Robert Peel and David Riccardo

What was the conditions before Robert Peel became PM of the UK

• Tariffs caused high food prices;shortages

• Urban discontent with high food prices(affected the workers who had to more of their wages towards food; affected firm owners who had to pay workers more to be able to afford food

• Riots of anti-corn law leagues(consisted of the working class)

• Worsened the potato famine in Ireland due to there being no cheaper food alternative due to the tariffs

What did Robert Peel do?

Abolished corn laws resulting in:

• Cheaper food prices benefiting the working class

• Showed the world that Britain is willing to conduct free trade and cemented Britain as leader in global free trade.

Economic effects of tariffs

• Cause shortages and total surplus losses due to the dead weight losses.

• Causes inefficient domestic production due to the tariffs due to the inefficient rise in price

• Causes demand to contract

David Riccardo

Emphasized that even if a country has an absolute advantage in all things, they should till trade because the country they trade with might have an comparative advantage. Hence positively affected total output which affects global output.

Gains from exports

• Some of consumer surplus gets absorbed into Producer surplus

• There is a creation of new benefit which gets added into the producer surplus

• Increase in total surplus.

Gains from exports

• Some of producer surplus gets absorbed into consumer surplus

• There is a creation of new benefit which gets added into the consumer surplus

• Increase in total surplus.

Inequality in gains from trade

• Developing countries mainly export low value commodities and import high value commodities

• This causes their terms of trade to became very small because terms of trade = index of export price/index of import price

• When a countries terms of trade is small, it means they have to export more in order to afford imports.

• That’s where a trade deficit comes

Pros of free trade

1. Lower consumer prices: Due to the elimination of artificial barriers to trade and causes source of goods to switch to a cheaper source.

Example: When China joined the WTO in 2001, the US price index for manufactured goods fell by 7.6%

2. Greater efficiency: When a country specializes on their comparative advantage it leads to better efficiency

Example: During the winter it was expensive(due to needing access to heated greenhouses, massive amounts of electricity) to grow roses in the US but was fairly easy to grow them in Colombia. The opportunity cost for the US was that growing roses meant not producing as much computers, so the US specialized on producing computer and Colombia focused on producing roses leading to greater efficiency.

3. Access to global markets: Countries firm’s can benefit from economies of scale and can lead to export led growth, because due to access to the markets AD can increase due to an increase in net exports and AS can also increase due to COP being cheaper due to the switching to a cheaper source.

Example: South Korea using export led growth to get currencies like US Dollars in order to import materials which they were lacking locally helped grow the GDP and economy.

Pros of protectionism

Protectionism through quotas, tariffs, subsidies and regulations(rigorous quality checks)

1. Infant industries: Protecting new industries so they can grow into mature industries

Example: When South Korea banned the importing of finished cars and only allowed foreign firms to run co-jointly with local firms. Protect gave time for local firms to learn global standards

2. Safeguard jobs: Imports that are unrestricted can cause losses of jobs in domestic industry.

Example: US tariff steel in 2018 it saved roughly 1000-2000 jobs however consumers had to pay a high price for it.

3. National security: Protection for key sectors like defense and agriculture.

Example: United States chips act of 2022, where 52.7 billion was used in subsidies and tax credits to make domestic production to favor domestical produced goods over cheaper foreign ones, in the fear that if Taiwan gets invaded, it will effect the supply of chips to the US.

4. Dumping argument: Products being sold in a foregin market below cost

Example: During the 2010s and 2020s the US and EU complained about China dumping steel into their markets because of construction downturns in China that if firms closed it would lead to unemployment so China would sell steel at cost that didn’t cover the cost of materials, causing the EU and US to increase tariffs against China.