Principles of Microeconomics Scarcity and Social Provisioning Chapter 27 Globalization and Protectionism

CHAPTER 27 . GLOBALIZATION AND PROTECTIONISM INTRODUCTION TO GLOBALIZATION AND PROTECTIONISM . Flat Screen Competition . The market for displays in the United States is huge . The manufacturers of screens in the United States must compete against manufacturers from around the world . Credit modification of work by Creative Commons ) WHATS THE DOWNSIDE OF PROTECTION ?

Governments are motivated to limit and alter market outcomes for political or social ends . While governments can limit the rise in prices of some products , they can not control how much people want to buy or how much firms are Willing to sell . The laws of demand and supply still hold . Trade policy is an example Where regulations can redirect economic forces , but it can not stop them from manifesting themselves elsewhere . displays , the displays for laptop computers , tablets , and screen televisions , are an example of such an ing principle . In the early , the vast majority of displays used in laptops were imported , primarily from japan . The small but politically powerful industry filed a dumping complaint with the Commerce Department . They argued that Japanese firms were selling displays at less than fair value , which made it difficult for firms to compete . This argument for trade protection is referred to as . Other arguments for protection in this complaint included national security . After a preliminary determination by the Commerce Department that the Japanese firms were dumping , the International Trade Commission imposed a 63 dumping margin ( or tax )

PRINCIPLES or ECONOMICS 761 on the import of displays . Was this a successful exercise of US . trade policy ?

See what you think after reading the chapter . CHAPTER Introduction to Globalization and Protectionism In this chapter , you will learn about Protectionism An Indirect Subsidy from Consumers to Producers International Trade and Its Effects , Wages , and Working Conditions Arguments in Support of Restricting Imports How Trade Policy Is Enacted Globally , Regionally , and Nationally The of Trade Policy The world has become more connected on multiple levels , especially economically . In 1970 , imports and exports made up 11 of , while now they make up 32 . However , the United States , due to its size , is less internationally connected than most countries . For example , according to the World Bank , 97 of economic activity is connected to trade . This chapter explores trade laws and strategies a country uses to regulate international trade . This topic is not out controversy . As the world has become more globally connected , firms and workers in countries like the United States , Japan , or the nations of the European Union , perceive a competitive threat from firms in countries like Mexico , China , or South Africa , that have lower costs of living and therefore pay lower wages . Firms and workers in countries fear that they will fer if they must compete against more productive workers and advanced technology in countries . On a different tack , some environmentalists worry that multinational firms may evade environmental protection laws by moving their production to countries with loose or nonexistent pollution , trading a clean environment for jobs . Some politicians worry that their country may become overly dependent on key imported products , like oil , which in a time of war could threaten national security . All of these fears governments to reach the same basic policy conclusion to protect national interests , whether businesses , jobs , or security , imports of foreign products should be restricted . This chapter analyzes such arguments . First , however , it is essential to learn a few key concepts and understand how the demand and supply model applies to international trade .

PROTECTIONISM AN INDIRECT SUBSIDY FROM CONSUMERS TO PRODUCERS LEARNING By the end of this section , you will be able to Explain protectionism and its three main forms Analyze protectionism through concepts of demand and supply , noting its effects on equilibrium Calculate the effects of trade barriers hen a government policies to reduce or block international trade it is engaging in protectionism . Protectionist policies often seek to shield domestic producers and domestic workers from foreign competition . Protectionism takes three main forms tariffs , import quotas , and nontariff barriers . Recall from International Trade that tariffs are taxes imposed on imported goods and services . They make imports more expensive for consumers , discouraging imports . For example , in recent years large , televisions imported from China have faced a tariff rate . Another way to control trade is through import quotas , which are numerical limitations on the of products that can be imported . For instance , during the early , the Reagan tion imposed a quota on the import ofjapanese automobiles . In the , many developed countries , including the United States , found themselves with declining textile industries . Textile production does not require highly skilled workers , so producers were able to set up factories in countries . In order to manage this loss of jobs and income , the developed countries an international Agreement that essentially divided up the market for textile exports between importers and the remaining domestic producers . The agreement , which ran from 1974 to 2004 , specified the exact quota of textile imports that each developed country would accept from each country . A similar story exists for sugar imports into the United States , which are still governed by quotas . Nontariff barriers are all the other ways that a nation can draw up rules , regulations , inspections , and paperwork to make it more costly or difficult to import products . A rule requiring certain safety standards can limit imports just as effectively as high tariffs or low import quotas , for instance . There are also nontariff barriers in the form of these rules describe the Made in Country label as the one in which the last substantial change in the product took place . A wishing to evade import restrictions may try to change the production process so that the last

PRINCIPLES or ECONOMICS 763 big change in the product happens in his or her own country . For example , certain textiles are made in the United States , shipped to other countries , combined with textiles made in those other countries to make then back to the United States for a final assembly , to escape paying tariffs or to obtain a Made in the USA label . Despite import quotas , tariffs , and nontariff barriers , the share of apparel sold in the United States that is imported rose from about half in 1999 to about today . The Bureau of Labor Statistics ( estimated the number of jobs in textiles and apparel fell from in 2007 to in 2012 , a 42 decline . Even more textile industry jobs would have been lost out tariffs , however , domestic jobs that are saved by import quotas come at a cost . Because textile and apparel protectionism adds to the costs of imports , consumers end up paying billions of dollars more for clothing each year . When the United States eliminates trade barriers in one area , consumers spend the money they save on that product elsewhere in the there is no overall loss of jobs for the economy as a whole . Of course , workers in some of the poorest countries of the world who would otherwise have jobs producing textiles , would gain considerably if the United States reduced its barriers to trade in textiles . That said , there are good reasons to be wary about reducing barriers to trade . The 2012 and 2013 fires in textile factories , which resulted in a horrific loss of life , present that our simplified analysis in the chapter will not capture . Realizing the compromises between nations that come about due to trade policy , many countries came together in 1947 to form the General Agreement on Tariffs and Trade ( We cover the in more detail later in the chapter . This agreement has since been superseded by the World Trade Organization ( whose membership includes about 150 nations and most of the economies of the world . It is the primary international mechanism through which nations negotiate their trade rules about tariffs , quotas , and nontariff barriers . The next section ines the results of such protectionism and develops a simple model to show the impact of trade policy . DEMAND AND SUPPLY ANALYSIS OF PROTECTIONISM To the , restricting imports may appear to be nothing more than taking sales from producers and giving them to domestic producers . Other factors are at work , however , because firms do not operate in a vacuum . Instead , firms sell their products either to consumers or to other firms ( if they are business suppliers ) who are also affected by the trade barriers . A demand and supply analysis of protectionism shows that it is not just a matter of domestic gains and foreign losses , but a policy that imposes substantial domestic costs as well . Consider two countries , Brazil and the United States , who produce sugar . Each country has a tic supply and demand for sugar , as detailed in Table and illustrated in Figure . In Brazil , without trade , the equilibrium price of sugar is 12 cents per pound and the equilibrium output is 30 tons . When there is no trade in the United States , the equilibrium price of sugar is 24 cents per pound and the equilibrium quantity is 80 tons . These equilibrium points are labeled with the point .

764 ( Brazil Price ( cents per pound ) Quantity ( tons of sugar ) 9303540 Price with free Price with partial protectionism Price with no trade Price ( cents per pound ) 30 25 24 20 00 ( The United States ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Price with no trade Price with partial protectionism Price with free trade 120 Quantity ( tons of sugar ) Figure . The Sugar Trade between Brazil and the United States . Before trade , the equilibrium price of sugar in Brazil is 12 cents a pound and for 24 cents per pound in the United States . When trade is allowed , businesses will buy cheap sugar in Brazil and sell it in the United States . This will result in higher prices in Brazil and lower prices in the United States . Ignoring transaction costs , prices should converge to 16 cents per pound , with Brazil exporting 15 tons of sugar and the United States importing 15 tons of sugar . If trade is only partly open between The Sugar Trade between Brazil and the United States the countries , it will lead to an outcome between the and possibilities . Price cents 12 cents 14 cents 16 cents 20 cents 24 cents 28 cents Table . The Sugar Trade between Brazil and the United States Brazil Quantity Supplied Brazil Quantity Demanded Quantity Supplied Quantity Demanded ( tons ) 20 30 35 40 45 50 55 ( tons ) 35 30 28 25 21 18 15 ( tons ) tons ) 60 100 66 93 69 90 72 87 76 83 80 80 82 78 If international trade between Brazil and the United States now becomes possible , firms will spot an opportunity buy sugar cheaply in Brazil , and sell it at a higher price in the United States . As sugar is shipped from Brazil to the United States , the quantity of sugar produced in Brazil will be greater than Brazilian consumption ( with the extra production being exported ) and the amount produced in the United States will be less than the amount of consumption ( with the extra consumption being imported ) Exports to the United States will reduce the supply of sugar in

