Page 193 - The Principle of Economics

THE UNFAIR-COMPETITION ARGUMENT
A common argument is that free trade is desirable only if all countries play by the same rules. If firms in different countries are subject to different laws and regu- lations, then it is unfair (the argument goes) to expect the firms to compete in the international marketplace. For instance, suppose that the government of Neigh- borland subsidizes its steel industry by giving steel companies large tax breaks. The Isolandian steel industry might argue that it should be protected from this for- eign competition because Neighborland is not competing fairly.
Would it, in fact, hurt Isoland to buy steel from another country at a sub- sidized price? Certainly, Isolandian steel producers would suffer, but Isolandian steel consumers would benefit from the low price. Moreover, the case for free trade is no different: The gains of the consumers from buying at the low price would ex- ceed the losses of the producers. Neighborland’s subsidy to its steel industry may be a bad policy, but it is the taxpayers of Neighborland who bear the burden. Isoland can benefit from the opportunity to buy steel at a subsidized price.
THE PROTECTION-AS-A-BARGAINING-CHIP ARGUMENT
Another argument for trade restrictions concerns the strategy of bargaining. Many policymakers claim to support free trade but, at the same time, argue that trade re- strictions can be useful when we bargain with our trading partners. They claim that the threat of a trade restriction can help remove a trade restriction already im- posed by a foreign government. For example, Isoland might threaten to impose a tariff on steel unless Neighborland removes its tariff on wheat. If Neighborland re- sponds to this threat by removing its tariff, the result can be freer trade.
The problem with this bargaining strategy is that the threat may not work. If it doesn’t work, the country has a difficult choice. It can carry out its threat and im- plement the trade restriction, which would reduce its own economic welfare. Or it can back down from its threat, which would cause it to lose prestige in interna- tional affairs. Faced with this choice, the country would probably wish that it had never made the threat in the first place.
An example of this occurred in 1999, when the U.S. government accused Europeans of restricting the import of U.S. bananas. After a long and bitter dispute with governments that are normally U.S. allies, the United States placed 100 per- cent tariffs on a range of European products from cheese to cashmere. In the end, not only were Europeans denied the benefits of American bananas, but Americans were denied the benefits of European cheese. Sometimes, when a government en- gages in a game of brinkmanship, as the United States did in this case, everyone goes over the brink together.
CASE STUDY TRADE AGREEMENTS
A country can take one of two approaches to achieving free trade. It can take a unilateral approach and remove its trade restrictions on its own. This is the ap- proach that Great Britain took in the nineteenth century and that Chile and South Korea have taken in recent years. Alternatively, a country can take a mul- tilateral approach and reduce its trade restrictions while other countries do the
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 195