4 the governments objective is to maximize consumers

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4. The government's objective is to maximize consumers surplus plus its own revenue plus twice the amount of producers surplus. A tariff of 5 per unit improves producers surplus by 562.5, worsens consumers surplus by 1375, and leads to government revenue of 625. The tariff results in an increase in the government's objective function of 375. 5. The United States has a legitimate interest in the trade policies of other countries, just as other countries have a legitimate interest in U.S. activities. The reason is that uncoordinated trade policies are likely to be inferior to those based on negotiations. By negotiating with each other, governments are better able both to resist pressure from domestic interest groups and to avoid trade wars of the kind illustrated by the Prisoners' Dilemma example in the text. 6. a. While tariffs are legal, the United States is obliged to offer compensation for any unilateral tariff increase by reducing other tariffs to compensate the affected exporting country. b. Export subsidies on agricultural products are legal under GATT. c. This is not legal under GATT because the United States is not offering compensating reductions in other tariffs on Canadian goods. Interestingly, in the late 1980s, U.S. efforts to protect the shakes and shingles industry were met with an outcry and Canadian threats of a trade war. These protectionist efforts by the United States were rescinded. d. This is legal under GATT since the action is taken by Canada on its own exports. e. This is legal under GATT since it does not involve any direct export subsidies. f. This is legal under GATT and, in fact, may help increase the benefits from trade.
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63 7. The potential economic costs associated with the entrance of Poland and Hungary into an expanded EU depend largely on whether their membership results in trade creation or trade diversion. In particular, Poland and Hungary will gain if they engage in new trade with Western Europe although they might lose if trade within the European Union simply replaces trade which had been occurring with Eastern bloc countries. Furthermore, both of these nations will face at least higher structural unemployment during the transition period. Some of the negative effects on workers might be lessened if labor mobility is permitted across borders. The Western nations should also be concerned on the trade creation versus trade diversion aspects of the entry of Poland and Hungary. For distributional and political reasons, they may be concerned about whether the prices of their own products will be driven down by competition or whether the entrants will simply bring to the Western markets an expanded variety of products and scope for additional scale economies of production. Workers in Western markets may be concerned that inflows of foreign labor drive down wages, although, as we have observed in previous chapters, the nominal wage shifts should be considered in light of changes in the prices of consumption goods. Countries outside of the EU, such as the United States and Japan,
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