DEBATING TRADE
• Principles of
Microeconomic
Theory, ECO 284
• John Eastwood
• CBA 247
• 523-7353
• John.Eastwood@nau.edu
• www.cba.nau.edu/eastwood-j
The Competitiveness Argument
“Free trade is beneficial only if your country is
strong enough to stand up to foreign competition.”
1. Our industries are inefficient.
2. The only way we can export is by cutting wages.
3. Trade barriers will protect our standard of living.
• Is it valid? Is it sound?
The Competitiveness Argument
• Not valid. An absolute advantage is neither
necessary nor sufficient to guarantee
comparative advantage in a good.
• Trade increases the welfare of a nation.
The Pauper Labor Argument
1. Foreign labor is poorly paid.
2. Foreign apparel is cheaper as a result.
3. Our industry is threatened. Our workers
will lose jobs. (Owners will lose money.)
4. Apparel quotas will ensure our survival.
5. The nation will be better off.
• Is it valid? Is it sound?
The Pauper Labor Argument
• Not valid. Although a quota may enrich US
apparel makers, it makes the nation poorer.
• Home gains by importing foreign’s comparative
advantage (CA) good. This gain does not depend
on the whether the low cost is due to high
productivity or low wages.
• Compassion for displaced workers is appropriate.
– Unemployment compensation and retraining are far less
costly.
The Exploitation Argument
“Trade exploits a country and makes it
worse off if its workers receive much lower
wages than worker in developed nations.”
If we are debating trade, the point is not to
ask whether these workers deserve more,
but to ask if they would be better off if they
refused to these jobs.
The Exploitation Argument
What is the alternative?
•
Model: Even if one country has an absolute
disadvantage in both goods, its wage rate will be
relatively low. However, trade raises its wage rate.
•
Trade enhances economic growth.
•
“Dropped Stitches” article.
National Security Argument
1. Mosquito netting will be needed in the event of
war in the tropics.
2. We must produce the netting during the war.
3. Our equipment, ordinarily used to produce lace,
can be used to manufacture mosquito netting.
4. Our industry is threatened by imported lace.
5. Therefore, Congress should protect US lace
makers with a tariff.
• Is it valid? Is it sound?
The National Security Argument
• If you assume all premises are true, the conclusion
does not follow. If production is vital, then a
production subsidy would be more efficient. A
tariff would make us poorer, not stronger.
• Once revised to recommend a subsidy, the
argument is probably not sound
– Modern wars are brief. A stockpile of netting may be
necessary, but not production capacity (2 is false.)
– Is the industry really threatened? (4 may be false.)
The Case Against Protection
• The Infant-Industry Argument
– “It is necessary to protect a new industry to
enable it to grow into a mature industry that can
compete in world markets.”
The Case Against Protection
• The Infant-Industry Argument
– This argument is not sound because:
• It only applies if the benefits of learning-by-doing
not only accrue to the owners and workers of the
firms in the infant industry but also spill over to
other industries and parts of the economy.
• It is more efficient to protect an infant industry by
using a subsidy financed from taxes.
The Case Against Protection
• The Dumping Argument
– Dumping occurs when a foreign firm sells its
exports at a lower price that its cost of
production.
The Case Against Protection
• The Dumping Argument
– The dumping argument should be resisted
because:
• Consumers gain more than import-competing
producers lose.
• Foreign’s low price may due to low costs.
• A natural global monopoly is not likely.
• Regulation would be the best way of dealing with a
natural global monopoly.
Other Arguments for Protection
1) Saves jobs
2) Protects the environment
3) Brings diversity and stability
4) Penalizes lax environmental standards
5) Protect National Culture
Why Is International
Trade Restricted?
• Tariff Revenue
• Rent Seeking
– Free trade brings benefits to some but imposes
costs on others, with total benefits exceeding
total costs
Why Is International
Trade Restricted?
• Compensating Losers
– Losers are compensated, to some degree, in
reality:
• Trade Adjustment Assistance
– Carter, Reagan
– NAFTA and retraining workers
• Unemployment compensation
Why Is International
Trade Restricted?
• Difficulties
– Cost of identifying losers and estimating losses
would be enormous.
– Losers today, may be winners tomorrow.