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tion.” For example, years of heavy government subsidies helped the European Airbus tively in foreign markets.
consortium take a sizable share of the world commercial aircraft market away from U.S.
manufacturers like Boeing and McDonnell-Douglas”a trend that has lately reversed.


Tariffs versus Quotas
Although both tariffs and quotas reduce international trade and increase the prices of do-
mestically produced goods, there are some important differences between these two ways
to protect domestic industries.
First, under a quota, profits from the higher price in the importing country usually go
into the pockets of the foreign and domestic sellers of the products. Limitations on supply
(from abroad) mean (a) that customers in the importing country must pay more for the
product and (b) that suppliers, whether foreign or domestic, receive more for every unit
they sell. For example, the right to sell sugar in the United States under the tight sugar
quota has been extremely valuable for decades. Privileged foreign and domestic firms can
make a lot of money from quota rights.
By contrast, when trade is restricted by a tariff instead, some of the “profits” go as tax
revenues to the government of the importing country. (Domestic producers still benefit,
because they are exempt from the tariff.) In this respect, a tariff is certainly a better propo-
sition than a quota for the country that enacts it.
Another important distinction between the two measures arises from their different im-
plications for productive efficiency. Because a tariff handicaps all foreign suppliers



Liberalizing World Trade: The Doha Round
The time and place were not auspicious: an international gathering Doha Round almost collapsed in 2003 and again in 2006 when
in the Persian Gulf just two months after the September 11, 2001 negotiating sessions got nowhere. In early 2008, there was not much
terrorists attacks. Nerves were frayed, security was extremely tight, optimism that the contentious agricultural issues could be resolved,
and memories of a failed trade meeting in Seattle in 1999 lingered leaving many observers doubting that the Doha Round would ever
be completed. But no one knows what the future may bring.
on. Yet representatives of more than 140 nations, meeting in
Doha, Qatar, in November 2001, managed to agree on the out-
lines of a new round of comprehensive trade negotiations”one
that now appears unlikely to be completed.
The so-called Doha Round focuses on bringing down tariffs,
subsidies, and other restrictions on world trade in agriculture,
services, and a variety of manufactured goods. It also seeks
greater protection for intellectual property rights, while making
sure that poor countries have access to modern pharmaceuticals
SOURCE: © Patrick Baz/AFP/Getty Images




at prices they can afford. Reform of the World Trade Organiza-
tion™s own rules and procedures is also on the agenda. Perhaps
most surprisingly, the United States has even promised to con-
sider changes in its antidumping laws, which are used to keep
many foreign goods out of U.S. markets. (Dumping is explained
at the end of this chapter.)
Large-scale trade negotiations such as this one, involving more
than 100 countries and many different issues, take years to com-
plete. (The last one, the Uruguay Round, took seven years.) And the




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350 The United States in the World Economy



equally, it awards sales to those firms and nations that can supply the goods most
cheaply”presumably because they are more efficient. A quota, by contrast, necessarily
awards its import licenses more or less capriciously”perhaps in proportion to past sales
or even based on political favoritism. There is no reason to expect the most efficient sup-
pliers will get the import permits. For example, the U.S. sugar quota was for years sus-
pected of being a major source of corruption in the Caribbean.
If a country must inhibit imports, two important reasons support a preference for tar-
iffs over quotas:
1. Some of the revenues resulting from tariffs go to the government of the importing
country rather than to foreign and domestic producers.
2. Unlike quotas, tariffs offer special benefits to more efficient exporters.



WHY INHIBIT TRADE?
To state that tariffs provide a better way to inhibit international trade than quotas leaves
open a far more basic question: Why limit trade in the first place? It has been estimated
that trade restrictions cost American consumers more than $70 billion per year in the form
of higher prices. Why should they be asked to pay these higher prices? A number of an-
swers have been given. Let™s examine each in turn.


Gaining a Price Advantage for Domestic Firms
A tariff forces foreign exporters to sell more cheaply by restricting their market access. If
the foreign firms do not cut their prices, they will be unable to sell their goods. So, in
effect, a tariff amounts to government intervention to rig prices in favor of domestic
producers.5
Not bad, you say. However, this technique works only as long as foreigners accept the
tariff exploitation passively”which they rarely do. More often, they retaliate by imposing
tariffs or quotas of their own on imports from the country that began the tariff game.
Such tit-for-tat behavior can easily lead to a trade war in which everyone loses through the
resulting reductions in trade. Something like this, in fact, happened to the world economy
in the 1930s, and it helped prolong the worldwide depression. Preventing such trade wars
is one main reason why nations that belong to the World Trade Organization (WTO) pledge
not to raise tariffs.
Tariffs or quotas can benefit particular domestic industries in a country that is able to
impose them without fear of retaliation. But when every country uses them, every
country is likely to lose in the long run.


Protecting Particular Industries
The second, and probably more frequent, reason why countries restrict trade is to protect
particular favored industries from foreign competition. If foreigners can produce steel or
shoes more cheaply, domestic businesses and unions in these industries are quick to de-
mand protection. And their governments may be quite willing to grant it.
The “cheap foreign labor” argument is most likely to be invoked in this context. Protec-
tive tariffs and quotas are explicitly designed to rescue firms that are too inefficient to
compete with foreign exporters in an open world market. But it is precisely this harsh
competition that gives consumers the chief benefits of international specialization: better
products at lower prices. So protection comes at a cost.