PRINCIPLES OF ECONOMICS 765 Brazil , raising its price . Imports into the United States will increase the supply of sugar , lowering its price . When the price of sugar is the same in both countries , there is no incentive to trade further . As Figure shows , the equilibrium with trade occurs at a price of 16 cents per pound . At that price , the sugar farmers of Brazil supply a quantity of 40 tons , while the consumers of Brazil buy only 25 tons . The extra 15 tons of sugar production , shown by the horizontal gap between the demand curve and the supply curve in Brazil , is exported to the United States . In the United States , at a price of 16 cents , the farmers produce a quantity of 72 tons and consumers demand a quantity of 87 tons . The excess demand of 15 tons by American consumers , shown by the horizontal gap between demand and domestic supply at the price of 16 cents , is supplied by imported sugar . Free trade typically results in income distribution effects , but the key is to recognize the overall gains from trade , as shown in ure . Building on the concepts outlined in Demand and Supply and Demand , Supply , and Efficiency in terms of consumer and producer surplus , Figure ( a ) shows that producers in Brazil gain by selling more sugar at a higher price , while Figure ( shows consumers in the United States benefit from the lower price and greater availability of sugar . Consumers in Brazil are worse off ( compare their trade consumer surplus with the consumer surplus ) and producers of sugar are worse off . There are gains from increase in social surplus in each country . That is , both the United States and Brazil are better off than they would be without trade . The following Clear It Up feature explains how trade policy can countries . No trade free trade GaIns of trade ( cents ) I ( cents per pound ) I ( DomestIc , demand ( tons of sugar ( tons of sugar ) a ) The States Figure . Free Trade of Sugar . Free trade results in gains from trade . Total surplus increases in both countries . However , there are clear income distribution effects . Visit this website to read more about the global sugar trade .

766 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER El WHY ARE THERE COUNTRIES ?

Why are the poor countries of the world poor ?

There are a number of reasons , but one of them will surprise you the trade policies of the countries . Following is a stark review of social priorities which has been widely publicized by the international aid organization , International . countries of the the United States , Canada , countries of the European Union , and their domestic farmers collectively by about 360 billion per year . By contrast , the total amount of foreign aid from these same countries to the poor countries of the world is about 70 billion per year , or less than 20 of the farm subsidies . Why does this matter ?

It matters because the support of farmers in countries is devastating to the livelihoods of farmers in income countries . Even when their climate and land are to products like cotton , rice , sugar , or milk , farmers in countries find it difficult to compete . Farm subsidies in the countries cause farmers in those countries to increase the amount they produce . This increase in supply drives down world prices of farm products below the costs of production . As Michael of the Washington Post describes it he effects in the regions of West Africa are dramatic . keep ing millions of Africans on the edge of malnutrition . In some of the poorest countries on Earth , cotton farmers are some of the poorest people , earning about a dollar a day . Who benefits from the current system of subsidies ?

About American cotton producers , with an average annual income of more than . As if subsidies were not enough , often , the countries block agricultural exports from countries . In some cases , the situation gets even worse when the governments of countries , having bought and paid for an excess supply of farm products , give away those products in poor countries and drive local farmers out of business gether . For example , shipments of excess milk from the European Union have caused great hardship dairy farmers . Shipments of excess rice from the United States to Haiti drove thousands of rice farmers in Haiti out of business . The opportunity costs of protectionism are not paid just by domestic consumers , but also by foreign for many agricultural products , those foreign producers are the worlds poor . Now , lets look at what happens with protectionism . sugar farmers are likely to argue that , if only they could be protected from sugar imported from Brazil , the United States would have higher domestic sugar production , more jobs in the sugar industry , and American sugar farmers would receive a higher price . If the United States government sets a tariff on imported sugar , or sets an import quota at zero , the result will be that the quantity of sugar traded between countries could be reduced to zero , and the prices in each country will return to the levels before trade was allowed . Blocking only some trade is also possible . Suppose that the United States passed a sugar import quota of seven tons . The United States will import no more than seven tons of sugar , which means that

PRINCIPLES OF ECONOMICS 767 Brazil can export no more than seven tons of sugar to the United States . As a result , the price of sugar in the United States will be 20 cents , which is the price where the quantity demanded is seven tons greater than the domestic quantity supplied . Conversely , if Brazil can export only seven tons of sugar , then the price of sugar in Brazil will be 14 cents per pound , which is the price where the domestic quantity supplied in Brazil is seven tons greater than domestic demand . In general , when a country sets a low or medium tariff or import quota , the equilibrium price and quantity will be somewhere between no trade and completely free trade . The following Work It Out explores the impact of these trade barriers . EFFECTS OF TRADE BARRIERS Let look carefully at the effects of tariffs or quotas . If the government imposes a tariff or quota sufficient to eliminate trade with Brazil , two things occur consumers pay a higher price and therefore buy a smaller quantity of sugar . producers obtain a higher price so they sell a larger quantity of sugar . The effects of a tariff on producers and consumers in the United States can be measured using two concepts developed in Demand , Supply , and Efficiency consumer surplus and producer surplus . Domestic Demand supply ' Domestic imports ?

I . I I Os Figure . US . Sugar Supply and Demand . When there is free trade , the equilibrium is at point A . When there is no trade , the equilibrium is at point Step . Look at Figure , which shows a hypothetical version of the demand and supply of sugar in the United States . Step . Note that the sugar market is in equilibrium at point A where Domestic Quantity Demanded ( Quantity plied ( Domestic Imports from Brazil ) at a price of when there is free trade . Step . Note , also , that imports are equal to the distance between points and A . Step . Recall that consumer surplus is the value a consumer gets beyond what they paid for when they buy a product . Graphically , it is the area under a demand curve but above the price . In this case , the consumer surplus in the United States is the area of the triangle formed by the points , A , and . Step . Recall , also , that producer surplus is another name for is the income producers get above the cost of duction , which is shown by the supply curve here . In this case , the producer surplus with trade is the area of the triangle formed by the points , and .

763 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Step . Suppose that the barriers to trade are imposed , imports are excluded , and the price rises to . Look what happens to producer surplus and consumer surplus . At the higher price , the domestic quantity supplied increases from to at point Because producers are selling more quantity at a higher price , the producer surplus increases to the area of the triangle , and Step . Compare the areas of the two triangles and you will see the increase in the producer surplus . Step . Examine the consumer surplus . Consumers are now paying a higher price to get a lower quantity ( instead of ) Their consumer surplus shrinks to the area of the triangle , and . Step . Determine the net effect . The producer surplus increases by the area , The loss of consumer surplus , however , is larger . It is the area , A , In other words , consumers lose more than producers gain as a result of the trade barriers and the United States has a lower social surplus . WHO BENEFITS AND WHO PAYS ?

Using the demand and supply model , consider the impact of protectionism on producers and in each of the two countries . For protected producers like sugar farmers , restricting imports is clearly positive . Without a need to face imported products , these producers are able to sell more , at a higher price . For consumers in the country with the protected good , in this case sugar consumers , restricting imports is clearly negative . They end up buying a lower quantity of the good and paying a higher price for what they do buy , compared to the equilibrium price and quantity out trade . The following Clear It Up feature considers why a country might outsource jobs even for a domestic product . WHY ARE LIFE SAVERS , AN AMERICAN PRODUCT , NOT MADE IN AMERICA ?

Life Savers , the hard candy with the hole in the middle , were invented in 1912 by Clarence Crane in Cleveland , Ohio . ing in the late and for 35 years afterward , 46 billion Life Savers a year , in 200 million rolls , were produced by a plant in Holland , Michigan . But in 2002 , the Kraft Company announced that the Michigan plant would be closed and Life Saver production moved across the border to Montreal , Canada . One reason is that Canadian workers are paid slightly less , especially in healthcare and insurance costs that are not linked to employment there . Another main reason is that the United States government keeps the price of sugar high for the benefit of sugar farmers , with a combination of a government price program and strict quotas on imported sugar . According to the Coalition for Sugar Reform , from 2009 to 2012 , the price of refined sugar in the United States ranged from 64 to 92 higher than the world price . Life Saver production uses over 100 tons of sugar each day , because the candies are 95 sugar . A number of other candy companies have also reduced production and expanded foreign production . Indeed , from 1997 to 2011 , some jobs in the industries , or more than seven times the total employment in sugar production , were eliminated . While the candy industry is especially affected by the cost of sugar , the costs are spread more broadly . consumers pay roughly billion per year in higher food prices because of elevated sugar costs . Meanwhile , sugar producers in countries are driven out of business . Because of the sugar subsidies to domestic producers and the quotas on imports , they can not sell their output profitably , or at all , in the United States market . The fact that protectionism pushes up prices for consumers in the country enacting such ism is not always acknowledged openly , but it is not disputed . After all , if protectionism did not domestic producers , there would not be much point in enacting such policies in the first place . Protectionism is simply a method of requiring consumers to subsidize producers . The subsidy is

PRINCIPLES OF ECONOMICS 769 rect , since it is paid by consumers through higher prices , rather than a direct subsidy paid by the with money collected from taxpayers . But protectionism works like a subsidy , nonetheless . The American satirist Ambrose defined tariff this way in his 191 book , The Devil Dictionary Tariff , A scale of taxes on imports , designed to protect the domestic producer against the greed of his The effect of protectionism on producers and consumers in the foreign country is complex . When an import quota is used to impose partial protectionism , the sugar producers of Brazil receive a lower price for the sugar they sell in a higher price for the sugar they are allowed to export to the United States . Indeed , notice that some of the burden of protectionism , paid by domestic consumers , ends up in the hands of foreign producers in this case . Brazilian sugar consumers seem to benefit from protectionism , because it reduces the price of sugar that they pay . On the other hand , at least some of these Brazilian sugar consumers also work as sugar farmers , so their incomes and jobs are reduced by protectionism . Moreover , if trade between the countries vanishes , Brazilian consumers would miss out on better prices for imported do not appear in our ple of sugar protectionism . The effects of protectionism on foreign countries notwithstanding , protectionism requires domestic consumers of a product ( consumers may include either households or other firms ) to pay higher prices to benefit domestic producers of that product . In addition , when a country enacts ism , it loses the economic gains it would have been able to achieve through a combination of advantage , specialized learning , and economies of scale , concepts discussed in International Trade . KEY CONCEPTS AND SUMMARY There are three tools for restricting the flow of trade tariffs , import quotas , and nontariff barriers . When a country places limitations on imports from abroad , regardless of whether it uses tariffs , tas , or nontariff barriers , it is said to be practicing protectionism . Protectionism will raise the price of the protected good in the domestic market , which causes domestic consumers to pay more , but domestic producers to earn more . SELF CHECK QUESTIONS . Explain how a tariff reduction causes an increase in the equilibrium quantity of imports and a decrease in the equilibrium price . Hint Consider the Work It Out Effects of Trade Barriers . Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar . REVIEW QUESTIONS Who does protectionism protect ?

