3. Both a tariff and an import quota would create a deadweight loss because total surplus would fall. K. Other Benefits of International Trade 1.In addition to increasing total surplus, there are several other benefits of free trade.
7 2.These include an increased variety of goods, lower costs through economies of scale, increased competition, and an enhanced flow of ideas. III. The Arguments for Restricting Trade A. The Jobs Argument 1. If a country imports a product, domestic producers of the product will have to lay off workers because they will decrease domestic output when the price decreases to the world price. 2. Free trade, however, will create job opportunities in other industries where the country enjoys a comparative advantage. Either the exchange rate or wages adjust to ensure that some industries become competitive and able to export at lower world prices. B. The National-Security Argument 1. Certain industries may produce key resources needed to produce products necessary for national security. 2. In many of the cases for which this argument is used, the role of the particular market in providing national security is exaggerated. C. The Infant-Industry Argument 1. New industries need time to get established to be able to compete in world markets. 2. Even if this argument is legitimate, it is nearly impossible for the government to choose which industries will be profitable in the future and it is even more difficult to remove tariffs or quotas in an industry once they are in place. D. The Unfair-Competition Argument 1. It is unfair if firms in one country are forced to comply with more regulations than firms in another country, or if another government subsidizes the production of a good. 2. Even if another country is subsidizing the production of a product so that it can be exported to a country at a lower price, the domestic consumers who import the product gain more than the domestic producers lose. E. The Protection-As-A-Bargaining-Chip Argument 1. Threats of protectionism can make other countries more willing to reduce the amounts of protectionism they use. 2. If the threat does not work, the country has to decide if it would rather reduce the economic well-being of its citizens (by carrying out the threat) or lose credibility in negotiations (by reneging on its threat).