In this lesson we want to consider Trade Policy.
Which is really the process under which restrictions on trade or removal of
restrictions on trade actually takes place in a country like the United States.
Let's start with a puzzle.
We've reviewed how there are gains from trade.
Looked at the arguments, comparative advantage,
for example, expanding markets, for example.
They basically show that there are gains from trade, and
they suggest removing any barriers to trade that might exist.
One can call this a policy of free trade.
There's actually a lot of agreement
amongst economists that such barriers are detrimental.
They reduce gains that otherwise might be there.
And nevertheless, we see that there are a lot of trade barriers.
There are tariffs.
There are quotas.
And there is also some less visible barriers that
restrict imports and exports and goods to the country.
One famous example of this is occurred in the 1930s.
A very high tariff was imposed on goods coming into the United States.
It's called the Smoot-Hawley tariff.
Many economists think that the Smoot-Hawley tall, tariff made
the Great Depression worse than it otherwise would be.
Other countries retaliated and put high tariffs in as well.
And as you can see from this front page article in
the New York Times over a 1,000 economists were objecting to this.
And they asked President Hoover to veto the tariff bill.
Which was going through the Congress, the Smoot-Hawley Bill.
Well, Hoover listens to some of these arguments, he
may have been wary of the barriers to trade.
But he didn't veto, he signed the bill.
And so, Smoot-Hawley went into play in 1930 and it made things worse.
Despite the fact that all these economists objected.
That's pretty typical.
So lets look at how this happens.
Lets look at the effects of some of these arguments, the, the, the
reasons why they tend to be discounted or ignored, even in a democracy.
And then look at some of the remedies and by that
I mean some ways that one can reduce these trade barriers.
Recognizing the constraints that the politics
sometimes places on a better policy.
So to do this, let's just consider some of the typical arguments that one
might here in favor of restrictions on tr, on trade or against free trade.
A famous one, it's been around a long
time, is the so called Infant Industry argument.
It was actually put forth by Alexander Hamilton.
In the early days of the United States of America.
And it's also put forth today in many developing countries.
The idea is that and industry as it's just beginning,
maybe in a young country, needs protection from competition from abroad.
Until it gets big enough and strong enough,
maybe to keep costs low for economies of scale.
So if it could just get going, it would be good.
But it needs protection in the meantime.
It's an infant industry.
Therefore it needs the protection.
So that's the argument.
The problem with the argument is, is at least the following two.
One is that protection usually lasts well beyond the infancy of the industry.
You could still continue to have protection for many, many years later.
In the United States there was protection against
the manufacture of textiles that goes way back.
But years after anyone can plausibly claim that that was an infant industry
those tariffs and quotas remain to reduce competition
into manufacturing of textiles in the United States.
The other thing that happens, it's not clear at all which industries to protect.
It's sometimes anyone's guess what's really the upcoming
new industry, the promising industry, the infant industry.
And you can imagine in such a
case there will be political pressures and influences
to claim that one industry is more deserving of protection than another.
Another argument is sometimes called the National Security Argument.
It's that certain goods and services are needed in time of war.
And so you can't let another country specialize in those if it
means that the country in question say the United States isn't producing those.
There are quite a few examples of this, one famous one is the so-called Jones Act.
Which says that shipping between U.S. ports, say from Los Angeles
to San Francisco, must be done on American ships, on U.S. ships.
The idea here is that it's important for security, so
you could have American Flagships along the coastline, not foreign ships.
It seems like the kind of an ancient idea
because there's so many other ways to protect the shore.
In times of war you'd have the Navy there in any case.
Another example is, is rice in Japan.
The Japanese would argue that rice is a national security issue.
If there was a war they'd have to grow their own rice.
Again, it kind of stretches believability.
Another even more extreme is you need to
have production of textiles, therefore, to protect the textile manufacturers.
Because if there is a war, you need
to make military uniforms in terms of textiles.
All these cases, while suspicious, alone have alternatives.
And if there really is something that you need, some crucial materials,
say for a weapon or what have you, you could stockpile those.
In case if there was an emergency.
You wouldn't have to rely on foreign suppliers.
You'd have them stockpiled for, for this particular case.