What does it protect them from ?

Name and define three policy tools for enacting protectionism . How does protectionism affect the price of the protected good in the domestic market ?

770 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER CRITICAL THINKING QUESTIONS Show graphically that for any tariff , there is an equivalent quota that would give the same result . What would be the difference , then , between the two types of trade barriers ?

Hint It is not something you can see from the graph . From the Work It Out Effects of Trade Barriers , you can see that a tariff raises the price of imports . What is interesting is that the price rises by less than the amount of the tariff . Who pays the rest of the tariff amount ?

Can you show this graphically ?

PROBLEMS Assume two countries , Thailand ( and Japan ( I ) have one good cameras . The demand ( and supply ( for cameras in Thailand and japan is described by the following functions 60 is the price measured in a common currency used in both countries , such as the Thai Baht . Compute the equilibrium price ( and quantities ( in each country without trade . Now assume that free trade occurs . The price goes to Baht . Who exports and imports cameras and in what quantities ?

REFERENCES Bureau of Labor Statistics . Industries at a Accessed December 31 , International . import quotas numerical limits on the quantity of products that can be imported nontariff barriers ways a nation can draw up rules , regulations , inspections , and paperwork to make it more costly or difficult to import products protectionism government policies to reduce or block imports World Trade Organization ( organization that seeks to negotiate reductions in barriers to

PRINCIPLES OF ECONOMICS 771 trade and to adjudicate complaints about violations of international trade policy successor to the General Agreement on Tariffs and Trade ( SOLUTIONS Answers to Questions . This is the opposite case of the Work It Out feature . A reduced tariff is like a decrease in the cost of production , which is shown by a downward ( or rightward ) shift in the supply curve . A subsidy is like a reduction in cost This shifts the supply curve down ( or to the right ) driving the price of sugar down . If the subsidy is large enough , the price of sugar can fall below the cost of production faced by foreign producers , which means they will lose money on any sugar they produce and sell

INTERNATIONAL TRADE AND ITS EFFECTS ON JOBS , WAGES , AND WORKING CONDITIONS LEARNING OBJECTIVES By the end of this section , you will be able to Discuss how international trade the job market Analyze the opportunity cost of protectionism Explain how international trade impacts wages , labor standards , and working conditions theory at least , imports might injure workers in several different ways fewer jobs , lower wages , or poor working conditions . Let consider these in turn . In the early , the United States was negotiating the North American Free Trade Agreement ( with Mexico , an agreement that reduced tariffs , import quotas , and nontariff barriers to trade between the United States , Mexico , and Canada . Ross , a 1992 candidate for dent , claimed , in prominent campaign arguments , that if the United States expanded trade with , there would be a giant sucking sound as employers relocated to Mexico to take advantage of lower wages . After all , average wages in Mexico were , at that time , about of those in the United States . passed Congress , President Bill Clinton signed it into law , and it took effect in 1995 . For the next six years , the United States economy had some of the most rapid job growth and low unemployment in its history . Those who feared that open trade with Mexico would lead to a decrease in jobs were proven wrong . This result was no surprise to economists . After all , the trend toward globalization has been going on for decades , not just since . If trade did reduce the number of available jobs , then the United States should have been seeing a steady loss of jobs for decades . While the United States economy does experience rises and falls in unemployment to the Bureau of Labor Statistics , from spring 2008 to late 2009 , the unemployment rate rose from to 10 it has since fallen back to in spring number of jobs is not falling over extended periods of time . The number of jobs rose from 71 million in 1970 to 138 million in 2012 . Protectionism certainly saves jobs in the specific industry being protected but , for two reasons , it costs jobs in other unprotected industries . First , if consumers are paying higher prices to the industry , they inevitably have less money to spend on goods from other industries , and so jobs

PRINCIPLES or ECONOMICS 773 are lost in those other industries . Second , if the protected product is sold to other firms , so that other firms must now pay a higher price for a key input , then those firms will lose sales to foreign producers who do not need to pay the higher price . Lost sales translate into lost jobs . The hidden opportunity cost of using protectionism to save jobs in one industry is jobs sacrificed in other industries . This is why the United States International Trade Commission , in its study of barriers to trade , predicts that reducing trade barriers would not lead to an overall loss of jobs . Protectionism jobs from industries without import protections to industries that are protected from imports , but it does not create more jobs . Moreover , the costs of saving jobs through protectionism can be very high . A number of different studies have attempted to estimate the cost to consumers in higher prices per job saved through . Table shows a sample of results , compiled by economists at the Federal Reserve Bank of Dallas . Saving a job through protectionism typically costs much more than the actual worker salary . For example , a study published in 2002 compiled evidence that using protectionism to save an age job in the textile and apparel industry would cost per job saved . In other words , those workers could have been paid per year to be unemployed and the cost would only be half of what it is to keep them working in the textile and apparel industry . This result is not unique to textiles and apparel . Industry Protected with Import Tariffs or Quotas Annual Cost Saved Sugar Polyethylene resins Dairy products Frozen concentrated orange juice Ball bearings Machine tools Women handbags Glassware Apparel and textiles Rubber footwear Women nonathletic footwear Table . Cost to US Consumers of Saving ajob through Protectionism ( Source Federal Reserve Bank of Dallas ) Why does it cost so much to save jobs through protectionism ?

The basic reason is that not all of the extra money paid by consumers because of tariffs or quotas goes to save jobs . For example , if tariffs are imposed on steel imports so that buyers of steel pay a higher price , steel companies earn greater profits , buy more equipment , pay bigger bonuses to managers , give pay raises to existing also avoid firing some additional workers . Only part of the higher price of protected steel goes toward saving jobs . Also , when an industry is protected , the economy as a whole loses the benefits of playing to its comparative other words , producing what it is best at . So , part of the higher price that consumers pay for protected goods is lost economic efficiency , which can be measured as another deadweight loss , like that discussed in Labor and Financial Markets . There a bumper sticker that speaks to the threat some workers feel from imported products Buy If the car were being driven by an economist , the sticker might

774 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER declare Block obs for Some Americans , for Other Americans , and Also Pay High TRADE AND WAGES Even if trade does not reduce the number of jobs , it could affect wages . Here , it is important to rate issues about the average level of wages from issues about whether the wages of certain workers may be helped or hurt by trade . Because trade raises the amount that an economy can produce by letting firms and workers play to their comparative advantage , trade will also cause the average level of wages in an economy to rise . Workers who can produce more will be more desirable to employers , which will shift the demand for their labor out to the right , and increase wages in the labor market . By contrast , barriers to trade will reduce the average level of wages in an economy . However , even if trade increases the overall wage level , it will still benefit some workers and hurt ers . Workers in industries that are confronted by competition from imported products may find that demand for their labor decreases and shifts back to the left , so that their wages decline with a rise in international trade . Conversely , workers in industries that benefit from selling in global markets may find that demand for their labor shifts out to the right , so that trade raises their wages . View this website to read an article on the issues surrounding fair trade coffee . El ' One concern is that while globalization may be benefiting , workers in the United States , it may also impose costs on , workers . After all , workers presumably benefit from increased sales of sophisticated products like computers , ery , and pharmaceuticals in which the United States has a comparative advantage . Meanwhile , skilled workers must now compete against extremely workers worldwide for making simpler products like toys and clothing . As a result , the wages of workers are likely to fall . There are , however , a number of reasons to believe that while globalization has helped some industries and hurt others , it has not focused its negative impact on the wages of Americans . First , about half of trade is trade . That means the trades lar goods with other economies like Canada , Japan , Germany , and the United Kingdom . For instance , in 2014 the exported over million cars , from all the major automakers , and also imported several million cars from other countries . Most workers in these industries have skills and many of them do quite well in the world of globalization . Some evidence suggested that trade between

