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DEBATING TRADE

DEBATING TRADE. Principles of Microeconomic Theory, ECO 284 John Eastwood CBA 247 523-7353 John.Eastwood@nau.edu www.cba.nau.edu/eastwood-j. The Competitiveness Argument. “Free trade is beneficial only if your country is strong enough to stand up to foreign competition.”

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DEBATING TRADE

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  1. DEBATING TRADE • Principles of Microeconomic Theory, ECO 284 • John Eastwood • CBA 247 • 523-7353 • John.Eastwood@nau.edu • www.cba.nau.edu/eastwood-j

  2. The Competitiveness Argument “Free trade is beneficial only if your country is strong enough to stand up to foreign competition.” • Our industries are inefficient. • The only way we can export is by cutting wages. • Trade barriers will protect our standard of living. • Is it valid? Is it sound?

  3. The Competitiveness Argument • Not valid. An absolute advantage is neither necessary nor sufficient to guarantee comparative advantage in a good. • Trade increases the welfare of a nation.

  4. The Pauper Labor Argument • Foreign labor is poorly paid. • Foreign apparel is cheaper as a result. • Our industry is threatened. Our workers will lose jobs. (Owners will lose money.) • Apparel quotas will ensure our survival. • The nation will be better off. • Is it valid? Is it sound?

  5. The Pauper Labor Argument • Not valid. Although a quota may enrich US apparel makers, it makes the nation poorer. • Home gains by importing foreign’s comparative advantage (CA) good. This gain does not depend on the whether the low cost is due to high productivity or low wages. • Compassion for displaced workers is appropriate. • Unemployment compensation and retraining are far less costly.

  6. The Exploitation Argument “Trade exploits a country and makes it worse off if its workers receive much lower wages than worker in developed nations.” If we are debating trade, the point is not to ask whether these workers deserve more, but to ask if they would be better off if they refused to these jobs.

  7. The Exploitation Argument What is the alternative? • Model: Even if one country has an absolute disadvantage in both goods, its wage rate will be relatively low. However, trade raises its wage rate. • Trade enhances economic growth. • “Dropped Stitches” article.

  8. National Security Argument • Mosquito netting will be needed in the event of war in the tropics. • We must produce the netting during the war. • Our equipment, ordinarily used to produce lace, can be used to manufacture mosquito netting. • Our industry is threatened by imported lace. • Therefore, Congress should protect US lace makers with a tariff. • Is it valid? Is it sound?

  9. The National Security Argument • If you assume all premises are true, the conclusion does not follow. If production is vital, then a production subsidy would be more efficient. A tariff would make us poorer, not stronger. • Once revised to recommend a subsidy, the argument is probably not sound • Modern wars are brief. A stockpile of netting may be necessary, but not production capacity (2 is false.) • Is the industry really threatened? (4 may be false.)

  10. The Case Against Protection • The Infant-Industry Argument • “It is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets.”

  11. The Case Against Protection • The Infant-Industry Argument • This argument is not sound because: • It only applies if the benefits of learning-by-doing not only accrue to the owners and workers of the firms in the infant industry but also spill over to other industries and parts of the economy. • It is more efficient to protect an infant industry by using a subsidy financed from taxes.

  12. The Case Against Protection • The Dumping Argument • Dumping occurs when a foreign firm sells its exports at a lower price that its cost of production.

  13. The Case Against Protection • The Dumping Argument • The dumping argument should be resisted because: • Consumers gain more than import-competing producers lose. • Foreign’s low price may due to low costs. • A natural global monopoly is not likely. • Regulation would be the best way of dealing with a natural global monopoly.

  14. Other Arguments for Protection 1) Saves jobs 2) Protects the environment 3) Brings diversity and stability 4) Penalizes lax environmental standards 5) Protect National Culture

  15. Why Is InternationalTrade Restricted? • Tariff Revenue • Rent Seeking • Free trade brings benefits to some but imposes costs on others, with total benefits exceeding total costs

  16. Why Is InternationalTrade Restricted? • Compensating Losers • Losers are compensated, to some degree, in reality: • Trade Adjustment Assistance • Carter, Reagan • NAFTA and retraining workers • Unemployment compensation

  17. Why Is InternationalTrade Restricted? • Difficulties • Cost of identifying losers and estimating losses would be enormous. • Losers today, may be winners tomorrow.

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