M09_KRUG8276_08_IM_C09

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Chapter 9 The Political Economy of Trade Policy Chapter Organization The Case for Free Trade Free Trade and Efficiency Additional Gains from Free Trade Rent Seeking Political Arguments for Free Trade Case Study: The Gain from “1992” National Welfare Arguments against Free Trade The Terms of Trade Argument for a Tariff The Domestic Market Failure Argument against Free Trade How Convincing is the Market Failure Argument? Income Distribution and Trade Policy Electoral Competition Collective Action Modeling the Political Process Who Gets Protected? Box: Politicians for Sale: Evidence from the 1990s International Negotiations and Trade Policy The Advantages of Negotiation International Trading Agreements: A Brief History The Uruguay Round Trade Liberalization From the GATT to the WTO Box: Settling a Dispute, and Creating One
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38 Krugman/Obstfeld • International Economics: Theory and Policy, Eighth Edition Benefits and Costs The Doha Disappointment Box: Do Agricultural Subsidies Hurt the Third World? Preferential Trading Agreements Case Study: Testing the WTO’s Metal
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Chapter 9 The Political Economy of Trade Policy 39 Box: Free Trade Versus Customs Unions Box: Do Trade Preferences Have Appeal? Case Study: Trade Diversion in South America Summary Appendix: Proving the Optimum Tariff is Positive Demand and Supply The Tariff and Prices The Tariff and Domestic Welfare Chapter Overview The models presented up to this point generally suggest that free trade maximizes national welfare, although it clearly is associated with income distributional effects. Most governments, however, maintain some form of restrictive trade practices. This chapter investigates reasons for this. One set of reasons concerns circumstances under which restrictive trade practices increase national welfare. Another set of reasons concerns the manner in which the interests of different groups are weighed by governments. The chapter concludes with a discussion of the motives for international trade negotiations and a brief history of international trade agreements. One recurring theme in the arguments in favor of free trade is the emphasis on related efficiency gains. As illustrated by the consumer/producer surplus analysis presented in the text, non-distortionary production and consumption choices which occur under free trade provide one set of gains from eliminating protectionism. Another level of efficiency gains arise because of economies of scale in production. Two additional arguments for free trade are introduced in this chapter. Free trade, as opposed to “managed trade,” provides a wider range of opportunities and thus a wider scope for innovation. The use of tariffs and subsidies to increase national welfare (such as a large country’s use of an optimum tariff), even where theoretically desirable, in practice may only advance the causes of special interests at the expense of the general public. When quantity restrictions are involved, rent-seeking behavior—where companies strive to
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