PRINCIPLES or ECONOMICS 775 similar countries had a small impact on domestic workers but later evidence indicates that it all depends on how the labor market is . In other words , the key is how workers are in finding jobs in different industries . Trade on workers depends a lot on the structure of labor markets and indirect effects felt in other parts of the economy . For example , in the United States and the United Kingdom , because labor market are low , the impact of trade on low income ers is small . Second , many workers hold service jobs that can not be replaced by imports from countries . For example , lawn care services or moving and hauling services or hotel maids can not be imported from countries long distances away like China or . Competition from imported products is not the primary determinant of their wages . Finally , while the focus of the discussion here is on wages , it is worth pointing out that workers suffer due to protectionism in all the those that they do not work in the For example , food and clothing are protected industries . These workers therefore pay higher prices for these basic necessities and as such their dollar stretches over fewer goods . The benefits and costs of increased trade in terms of its effect on wages are not distributed evenly across the economy . However , the growth of international trade has helped to raise the productivity of workers as a thus helped to raise the average level of wages . LABOR STANDARDS AND WORKING CONDITIONS Workers in many countries around the world labor under conditions that would be gal for a worker in the United States . Workers in countries like China , Thailand , Brazil , South Africa , and Poland are often paid less than the United States minimum wage . For example , in the United States , the minimum wage is per hour a typical wage in many countries might be more like per day , or often much less . Moreover , working conditions in countries may be extremely unpleasant , or even unsafe . In the worst cases , production may involve the labor of small children or even workers who are treated nearly like slaves . These concerns over standards of foreign labor do not affect most of trade , which is and carried out with other income countries that have labor standards similar to the United States , but it is , nonetheless , morally and economically important . In thinking about labor standards in other countries , it is important to draw some distinctions between what is truly unacceptable and what is painful to think about . Most people , economists included , have little difficulty with the idea that production by confined in factories or by slave labor is morally unacceptable . They would support aggressive efforts to eliminate such shutting out imported products made with such labor . Many cases , however , are less . An opinion article in the New York Times several years ago described the case of Ahmed , a boy from Pakistan . He earned per day working in a carpet factory . He dropped out of school in second grade . Should the United States and other countries refuse to purchase rugs made by Ahmed and his ?

If the carpet factories were to close , the likely alternative job for Ahmed is farm work , and as Ahmed says of his job This makes much more money and is more Other workers may have even less attractive alternative jobs , perhaps scavenging garbage or tion . The real problem for Ahmed and many others in countries is not that globalization

776 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER has made their lives worse , but rather that they have so few good life alternatives . The United States went through similar situations during the nineteenth and early twentieth centuries . In closing , there is some irony when the United States government or citizens take issue with labor standards in countries , because the United States is not a world leader in ment laws to protect employees . In Western European countries and Canada , all citizens are some form of national healthcare by the government the United States does not offer such a guarantee but has moved in the direction of universal health insurance coverage under the recent Affordable Care Act . Many European workers receive six weeks or more of paid vacation per year in the United States , vacations are often one to three weeks per year . If European countries accused the United States of using unfair labor standards to make products cheaply , and announced that they would shut out all imports until the United States adopted guaranteed national healthcare , added more national holidays , and doubled vacation time , Americans would be outraged . Yet when start talking about restricting imports from poor countries because of low wage levels and poor working conditions , they are making a very similar argument . This is not to say that labor in countries are not an important issue . They are . However , linking labor in countries to trade the emphasis from the real question to ask What are acceptable and enforceable minimum labor standards and protections to have the world over ?

KEY CONCEPTS AND SUMMARY As international trade increases , it contributes to a shift in jobs away from industries where that does not have a comparative advantage and toward industries where it does have a comparative advantage . The degree to which trade affects labor markets has a lot to do with the structure of the labor market in that country and the adjustment process in other industries . Global trade should raise the average level of wages by increasing productivity . However , this increase in average wages may include both gains to workers in certain jobs and industries and losses to others . In thinking about labor practices in countries , it is useful to draw a line between what is unpleasant to think about and what is morally objectionable . For example , low wages and long ing hours in poor countries are unpleasant to think about , but for people in parts of the world , it may well be the best option open to them . Practices like child labor and forced labor are morally objectionable and many countries refuse to import products made using these practices . SELF CHECK QUESTIONS Explain how trade barriers save jobs in protected industries , but only by costing jobs in other industries . Explain how trade barriers raise wages in protected industries by reducing average wages . How does international trade affect Working conditions of countries ?

Do the jobs for workers in countries that involve making products for export to countries typically pay these Workers more or less than their alternative ?

How do trade barriers affect the average income level in an economy ?

How does the cost of saving jobs in protected industries compare to the Workers wages and salaries ?

777 PRINCIPLES OF ECONOMICS REVIEW QUESTIONS . Does international trade , taken as a Whole , increase the total number of jobs , decrease the total number of jobs , or leave the total number of jobs about the same ?

Is international trade likely to have roughly the same effect on the number of jobs in each individual industry ?

How is international trade , taken as a whole , likely to affect the average level of Wages ?

Is international trade likely to have about the same effect on everyone Wages ?

CRITICAL THINKING QUESTIONS If trade barriers hurt the average Worker in an economy ( due to lower wages ) why does government create trade barriers ?

Why do you think labor standards and Working conditions are lower in the countries of the World than in countries like the United States ?

REFERENCES Bureau of Labor Statistics . Data Retrieval Employment , Hours , and Earnings ( CES ) Last modified February , Kiran . 2015 . Why Are Oil Imports Falling ?

Accessed April , Nicholas . Let Them The New York Times , June 25 , SOLUTIONS Answers to Questions . Trade barriers raise the price of goods in protected industries . If those products are inputs in other industries , it raises their production costs and then prices , so sales fall in those other industries . Lower sales lead to lower employment . Additionally , if the protected industries are consumer goods , their customers pay higher prices , which reduce demand for other consumer products and thus employment in those industries . Trade based on comparative advantage raises the average Wage rate , though it can reduce the incomes of industries . By moving away from a country comparative advantage , trade barriers do the opposite they give Workers in protected industries an advantage , While reducing the average Wage . By raising incomes , trade tends to raise working conditions also , even though those conditions may not ( yet ) be equivalent to those in countries .

778 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER They typically pay more than the alternative . If a Nike firm did not pay Workers at least as much as they would earn , for example , in a subsistence rural lifestyle , they many never come to work for Nike . Since trade barriers raise prices , real incomes fall . The average worker would also earn less . Workers working in other sectors and the protected sector see a decrease in their real wage .

ARGUMENTS IN SUPPORT OF RESTRICTING IMPORTS LEARNING OBJECTIVES By the end of this section , you will be able to Explain and analyze various arguments that are in support of restricting imports , including the infant industry argument , the argument , the environmental protection argument , the unsafe consumer products argument , and the national interest argument Explain dumping and race to the bottom Evaluate the significance of countries perceptions on the benefits of growing trade previously noted , protectionism requires domestic consumers of a product to pay higher prices to benefit domestic producers of that product . Countries that institute protectionist policies lose the economic gains achieved through a combination of comparative advantage , specialized learning , and economies of scale . With these overall costs in mind , let us now consider , one by one , a number of arguments that support restricting imports . THE INFANT INDUSTRY ARGUMENT Imagine wants to start its own computer industry , but it has no computer firms that can produce at a low enough price and high enough quality to compete in world markets . However , politicians , business leaders , and workers hope that if the local industry had a chance to get established , before it needed to face international competition , then a domestic company or group of companies could develop the skills , management , technology , and economies of scale that it needs to become a successful domestic industry . Thus , the infant industry argument for is to block imports for a limited time , to give the infant industry time to mature , before it starts competing on equal terms in the global economy . Revisit Policy Around the World for more information on the infant industry argument . The infant industry argument is theoretically possible , even sensible give an industry a indirect subsidy through protection , and then reap the economic benefits of having a vibrant , healthy industry . Implementation , however , is tricky . In many countries , infant industries have gone from babyhood to senility and obsolescence without ever having reached the profitable maturity stage . Meanwhile , the protectionism that was supposed to be often took a very long time to be repealed . As one example , Brazil treated its computer industry as an infant industry from the late until

780 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER about 1990 . In an attempt to establish its computer industry in the global economy , Brazil largely barred imports of computer products for several decades . This policy guaranteed increased sales for Brazilian computers . However , by the , due to lack of international competition , Brazil had a backward and industry , typically lagging behind world standards for price and mance by three to five long time in this industry . After more than a decade , ing which Brazilian consumers and industries that would have benefited from computers paid the costs and Brazil computer industry never competed effectively on world markets , Brazil phased out its infant industry policy for the computer industry . Protectionism for infant industries always imposes costs on domestic users of the product , and has provided little benefit in the form of stronger , competitive industries . However , several countries in East Asia offer an exception . Japan , Korea , Thailand , and other countries in this region have sometimes provided a package of indirect and direct subsidies targeted at certain industries , including protection from foreign competition and government loans at interest rates below the ket equilibrium . In Japan and Korea , for example , subsidies helped get their domestic steel and auto industries up and running . Why did the infant industry policy of protectionism and other subsidies work fairly well in East Asia ?

