Monday, June 2, 2014

Arguments Against Free Trade

Arguments Against Free Trade

Free Trade is a good thing with a few exceptions. Some objections to free trade are not legitimate. The legitimate exceptions are not the popular ones. Idea that trade makes the rich richer and the poor poorer- the solution is to take money from the rich and give it to the poor which no one wants to do - therefore tariffs are imposed.

    • Protectionism Creates Jobs and Income. In certain sectors trade liberalization destroys the economy of certain communities. This is not a factor in the theory of comparative advantage. Trade relies on specialization which has social costs (dislocation and destruction of communities). Managing the consequences has a cost.
      • CONTRA: domestic output of import-competing goods does not increase by the amount imports decline. Assumes no retaliation by countries that lose export sales and output - these countries will institute protectionist policies of their own and thus every country loses in a "beggar thy neighbor" situation.
    • Pauper LaborLoss of jobs in the US since the US is at a competitive disadvantage with countries that do not have labor regulations (minimum wage, child labor, environmental regulations)
      • CONTRA: assumes labor is the only cost of production (there might not be a competitive advantage in labor, but there might be in capital, raw materials, natural gas, and other inputs in an industrialized country)
    • Infant Industry: when production of a commodity first begins in a country the firms producing it are often small, inexperienced, and unfamiliar with the technology they are using. Workers are also inexperienced and less efficient. During the breaking in time, costs are higher then they will be later on and the infant firms in the new industry may need temporary protection from older, established firms in other countries. CA will be realized over time. (counter- free market idea that other sources of funds ought to be available to the infant industry if it is truly a good idea)
      • Difficulties in actual practice: It is difficult to determine in advance which industries possess a potential comparative advantage (cost to society can be heavy if protection is given to the wrong industry). Infant industries have shown a tendency to remain dependant on protection and they may still be getting money from the government even though they are no longer "infant" industries. Government bureaucrats that determine infant industries are shaped by ulterior motives and concerns.
      • Alternatives to tariffs: A direct subsidy might be better or more efficient than a tariff b/c it does not distort prices and cause loss of consumers' surplus or bring about retaliation from other countries, but a direct subsidy requires the gov. to put up its own money.
    • Industrial Strategy or Strategic Trade: Applies to industries with high research and development costs, or high sunk costs (before you make one product you must invest a large amount of money to build the facilities). There can only be one or two producers of the given product and there are excess gains to whoever gets there first. There are barriers to entry, and as a result imperfect competition. The early arriving producer has a monopoly or a very dominant position. A small investment by the government will potentially make their producer the dominant one.
    • Optimal Tariffs or Terms of Trade. The "Wal-Mart" Theory: by imposing a tariff a large country might be able to turn the terms of trade in its favor. This increase in that country's share of the gains from trade might be large enough to outweigh the loss from a reduced volume in trade (optimal only for the country imposing the tariff and no the world). Arises when the country is not a "price-taker" - the country is a powerful enough purchaser that it does not take the price offered, rather it can set its own terms.Gains might be lost if other countries retaliate by imposing tariffs of their own
      • "Monopsonist" -- the large country can determine the Terms of Trade because of its massive consumption of a product. Another country imposes a $100 tariff on a $1000 computer → consumers in the smaller country must pay $1100. The US imposes a $100 tariff on $1000 computer → US consumers pay $1000. The computer company does not charge $1100 in the US because it cannot afford to lose business from such a massive consumer. Thus the company must lose the $100.
    • Conservative Social Welfare:there is the prospect trade liberalization will distort people's willingness to take risks. You and I both make $50,000 and then trade is liberalized. My salary goes down to $20,000 a year, while your salary goes up to $80,000 dollars. The country's income is still the same so economists might say that the effect is the same. However in actuality it is not- it is polarizing (social disorder might arise).   Losers tend to cut back spending more and to take less risks
      • Pareto Optimal Result- wealth of the country rises as a whole, and no one is a big loser because money is taken from those with the high gains and given to those who lost. After free trade is liberalized everyone gains. Is this communist? Do not distribute perfectly, distribute so that no one is worse off, most a are a little better off, and a few are a lot better off.
    • Tariffs are a huge source of governmental income\
    • Non-Economic Reasons for a democratic government to choose protectionist policies 
      • National Security (fear of dependence on outside suppliers)
      • Protectionism is necessary to maintain a certain quality of Life/Cultural Character
      • Fairness - industries with scarce factors of production have reason to seek protection if they are unlikely to be compensated for losses attributable to free trade
      • Industrial Lobbying

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