Chapter 21 Macroeconomics

Protectionism

When a government legislates policies to reduce or block imports

Tariffs

Import quotas

Nontariff barriers

Import Quotas

Numerical limitations on the quantity of products that a country can import

Nontariff Barriers

Ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products

Rules requiring certain safety standards or origin relations

World Trade Organization (WTO)

Organization that seeks to negotiate reductions in barriers to trade and to adjudicate complains about violations of internation trade policy

Successor to the General Agreement on Tariffs and Trade (GATT)

In Theory, Imports Might Injure Workers in Several Different Ways:

Fewer jobs

Lower wages

Poor working conditions

Protectionism Can Save Jobs in a Specific Industry Being Protected, but it Costs Jobs in other Unprotected Industries

If consumers are paying higher prices to a protected industry, they have less money to spend on goods from other industries-so jobs are lost in those other industries

If a firm sells a protected product to other firms, so that other firms must now pay a higher price for a key input, then those firms lose sales to foreign producers

Lost sales=lost jobs

While Globalization May be Benefiting High-skilled, High-Wage Workers, it May Impose Costs on Low-skilled, Low-wage U.S. Workers

BUT

About half of the U.S. trade is intra-industry trade

Many low-skilled workers hold service jobs that imports from low-wage countries cannot replace

Workers in Many-Income Countries Around the World

Labor under conditions that would be illegal for workers in the U.S.

Are often paid less than the U.S. minimum wage

Have working conditions that may be extremely unpleasant or unsafe

The United States is Not a World Leader in Government Laws to Protect Employees

Only one of 41 countries that does not provide mandated paid leave for new parents

Arguments that are in Support of Restricting Imports

Infant Industry Agreement

Anti-Dumping Agreement

Environmental Protection Argument

Unsafe Consumer Products Argument

National Interest Argument

The Infant Industry Argument

Block imports for a limited time, to give an infant industry time to mature, before it starts competing on equal terms in the global economy

Dumping

Selling goods below their cost of production

Not allowed under WTO rules

Anti-Dumping Laws

Block imports that are sold below the cost of production by imposing tariffs that increase the price of these imports to reflect their cost of production

Why Would Foreign Firms Export a Product at Less Than its Cost of Production - Presumably Taking a Loss?

Innocent Explanation

Sinister Explanation

Innocent Explanation

Demand and supply set market prices, not the cost of production

Sinister Explanation

Dumping is part of a long-term strategy to drive out the domestic competition, then raise prices

Called predatory pricing

Race to the Bottom

When production locates in countries with the lowest environmental (or other) standards, putting pressure on all countries to reduce their environmental standards

Does not appear to describe reality: generally, other factors that determine location are much more important to companies than trying to skimp on environmental protection costs

For Imported Products, WTO Says:

Countries can set their own safety standards

Regulations must be based on science

They should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail

Examples of Recalls

2007 - Mattel recalled nearly two million toys imported from China due to concerns about high levels of lead in the paint, as well as some loose parts

2013 - Japan blocked imports of U.S. wheat because of concerns that genetically modified (GMO) wheat might be included in the shipments

National Interest Argument

The argument that there are compelling national interests against depending on key imports from other nations

Examples include oil and special materials or technologies that might have national security applications

Examples for More Reasonable Strategies for the U.S. to Protect from a Cutoff of Foreign Oil

Import 100% of petroleum supply now, and save domestic oil resources for when/if foreign supply cutoff

Discourage use through raising taxes on oil, and start a high-powered program to seek out alternatives to oil

General Agreement on Tariffs and Trade (GATT)

Forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade

The precursor of the World Trade Organization

Free Trade Agreement

Economic agreement between countries to allow free trade between members

Without tariffs or quotas

Common Market

Economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy

Economic Union

Economic agreement between countries to allow free trade between members, a common external trade policy, and coordinated monetary and fiscal policies

Many Nations Belong both to the World Trade Organization and to Regional Trading Agreements

European Union

North American Free Trade Agreement (NAFTA)

Asia Pacific Economic Cooperation (APEC)

The Average Level of Tariffs on Imported Products Charged by Industrialized Countries

40%in 1946

Less than 5% by 1990

Common Belief Among Economists

It is better the gains from trade, than it is to cut off trade

Deal with the costs and tradeoffs with other policy tools

Disruptive Market Change

Innovative new product or production technology which disrupts the status quo in a market

The innovators earn more income and profits

The other firms lose income and profits, unless they can come up with their own innovations