A study by the World Bank in the early offered three guidelines to countries thinking about infant industry protection . Do not hand out protectionism and other subsidies to all industries , but focus on a few industries where your country has a realistic chance to be a producer . Be very hesitant about using protectionism in areas like computers , where many other industries rely on having the best products available , because it is not useful to help one industry by imposing high costs on many other industries . Have clear guidelines for when the infant industry policy will end . In Korea in the and , a common practice was to link protectionism and subsidies to export sales in global markets . If export sales rose , then the infant industry had succeeded and the could be phased out . If export sales did not rise , then the infant industry policy had failed and the protectionism could be phased out . Either way , the protectionism would be temporary . Following these rules is easier said than done . Politics often intrudes , both in choosing which tries will receive the benefits of being treated as infants and when to phase out import restrictions and other subsidies . Also , if the government of a country wishes to impose costs on its citizens so that it can provide subsidies to a few key industries , it has many tools for doing so direct government payments , loans , targeted tax reductions , government support of research and development of new technologies , and so on . In other words , protectionism is not the only or even the best way to support key industries . Visit this Website to view a presentation by questioning how integrated the World really is .

PRINCIPLES or ECONOMICS 731 Lil ' THE ARGUMENT Dumping refers to selling goods below their cost of production . laws block imports that are sold below the cost of production by imposing tariffs that increase the price of these imports to reflect their cost of production . Since dumping is not allowed under the rules of the World Trade Organization ( nations that believe they are on the receiving end of dumped goods can file a complaint with the . complaints have risen in recent years , from about 100 cases per year in the late to about 200 new cases each year by the late . Note that dumping cases are . During , case filings increase . During economic booms , case filings go down . Individual countries have also frequently started their own investigations . The government has dozens of orders in place from past investigations . In 2009 , for example , some imports that were under orders included pasta from Turkey , steel pipe fittings from Thailand , plastic tape from Italy , preserved mushrooms and lined paper products from India , and carbon steel and apple juice concentrate from China . Why Might Dumping Occur ?

Why would foreign firms export a product at less than its cost of presumably means taking a loss ?

This question has two possible answers , one innocent and one more sinister . The innocent explanation is that market prices are set by demand and supply , not by the cost of duction . Perhaps demand for a product shifts back to the left or supply shifts out to the right , which drives the market price to low below the cost of production . When a local store has a sale , for example , it may sell goods at below the cost of production . If companies find that there is excess supply of steel or computer chips or machine tools that is driving the market price down below their cost of may be the market in action . The sinister explanation is that dumping is part of a strategy . Foreign firms sell goods at prices below the cost of production for a short period of time , and when they have driven out the domestic competition , they then raise prices . This scenario is sometimes called predatory ing , which is discussed in the Monopoly chapter . Should Cases Be Limited ?

cases pose two questions . How much sense do they make in economic theory ?

How much sense do they make as practical policy ?

In terms of economic theory , the case for laws is weak . In a market governed by demand 782 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER and supply , the government does not guarantee that firms will be able to make a profit . After all , low prices are difficult for producers , but benefit consumers . Moreover , although there are plenty of cases in which foreign producers have driven out domestic firms , there are zero documented cases in which the foreign producers then jacked up prices . Instead , foreign producers typically continue competing hard against each other and providing low prices to consumers . In short , it is difficult to find evidence of predatory pricing by foreign firms exporting to the United States . Even if one could make a case that the government should sometimes enact rules in the short term , and then allow free trade to resume shortly thereafter , there is a growing concern that investigations often involve more politics than careful analysis . The Commerce Department is charged with calculating the appropriate cost of production , which can be as much an art as a science . For example , if a company built a new factory two years ago , should part of the factory cost be counted in this years cost of production ?

When a company is in a country where prices are controlled by the government , like China for example , how can one measure the true cost of production ?

When a domestic industry complains loudly enough , government regulators seem very likely to find that unfair dumping has occurred . Indeed , a common pattern has arisen where a domestic industry files an complaint , the governments meet and negotiate a reduction in imports , and then the domestic producers drop the suit . In such cases , cases often appear to be little more than a cover story for imposing tariffs or import quotas . In the , almost all of the cases were initiated by the United States , Canada , the European Union , Australia , and New Zealand . By the , countries like Argentina , Brazil , South Korea , South Africa , Mexico , and India were filing the majority of the cases before the . As the number of cases has increased , and as countries such as the United States and the European Union feel targeted by the actions of others , the may well pose some additional guidelines to limit the reach of laws . THE ENVIRONMENTAL PROTECTION ARGUMENT The potential for global trade to affect the environment has become controversial . A president of the Sierra Club , an environmental lobbying organization , once wrote The consequences of globalization for the environment are not good . Globalization , if we are lucky , will raise average incomes enough to pay for cleaning up some of the mess that we have made . But before we get there , globalization could also destroy enough of the planets basic biological and physical systems that prospects for life itself will be radically If free trade meant the destruction of life itself , then even economists would convert to ism ! While economic activity of all pose environmental dangers , it seems quite possible that , with the appropriate safeguards in place , the environmental impacts of trade can be minimized . In some cases , trade may even bring environmental benefits . In general , countries such as the United States , Canada , Japan , and the nations of the European Union have relatively strict environmental standards . In contrast , and countries like Brazil , India , and China have lower environmental standards . The general view of the governments of such countries is that environmental protection is a luxury as soon as their people have enough to eat , decent healthcare , and longer life , then they will spend

PRINCIPLES or ECONOMICS 783 more money on sewage treatment plants , scrubbers to reduce air pollution from factory smokestacks , national parks to protect wildlife , and so on . This gap in environmental standards between and countries raises two worrisome possibilities in a world of increasing global trade the race to the bottom scenario and the question of how quickly environmental standards will improve in countries . The Race to the Bottom Scenario The race to the bottom scenario of global environmental degradation runs like this . multinational companies shift their production from countries with strong environmental standards to countries with weak standards , thus reducing their costs and increasing their profits . Faced with such behavior , countries reduce their environmental standards to attract multinational firms , which , after all , provide jobs and economic clout . As a result , global production becomes concentrated in countries where it can pollute the most and environmental laws everywhere race to the Although the scenario sounds plausible , it does not appear to describe reality . In fact , the financial incentive for firms to shift production to poor countries to take advantage of their weaker environmental rules does not seem especially powerful . When firms decide where to locate a new factory , they look at many different factors the costs of labor and financial capital whether the location is close to a reliable suppliers of the inputs that they need whether the location is close to customers the quality of transportation , communications , and electrical power networks the level of taxes and the competence and honesty of the local government . The cost of environmental is a factor , too , but typically environmental costs are no more than to of the costs faced by a large industrial plant . The other factors that determine location are much more important to these companies than trying to skimp on environmental protection costs . When an international company does choose to build a plant in a country with lax laws , it typically builds a plant similar to those that it operates in tries with stricter environmental standards . Part of the reason for this decision is that designing an industrial plant is a complex and costly task , and so if a plant works well in a country , companies prefer to use the same design everywhere . Also , companies realize that if they create an environmental disaster in a country , it is likely to cost them a substantial amount of money in paying for damages , lost trust , and reduced building plants everywhere they minimize such risks . As a result of these factors , plants in countries often have a better record of compliance with environmental laws than do plants . Pressuring Countries for Higher Environmental Standards In some cases , the issue is not so much whether globalization will pressure countries to reduce their environmental standards , but instead whether the threat of blocking international trade can pressure these countries into adopting stronger standards . For example , restrictions on ivory imports in countries , along with stronger government efforts to catch elephant ers , have been credited with helping to reduce the illegal poaching of elephants in certain African countries . However , it would be highly undemocratic for the citizens of countries to attempt to dictate to the citizens of countries what domestic policies and priorities they must adopt , or how they should balance environmental goals against other priorities for their

784 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER . Furthermore , if countries want stronger environmental standards in countries , they have many options other than the threat of protectionism . For example , countries could pay for equipment in countries , or could help to pay for national parks . countries could help pay for and carry out the scientific and economic studies that would help environmentalists in countries to make a more persuasive case for the economic benefits of protecting the environment . After all , environmental protection is vital to two industries of key importance in many and tourism . Environmental advocates can set up standards for labeling , like this tuna caught in a net that kept dolphins safe or this product made only with wood not taken from rainforests , so that consumer pressure can reinforce environmentalist values . These values are also reinforced by the United Nations , which sponsors treaties to address issues such as mate change and global warming , the preservation of biodiversity , the spread of deserts , and the health of the seabed . Countries that share a national border or are within a region often sign environmental agreements about air and water rights , too . The is also becoming more aware of environmental issues and more careful about ensuring that increases in trade do not inflict environmental damage . Finally , it should be noted that these concerns about the race to the bottom or pressuring countries for more strict environmental standards do not apply very well to the roughly half of all trade that occurs with other countries . Indeed , many European countries have stricter environmental standards in certain industries than the United States . THE UNSAFE CONSUMER PRODUCTS ARGUMENT One argument for shutting out certain imported products is that they are unsafe for consumers . Indeed , consumer rights groups have sometimes warned that the World Trade Organization would require nations to reduce their health and safety standards for imported products . However , the explains its current agreement on the subject in this way It allows countries to set their own But it also says regulations must be based on science . And they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions Thus , for example , under rules it is perfectly legitimate for the United States to pass laws requiring that all food products or cars sold in the United States meet certain safety standards approved by the United States government , whether or not other countries choose to pass similar standards . However , such standards must have some scientific basis . It is improper to impose one set of health and safety for domestically produced goods but a different set of standards for imports , or one set of for imports from Europe and a different set of standards for imports from Latin America . In 2007 , recalled nearly two million toys imported from China due to concerns about high els of lead in the paint , as well as some loose parts . It is unclear if other toys were subject to similar standards . More recently , in 2013 , Japan blocked imports of wheat because of concerns that genetically modified ( wheat might be included in the shipments . The science on the impact of on health is still developing . THE NATIONAL INTEREST ARGUMENT Some argue that a nation should not depend too heavily on other countries for supplies of certain key

