Unit 2: International Trade Policy
The previous unit addressed why nations trade by describing the causes and effects of international trade and the functioning of a trade world economy. While this question is interesting in and of itself, its answer is much more interesting if it helps us determine what a nation's trade policy should be.
In this unit, we will begin our investigation of trade policy issues by analyzing the implications of tariffs for trade and welfare. We will then move on to non-tariff barriers and their implications before concluding with a discussion of the arguments for restricting trade and an overview of the political economy of trade policy.
Completing this unit should take you approximately 8 hours.
Upon successful completion of this unit, you will be able to:
- define and explain consumer and producer surplus;
- identify the welfare effects on consumers, producers, and the government of a tariff on a partial equilibrium graph for large and for small countries;
- calculate the world and importing country welfare effects of a tariff for large and for small countries;
- explain how prices change as a result of a tariff for large and for small countries;
- explain price and welfare effects of an import quota for large and for small countries;
- distinguish between tariffs and import quotas;
- explain price and welfare effects of an export subsidy for large and for small countries;
- define a countervailing duty;
- explain price and welfare effects of countervailing duties for large and for small countries;
- explain price and welfare effects of voluntary export restraints for large and for small countries;
- explaining price and welfare effects of export taxes for large and for small countries;
- explain local content requirements;
- list possible motivations of a government in deciding upon international trade policies;
- explain lobbying in a situation in which the benefits of protectionism are concentrated but the costs of protectionism widely dispersed;
- explain why certain industries are more likely to receive protection from import competition;
- list and explain the advantages and disadvantages of protectionism;
- explain preferential trading agreements;
- list the main features of import substitution industrialization;
- explain the empirical evidence regarding the efficacy of import substitution in developing countries;
- describe the wave of trade liberalization in developing countries that began in the 1980s;
- discuss the reasons why most economists today support free trade; and
- list circumstances under which selected protection might raise a country's welfare.
2.1: The Instruments of Trade Policy
In this subunit, we will evaluate the costs and benefits of tariffs, their welfare effects, and winners and losers from tariff policies. We will also discuss what export subsidies and agricultural subsidies are, and explain how they affect trade in agriculture in the United States and the European Union. Then, we will explain the effect of voluntary export restraints on both importing and exporting countries, and describe how the welfare effects of voluntary export restraints compare with tariff and quota policies.
2.2: The Political Economy of Trade Policy
In this subunit, we will articulate arguments for free trade that go beyond the conventional "gains from trade" line or reasoning; evaluate national welfare arguments against free trade; examine the theory and evidence behind "political economy" views of trade policy; explain how international negotiations and agreements have promoted world trade; and discuss the special issues raised by preferential trade agreements.
2.3: Trade Policy in Developing Countries
In this subunit, we will recapitulate the case for protectionism as it has been historically practiced in developing countries and discuss import-substitution-led industrialization and the "infant industry" argument. Then, we will summarize the basic ideas behind "economic dualism" and its relationship to international trade. We will also explore the recent economic history of various East Asian countries, including Taiwan and South Korea, and detail the relationship between their rapid economic growth and their participation in international trade.
Read this brief summary of the World Trade Organization's effect on developing countries.
2.4: Controversies in Trade Policy
In this subunit, we will summarize the more sophisticated arguments for interventionist trade policy, especially those related to externalities and economies of scale. We will also evaluate the claims of the anti-globalization movement concerning trade effects on workers, labor standards, and the environment. We will conclude by discussing the role of the WTO as a forum for resolving trade disputes and addressing the tension between the rulings of the WTO and individual national interests.
