POL 202 Int. Relations Lecture 17 Outline of Last Lecture I. international Political Economya. International Tradei. The central Puzzle about Int. Trade1. Prohibited2. Largely free3. Intersection of domestic policies4. Facilitate5. Container shipsii. Core to the analysis1. Barriers2. Trade liberalization3. Int. institutionsiii. What’s so good about trade?1. Actors engage2. Specialization3. Core conceptsa. Absolute advantagei. Definitionb. Free tradei. Definitionc. Economic logiciv. Comparative advantage and the political economy of trade1. Comparative advantage2. Absolute advantagea. Opportunity costb. What’s so good about trade?i. Oliver Wendell Holmesii. Babe Ruthc. Comparative Advantage and the Political Economy of Tradei. All countries have a comparative advantage in somethingii. Examplesd. Distributional Effect of Trade1. Consider A country in a state of autarky; there is no international tradea. Prices determined by domestic supply2. Two areas of special interesta. Consumer surplusb. Producer surplus3. International tradeii. Implicationsiii. Tariffs 1. Quantity demanded falls2. Consumer surplus falls3. Producer increasesiv. Two new regions of intereste. What explains trade patterns?i. Heckscher and Ohlinf. Basic factors of productiona. Landb. Laborc. Capitald. Human capitalg. Specializationh. Noneconomic factors such as diplomatic relations also influence trade patternsi. Trade between hostile nationsii. Governments often pursue alliesi. Trade policies importantj. Consumers of farmers and BankersOutline of Current Lecture I. International Tradea. Comparative Advantagei. Definitionb. Absolute Advantagei. Definition c. Opportunity Costi. Definition d. International Tradee. Protectionismi. Definitionf. Trade Barriersi. Definitiong. Formsi. Tariffii. Quotaiii. Nontariffh. Trade RestrictionsII. Why do governments restrict trade?a. Domestic concernsb. Direct cost of protectionIII. Distributional effects of tradea. Tariff increases domestic price of goodb. Two new regions of interestIV. Winners and Losers of international tradea. Protectionb. 3 groupsV. Protecting American Sugar Industrya. US provides subsidies to sugar powersb. Studyc. How much we really pay for sugarVI. Economic interest and trade policya. Theories of trade policyi. Stopler-samuelson approach1. Defined and examplesii. Ricardo-viner approach1. Defined and examplesVII. Domestic Institutions and Trade Policiesa. Help or harm groupsb. Policiesc. Logicd. Support and Protecte. Political InstitutionsVIII. Costs, Benefits, and Compensation in National Trade Policiesa. Trade and unskilled workersb. Wages and profits1. Factor price equalization2. Prices of factors of production tend to become more equalc. Trade liberalizationd. CompensationCurrent LectureI. International Tradea. Comparative advantage-Recapi. Absolute Advantage1. Producing a good more efficiently than any other countryii. Comparative Advantage1. Producing a good at a lower opportunity cost than any other countryiii. Opportunity Cost1. What a country forgoes in order to produce a particular goodiv. The opportunity cost of producing cloth is lower in England and the opp cost of producing wine is lower in Portugalb. International Tradei. Increases aggregate welfare: there will be more cloth and wine to go aroundc. Protectionism: create some kind of a barrier to trade, shield domestic producers from imports; use specific measures to shield domestic products from importsi. Nearly all governments have thisd. Trade barriers:i. Impediments to the import of foreign goodse. Forms of Trade barriersi. Tariff: a tax import levied at the border and paid by the importerii. Quota: limits the quantity of a foreign good that can be sold domesticallyiii. Nontariff barriers to trade: regulations targeted and foreign goodsII. Trade Restrictions are the Rule, not the Exceptiona. In the 1850s the Britain and other leading industrial countries moved towards trade liberalizationi. Most of world’s major economies were open world trade grew rapidlyii. Produces first wave of globalization by the end of 19 centuryiii. In 1914 with the start of WWI international trade relations entered 30 years crisis1. Trade liberalization restarted 1945 under American leadershipiv. This led to further liberalization which led to the wave of globalization after 1980III. Why do governments restrict trade?a. Trade barriers often reflect domestic concernsi. Trade barriers assist national producers even as they cost consumers moreb. The most direct cost of protection is to consumes of the protected goodc. Redistributive effect: income is redistributed from domestic consumers to the protected domestic industryd. Protectionism also reduces the ability of society to use its resources more effectivelyIV. Distributional Effects of Tradea. Tariff increases domestic price of goodi. Quantity demanded fallsii. Consumer surplus fallsiii. But producer surplus increasesb. Two new regions of interesti. Surplus to governmentii. Deadweight loss represents efficiency losses to society from protectionismV. Winners and losers in International Tradea. Protection creates returns above the normal rate of profit by artificially restricting competition and supplyb. Yet 3 groups lose from trade protectioni. Consumers of the imported goodii. Exportersiii. Politicians who may be punished by citizens due to costs that protection imposes on themVI. Protecting the American Sugar Industrya. The US provides subsided to sugar growers, guaranteeing them a high pricei. Subsidies come at the expense of American Taxpayersii. Tariffs raise price of imported sugariii. Cost of the economy: 640 million a yearb. Study showed that every 1000 given to a member of Congress by sugar producers increased the probability would vote for sugar subsidies by 4-7%c. Few Americans realize that they are paying so much for sugarVII. Economic interest and Trade Policya. Two leading theories of trade policy interestsi. Stopler-samuelson approachii. Ricardo-viner approachb. The Stophler Samuelson approachi. Protectionism benefits score factor of productionii. Protection hurts the abundant factoriii. Trade benefits owners of factors of production used to produce exported goods1. Heckscher of Ohlin suggests that this will be the abundant factoriv. Artificially restricting trade thus hurts owners of abundant factorsv. US has lots of capital but scarce unskilled labor so it imports labor intensive goods1. Protection restricts importation of these products