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Some important issues
- Raw materials prices
- Less-developed countries (LDCs) have claimed exploitation by industrial
countries
- e.g. by buying raw materials cheaply & selling manufactures
dear
- Manufactured exports from LDCs
- some LDCs have had success in exporting manufactures
- leading to complaints that jobs are under threat in the industrial
countries
- Trade disputes between industrial countries
- In some countries , established producers of certain goods are
being undercut by efficient modern producers
- especially from Japan & East Asia
- should such exports be restricted?
Comparative advantage
- Trade offers benefits when there are international differences in
the opportunity cost of goods.
- Opportunity cost of a good
- the quantity of other goods sacrificed to make one more unit of
that good
- The law of comparative advantage
- states that countries should specialize in producing and exporting
the goods that they produce at a lower relative cost than
other countries.
The source of comparative advantage
- An important difference between countries is in factor endowments
- which will be reflected in different relative factor prices
- e.g. if the UK has relatively abundant capital but relatively
scarce labour as compared with India,
- then the UK would tend to specialize in capital-intensive goods,
- and India would tend to specialize in labour-intensive products
- Comparative advantage may also reflect a relative advantage in technology
Gainers and losers
- Countries may gain from specialization and trade
- but not all countries may gain equally
- Commercial policy
- is government policy that influences international trade through
taxes or subsidies
- or through direct restrictions on imports and exports.
Tariffs
- The deadweight burden of a tariff suggests that society suffers from
this method of restricting trade.
- This is the case for free trade.
- Tariffs have fallen substantially under the GATT
- General Agreement on Tariffs and Trade
The case for tariffs – good arguments
- Optimal tariff
- a first-best argument
- only valid where the importing country is large enough to affect
the world price
- This policy fulfils the principle of targeting
- which says that the most efficient way to attain a given objective
is to use a policy that influences that activity directly.
- Policies that attain the objective, but also influence other activities
are second-best, because they distort those other activities.
The case for tariffs – second-best arguments
- Way of life
- an attempt to preserve ‘traditional’ ways
- a production subsidy would be better
- Suppressing luxuries
- an attempt to curb consumption patterns of the rich in a poor
society
- better achieved by a consumption tax
- Infant industries
- an attempt to nurture new activities via learning by doing
- a temporary production subsidy probably better
- Revenue
- tariffs raise government revenue
- but there are better ways
- Cheap foreign labour
- a non-argument – denies benefits of comparative advantage
Other commercial policies
- Although tariff rates have fallen under GATT, there has been a proliferation
of other trade restrictions
- quotas
- non-tariff barriers
- administrative regulations that discriminate against foreign
goods
- export subsidies
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