Self-Check Questions

industry and competition, environmental concerns, and issues of safety and security. The infant industry argument for protectionism is that small domestic industries need to be temporarily nurtured and protected from foreign competition for a time so that they can grow into strong competitors. In some cases, notably in East Asia, this approach has worked. Often, however, the infant industries never grow up. On the other hand, arguments against dumping (which is setting prices below the cost of production to drive competitors out of the market), often simply seem to be a convenient excuse for imposing protectionism. Low-income countries typically have lower environmental standards than high-income countries because they are more worried about immediate basics such as food, education, and healthcare. However, except for a small number of extreme cases, shutting off trade seems unlikely to be an effective method of pursuing a cleaner environment. Finally, there are arguments involving safety and security. Under the rules of the World Trade Organization, countries are allowed to set whatever standards for product safety they wish, but the standards must be the same for domestic products as for imported products and there must be a scientific basis for the standard. The national interest argument for protectionism holds that it is unwise to import certain key products because if the nation becomes dependent on key imported supplies, it could be vulnerable to a cutoff. However, it is often wiser to stockpile resources and to use foreign supplies when available, rather than preemptively restricting foreign supplies so as not to become dependent on them.

20.4 How Governments Enact Trade Policy: Globally, Regionally, and Nationally

Governments determine trade policy at many different levels: administrative agencies within government, laws passed by the legislature, regional negotiations between a small group of nations (sometimes just two), and global negotiations through the World Trade Organization. During the second half of the twentieth century, trade barriers have, in general, declined quite substantially in the United States economy and in the global economy. One reason why countries sign international trade agreements to commit themselves to free trade is to give themselves protection against their own special interests. When an industry lobbies for protection from foreign producers, politicians can point out that, because of the trade treaty, their hands are tied.

20.5 The Tradeoffs of Trade Policy

International trade certainly has income distribution effects. This is hardly surprising. All domestic or international competitive market forces are disruptive. They cause companies and industries to rise and fall. Government has a role to play in cushioning workers against the disruptions of the market. However, just as it would be unwise in the long term to clamp down on new technology and other causes of disruption in domestic markets, it would be unwise to clamp down on foreign trade. In both cases, the disruption brings with it economic benefits.

Self-Check Questions

1 . Explain how a tariff reduction causes an increase in the equilibrium quantity of imports and a decrease in the equilibrium price. Hint: Consider the Work It Out "Effects of Trade Barriers." 2 . Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar. 3 . Explain how trade barriers save jobs in protected industries, but only by costing jobs in other industries. 4 . Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide. 5 . How does international trade affect working conditions of low-income countries? 6 . Do the jobs for workers in low-income countries that involve making products for export to high-income countries typically pay these workers more or less than their next-best alternative? 7 . How do trade barriers affect the average income level in an economy? 8 . How does the cost of “saving” jobs in protected industries compare to the workers’ wages and salaries? 9 . Explain how predatory pricing could be a motivation for dumping. 10 . Why do low-income countries like Brazil, Egypt, or Vietnam have lower environmental standards than high-income countries like the Germany, Japan, or the United States? 11 . Explain the logic behind the “race to the bottom” argument and the likely reason it has not occurred. 12 . What are the conditions under which a country may use the unsafe products argument to block imports? 13 . Why is the national security argument not convincing? 14 . Assume a perfectly competitive market and the exporting country is small. Using a demand and supply diagram, show the impact of increasing standards on a low-income exporter of toys. Show the tariff's impact. Is the effect on toy prices the same or different? Why is a standards policy preferred to tariffs? 15 . What is the difference between a free trade association, a common market, and an economic union? 16 . Why would countries promote protectionist laws, while also negotiate for freer trade internationally? 17 . What might account for the dramatic increase in international trade over the past 50 years? 18 . How does competition, whether domestic or foreign, harm businesses? 19 . What are the gains from competition?

Review Questions

20 . Who does protectionism protect? From what does it protect them? 21 . Name and define three policy tools for enacting protectionism. 22 . How does protectionism affect the price of the protected good in the domestic market? 23 . Does international trade, taken as a whole, increase the total number of jobs, decrease the total number of jobs, or leave the total number of jobs about the same? 24 . Is international trade likely to have roughly the same effect on the number of jobs in each individual industry? 25 . How is international trade, taken as a whole, likely to affect the average level of wages? 26 . Is international trade likely to have about the same effect on everyone’s wages? 27 . What are main reasons for protecting “infant industries”? Why is it difficult to stop protecting them? 28 . What is dumping? Why does prohibiting it often work better in theory than in practice? 29 . What is the “race to the bottom” scenario? 30 . Do the rules of international trade require that all nations impose the same consumer safety standards? 31 . What is the national interest argument for protectionism with regard to certain products? 32 . Name several of the international treaties where countries negotiate with each other over trade policy. 33 . What is the general trend of trade barriers over recent decades: higher, lower, or about the same? 34 . If opening up to free trade would benefit a nation, then why do nations not just eliminate their trade barriers, and not bother with international trade negotiations? 35 . Who gains and who loses from trade? 36 . Why is trade a good thing if some people lose?