Page 124 - Economics

CONFIRMING PAGES

CHAPTER 5
95
The United States in the Global Economy
Government and Trade Why Government Trade
If people and nations benefit from specialization and Interventions?
international exchange, why do governments sometimes In view of the benefits of free trade, what accounts for the
try to restrict the free flow of imports or encourage ex- impulse to impede imports and boost exports through
ports? What kinds of world trade barriers can govern- government policy? There are several reasons—some
ments erect, and why would they do so? legitimate, most not.
Misunderstanding the Gains from Trade It
Trade Impediments and Subsidies is a commonly accepted myth that the greatest benefit to
There are four means by which governments commonly be derived from international trade is greater domestic
interfere with free trade: employment in the export sector. This suggests that ex-
• Protective tariffs are excise taxes or duties placed on ports are “good” because they increase domestic employ-
imported goods. Protective tariffs are designed to ment, whereas imports are “bad” because they deprive
shield domestic producers from foreign competition. people of jobs at home. Actually, the true benefit created
They impede free trade by causing a rise in the prices by international trade is the overall increase in output ob-
of imported goods, thereby shifting demand toward tained through specialization and exchange. A nation can
domestic products. An excise tax on imported shoes, fully employ its resources, including labor, with or without
for example, would make domestically produced international trade. International trade, however, enables
shoes more attractive to consumers. society to use its resources in ways that increase its total
• Import quotas are limits on the quantities or total output and therefore its overall well-being.
A nation does not need international trade to operate

value of specific items that may be imported. Once a on its production possibilities curve. A closed (nontrading)
quota is “filled,” further imports of that product are national economy can have full employment without in-
choked off. Import quotas are more effective than ternational trade. However, through world trade an econ-
tariffs in retarding international commerce. With a omy can reach a point of consumption beyond its domestic
tariff, a product can go on being imported in large production possibilities curve. The gain from trade is the
quantities; with an import quota, however, all im- extra output obtained from abroad—the imports obtained
ports are prohibited once the quota is filled. for less cost than the cost if they were produced at home.
• Nontariff barriers (and, implicitly, nonquota barriers)
include onerous licensing requirements, unreason- Political Considerations While a nation as a
able standards pertaining to product quality, or sim- whole gains from trade, trade may harm particular domes-
ply bureaucratic red tape in customs procedures. tic industries and particular groups of resource suppliers.
Some nations require that importers of foreign goods In our earlier comparative-advantage example, specializa-
obtain licenses and then restrict the number of licenses tion and trade adversely affected the U.S. avocado industry
issued. Although many nations carefully inspect im- and the Mexican soybean industry. Those industries might
ported agricultural products to prevent the introduc- seek to preserve their economic positions by persuading
tion of potentially harmful insects, some countries their respective governments to protect them from im-
use lengthy inspections to impede imports. ports—perhaps through tariffs or import quotas.
• Export subsidies consist of government payments to Those who directly benefit from import protection
domestic producers of export goods. By reducing are few in number but have much at stake. Thus, they have
production costs, the subsidies enable producers to a strong incentive to pursue political activity to achieve their
charge lower prices and thus to sell more exports in aims. However, the overall cost of tariffs and quotas typi-
world markets. Two examples: Some European gov- cally greatly exceeds the benefits. It is not uncommon to
ernments have heavily subsidized Airbus Industries, find that it costs the public $200,000 or more a year to
a European firm that produces commercial aircraft, protect a domestic job that pays less than one-fourth that
to help Airbus compete against the American firm amount. Moreover, because these costs are buried in the
Boeing. The United States and other nations have price of goods and spread out over millions of citizens,
subsidized domestic farmers to boost the domestic the cost born by each individual citizen is quite small. In the
food supply. Such subsidies have lowered the market political arena, the voice of the relatively few producers de-
price of food and have artificially lowered export manding protectionism is loud and constant, whereas the
prices on agricultural produce. voice of those footing the bill is soft or nonexistent.

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