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23 Political Economy of Trade Policy, Part 1

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

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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.
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