Lecture Notes: International Trade - Trade Barriers and Export Subsidies

Key Concepts

• Trade Barriers: Measures imposed by governments to regulate international trade, often to protect local industries.
• Export Subsidies: Financial support from governments to local manufacturers to make their exports more competitive internationally.

Types of Trade Barriers

Tariffs

• Definition: Taxes on imported goods, raising their cost and reducing demand.
• Example: 2018 US steel and aluminum tariffs announced by Donald Trump.
• Economic Impact:
  • Raise costs, potentially kill jobs (estimated 609,000 jobs by Trump's tariffs).
  • Decline in consumption due to higher prices.
  • Increase in domestic production due to reduced competition from imports.
  • Decline in imports and rise in federal revenue.
  • Allows inefficiency in domestic industries as they face less foreign competition.
  • Potential decline in exports as foreign countries may retaliate.

Quotas

• Definition: Limits on the quantity of goods that can be imported.
• Economic Impact:
  • Decline in consumption as availability is restricted.
  • Increase in domestic production to fill the gap.
  • Higher prices for goods due to limited supply.
  • No direct revenue for the government.
  • Example: 1981 voluntary quotas by Japanese automobile companies.

Non-Tariff Barriers

• Examples: Licenses, local partnership requirements.
  • Notably used by China to control imports.

Export Subsidies

• Financial aids provided to local manufacturers to give them an advantage in international markets.
• Example: Airbus receiving subsidies from European countries.

Economic Effects of Tariffs and Quotas

• Price and Quantity Dynamics:
  • Tariffs and quotas tend to raise prices and reduce the quantity of imports.
  • Domestic production increases but often at a less efficient level.
• Graphical Illustration:
  • Without trade, domestic supply meets demand at a higher price.
  • Free trade lowers prices (world price) and increases quantities consumed.
  • Tariffs/quota push supply left, increasing prices (PT).

Reasons for Protecting Industries

• Military Self-Sufficiency: Ensuring domestic capability to produce military goods.
• Product Diversification: Maintaining a varied industrial base for economic stability.
• Infant Industry Protection: Supporting emerging industries until they can compete internationally.
• Anti-Dumping: Preventing foreign companies from selling below cost to undermine local industries.

Trade Agreements

European Union (EU)

• Originated from the Common Market (1958).
• Abolished tariffs and import quotas among members.
• Common tariffs with non-member countries.
• Created Eurozone with a single currency.

NAFTA

• Established in 1993 among the US, Canada, and Mexico.
• Created a free trade zone, increasing trade and GDP per capita.

Impact of Trade on Jobs

• While trade can lead to job losses in certain sectors, it generally results in cheaper consumer goods.
• Trade adjustment acts exist to support workers affected by trade.
• Much of job displacement is due to automation rather than trade.

Conclusion

• Economists largely agree on the benefits of free trade, despite some localized challenges.
• The Trans-Pacific Partnership aimed to enhance trade in Asia but was revoked in early presidency of Trump.

This concludes the course lectures led by Professor Federman. Thank you for attending!