INTERNATIONAL ECONOMICS Lecture 18 Luca Rodrguez Arguments for

INTERNATIONAL ECONOMICS Lecture 18 | Lucía Rodríguez | Arguments for protection

ARGUMENTS FOR PROTECTION • Claims for government intervention are more frequent when the economy is performing poorly and unemployment is high. Figure 4. Growth in volume of world merchandise trade and GDP, 2000 -11 a Annual % change

ARGUMENTS FOR PROTECTION • But, even when the economy is operating at full employment, changing the patterns of trade can have important effects on the distribution of income. – Recall, Stolper Samuelson theorem, regarding owners of the factors of production. – But also, how consumers’ and producers’ surpluses change as a result of trade policy. • Whether governments have alternative policies to compensate those who lose, is another key aspect of public debate about trade (in particular, in countries without broad social safety nets).

ARGUMENTS FOR PROTECTION • Save jobs at home: – Intuition: domestic industries will be benefited and save local jobs. – Clarifications needed: • Domestic output of import-competing goods does not increase by the amount that imports decline. • Assimmetry: once imposed, tariffs are difficult to remove and therefore are poorly suited to address temporary macroeconomic problems (there are other alternative policies…) • Possible retaliation by the Ro. W that loses export sales and output. • Close a trade deficit: – Intuition: import restraints eliminate balance-of-payments imbalances. – Clarifications: • Look internally: domestic savings versus domestic investment. • Would you impose the tariff on a single country or completely isolate?

ARGUMENTS FOR PROTECTION • Avoid adverse effects on Income Distribution: – Intuition: Stolper-Samuelson Theorem relatively scarce factors of production are likely to favor the imposition of trade barriers. (Labor unions will try to restrict imports of L-intensive goods). – Clarifications: • Taxes and Transfer Payments (eg. TAA): cash payments, retraining and relocation assistance to individuals who lose their jobs due to trade. • What about the rest of those who lose from free trade? • Balance between compensation and adjustment.

ARGUMENTS FOR PROTECTION • Cost disadvantage in wages: – Intuition: wages are lower in developing countries, increasing their competitiveness through lower costs. Tariffs put them back on a level playing field. – Clarifications needed: • There are more factors of production which could offset the difference in wage costs. • Differences in productivity could account for the gap in wages. • National Defense: – Intuition: some industries may be considered essential to maintain the military strength of a nation. – Clarifications needed: • Self-sufficiency could be very ineficient. • Example: energy dependence.

ARGUMENTS FOR PROTECTION • Take advantage of a large country market power: – Intuition: the gain from turning the To. T in its favor might offset the loss from a reduced volume of trade.

QUICK REVIEW: NEOCLASSICAL THEORY • General Equilibrium, large country case: – Initial situation: free-trade • Tariff on Y effects: i. Terms of Trade will improve, increasing the slope of the world prices. ii. The tariff is again measured by the size of the wedge iii. What happens to production, consumption, trade and net welfare? Country A T Good Y R C C’ P U’ Q U T R Good X

ARGUMENTS FOR PROTECTION – Clarifications: • Example: Great Britain • Retaliation and attraction of new entrants due to existing profits.

ARGUMENTS FOR PROTECTION • Promotion of an infant industry: – Intuition: during the breaking-in stage, costs are higher as workers are less efficient, firms are small and unfamiliar with the technology. • The country’s PPF does not represent the true potential: we could reach Eo. S in the production of X. • Set-up a tariff: higher To. T and initial welfare losses. • Thanks to Internal/External Economies of Scale, our PPF shifts outward. Good Y C P P P’ C C’ Good X

ARGUMENTS FOR PROTECTION – Clarifications needed: • • No need to export the good ex-post. Protection has to stay temporarily: dependence could arise. Pick Winners. Direct Policy measures wouldn't affect consumption.

ARGUMENTS FOR PROTECTION • Strategic Trade: – Intuition: Industrial targeting, not for catch-up playing, oriented towards shifting trade profits to domestic firms. – Clarifications: • Example: Virgin Galactic, Blue Origin (page 196). p V. G. n B. O. P -100 (+100) -100 +500 (+700) N 0 (+200) 500 0 (+200) • Which industries to target? Look for spillovers: semiconductors example. 0 0

ARGUMENTS FOR PROTECTION • Political arguments: – The median Voter: assimung a world of direct democracy, where every issue through a referendum. Tariff Median Voters ordered by preference

ARGUMENTS FOR PROTECTION – Protection for sale: monetary contributions cause politicians to attach more importance to those who can effectively lobby. » Efficiency versus lobbying (larger imports share vs fewer domestic producers) » Remember: