Topic 13 Small Country Trade Model Agenda Trade Equilibrium How to look at trade in a supply demand graph Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade A brief history of the World Trade Organization Motivating Questions What happens when your country is too small to affect world prices If trade is so great why do we have tariffs import quotas and lots of bureaucratic red tape involved in importing Trade Equilibrium Once again it s all about supply and demand Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade First some definitions Just in case you haven t been paying attention Exports Goods and Services that are produced domestically and sold abroad Imports Goods and Services that are produced abroad and sold domestically Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Small countries are simple cases to look at We ll make the following assumptions about a small country 1 Whatever amount they demand can be supplied 2 Demand doesn t affect world prices 3 Supply first comes from domestic firms while the remainder comes from foreign firms Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Example Let s do this on the whiteboard Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Typos First we need to fix some typos on your worksheets Graphs on p 2 3 and 5 smallest on y axis should be 3 00 not 2 50 First line of p 4 should say Suppose the World Price is 3 00 First line of p 6 should say The government of Botswana feels that local electric producers are facing unfair competition when the World Price is 3 00 They decide to impose an import tariff of 1 50 Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade One more typo Finally the graph on the last page should look like 7 00 A 5 00 B 4 50 C D E F Tariff 3 00 30 Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier 50 Removing Barriers to Trade GWatts When world price is lower than domestic price The gains of the winners consumers exceed the losses of the losers producers What exactly are the benefits of imports to consumers 1 Increased consumption Obviously if the price is lower consumers will demand more 2 Increased variety of goods there are more goods available now Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade When world price is lower than domestic price More benefits 3 Lower costs through economies of scale the reason they are paying lower prices is that the goods cost less to make in the foreign country 4 Increased competition domestic firms may work harder to innovate now 5 Enhanced flow of ideas Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Trade Barrier Justifications and their counter arguments Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade So why do some argue that we should limit imports 1 The Jobs Argument If a country imports a cheap product domestic producers of the product will have to lay off workers because they decrease domestic output BUT free trade will create job opportunities in other industries where the country has a comparative advantage e g Japanese automakers become mechanic instead of plant worker Comparative advantage is in high skill work Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade More justifications 2 National Security Argument Suppose a steel industry representative says we have to keep the domestic industry strong because steel is used for weapons which is used for national security Should we believe the representative We can probably trust the argument when it comes from the military but not from industry reps Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade More justifications 3 Infant Industry Argument Trade Equilibrium Young industries need trade restrictions to help them get started BUT it s hard to decide when competition is finally okay so tariffs often persist after industry is mature A related argument is an industry needs temporary protection e g Bush imposed temporary tariffs on steel in 2002 Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade More justifications 4 Unfair Competition Argument Trade Equilibrium Not fair to expect firms to compete with foreign firms facing less regulation or who get subsidies e g Mexican corn growers might complain of the U S subsidy for corn farming BUT is this so bad for Mexico While Mexican corn producers would suffer Mexican consumers benefit and U S taxpayers bear the burden Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade More justifications 5 Protection As A Bargaining Chip Trade Equilibrium Suppose Canada puts an import tariff on U S automobiles We can threaten to put a tariff on Canadian lumber BUT if Canada doesn t budge we have to follow through on the threat or look weak Following through means less economic welfare for Canada AND U S we import a lot of lumber from Canada Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade More justifications 5 Efficiency vs Equality Trade Equilibrium Some people gain a lot from trade while some lose a little Is trade widening the income gap YES There is no counter argument for this one Economists worry about this one Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Effects of a Trade Barrier What kinds of trade barriers are there What do they do exactly Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade How do countries implement a trade barrier 1 Tariff a tax imposed by a nation on an imported good e g 100 tariff on every imported car a Revenue Tariff designed to produce income for government b Protective Tariff designed to protect certain producers from foreign competition Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade How do countries implement a trade barrier 2 Import Quota A limit imposed by a nation on the quantity or total value of a good that may be imported during some period of time e g 10 GWatts of
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