单击此处编辑母版标题样式,单击此处编辑母版文本样式,第二级,第三级,第四级,第五级,*,单击此处编辑母版标题样式,单击此处编辑母版文本样式,第二级,第三级,第四级,第五级,*,*,CHAPTER 9 ARGUMENTS AGIANST,FREE TRADE,Traditional Arguments against Free Trade,New Protectionism,The Political Economy of Trade Policy,1.Infant industry argument,An argument in favor of protecting the domestic backward industries through,government backing,help,and intervention.,(valid as from the standpoint of enhancing the welfare of the world as a whole),The main motive is to create a level playing field.,Home country industry“late start,often do not have the economies of scale(crux of the argument),If protection temporarily,firms realize sufficient economies of scale,(internal or external),Eventually per-unit costs fall,home industry becomes an exporter.,At this point protection can be removed.,Consumers finance the expansion,but more than repaid when the industry grows.,1 Traditional Arguments against Free Trade,The argument was first explicated,by,Alexander Hamilton,in his 1790,Report on Manufactures,.,The first US Secretary of the Treasury.,Was later picked up by,Friedrich List,in his 1,8,84 work,The National System,of Political Economy,A,leading 19th century German Economist,(1755 1804),Many countries have successfully industrialized behind tariff barriers.For example,from 1816 through 1945,tariffs in the USA were among the highest in the world.,Almost all NDCs Newly Developed Countries had adopted some form of infant industry promotion strategy when they were in catching-up positions.,But it is controversial as a policy recommendation:,Even when infant industry protection is well intentioned,infant industries may never grow up.,For example,during the 1980s,Brazil,enforced strict controls on,the import of foreign computers in an effort to nurture its own,infant“computer industry.This industry never matured.,Two problems that come up with this argument:,The identification of infant industry,.T,he industries that are likely to become low-cost producers should be indentified.,Costs amount of foreign exchange saved?,(2)The form of protection,.,Tariff or subsidy,？,A subsidy has a lower welfare cost to the country than a tariff.,Why not let the industry proceed on its own?,(as Entrepreneurs in a market economy would undertake expansion,on their own),Build efficient system in allocating funds through deregulation or,government guarantees for the loans.,2.Terms of trade argument,(1)Argument,A,large,country imposes a tariff,World price of the imported goods,fall,P,X,/P,M,of the importing country,improves,(2)Problems:,Fail to consider reduced,level of home countrys welfare,because of the countrys reduced consumption of low-cost imports.,This additional consideration of forgone quantities is brought into the analysis through the concept of the optimum tariff rate.,The,optimum tariff rate,is the rate that,maximizes the countrys,welfare,.Conceptually,it is the tariff rate at which the,positive,difference,between the gain from better prices and the loss from,reduced quantity of imports is,at a maximum,.,Optimum tariff,t,o,Prohibitive tariff,t,p,Tariff rate,Figure 8-1 The optimum tariff,National welfare,1,National welfare,At,point 1,corresponding to,the optimum tariff t,0,national,welfare is maximized.,The optimum tariff rate is,always positive but less than,the prohibitive rate(t,p,)that,would eliminate all imports.,(ii)Beggar-my-neighbor argument,gain at the expense of foreign countries,Harm the trading partner;,Trading partner will retaliate with a tariff of its own;,End up with reduced welfare;,Neither country may end up with better terms-of-trade.,3.Balance of trade argument,Balance of trade=value of exports value of imports,Problems:,(1)Retaliation by trading partners,；,(2)The reduced ability of foreign countries to buy the home,countrys products,；,Thus,no guarantee the improvement of BOT.,Any other approaches to improve BOT?,If the deficit is a macroeconomic problem,then,increase Y,reduce spending(C+I+G),Y=C+I+G+(X-M)Y -(C+I+G)=X-M,4.Tariff to Reduce Aggregate Unemployment Argument,Tariff demand for home-produced goods rises,more labor hired spendable income,other industries expand add new jobs,Several points raised:,1.Multiplier effects come about in a beggar-my-neighbor,manner because jobs lost abroad,retaliation.,2.National income of foreign countries reduced,thus cut,import.,Why not other policies:monetary and fiscal policy?,4.Tariff to Reduce Aggregate Unemployment Argument,Several points raised:,1.Multiplier effects come about in a beggar-my-neighbor,manner because jobs lost abroad,retaliation,.,2.National,income,of foreign countries,reduced,thus cut,import.,Why not other policies:monetary and fiscal policy?,Tariff demand for home-produced goods rises,more labor hired spendable income,other industries expand add new jobs,5.Fair competition argument,creating a level playing field,To offset foreign dumping,Dumping by foreign firms into the home country is in some sense,unfair,and constitutes,a threat to domestic p