PRINCIPLES or ECONOMICS 785 products , such as oil , or for special materials or technologies that might have national security . On closer consideration , this argument for protectionism proves rather weak . As an example , in the United States , oil provides about 40 of all the energy and 32 of the oil used in the United States economy is imported . Several times in the last few decades , when disruptions in the Middle East have shifted the supply curve of oil back to the left and sharply raised the price , the effects have been felt across the United States economy . This is not , however , a very convincing argument for restricting imports of oil . If the United States needs to be protected from a possible cutoff of oil , then a more reasonable strategy would be to import 100 of the petroleum supply now , and save domestic oil resources for when or if the foreign supply is cut off . It might also be useful to import extra oil and put it into a stockpile for use in an emergency , as the United States government did by starting a Strategic Petroleum Reserve in 1977 . Moreover , it may be necessary to discourage people from using oil , and to start a program to seek out alternatives to oil . A forward way to do this would be to raise taxes on oil . What more , it makes no sense to argue that because oil is highly important to the United States economy , then the United States should shut out oil imports and use up its domestic supplies of oil more quickly . domestic production of oil is increasing . Shale oil is adding to domestic supply using fracking extraction techniques . Whether or not to limit certain kinds of imports of key technologies or materials that might be tant to national security and weapons systems is a slightly different issue . If weapons builders are not confident that they can continue to obtain a key product in wartime , they might decide to avoid designing weapons that use this key product , or they can go ahead and design the weapons and pile enough of the key components or materials to last through an armed . Indeed , there is a Defense National Stockpile Center that has built up reserves of many materials , from aluminum oxides , antimony , and bauxite to tungsten , vegetable tannin extracts , and zinc ( although many of these stockpiles have been reduced and sold in recent years ) Think every country is trade ?

How about the US ?

The following Clear it Up might surprise you . HOW DOES THE UNITED STATES REALLY FEEL ABOUT EXPANDING TRADE ?

How do people around the World feel about expanding trade between nations ?

In summer 2007 , the Pew Foundation people in 47 countries . One of the questions asked about opinions on growing trade ties between countries . Table shows the percentages who answered either very good or somewhat good for some of countries surveyed . For those who think of the United States as the worlds leading supporter of expanding trade , the survey results may be . When adding up the shares of those who say that growing trade ties between countries is very good or somewhat good , Americans had the least favorable attitude toward increasing globalization , while the Chinese and South Africans ranked highest . In fact , among the 47 countries surveyed , the United States ranked by far the lowest on this measure , lowed by Egypt , Italy , and Argentina .

786 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Country Very Good Somewhat Good Total China 38 53 91 South Africa 42 43 87 South Korea 24 62 86 Germany 30 55 85 Canada 29 53 82 United Kingdom 28 50 78 Mexico 22 55 77 Brazil 13 59 72 japan 17 55 72 United States 14 45 59 Table . The Status of Growing Trade Ties between Countries ( Source ) One final reason why economists often treat the national interest argument skeptically is that almost any product can be touted by lobbyists and politicians as vital to national security . In 1954 , the United States became worried that it was importing half of the Wool required for military uniforms , so it declared wool and mohair to be strategic materials and began to give subsidies to wool and mohair farmers . Although wool was removed from the official list of strategic materials in 1960 , the dies for mohair continued for almost 40 years until they were repealed in 1993 , and then were stated in 2002 . All too often , the national interest argument has become an excuse for handing out the indirect subsidy of protectionism to certain industries or companies . After all , decisions about What constitutes a key strategic material are made by politicians , not nonpartisan analysts . KEY CONCEPTS AND SUMMARY There are a number of arguments that support restricting imports . These arguments are based around industry and competition , environmental concerns , and issues of safety and security . The infant industry argument for protectionism is that small domestic industries need to be nurtured and protected from foreign competition for a time so that they can grow into strong competitors . In some cases , notably in East Asia , this approach has worked . Often , however , the infant industries never grow up . On the other hand , arguments against dumping ( which is setting prices below the cost of production to drive competitors out of the market ) often simply seem to be a excuse for imposing protectionism . countries typically have lower environmental standards than countries because they are more worried about immediate basics such as food , education , and healthcare . ever , except for a small number of extreme cases , shutting off trade seems unlikely to be an effective method of pursuing a cleaner environment . Finally , there are arguments involving safety and security . Under the rules of the World Trade , countries are allowed to set whatever standards for product safety they wish , but the standards must be the same for domestic products as for imported products and there must be a scientific basis for the standard . The national interest argument for protectionism holds that it is unwise to import certain key products because if the nation becomes dependent on key imported supplies , it could be

PRINCIPLES OF ECONOMICS 787 vulnerable to a cutoff . However , it is often wiser to stockpile resources and to use foreign supplies when available , rather than preemptively restricting foreign supplies so as not to become dependent on them . SELF CHECK QUESTIONS Explain how predatory pricing could be a motivation for dumping . Why do countries like Brazil , Egypt , or Vietnam have lower environmental standards than countries like the Germany , japan , or the United States ?

Explain the logic behind the race to the bottom argument and the likely reason it has not occurred . What are the conditions under which a country may use the unsafe products argument to block imports ?

Why is the national security argument not convincing ?

Assume a perfectly competitive market and the exporting country is small . Using a demand and supply diagram , show the impact of increasing standards on a exporter of toys . Show the impact of a tariff . Is the effect on the price of toys the same or different ?

Why is a standards policy preferred to tariffs ?

REVIEW QUESTIONS What are main reasons for protecting infant industries ?

Why is it difficult to stop protecting them ?

What is dumping ?

Why does prohibiting it often Work better in theory than in practice ?

What is the race to the bottom scenario ?

Do the rules of international trade require that all nations impose the same consumer safety standards ?

What is the national interest argument for protectionism with regard to certain products ?

CRITICAL THINKING QUESTIONS . How would direct subsidies to key industries be preferable to tariffs or quotas ?

How can governments identify good candidates for infant industry protection ?

Can you suggest some key characteristics of good candidates ?

Why are industries like computers not good candidates for infant industry protection ?

theory argues that it economically rationale ( and profitable ) to sell additional output as long as the price covers the variable costs of production . How is this relevant to the determination of Whether dumping has occurred ?

How do you think Americans would feel if other countries began to urge the United States to increase environmental standards ?

Is it legitimate to impose higher safety standards on imported goods than exist in the foreign country Where the goods were produced ?

Why might the unsafe consumer products argument be a more effective strategy ( from the perspective of the importing country ) than using tariffs or quotas to restrict imports ?

Why might a tax on domestic consumption of resources critical for national security be a more efficient approach than barriers to imports ?

783 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER PROBLEMS . You have just been put in charge of trade policy for . Coffee is a recent crop that is growing well and the export market is developing . As such , coffee is an infant industry . coffee producers come to you and ask for tariff protection from cheap Tanzanian coffee . What sorts of policies will you enact ?

Explain . The country of exports steel to the Land of Submarines . Information for the quantity demanded ( and quantity supplied ( in each country , in a world without trade , are given in Table and Table . Price ( 60 230 180 70 200 200 80 170 220 90 150 240 100 140 250 Table . Price ( 60 430 70 420 330 80 360 90 400 400 100 390 440 Table . Land of Submarines . What would be the equilibrium price and quantity in each country in a world without trade ?

How can you tell ?

What would be the equilibrium price and quantity in each country if trade is allowed to occur ?

How can you tell ?

Sketch two supply and demand diagrams , one for each country , in the situation before trade . On those diagrams , show the equilibrium price and the levels of exports and imports in the world after trade . If the Land of Submarines imposes an import quota of 30 , explain in general terms whether it will benefit or injure consumers and producers in each country . Does your general answer change if the Land of Submarines imposes an import quota of 70 ?

REFERENCES , Andrew , Richard , The Pew Global Attitudes Pew Research Center . Last modified October , Lutz , Hannah . 2015 . US . Auto Exports Hit Record in Automotive News . Accessed April , 20 .

