproportionately on the poor.THE IMPACT OF TARIFFS ON THE POORAPPLYING THE CONCEPTS #1: Do tariffs (taxes) on imported goods hurt the poor disproportionately?A P P L I C A T I O N1C H A P T E R 18International Trade andPublic Policy10 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.WHAT ARE THE RATIONALES FORPROTECTIONIST POLICIES?18.3To Shield Workers from Foreign Competition● learning by doingKnowledge and skills workers gain during production that increase productivity and lower cost.● infant industriesIndustries that are at an early stage of development.To Help Domestic Firms Establish Monopolies in World MarketsTo Nurture Infant Industries until They MatureOne of the most basic arguments for protectionism is that it shields workers in industries that would be hurt by trade.If the production of a particular good requires extremely large economies of scale, the world market will support only a few, or perhaps just one, firm.C H A P T E R 18International Trade andPublic Policy11 of 23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.