International eco: Trade policy in practice Lect 10 part 3 (No free trade…
International eco: Trade policy in practice Lect 10 part 3
Free trade or no free trade
Politics may be one explanation for why we still observe (substantial) trade barriers hampering free trade
Another one is that: The models we discussed may not be telling the whole story about free trade:
Focus only on economic gains from trade
More/less gains from trade?
Bigger disadvantages from trade?
Ricardian, Specific Factor and H-O model all shows significant
gains from trade:
Hampering free trade, by imposing tariffs, export subsidies, etc., distorts production and consumption incentives
Even if some losers, they could in principle be compensated for their losses by the winners
Free trade expands consumption possibilities
More gains from trade follow from theories of trade relying
increasing returns to scale
. Restrictions only:
reduce international competition:
too many (unproductive) firms active
less incentives to become more productive
reduce learning by trading --> trade contains knowledge
limit gains from external economies of scale by limiting the concentration of industries
Free trade cont.
Make Trade not War:
trading nations less likely to go to war
Political arguments for free trade
people spend time and other resources seeking quota rights and the profit that they will earn, instead of using them for productive purposes
Excessive policy making:
Excessive regulation: EU for a long time had peculiar restrictions on imports of many fruits and vegetables, e.g. cucumbers and bananas:
Any policy that deviates from free trade would be quickly manipulated by political groups, leading to decreased national welfare:
No free trade
arguments against free trade (only 1 argument from theory)
A large country can generate positive welfare effects by using its trade policy to improve its terms of trade
Import tariff (US, EU) / export tax (Saudi Arabia)
However this will only be so if:
this terms-of-trade effect dominates the negative welfare effect of the trade policy by distorting production and consumption incentives
other countries do not retaliate
Very doubtful that this works in practice!
A second argument
against free trade is that
domestic market failures
restricting trade can solve these market failures?!
Persistently high underemployment of workers
restrictions on labor mobility, or on wages
Technological benefits for society discovered through private production, but from which private firms cannot fully profit
lack of innovation
Badly functioning capital markets
Restricting firm investment and growth
Environmental costs for society caused by private production, but for which private firms do not fully pay
too much pollution
How can trade help here?
Trading scheme for CO2 emissions
Create a better functioning credit market
Remove restrictions on people’s mobility
But, sometimes these are hard to implement
Trade policy a second-best option?!
In principle, always best to directly tackle the market failure