PRINCIPLES OF ECONOMICS 789 laws laws that block imports sold below the cost of production and impose tariffs that would increase the price of these imports to their cost of production dumping selling internationally traded goods below their cost of production national interest argument the argument that there are compelling national interests against depending on key imports from other nations race to the bottom when production locates in countries with the lowest environmental ( or other ) standards , putting pressure on all countries to reduce their environmental standards SOLUTIONS Answers to Questions If imports can be sold at extremely low prices , domestic firms would have to match those prices to be competitive . By definition , matching prices would imply selling under cost and , therefore , losing money . Firms can not sustain losses forever . When they leave the industry , importers can take over , raising prices to monopoly levels to cover their losses and earn profits . Because countries need to provide , clothing , and their people . In other words , they consider environmental quality a luxury . countries can compete for jobs by reducing their environmental standards to attract business to their countries . This could lead to a competitive reduction in regulations , which would lead to greater environmental damage . While pollution management is a cost for businesses , it is tiny relative to other costs , like labor and adequate infrastructure . It is also costly for firms to locate far away from their customers , which many countries are . The decision should not be arbitrary or unnecessarily discriminatory . It should treat foreign companies the same Way as domestic companies . It should be based on science . Restricting imports today does not solve the problem . If anything , it makes it Worse since it implies using up domestic sources of the products faster than if they are imported . Also , the national security argument can be used to support protection of nearly any product , not just things critical to our national security . The effect of increasing standards may increase costs to the small exporting country . The supply curve of toys will shift to the left . Exports will decrease and toy prices will rise . Tariffs also raise prices . So the effect on the price of toys is the same . A tariff is a second best policy and also affects other sectors . However , a common standard across countries is a first best policy that attacks the problem at its root .

HOW TRADE POLICY IS ENACTED GLOBALLY , REGIONALLY , AND NATIONALLY LEARNING OBJECTIVES By the end of this section , you will be able to Explain the origin and role of the World Trade Organization ( and General Agreement on Tariffs and Trade ( Discuss the significance and provide examples of regional trading agreements Analyze trade policy at the national level Evaluate trends in barriers to trade hese public policy arguments about how nations should react to globalization and trade are fought out at several levels at the global level through the World Trade Organization and through regional trade agreements between pairs or groups of countries . THE WORLD TRADE ORGANIZATION The World Trade Organization ( was officially born in 1995 , but its history is much longer . In the years after the Great Depression and World War II , there was a worldwide push to build that would tie the nations of the world together . The United Nations officially came into in 1945 . The World Bank , which assists the poorest people in the world , and the International Monetary Fund , which addresses issues raised by international financial transactions , were both in 1946 . The third planned organization was to be an International Trade Organization , which would manage international trade . The United Nations was unable to agree to this . Instead , the eral Agreement on Tariffs and Trade ( was established in 1947 to provide a forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade . In 1995 , the was transformed into the . The process was to negotiate an agreement to reduce barriers to trade , sign that agreement , pause for a while , and then start negotiating the next agreement . The rounds of talks in the , and now the , are shown in Table . Notice that the early rounds of talks took a relatively short time , included a small number of countries , and focused almost entirely on reducing tariffs . Since the , however , rounds of trade talks have taken years , included a large number of tries , and an range of issues .

PRINCIPLES or ECONOMICS 791 Year ) Main Subjects 1947 Geneva Tariff reduction 23 1949 Tariff reduction 13 1951 Tariff reduction 38 1956 Geneva Tariff reduction 26 Dillon round Tariff reduction 26 Kennedy round Tariffs , measures 62 Tokyo round Tariffs , nontariff barriers 102 round Agriculture , services , intellectual property , competition , investment , 147 environment , dispute settlement Table . The Negotiating Rounds of and the World Trade Organization The sluggish pace of negotiations led to an old joke that really stood for Gentleman Agreement to Talk and Talk . The slow pace of international trade talks , however , is understandable , even sensible . Having dozens of nations agree to any treaty is a lengthy process . often set up separate trading rules for certain industries , like agriculture , and separate trading rules for certain countries , like the countries . There were rules , exceptions to rules , opportunities to opt out of rules , and precise wording to be fought over in every case . Like the before it , the is not a world government , with power to impose its decisions on others . The total staff of the in 2014 is 640 people and its annual budget ( as of 2014 ) is 197 million , which makes it smaller in size than many large universities . REGIONAL TRADING AGREEMENTS There are different types of economic integration across the globe , ranging from free trade , in which participants allow each others imports without tariffs or quotas , to common , in which participants have a common external trade policy as well as free trade within the group , to full economic unions , in which , in addition to a common market , monetary and fiscal policies are coordinated . Many nations belong both to the World Trade Organization and to regional trading agreements . The best known of these regional trading agreements is the European Union . In the years after World War II , leaders of several European nations reasoned that if they could tie their economies together more closely , they might be more likely to avoid another devastating war . Their efforts began with a free trade association , evolved into a common market , and then transformed into what is now a full economic union , known as the European Union . The EU , as it is often called , has a number of goals . For example , in the early it introduced a common currency for Europe , the euro , and phased out most of the former national forms of money like the German mark and the French franc , though a few have retained their own currency . Another key element of the union is to eliminate barriers to the mobility of goods , labor , and capital across Europe . For the United States , perhaps the regional trading agreement is the North American Free Trade Agreement ( The United States also participates in some regional

792 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER trading agreements , like the Caribbean Basin Initiative , which offers reduced tariffs for imports from these countries , and a free trade agreement with Israel . The world has seen a of regional trading agreements in recent years . About 100 such agreements are now in place . A few of the more prominent ones are listed in Table . Some are just agreements to continue talking others set specific goals for reducing tariffs , import quotas , and nontariff barriers . One economist described the current trade treaties as a spaghetti bowl , which is what a map with lines connecting all the countries with trade treaties looks like . There is concern among economists who favor free trade that some of these regional agreements may promise free trade , but actually act as a way for the countries within the regional agreement to try to limit trade from anywhere else . In some cases , the regional trade agreements may even with the broader agreements of the World Trade Organization . Trade Agreements Participating Countries Asia Australia , Canada , Chile , People Republic of China , Hong Kong , China , Indonesia , japan , Republic of Korea , Malaysia , Mexico , New Zealand , New Guinea , Peru , Philippines , Russia , Singapore , Chinese Taipei , Thailand , United States , Vietnam Euro Can Union Austria , Belgium , Cyprus , Czech Republic , Denmark , Finland , France , Germany , EU ) Greece , Hungary , Ireland , Italy , Netherlands , Poland , Portugal , Spain , Sweden , United Kingdom North America Free Trade Agreement ( Canada , Mexico , United States Latin American Integration Argentina , Bolivia , Brazil , Chile , Columbia , Ecuador , Mexico , Paraguay , Peru , Venezuela Association ( Association of Southeast Asian , Indonesia , Malaysia , Philippines , Singapore , Thailand , Vietnam Nations ( Southern African Development , Congo , Mozambique , South Community Africa , Zimbabwe ( Table . Some Regional Trade Agreements TRADE POLICY AT THE NATIONAL LEVEL Yet another dimension of trade policy , along with international and regional trade agreements , pens at the national level . The United States , for example , imposes import quotas on sugar , because of a fear that such imports would drive down the price of sugar and thus injure domestic sugar ers . One of the jobs of the United States Department of Commerce is to determine if imports from other countries are being dumped . The United States International Trade ment whether domestic industries have been substantially injured by the ing , and if so , the president can impose tariffs that are intended to offset the unfairly low price . In the arena of trade policy , the battle often seems to be between national laws that increase and international agreements that try to reduce protectionism , like the . Why would a country pass laws or negotiate agreements to shut out certain foreign products , like sugar or textiles ,

PRINCIPLES or ECONOMICS 793 while simultaneously negotiating to reduce trade barriers in general ?

One plausible answer is that international trade agreements offer a method for countries to restrain their own special interests . A member of Congress can say to an industry lobbying for tariffs or quotas on imports Sure would like to help you , but that pesky agreement just wont let If consumers are the biggest losers from trade , why do they not fight back ?

The quick answer is because it is easier to a small group of people around a narrow interest versus a large group that has diffuse interests . This is a question about trade policy theory . Visit this website and read the article . I TRENDS IN BARRIERS TO TRADE In newspaper headlines , trade policy appears mostly as disputes and acrimony . Countries are almost constantly threatening to challenge the unfair trading practices of other nations . Cases are brought to the dispute settlement procedures of the , the European Union , and other regional trading agreements . Politicians in national legislatures , goaded on by lobbyists , often threaten to pass bills that will establish a fair playing field or prevent unfair trade most such bills seek to accomplish these goals by placing more restrictions on trade . Protesters in the streets may object to specific trade rules or to the entire practice of international trade . Through all the controversy , the general trend in the last 60 years is clearly toward lower barriers to trade . The average level of tariffs on imported products charged by industrialized countries was 40 in 1946 . By 1990 , after decades of negotiations , it was down to less than . Indeed , one of the reasons that negotiations shifted from focusing on tariff reduction in the early rounds to a broader agenda was that tariffs had been reduced so dramatically there was not much more to do in that area . tariffs have followed this general pattern After rising sharply during the Great sion , tariffs dropped off to less than by the end of the century . Although measures of import quotas and nontariff barriers are less exact than those for tariffs , they generally appear to be at lower levels , too . Thus , the last has seen both a dramatic reduction in barriers to trade , such as tariffs , import quotas , and nontariff barriers , and also a number of technological that have made international trade easier , like advances in transportation , communication , and information management . The result has been the powerful surge of international trade . KEY CONCEPTS AND SUMMARY Trade policy is determined at many different levels administrative agencies within government , laws passed by the legislature , regional negotiations between a small group of nations ( sometimes just two )

794 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER and global negotiations through the World Trade Organization . During the second half of the eth century , trade barriers have , in general , declined quite substantially in the United States economy and in the global economy . One reason why countries sign international trade agreements to commit themselves to free trade is to give themselves protection against their own special interests . When an industry lobbies for protection from foreign producers , politicians can point out that , because of the trade treaty , their hands are tied . SELF ' QUESTIONS . What is the difference between a free trade association , a common market , and an economic union ?

