CHAPTER 6 I What s So Good about Trade A Division of Labor a Permit diverse segments of society to focus on different economic activities b Adam Smith c Allows gains from international trade B Comparative Advantage a Ability to produce a good more efficiently than other goods C Absolute Advantage a Not necessary for a country to have this b Ability to do something better than others Trade protection is harmful to the economy as a whole Trade protection raises the price of imports and reduces the efficiency of domestic production Free trade induces a country to follow its comparative advantage II Why do Countries Trade What They do Heckscher Ohlin trade theory Tries to explain national comparative advantage Characterizes the basic economic characteristics of a country in terms f its factor endowments Factors of Production o Land o Labor o Capital for investment o Human capital These factors determine national comparative advantage and what countries produce and export Example a country with large population and poor farmland is likely to have a comparative disadvantage in farming This theory argues that a country will export goods that make intensive use of the resources the country has in abundance Noneconomic factors affect trade o Example diplomatic and military relations between nations influence their trade patterns o Hostile relationships less trade III Trade Restrictions are the Rule Not the Exception Protectionism the use of specific measures to shield domestic producers from imports Trade Barriers government limitation on the international exchange of goods by the use of tariffs and etc Tariff tax on imports levied at the border and paid by the importer This raises the price of the imports directly Quantitative Restriction quota limits the quantity of a foreign good that can be sold domestically Nontariff Barriers to Trade regulations targeted at foreign goods or requirements that governments purchase from national producers Great Britain moved in the direction of trade liberalization they pursued policies that involved fewer restrictions on trade United States was one of the most protectionist nations in the world but then moved towards free trade DEVELOPED Nations protect agricultural producers much more than manufacturers DEVELOPING Nations protect manufacturers over agriculture U S protects steel industry IV Why Do Governments Restrict Trade The Domestic Political Economy of Protection Trade barriers usually reflect domestic concerns Producers are concerned because imported goods cut into their profit Others are concerned that foreign barriers to their goods keep them out of markets abroad and cut into their profit Trade protection methods allow domestic producers to sell more of their products to raise their prices or both Most direct cost of protection is to consumers of the protected Redistributive effect producers gain and consumers lose from V Winners and Losers in the International Trade Domestic industries protected y trade barriers receive clear good protection benefits Groups that lose from trade protection o Consumers of the imported good o Exporters o Citizens 1980s many people in Soviet bloc countries blamed the stagnation of their economies on their governments pervasive trade controls VI Economic Interests and Trade Policy Heckscher Ohlin approach if a country exports goods that make intensive use of a factor of production that the country has in abundance then trade is particularly good for those who own the factor of production Stolper Samuelson Approach protection benefits the scare factors of production Bangladesh A poor country with unskilled labor They export clothing which makes intensive use of its abundant unskilled labor It imports such capital intensive products as machinery equipment and chemicals Trade barriers artificially restrict the supply of the imported capital intensive goods so that some of them at least will have to be produced in Bangladesh We expect owners of the scarce factors of production in a country to be protectionist and the owners of the abundant factors to favor free trade In countries with abundant land farmers should support trade in countries were land is scarce farmers should support protection Many demands for protection come from industries steel sugar growers shoe manufacturers Ricardo Viner or Specific Factors Approach model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature of the factor itself This differs from Stolper Samuelson because some factors of production tied to their industry are specific to their industry VII Domestic Institutions and Trade Policy Trade protection helps relatively narrow and concentrated groups like the steel industry However it hurts the economy and consumers as a whole VIII Organization of Interests Concentrated producers will win over diffuse consumers An organization reflecting the concerns of broad groups is more likely to ignore the demands of specific groups Contrary interests that are organized into narrower groups are more likely to pursue the particular goals of such special interests IX Representation of Interests Through Political Institutions Democracy countries are more likely to liberalize their trade than dictatorship countries X Costs Benefits and Compensation in National Trade Policies Societies differ in the ways their partisan electoral and legislative institutions represent the interest of their citizens Most industrial countries are parliamentary and have a legislature elected on a proportional basis in which voters choose the part they prefer rather than the individual local candidate Americans vote for the president on a national basis but elect individual local candidates who may have no pull to the national party There are also systems in between Example of how the breadth of a politician s constituency can affect trade policy o 1934 Congress granted the president authority to negotiate trade agreements with other countries o The president was basically just supposed to suggest a negotiation to Congress and get the thumbs up or down o Many people think that the President took a bigger role in trade negotiations which ultimately lead to liberal trade policies Even if trade liberalization makes a country s economy as whole better off it can seriously harm groups within the country Country would be better off it bought off the negatively affected interests This would make a movement toward the
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