ECON 100 1st Edition Lecture 13 Outline of Last Lecture I Global Markets A Imports and exports B International Trade C Gains and Losses from Imports D Gains and Losses from Exports II International Trade Restrictions A Tariffs B Import Quotas C Other Import Barriers D Export Subsidies Outline of Current Lecture I The Case Against Protection A Seven Arguments for Trade Restrictions II Trade Wars A Restricted International Trade 1 Tariff Revenue 2 Rent Seeking III Compensating Losers Current Lecture The Case Against Protection Seven arguments for trade restrictions are that protecting domestic industries from foreign competition 1 Helps an infant industry grow 2 Counteracts dumping 3 Saves domestic jobs 4 Allows us to compete with cheap foreign labor 5 Penalizes lax environmental standards 6 Prevents rich countries from exploiting developing countries 7 Reduces offshore outsourcing that sends good U S jobs to other countries Helps an Infant Industry Grow Comparative advantages change with on the job experience learning by doing These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute An infant industry a new industry or produce is not as productive as it will become with experience It is argued that such an industry should be protected from international competition until it can stand alone and compete Counteracts Dumping Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production Might be used by a firm that wants to gain a global monopoly by driving domestic firms out of business then charging a higher price in its monopoly position Illegal under the WTO although hard to detect because it is virtually impossible to determine a firms costs Saves Domestic Jobs More jobs are created than destroyed by free trade Imports create jobs for retailers that sell imported goods and for firms that service those goods and by creating income in the rest of the world Allows Us to Compete with Cheap Foreign Labor Low wage labor is low productivity labor high wage labor is high productivity labor It is comparative advantage not wage differences that drive international trade and enable us to compete with other countries and other countries to compete with us Penalizes Lax Environmental Standards Another argument for protection is that it provides an incentive free trade with the richer greener countries to poor countries to raise their environmental standards But a poor country cannot afford to be as concerned about its environmental standard as a rich country can A poor country may have a comparative advantage in doing dirty work which helps it to raise its income and at the same time enable the global economy to achieve higher environmental standards than would otherwise be possible Prevents Rich Countries from Exploiting Developing Countries International trade must be restricted to prevent the people of the rich industrial world from exploiting the poorer people of the developing countries and forcing them to work for slave wages By trading with poor countries we increase the demand for the goods that these countries produce and increase the demand for their labor demand for labor increases wage rate increases Reduces Offshore Outsourcing that Sends Good U S Jobs to Other Countries Offshore outsourcing buying goods components or services from firms in other countries brings gains from trade identical to those of any other type of trade Americans on average gain from offshore outsourcing but some people lose those who have invested in the human capital to do a specific job that has now gone offshore Avoiding Trade Wars One counterargument to protection is that protecting invites retaliation and can trigger a trade war a contest in which when one country raises its import tariffs other countries retaliate with increases of their own which trigger yet further increases form the first country Can end world trade eventually Restricted International Trade Two key reasons trade is restricted 1 Tariff Revenue Tariffs on international trade are a convenient source of revenue in developing countries who have a difficult time collecting taxes from their citizens 2 Rent Seeking Rent seeking is lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others The number of winners from free trade is large but the gain per person is small gains are too small to make the cost of political activity worth bearing the number of losers from free trade is small but the loss per person is large these are the people willing to lobby against free trade Protectionists undertake a larger quantity of political lobbying that the free traders Compensating Losers Losers are compensated indirectly through the normal unemployment compensation arrangements Full compensation in not attempted because the costs of identifying all the losers and estimating the value of their losses would be enormous and it would never be clear whether a person who has fallen on hard times is suffering because of free trade or because of other reasons Because we do not in general compensate the losers from free international trade protectionism is a popular and permanent feature of our national economic and political life