PS 4

1. Political reasons for trade policy

• Protect jobs and industries from foreign competition.

• National security: protect key industries like steel, energy, defense.

• Retaliation/bargaining: use trade policy to pressure other countries.

• Protect strategic or politically powerful groups.

• Respond to unfair trade claims, such as dumping.

2. Economic reasons for trade policy

• Infant industry argument: new industries may need temporary protection.

• Strategic trade policy: support industries with large scale economies or global advantage.

• Correct market failures, such as knowledge spillovers.

• Protect against dumping.

• Improve terms of trade in some cases for a large country.

3. Trade policy instruments

• Tariff: tax on imports.

• Quota: direct limit on quantity of imports.

• Voluntary export restraint: exporting country agrees to limit exports.

• Subsidy: government payment to domestic producers.

• Local content requirement: requires part of product to be made domestically.

• Administrative policies: rules and regulations that make imports harder.

• Antidumping duty: special tariff against unfairly low-priced imports.

4. Why consumers benefit from open trade

• Open trade lowers prices.

• It increases variety and availability.

• It raises consumer surplus.

5. Effect of open trade on domestic producers

• Open trade lowers market price.

• Domestic producers sell less.

• Some high-cost domestic firms may exit.

6. Do tariffs raise overall market prices?

• Yes.

• Tariffs raise the price of imports.

• Domestic producers can also charge higher prices because foreign competition is weaker.

7. Tariffs and redistribution of consumer surplus

• Tariffs raise price.

• Consumers lose surplus.

• Part of that loss goes to domestic producers.

• Part goes to government as tariff revenue.

• Part is deadweight loss.

8. Tariff inefficiencies

• Tariffs create deadweight loss.

Two inefficiencies:

• Production inefficiency: domestic firms produce more at higher cost.

• Consumption inefficiency: consumers buy less because price is higher.

9. Who bears the burden of a tariff on Canadian imports?

• Consumers: usually pay higher prices.

• Domestic producers: often benefit because they can sell more at higher prices.

• Foreign producers: may bear part of burden if they must lower prices to stay

competitive.

• Government: gains tariff revenue.

• So the burden is shared, but consumers usually bear a large part.

10. Is one policy economically preferable?

• In general, all three distort the market.

• Tariffs are usually preferred to quotas because tariffs generate government revenue,

while quotas often create quota rents.

• Subsidies help producers without raising consumer prices, but they cost taxpayers

money.

• So none is perfect.

• From an efficiency standpoint, free trade is usually best.

• If government must intervene, tariffs are often viewed as better than quotas, but subsidies

may be less harmful to consumers.