Why would countries promote protectionist laws , while also negotiate for freer trade internationally ?

What might account for the dramatic increase in international trade over the past 50 years ?

REVIEW QUESTIONS Name several of the international treaties where countries negotiate with each other over trade policy . What is the general trend of trade barriers over recent decades higher , lower , or about the same ?

If opening up to free trade would benefit a nation , then why do nations not just eliminate their trade barriers , and not bother with international trade negotiations ?

CRITICAL THINKING QUESTIONS . Why do you think that the rounds and , more recently , negotiations have become longer and more difficult to resolve ?

An economic union requires giving up some political autonomy to succeed . What are some examples of political power countries must give up to be members of an economic union ?

REFERENCES United States Department of Labor . Bureau of Labor Statistics . 2015 . Employment Situation Accessed April , United States Department of Commerce . About the Department of , United States International Trade Commission . About the Accessed January , GLOSSARY common market economic agreement between countries to allow free trade in goods , services , labor , and financial capital between members while having a common external trade policy

PRINCIPLES OF ECONOMICS 795 economic union economic agreement between countries to allow free trade between members , a common external trade policy , and coordinated monetary and fiscal policies free trade agreement economic agreement between countries to allow free trade between members General Agreement on Tariffs and Trade ( forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade the precursor to the World Trade Organization SOLUTIONS Answers to Questions . A free trade association offers free trade between its members , but each country can determine its own trade policy outside the association . A common market requires a common external trade policy in addition to free trade within the group . An economic union is a common market with coordinated fiscal and monetary policy . International agreements can serve as a political counterweight to domestic special interests , thereby preventing stronger protectionist measures . Reductions in tariffs , quotas , and other trade barriers , improved transportation , and communication media have made people more aware of what is available in the rest of the world .

THE OF TRADE POLICY LEARNING OBJECTIVES By the end of this section , you will be able to Asses the complexity of international trade Discuss why a economy is so affected by international trade Explain disruptive market change readily acknowledge that international trade is not all sunshine , roses , and happy endings . Over time , the average person gains from international trade , both as a worker who has greater productivity and higher wages because of the benefits of specialization and advantage , and as a consumer who can benefit from shopping all over the world for a greater variety of quality products at attractive prices . The average person , however , is hypothetical , not a mix of those who have done very well , those who have done all right , and those who have done poorly . It is a legitimate concern of public policy to focus not just on the average or on the success stories , but also on those have not been so fortunate . Workers in other countries , the , and prospects for new industries and materials that might be of key importance to the national economy are also all legitimate issues . The common belief among economists is that it is better to embrace the gains from trade , and then deal with the costs and with other policy tools , than it is to cut off trade to avoid the costs and . To gain a better intuitive understanding for this argument , consider a hypothetical American called . invents a new scientific technology that allows the firm to increase the output and quality of its goods with a smaller number of workers at a lower cost . As a result of this technology , other firms in this industry will lose money and will also have to lay off some of the competing firms will even go bankrupt . Should the United States protect the existing firms and their employees by making it illegal for to use its new technology ?

Most people who live in economies would oppose trying to block better products that lower the cost of services . Certainly , there is a case for society providing support and assistance for those who find themselves without work . Many would argue for support of programs that encourage retraining and acquiring additional skills . Government might also support research and development efforts , so that other firms may find ways of ing . Blocking the new technology altogether , however , seems like a mistake . After all , few people would advocate giving up electricity because it caused so much disruption to the kerosene and

PRINCIPLES or ECONOMICS 797 candle business . Few would suggest holding back on improvements in medical technology because they might cause companies selling leeches and snake oil to lose money . In short , most people View disruptions due to technological change as a necessary cost that is worth bearing . Now , imagine that new technology is as simple as this the company imports what it sells from another country . In other words , think of foreign trade as a type of innovative technology . The objective situation is now exactly the same as before . Because of new in this case is importing goods from another firms in this industry will lose money and lay off workers . Just as it would have been inappropriate and ultimately foolish to respond to the disruptions of new scientific technology by trying to shut it down , it would be and ultimately foolish to respond to the disruptions of international trade by trying to restrict trade . Some workers and firms will suffer because of international trade . In a living , breathing economy , some workers and firms will always be experiencing disruptions , for a wide variety of reasons . Corporate management can be better or worse . Workers for a certain firm can be more productive or less . Tough domestic competitors can create just as much disruption as tough foreign competitors . Sometimes a new product is a hit with consumers sometimes it is a flop . Sometimes a company is blessed by a run of good luck or stricken with a run of bad luck . For some firms , trade will offer great opportunities for expanding productivity and jobs for other firms , trade will impose stress and pain . The disruption caused by international trade is not fundamentally ent from all the other disruptions caused by the other workings of a market economy . In other words , the economic analysis of free trade does not rely on a belief that foreign trade is not disruptive or does not pose indeed , the story of begins with a particular ruptive market new causes real . In thinking about the of foreign trade , or any of the other possible costs and of foreign trade discussed in this chapter , the best public policy solutions typically do not involve protectionism , but instead involve finding ways for public policy to address the particular issues , while still allowing the benefits of national trade to occur . WHAT THE DOWNSIDE OF PROTECTION ?

The domestic display industry employed many workers before the imposed the dumping margin tax . panel displays make up a significant portion of the cost of producing laptop much as 50 . Therefore , the antidumping tax would substantially increase the cost , and thus the price , of laptops . As a result of the decision , Apple moved its domestic manufacturing plant for Macintosh computers to Ireland ( Where it had an ing plant ) shut down its US manufacturing plant for laptops . And IBM cancelled plans to open a laptop turing plant in North Carolina , instead deciding to expand production at its plant . In this case , rather than having the desired effect of protecting US . interests and giving domestic manufacturing an advantage over items manufactured elsewhere , it had the unintended effect of driving the manufacturing completely out of the country . Many people lost their jobs and most display production now occurs in countries other than the United States . KEY CONCEPTS AND SUMMARY International trade certainly has income distribution effects . This is hardly surprising . All domestic or international competitive market forces are disruptive . They cause companies and industries to rise

793 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER and fall . Government has a role to play in cushioning workers against the disruptions of the market . However , just as it would be unwise in the long term to clamp down on new technology and other causes of disruption in domestic markets , it would be unwise to clamp down on foreign trade . In both cases , the disruption brings with it economic benefits . SELF CHECK QUESTIONS . How does competition , Whether domestic or foreign , harm businesses ?

What are the gains from competition ?

REVIEW QUESTIONS Who gains and who loses from trade ?

Why is trade a good thing if some people lose ?

What are some ways that governments can help people who lose from trade ?

CRITICAL THINKING QUESTIONS What are some examples of innovative products that have disrupted their industries for the better ?

In principle , the benefits of international trade to a country exceed the costs , no matter whether the country is importing or exporting . In practice , it is not always possible to compensate the losers in a country , for example , workers who lose their jobs due to foreign imports . In your opinion , does that mean that trade should be inhibited to prevent the losses ?

Economists sometimes say that protectionism is the choice for dealing with any particular problem . What they mean is that there is often a policy choice that is more direct or effective for dealing with the choice that would still allow the benefits of trade to occur . Explain why protectionism is a choice for helping workers as a group helping industries stay strong protecting the environment ' advancing national defense . Trade has income distribution effects . For example , suppose that because of a reduction in trade barriers , trade between Germany and the Czech Republic increases . Germany sells house paint to the Czech Republic . The Czech Republic sells alarm clocks to Germany . Would you expect this pattern of trade to increase or decrease jobs and Wages in the paint industry in Germany ?

The alarm clock industry in Germany ?

The paint industry in Czech Republic ?

The alarm clock industry in Czech Republic ?

What has to happen for there to be no increase in total unemployment in both countries ?

PRINCIPLES OF ECONOMICS 799 REFERENCES , and , Labour Market , Trade and Unemployment , The Review of Economic Studies , 77 . 2010 ) and . Gains from Trade when Firms The journal of Economic Perspectives , 2012 ) Was Wrong ?

The American , February 15 , Office of the United States Trade Representative . Trade Representative Announces FY 2014 Quota Allocations for Raw Cane Sugar , Refined and Specialty Sugar and Accessed January , The World Bank . Merchandise trade ( of ) Accessed January , World Trade Organization . 2014 . Annual Report Accessed April , GLOSSARY disruptive market change innovative new product or production technology which disrupts the status quo in a market , leading the innovators to earn more income and profits and the other firms to lose income and profits , unless they can come up with their own innovations SOLUTIONS Answers to Questions . Competition from firms with better or cheaper products can reduce a business profits , and may drive it out of business . Workers would similarly lose income or even their jobs . Consumers get better or less expensive products . Businesses with the better or cheaper products increase their profits . Employees of those businesses earn more income . On balance , the gains outweigh the losses to a nation .