Exam 10: International Trade Policy

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The trade balance is the difference between the value of exports and the value of imports. The United States is running a very large trade deficit. In 2017, the US trade deficit was over $550 billion.

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Learning by doing and economies of scale can lead to trade restrictions. The reason is that a country may want to protect its domestic industries from foreign competition while they are doing their learning and growing large enough to exploit economies of scale. These two effects form the basis for the "infant industry" argument for trade restrictions.

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(Any four of the following)
1. The internal distribution of the gains from trade is usually highly unequal. For workers, the gains from trade tend to be widely dispersed and only accrue in the long run. In contrast, the costs of trade (such as domestic jobs lost) tend to be short run and relatively concentrated. This often results in those hurt by trade calling for restrictions.
2. Companies haggling over the gains from trade can restrict trade. The side that drives the hardest bargain gets the most gains from trade, but it also risks making the deal fall through. Strategic bargaining means demanding a greater share of the gains from trade than you can reasonably expect. If you are not successful, the deal falls apart and everyone is worse off.
3. Countries haggle over trade restrictions. Once a country imposes a trade restriction, other countries often threaten to retaliate. If the restriction is not lifted, then countries may be forced to make good on their threats of retaliation just to remain credible, even though their original goal was to reduce trade restrictions, not add to them.
4. Trade patterns often cannot be explained by inherent advantages (e.g. climate). They may be explained by learning by doing and economies of scale. Learning by doing means that the more you do a task, the better you become at doing it. Economies of scale refer to the situation in which the costs per unit of output decrease as the level of output increases. Economies of scale imply that countries should specialize but they do not indicate which countries should specialize in what products. So producers ask government to protect them from foreign competition so that they can take advantage of learning by doing and economies of scale. This is known as the "infant industry" argument.
5. When countries do not have full employment, imports can decrease domestic aggregate demand and increase unemployment. Thus when an economy is in a recession, there is a strong macroeconomic reason to limit imports.
6. Countries often justify trade restrictions on grounds of national security. These restrictions take two forms: The government may place restrictions on the export of strategic materials and military hardware. The government may impose restrictions on the import of defense related goods (e.g. steel) so that industry will be available in wartime.
7. Countries often place embargoes on trade with countries with whom they have serious disagreements. Thus the United States placed embargoes on trade with Iran and Cuba to punish and weaken those countries.
8. Tariffs bring in revenues. Developing countries tend to rely on tariffs as a source of revenues because tariffs are relatively easy to collect and they are a progressive tax since wealthy people who can afford to buy imported goods pay the tariffs.