Abstract
In Chapter 6 we leave the clean world of free trade and dive into trade barriers in their many incarnations, including tariffs, quotas, hassle-factors, and export subsidies. We see how tariffs harm overall welfare in both the importing and exporting countries. As bad as tariffs are, we see that quotas are even worse. Strategic trade - the protection of infant industries and champion industries - is explored at some length. Any distortive policy implemented by Country A is certain to face retaliation by Country B in the form of dumping claims and countervailing duties (CVDs). We see how these exacerbate the already bad effects of the initial barriers imposed by Country A. Finally, we take on two huge challenges to the notion of the beneficial nature of free trade: the Immiserization hypothesis, and Paul Samuelson's attack on free trade.
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- 1.
“Historical Tables, Budget of the U.S. Government, Fiscal Year 2010,” U.S. Office of Management and Budget, 2009.
- 2.
Interestingly, once the tariff’s importance as a revenue source was diminished, the government found itself less constrained in its use of tariffs as a political and economic weapon. When it depended on the revenues generated by the tariff, the government had to be somewhat careful not to unduly affect trade in an adverse way. Without this motivation, tariffs changed significantly in how they were thought of, and used. Magness, Phillip W. 2009, “From Tariffs to the Income Tax: Trade Protection and Revenue in the United States Tax System”.
- 3.
See note 2, above. Revenue tariffs were once very important to most advanced countries; today, they are an unimportant component of revenues virtually everywhere.
- 4.
Unlike domestic supply and demand, a large world is assumed in which changes in quantity produced and consumed in the domestic country are not significant enough to affect the world equilibrium. This is the reason for the horizontal world supply curve.
- 5.
We omit the minus sign (“−”) from our trading ratio notations in this section for convenience. (The actual slope of the TT line is negative, as always).
- 6.
The last few pages of discussion have been fairly technical; we want to make sure that our reader is still alert! Levity aside, increases in tariffs—and protectionism generally—are in fact historically associated with periods of heightened international tension and conflict.
- 7.
Importers will not capture the price difference, however, as quota rights will become valuable and will ultimately be traded at a price that equals the difference between the world price and what can be charged in the domestic market.
- 8.
In this example, Country A is exporting to multiple countries including B; it charges one price, P world .
- 9.
The conditional “if” here is critical. The notion of fostering innovation through central planning is something of a contradiction and has met with mixed results in practice. We discuss some of the challenges later in this chapter.
- 10.
Strategic Trade has been the subject of many studies, the preponderance of which has largely backed up the Ricardian case presented here. A review may be found in Slaughter MJ (2004) Infant industry protection and trade liberalization in developing countries. Nathan Associates, Arlington, pp 5–9. See also Smith A (1996) Strategic policy in the European car market. In: Krugman P, Smith A (eds) Empirical studies of strategic trade policy. University of Chicago Press, Chicago, pp 67–83, http://www.nber.org/chapters/c8676.pdf. For a contrary view, China expert Michael Pettis argues that the USA’s extraordinary growth in the nineteenth century was to a surprising degree enabled by industrial policy including the protection of infant industries. Pettis M (2013) A brief history of the Chinese growth model. Michael Pettis’ China Financial Markets. http://www.mpettis.com/2013/02/21/a-brief-history-of-the-chinese-growth-model/. Accessed 5 May 2013.
- 11.
“Insourcing” is often used synonymously with “inshoring” in the literature, though we would hold that the terms have different meanings; “insourcing” involves bringing a formerly external process in-house, regardless of the geography. Usage of the terms “inshoring” and “insourcing” varies depending on the author and context.
- 12.
Samuelson Paul (2004) Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization. J Econ Perspectives 18(3):135–146.
- 13.
We refer the reader to our earlier Footnote 20 in Chap. 3.
- 14.
For a contrary view, see Gary P. Pisano and Willy C. Shih, (2012). Producing Prosperity: Why America Needs a Manufacturing Renaissance (Boston: Harvard Business Review Press). The authors suggest that design and production cannot be so easily separated from one another. “You can create a CAD design but you need to understand what a production process can and can't do.”
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Langdana, F., Murphy, P.T. (2014). Trade Barriers and Protectionism. In: International Trade and Global Macropolicy. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-1635-7_6
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DOI: https://doi.org/10.1007/978-1-4614-1635-7_6
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