INTERNATIONAL TRADE AND GLOBALIZATION

INTERNATIONAL TRADE AND GLOBALIZATION

1. Trade Barriers

   • The theory of comparative advantage
     • provides the optimistic message that trade makes people better off.
       • The gainers gain more than the losers lose.
         • Rich countries can compete with poor countries (and vice versa) because wages adjust to efficiency differences.
           • There is pressure to protect domestic producers from foreign competition by imposing trade barriers
             • Tariffs.
             • Quotas

2. Tariffs

   • An import tariff is a tax levied on imports.
     • It raises the price paid by domestic con- sumers.
       • Tariffs also protect inefficient firms or industries from competition.

3. Import Quotas

   • An import quota sets the number of units of a particular product that can be brought into the country.
     • Importers of products that fall under quota restrictions must obtain a license to import the good.
       • Import licenses can be distributed in a variety of ways.
         • The government can auction them off in a free and fair market, and they would sell for a price that reflects their scarcity.

4. Voluntary Export Quotas

   • A voluntary export quota is the result of the bargaining between a home govern- ment and a foreign government to impose export quotas to limit the exports to the home country.
     • Unlike tariffs or import quotas, voluntary export quotas do not generate revenue for the importing country or its government.
       • Quotas and "voluntary" export restraints can have an even greater effect an trade than tariffs.
         • Like import tariffs, import quotas and voluntary export quotas limit the quantity of foreign goods available in the domestic market.
           • Such nontariff barriers raise the prices paid by domestic consumers and charged by domestic producers.
             • Domestic producers
               • benefit from quotas by being able to charge higher prices.
             • The importer
               • receives a license to buy cheap imports gains, or, if licenses are auctioned, the government gains some revenues.
             • The consumer
               • The big loser from quotas is the consumer, who must pay higher prices.

5. The Costs of Trade Barriers

   • Exports subtract from domestic consumption
   • Imports add to domestic consumption.
   • The gains from trade consist of imported goods and services that can be obtained more cheaply by importing them than by producing them at home.

6. Protectionist Arguments

   • The most common argument for protec- tion is that it is unfair to compete against low-wage countries.
     • According to
       • The theory of comparative advantage
         • high-wage countries can com- pete effectively against low-wage countries in those industries in which their productivity advantage more than offsets their wage disadvantage.
           • Likewise
             • low-wage countries can compete effectively against high-productivity countries in those industries in which their wage advantage more than offsets their productivity disadvantage.
               • Every country will have industries in which it has a comparative advantage and industries in which it has a comparative disadvantage

7. U.S. Trade Policies

   • The Hawley-Smoot Tariff Act
     • was the result of political logrolling in the U.S. Congress
       • Logrolling occurs when some politicians trade their own votes on issues of minor concern to their constituents in return
         • for
           • other politicians' votes
             • on issues of greater concern to their constituents.
               • the Hawley-Smoot Act triggered angry reactions overseas.
                 • Congress amended the Tariff Act of 1930 with the Reciprocal Trade Agreements Act of 1934.
                   • The Trade Expansion Act of 1962 gave the president the power to reduce tariffs and duties
                   • . The Trade Reform Act of 1974 resulted in the Tokyo Round (1980) of multilateral reductions, in which tariffs were cut further.
                   • . The Trade Reform Act of 1974 resulted in the Tokyo Round (1980) of multilateral reductions, in which tariffs were cut further.
   • GATT is the forum in which interna- tional tariff negotiations take place and are supervised
     • GATT was replaced on 1 Janu- ary 1995 by the World Trade Organization, or WTO.
       • The WTO is the international body charged with negotiating reduced barriers to trade.
         • Such barriers remain significant primarily with respect to the poorer countries of the globe, whose agricultural products and raw materials are excluded by high protection.

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