23 Political Economy of Trade Policy, Part 1

23 Political Economy of Trade Policy, Part 1 - Political...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 Political Economy of Trade Policy • Agenda: – The Case for Free Trade – The Case Against Free Trade – Income Distribution and Trade Policy – Who Gets Protected? 2 The Case for Free Trade The case for free trade rests primarily on 4 arguments: 1. Free trade and economic efficiency 2. Efficiencies from economies of scale 3. Increased productivity 4. Political “neutrality” 3 The Case for Free Trade 1. Free Trade and Efficiency : For a small country that cannot influence foreign export prices, a tariff causes a net loss to the economy by distorting production and consumption decisions. A move to free trade eliminates these distortions and increases national welfare. 4 The Case for Free Trade 2. Economies of Scale : When economies of scale exist, protected markets fragment production internationally, reduce competition domestically and raise profits of domestic firms leading to an inefficient scale of production. Free trade allows firms to take advantage of larger markets and operate at a more efficient scale of production.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 5 The Case for Free Trade 3. Increased Productivity: Free trade provides entrepreneurs with an incentive to seek new ways to export or compete with imports, leading to more opportunities for learning and innovation and increased productivity . 6 The Case for Free Trade 4. Political “Neutrality”: Trade policies are often dominated by special- interest policies rather than considerations of national welfare. A political commitment to free trade may be a good idea in practice even though there may be better policies in principle. 7 The Case for Free Trade Summary: – The conventionally measured costs of deviating from free trade are significant. – There are other benefits from free trade that add to the costs of protectionist policies. – Any attempt to pursue deviations from free trade are usually subverted by the political process. 8 Arguments against Free Trade The case against free trade rests primarily on 3 arguments. 1. Improving the terms of trade with a tariff 2. Improving the terms of trade with an export tax 3. Domestic market failures
Background image of page 2
3 9 Arguments against Free Trade 1. Terms of Trade Arguments for a Tariff: For a “large” country, a tariff lowers the price of imports and thus creates a terms of trade benefit. 10
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.

Page1 / 10

23 Political Economy of Trade Policy, Part 1 - Political...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online