For more details on this, see the appendix to this chapter.
5




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:

Chapter 17 351
International Trade and Comparative Advantage



Thinking back to our numerical example of comparative advantage, we can well imag-
ine the indignant complaints from Japanese computer makers as the opening of trade with
the United States leads to increased imports of American-made computers. At the same
time, American TV manufacturers would probably express outrage over the flood of
imported TVs from Japan. Yet it is Japanese specialization in televisions and U.S. special-
ization in computers that enables citizens of both countries to enjoy higher standards of
living. If governments interfere with this process, consumers in both countries will
lose out.
Industries threatened by foreign competition often argue that some form of protection
against imports is needed to prevent job losses. For example, the U.S. steel industry has
made exactly this argument time and time again since the 1960s”most recently in 2001,
when world steel prices plummeted and imports surged. And the U.S. government has
usually delivered some protection in response. But basic macroeco-
TA BL E 4
nomics teaches us that there are better ways to stimulate employ-
ment, such as raising aggregate demand.




SOURCE: Gary C. Hufbauer and Kimberly Ann
Elliott, Measuring the Costs of Protectionism in
Estimated Costs of Protectionism




the United States (Washington, D.C.: Institute
for International Economics; January 1994),
to Consumers
A program that limits foreign competition will be more effective at
preserving employment in the particular protected industry. But such job Industry Cost per Job Saved
gains typically come at a high cost to consumers and to the economy.
Apparel $139,000
Table 4 estimates some of the costs to American consumers of using
Costume jewelry 97,000




Table 1.3, pp. 12“13.
tariffs and quotas to save jobs in selected industries. In every case, the Shipping 415,000
costs far exceed the annual wages of the workers in the protected Sugar 600,000
Textiles 202,000
industries”ranging as high as $600,000 per job for the sugar quota.
Women™s footwear 102,000
Nevertheless, complaints over proposals to reduce tariffs or quo-
tas may be justified unless something is done to ease the cost to indi-
vidual workers of switching to the product lines that trade makes profitable.
The argument for free trade between countries cannot be considered airtight if govern-
ments do not assist the citizens in each country who are harmed whenever patterns of
production change drastically”as would happen, for example, if governments suddenly
reduced tariff and quota barriers.
Owners of television factories in the United States and of computer factories in Japan
may see large investments suddenly rendered unprofitable. Workers in those industries
may see their special skills and training devalued in the marketplace. Displaced workers
also pay heavy intangible costs”they may need to move to new locations and/or new in-
dustries, uprooting their families, losing old friends and neighbors, and so on. Although
the majority of citizens undoubtedly gain from free trade, that is no consolation to those
who are its victims.
To mitigate these problems, the U.S. government follows two basic approaches. First,
our trade laws offer temporary protection from sudden surges of imports, on the grounds
that unexpected changes in trade patterns do not give businesses and workers enough
time to adjust.
Second, the government has set up trade adjustment assistance programs to help Trade adjustment
assistance provides special
workers and businesses that lose their jobs or their markets to imports. Firms may be eli-
unemployment benefits,
gible for technical assistance, government loans or loan guarantees, and permission to
loans, retraining programs,
delay tax payments. Workers may qualify for retraining programs, longer periods of un-
and other aid to workers
employment compensation, and funds to defray moving costs. Each form of assistance is and firms that are harmed
designed to ease the burden on the victims of free trade so that the rest of us can enjoy its by foreign competition.
considerable benefits.


National Defense and Other Noneconomic Considerations
A third rationale for trade protection is the need to maintain national defense. For exam-
ple, even if the United States were not the most efficient producer of aircraft, it might still
be rational to produce our own military aircraft so that no foreign government could ever
cut off supplies of this strategic product.




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Part 4
352 The United States in the World Economy




How Popular Is Protectionism?
Since World War II, the world has mainly been moving toward freer
trade and away from protection. But the people of the world are Protectionists
not convinced that this trend is desirable. In what was probably Free traders
the most comprehensive polling ever conducted on the subject,
a Canadian firm asked almost 13,000 people in 22 countries the 56%
following question in 1998: “Which of the following two broad
approaches do you think would be the best way to improve the 47%
economic and employment situation in this country”protecting 42%




Percentage
our local industries by restricting imports, or removing import 37%
restrictions to increase our international trade?” The protectionist
response narrowly outnumbered the free-trade response by a
47 percent to 42 percent margin. (The rest were undecided.) Pro-
tectionist sentiment was much stronger in the United States, how-
ever, where the margin was 56 percent to 37 percent. (See the
accompanying graph.)
That was in 1998. In the United States (and elsewhere), there is
clear evidence that protectionist sentiment is actually gaining in
World United States
popularity. For example, a Wall Street Journal/NBC News poll in
1999 found that 39 percent of Americans believed that trade
agreements have helped the United States, while 30 percent be-
lieved they had hurt. When that same question was asked in 2007,
SOURCES: “How Popular Is Protectionism?” The Economist, January 2, 1999; and
only 28 percent thought trade agreements had helped, while Grant Aldonas, Robert Lawrence, and Matthew Slaughter, Succeeding in the Global
46 percent thought they had hurt. Economy, Financial Services Forum Policy Research, June 2007, p. 10.




The national defense argument is fine as far as it goes, but it poses a clear danger: Even
industries with the most peripheral relationship to defense are likely to invoke this argu-
ment on their behalf. For instance, for years the U.S. watchmaking industry argued for
protection on the grounds that its skilled craftsmen would be invaluable in wartime!
Similarly, the United States has occasionally banned either exports to or imports from
nations such as Cuba, Iran, and Iraq on political grounds. Such actions may have impor-
tant economic effects, creating either bonanzas or disasters for particular American indus-
tries. But they are justified by politics, not by economics. Noneconomic reasons also
explain quotas on importation of whaling products and on the furs of other endangered
species.

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