So there's alternatives to using protection which of course.
Has costs and damages on the economy.
Another argument is retaliation. You say that we will have our
trade barriers rise as a, as a, bargaining chip, a bargaining instrument.
The idea is that if, if, we, if
you, another country, follows protectionist policy, so will we.
So you threaten that, you threaten the trade barrier,
you're trying to get them to do a better thing.
Again this has problems too.
It can cause a trade war.
Sometimes the other countries will say heck, you
raise your tariffs, we're going to raise yours, raise ours.
Also becomes an argument that's quite
suspicious, quite frankly falls for protection.
Because some industry might say that hey, it's not fair that
our competitors abroad have this protection, so we need protection too.
And it's kind of retaliation argument, but it's really just looking for protection.
It reduces the welfare and the gains that
are available in the country that's being protected.
Monopoly power's another one.
Sometimes countries will hold back on the
amount of production, just like a monopolist would.
A country acting like a monopoly, or like a cartel.
The, organization for petroleum exporting countries, OPEC,
would make this argument from time to time.
If they hold back on how much they produce.
They're going to be able to raise the price of what they get.
That, those higher prices, that's, they're exploiting other countries of course.
That's a beggar thy neighbor policy and you could argue,
you could easily see how there'd be retaliation for this.
Certainly not an interest of greater competition around the world.
There's also a very important argument that we
need to adjust carefully against reducing trade barriers.
And that's that the cost of transition to free trade can be quite high.
Of course, it's true that we don't
instantly move to the benefits of free trade.
It takes some time.
In the case of the North American Free Trade Agreement for example.
That agreement may give Mexico an advantage in producing cement.
And cement manufacturing firms in the U.S. may
have to shut down or reduce their operations.
And that means people will lose their jobs at that point.
And so that's a real cost and what you want
to do is think about ways to reduce that cost.
You don't want to eliminate trade between the countries because that's detrimental.
But you also want to find out ways to
hold the people who would otherwise be hurt harmless as possible.
One way, a common way to do that, is to phase out the barriers to trade slowly.
In the case of the North American Free Trade Agreement, was ten
years at least, and so that gives people a chance to adjust.
Maybe some of the reduction in employment could simply be through
attrition as people retire. Another thing is to give assistance to people,
a social safety net through unemployment compensation
or welfare payments that are, that are hurt.
Here I think it's useful to stress
the analogy with new technology new technological innovations.
Remember free trade is really like a technological innovation.
An example of comparative advantage.
We saw that free trade enabled the United States to consume more
pharmaceutical goods and electronic goods in trading with Korea.
And almost as if there was a new
technology producing those pharmaceutical goods and technological goods.
So one would be really hard put
to make recommendations to prevent technological innovation
in the interest of these transition costs, and they are there.
There are people who are producing fewer pharmaceuticals
in Korea or fewer TV sets in the U.S.
As a result of this quote, unquote technological innovation will be harmed.
So it's another reason not to, to eliminate
this benefit to the country, benefit to society.
But to phase it in slowly.
Sometimes people say hey, other countries are
subsidizing their industries so that's not fair.
And that's the point that's frequently made, in the United States.
There is frequently complaining that the production of
airplanes in Europe is subsidized by their countries.
And that's not fair for the airplanes made in the United States.
But if you think about it for a
minute isn't that subsidy to airplane production in Europe,
isn't that kind of a good deal for American consumers?
Because airplane travel will be less expensive
if the governments in Europe are subsidizing it?
And so sometimes people say that why complain,
just relax and it's good to the U.S.
Of course, that doesn't sound so good to the airplane manufacturers
in the U.S. who may have quite a bit of political pull.
And, and so it's probably the most difficult issue to
deal with in practice because it quite frankly doesn't seem fair.
That other government might be subsidizing their interest, industries to the
detriment of industries into, in the U.S. or in other countries.
And then, given all these arguments, you can
see why indeed there are barriers to trade.
Some of them don't hold up carefully, but there
are still political pressures that bring them to bare.
Others are, are serious and they reflect the idea that, in the
short run, at least, people are hurt by the removal of trade barriers.
So, what are the techniques that economists have suggested,
over time, to remove the trade barriers, recognizing these arguments?
