welcome back this is Professor Federman we wrap up our discussion of international trade talking about trade barriers trade barriers and Export subsidies opposite of a barrier is an expert subsidy that helps countries produce products they can export to promote local Goods governments can impose tariffs which are taxes on imported products Donald Trump famously announced steel and aluminum tariffs when he was president in 2018. over objections from his advisors and Republicans tariffs are taxes and therefore they raise costs and therefore they kill jobs this article from 2019. the conservative tax Foundation estimates the total price of Trump's tariffs existing proposed and retaliatory and tariffs imposed in response by the countries will cost 197 billion dollars or 0.7 percent of all economic output at approximately 609 000 jobs so tariffs are taxes and you make something more expensive you get less of it let's examine several different types of trade barriers and let's also discuss export subsidies which help certain industries have an advantage over other countries by getting money from their governments there are tariffs that raise money by charging a tax we think of them in two different ways we think of them as Revenue tariff we the main purpose being to raise money for the government and to restrict the amount of imports but there's also protective tariffs and that's strictly about the main concept here is to restrict the amount of goods in a specific industry because we want to protect the domestic production to make sure we have a sufficient domestic production over product there are import quotas here the government just sets a certain limit there are only so many of this product that is allowed to be imported thereby leaving room for domestic production there are non-tariff barriers things like licenses or local partners China very famously is very difficult to export goods into China because you need for many things you need a local partner export subsidies give local manufacturing advantage very famously Airbus receives money from England France and Germany the Airbus company is a Consortium consisting of several European countries they get money from their governments which helps make the Airbus Jets more competitive relative to Boeing there have been throughout history and this goes back a long time in many countries want to support the domestic production of food so they provide Farm price supports they say the price of a certain um certain vegetables and fruits and things are supported and you can't trade below a certain price let's take a look at the economic impact of tariffs taxes directly there's going to be a decline in consumption because when you raise the price of something people buy less of it there's going to be an increase in domestic production because if you make foreign Goods more expensive it's going to make it easier for domestic production there'll be a decline in Imports because you raise the price of them it will raise revenue for the federal government indirectly what happens it lets Industries be inefficient if you make foreign Goods more expensive that means local Industries don't have to be as efficient as they would have had to be if they were competing without a tariff you you get higher prices if we buy less foreign Goods the foreigners have less money and therefore they'll buy fewer American Goods so there are a lot of impacts here from tariffs what about quotas now quote is a restriction in quantity you get a decline in consumption because you're restricting the quantity you'll get an increase in domestic production to make up the slack you'll get a decline in Imports because you're restricting the quantity quotas do not provide any government revenue but Farm producers will see higher prices because when you restrict the amount they can import into another country that means if they're bringing in less usually you can charge a higher price in 1981 there was also a voluntary quota the three-year voluntary quota Japanese automobile companies Honda Nissan and um Toyota were doing a tremendous job beating up the American Auto industry and the American Auto industry Ford Chrysler and GM went to Congress and asked for some help the Japanese before quotas could be put on they quote unquote voluntarily decided to restrict the amount of cars they would export into the United States for three years which at the time by the way very importantly gave the American manufacturers time to catch up in terms of quality what are the economic effects of tariffs and quotas so here we see price and quantity as always going all the way back to uh demand and supply here we see the domestic supply of goods that's what the little d means here we see the domestic demand for goods without any trade we'd have a price domestically and we'd be producing quantity little Q with no Imports this is where we would be now if we import and we have free trades or no tariffs that's going to expand the supply to the right the supply is going to increase and as a result it will hit demand at a lower lower point we end up with a new lower price world price we end up with more quantities of goods being consumed because the price is lower and that's where we'd be if we had free trade we would take the domestic Supply and increase it with the foreign imports well if the price is down at PW the domestic Supply is only a but the demand if the price is PW would be over in D omestic production is a we're going to import the extra here's where we produce domestically the price now is down at PW because that's the intersection of the supply with free trade and demand which means all the rest is supplied by Imports again why is domestic production restricted today because that's what we can supply domestically at that price now let's take a look at what happens to the supply if we impose a tariff or a quota it's going to push the supply curve to the left it's going to restrict the amount of Supply because we've raised the price of things because we're adding a tariff or quota with a tariff or a quota the supply is going to be SD the domestic Supply but we've added a tariff for quota the price is now going to be PT the price with a tariff we're going to end up with a new total amount of goods being traded at Point d we've pushed Supply back a little bit because of the Tariff prices are up because of the Tariff and there's less Goods transacted at a price of PT domestic Supply is only going to be B because that's what we can produce domestically at that price so the quantity of goods being produced domestically are going to be from the origin to be this is our domestic production which means we're importing the rest the value of the Tariff the dollar amount of the Tariff is how much it raises prices over the world price so the height of that box is the difference between PT the price because of a tariff and PW the world price with free trade and it's multiplied by left to right the number of goods that are imported tariff Revenue the difference in the two prices times the amount of goods that are imported why we want to protect some Industries certainly we want military self-sufficiency we want to make sure we can produce all our own military goods we want to have Diversified amount of products that we're making to keep a stable economy we want to maybe maybe protect infant Industries we also want to protect against dumping now that's foreigners selling stuff here below their cost for many years solar panel manufacturers complain that China was dumping Goods here from 2014 China condemns U.S anti-dumping duties on solar Imports there was a lot of strong evidence presented that China was selling solar panels here 10 years ago well below what it cost them to make them you might think that if you put a tariff that'll increase domestic employment versus cheap foreign labor so we can protect against things being made cheaply overseas by adding a tariff to make them more expensive but again that allows your local Industries to be less efficient and of course it makes everything more expensive on your own read about the European Union and NAFTA the European Union was created going back as far as 1958 there was something called The Common Market it abolished tariffs and import quotas between the member nations making it easier to trade so everybody had more goods and services they had a common tariff with Nations who were outside the European Union they created a Eurozone with one currency to facilitate trade in addition NAFTA in 1993 the United States Canada and Mexico signed a free trade agreement establishing a free trade zone throughout North America trade increased in all three countries enhancing the standard of living for everyone there was more GDP per person both in Canada Mexico and the United States they're winners and losers in when it comes to trade consumers buy cheaper Goods we have cheaper steel which means we have cheaper washing machines but clothing workers lost their jobs as all clothing manufacturing moved overseas there have been laws passed in Congress to help people who are hurt by trade the trade adjustment act for example this was designed to help individuals hurt by trade but in fact it's been estimated that only four percent of job losses over time come from International Trade far more people are replaced by machinery and robots offshoring of jobs relentlessly we're shifting work done by Americans to workers abroad because there's a comparative advantage which is lower wages which means we end up buying cheaper cell phones cheaper clothing this article appeared in April 2015 in the New York Times economists whether they're the Democrats Republicans conservatives or liberals usually agree on this the wisdom of free trade Obama reached a fast-track deal on a trade agreement back then at the time we were working on something called The trans-pacific partnership which was going to be a trade deal not including China to facilitate trade between the United States and other Asian trading countries and one of the first things that President Trump did was to get rid of the trans-pacific partnership which made trade a little more difficult That's all folks that wraps up the class this is Professor fedman I hope you enjoyed the course um I've had fun being your professor don't be afraid to stop by and say hello my office this is Professor Federman signing off