27. International trade: supply, demand, equilibrium

Two-country supply-demand model without trade restrictions:

♦ The price of a good must be the same in both countries

♦ The quantity of a good exported from one country must equal the quantity imported by the other

28. Types of trade barriers

Countries can reduce imports by setting tariffs or quotas. They can promote exports by subsidizing export goods.

Tariff = tax on imports

Quota = legal limit on the amount of a good that may be imported

Both tariffs and quotas

■↑ price of imports

■↓ quantity of imports

Export subsidy = government payment to an exporter to encourage exports. Closely related to subsidies is dumping. A firm or industry sells products on the world market at prices below the cost of production. Cheap imports benefit consumers but hurt some domestic businesses.

When imports are to be reduced, tariffs are generally preferable to quotas because:

■Tariffs generate (производят) income for the government

■Unlike quotas, tariffs offer no special benefits to inefficient exporters

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30. Trade barriers: case for protection

The arguments that protectionists make to justify trade barriers:

-military self-sufficiency argument- tariffs are needed to strengthen industries which produce goods for national defense.

-diversification for stability argument- highly specialized economies are very dependent on international markets for their incomes. So recessions obroad, international political developments etc. can cause deep declines in export revenue. Tariff and quota protection are needed to enable greater industrial diversification.

-infant industry argument- protective tariffs are needed to allow new domestic industries to establish themselves.

Temporarily shielding young domestic firms from severe competition of more mature and more efficient foreign firms will give infant industries a chance to develop and become efficient producers.

Infant industry argument – counterarguments:

1. In developing countries it is difficult to determine which industries are the infant

2. There are better than tariffs for protecting the infants

-Against dumping argument – tariffs are needed to protect from dumping by foreign producers/

Dumping is the selling of good in foreign market at a price below cost.

-Cheap foreign argument – domestic firms and workers must be shielded from the competition of countries where wages are low.

Without protection domestic markets could be pull down.

-increased domestic employment argument – reducing imports will be divert spending on another nation`s output. Domestic output and employment will rise

But there are some shortcomings:

1. Job creating from imports – imports may eliminate some jobs, but they create others ( selling imported cars )

2. Possibility of retaliation - @trade barrier war”

3. Long-run feedback – the long run impact of tariffs is not to increase employment but to reallocate workers away from export industries and to protected domestic industries.

4. Fallacy of composition – the export of one country must be important of another. The tariffs achieve short-run domestic goals by making trading partners poorer