Well, one simple thing could be called unilateral disarmament.
And that indeed what was, was what was argued by economist like Smith or Ricardo.
They argued they should repeal the so-called Corn Laws in England.
These were protectionist laws in terms of agricultural exports into England.
Imports from other countries into Eng, England.
Worked a little bit, but it rarely works.
One example of is textile quotas, which have
been in the United States for, for many years.
They're very slowly being phased out.
I remember a story where in Afghanistan, people were simply asking for
the U.S. to open some of it's markets to Afghanistan textiles.
And the U.S. wouldn't do it.
Afghanistan economy suffered when, in fact, both the
U.S. and Afghanistan could have benefited from it.
That would be more unilateral.
The U.S. would just reduce its tariffs to Afghanistan.
Doesn't really work that well.
So as a result there's been these alternatives, which means countries
are going to get together and agree together to reduce their tariffs.
It could be multilateral, sometimes called Reciprocal Tariff Reduction.
If you reduce your tariff, we will also reduce our tariff.
And a trade agreement is created that has that in, in it.
The general agreement on trade of tariffs GATT was set up after World War II.
To have these multilateral negotiations now
called the World Trade Organization, WTO.
It has actually worked quite well.
Tariffs have come down quite a bit over time because of this.
And, and the reason is that it brings export
interests and import interests together, and they have conflicting views.
But if they have to present their interests together in the legislatures
in front of the administrative parts
of government, the executive parts of government.
It basically tends to move in the direction of reducing the barrier.
So for example you could have a import competing industry, like sugar.
Which likes to have the quotas and the tariffs that
re, restricts the amount of imports into, say, the United States.
So those imports can be an interest that the sugar growers in the United States.
They don't want to have the reduction in the protection of tariffs or quotas.
But if part of that same agreement, had to do with
exporting firms from the U.S., that could be the aircraft manufacturers.
Or exporting airplanes around the world.
If they, they would like to have tariffs reduced in
other countries, and so they are going to lobby for that.
And so if you have the same trade agreement where tariffs
or quotas are being reduced in the United States say, on sugar.
And tariffs and quotas are being reduced in other
countries on manufactured goods, the political pressure balances out.
It's counter valiant forces and you make some progress.
And indeed, that is what has actually happened over, over the years.
Here's a little picture that demonstrates that.
It's tariffs as a share of total federal receipts in the U.S.
going back to the early days of the United States of America.
And you can see back in 1800 that there were over
75% of the revenues came from tariffs, it went down, on 1900.
And now, it's a very, very small level, almost
a trivial level as we move into the present century.
And so, that represents progress in reducing barriers to trade.
But there's still restrictions in terms of quotas
that are not include on the, included in this.
Progress in multilateral reduction has been very
slow recently, has not been much progress.
They're very difficult to have trade agreements with so
many countries participating, and
negotiations themselves are indeed difficult.
And so we've moved somewhat more towards these regional approaches
where one or two or three countries would be negotiating.
And one of those is NAFTA, North Agreement, North
American Free Trade Agreement is actually now 20 years old.
In that case the United States got together with Canada and Mexico,
agreed to reduce the barriers between the countries, phase it in slowly.
And that, that made a huge difference.
That's created trade, some people argue that
it's also distorted trade a little bit.
Because imports from the United States from Mexico would go up, but that
they may go down coming from Asia or from low cost producers in Asia.
It's trade distortion moving from Asia to Mexico.
But it's definitely created trade because the barriers have been reduced.
Unfortunately this aspect of trade reduction or
trade policy has also slowed down recently.
To both multilateral and regional approaches are not
quite as active as they were in earlier years.
It's important, I think, to try to understand the reason for that.
It could be that the U.S economy has not been doing well,
but whatever the reasons are, lets go back to the basic economic analysis.
There are gains from trade, comparative advantage, expanding markets.
There are political reasons frequently why the trade policy
that we have is what it is.
The restrictions are there the way they are and to deal
with those, you not only need to bring the economic arguments.
Smith, Ricardo, etc, you need to bring these political arguments in.
Think about ways to do this multilaterally,
regionally or even in rare cases, in a unilateral way.
Thank you very much.