Protectionist Trade Policies – The Wrong Move for America
Written as a policy analysis examining the economic theory and
providing quantitative analyses of the effects of protectionist trade policies
for those legislators who never took economics in college
Kyle Brewster
To the US House of Representatives Ways and Means Committee,
Pursuant to your request in search of the most economically
efficient means by which the government should use its power and influence for
the regulation of (or lack thereof) the United States’ economy, I have prepared
the following brief to provide useful information for such an endeavor.
Protectionism can be characterized by economic policies that
restrict imports from other countries by means of quotas, tariffs, and a
variety of other sorts of government regulation/intervention in an attempt to
protect domestic industries.
Scarce resources in the domestic markets are typically most
efficiently allocated by the free market. Therefore, the government should not
play a significant role in the interference with natural operations of the free
market unless the benefits of such interference result in a higher net benefit
to society than a lack thereof. The examples of government interventionist
policies that be will be examining in this brief include tariffs, quotas,
subsidies, and involvement in trade agreements.
Whenever it comes to discussion of proposed policy
initiatives, the number one priority of the government should be making
decisions with an in-depth analysis of cost versus benefits. Such a philosophy
for making decisions suggests that the best course of action for government
officials to take is one that provides the greatest utilitarian benefit while
reducing the costs or negative consequences of such decisions.
With this approach of analysis, decision-makers are able to
remain as objective as possible. Total benefits and the total cost are often
able to be measured quantitatively in both the short- and long-run. This is able
to render many of the political and emotional arguments that are frequently
made in attempts to gain favor for one side of the argument irrelevant and only
consider the objectivity of the data. As eloquently put by a professor of
political science during my university tenure, “Numbers don’t lie. People lie
about numbers.”
Summary: With
regards to protectionism being used as a tactic for promoting the welfare of
the economy and protecting domestic industries, here are my findings:
·
To suggest advocacy of protectionist principles
is taking steps back to the mercantilist economic conditions found throughout
16th-18th centuries, with the primary focus of increasing
exports, with less focus on the capitalization of comparative advantages and
less regards towards lowering price levels that domestic consumers face.
·
Tariffs are a means of restricting free trade, often
with the intention of protecting domestic industries. Tariffs tend to result in
a reduction of benefits to consumers that is greater than the increase of
benefits experienced by producers in a given industry. While there may be non-economic
benefits of tariffs, the cost to society at large tends to outweigh their
benefits. In addition, tariffs provoke retaliatory measures from the foreign
countries that are adversely affected.
·
Quotas have a similar net effect as tariffs.
Although the intended recipients of benefit may experience gains in production,
those gains are offset by a decrease in consumer benefit and a deadweight loss incurred
by society.
·
Even if countries enter into voluntary
agreements to restrict trade, there are still negative results.
·
Subsidies also result in a net overall loss to
society. While subsidies may benefit producers,
they come at a cost to consumers that outweighs benefits. In addition, subsidies
result in the overvaluation of the given good and is not a true representation
of the value deemed accurate by the free market.
·
Trade occurs when two parties engage in mutually
beneficial exchange. To inhibit such exchange is to inhibit the benefits
derived.
·
Rather than engaging in restrictive trade
policies to achieve domestic protection and achieve noneconomic objectives,
entering into trade agreements can be a more pragmatic means of achieving the
same goals.
Classical Schools of Economic Thought
The benefits of the specialization in production and the
benefits of trading can be found in economics schools of thought over 200 years
ago. Adam Smith, a Scottish philosopher and economist who lived from 1723 to
1790, is considered by many to be the “father of modern economics”
While the scale of the international economy did not exist
to the same extent during Smith’s lifespan compared to today, the principles he
found in his analyses continue to remain applicable. Smith referred to the
division of labor as the “greatest improvement in the productive powers of
labour, and the greater part of the skill, dexterity, and judgment with which
it is anywhere directed, or applied”
The effects of the division of labor can be observed on even
the most trifling of levels. This specialization of labor can be found in every
wealthy country – generally speaking, the farmer is nothing but a farmer, and a
manufacturer is nothing but a manufacturer
Regarding improvements in dexterity experiences, Smith
exemplified a blacksmith and a nailer (one who makes nails). A smith, who is
adept with hammer but whose sole business is not making nails, might only be
able to produce upwards of 200 nails in a given day (with a considerable rate
of rejects). Laborers who exercise no other trades but that of nail production
have been observed to be capable of making up to 2,000 nails in a given day.
Such discrepancies can be further increased with a given production-process is
broken down into multiple distinct operations
When a laborer begins work in a new trade, they are seldom
keen and hearty at the given process
Smith’s work additionally spoke to the advantage of
familiarity of a laborer with production machinery in their given trade.
Laborers are more likely to obtain easier/readier methods in pursuit of a goal
when their whole attention is directed at that single objective rather than a
great variety of things
Studies have been conducted that support the notion that
multitasking impedes on both physical and cognitive ability to complete tasks
The benefits of specialization of labor allow producers to
build a comparative advantage. A comparative advantage is defined as the
ability to perform a given task at a lower relative cost compared to
competitors
Ricardo argued that even if engaging in international trade
does not increase the value of a country, the mass availability of imported commodities
will benefit consumers by providing them with a higher purchasing power
resulting from lower price levels
Tariffs & Retaliatory Measures
Tariffs result in an overall net loss to society. While the
industry that such tariffs are attempting to protect may experience some
benefit, the negative effect on other industries and consumers tends to
outweigh those benefits. Refer to Appendix
A for further economic theory
analyzing the effects of tariffs.
For a contemporary example of the negative implications of
tariffs, consider the effects of the tariffs implemented by the Trump
administration in Section 232 that had the objective of protecting domestic
aluminum and steel production. As part of the platform of bringing jobs back to
America and putting “America First,” the Trump administration imposed tariffs
of 25 percent on steel imports and 10 percent on aluminum imports. These
decisions went against the consultation of Trump’s advisory staff
Trump took such measures to combat what he described as a
threat to national security created by imported metal that was a degradation to
the American industrial base, according to an investigation conducted by the
Department of Commerce
The actions by the Trump administration have also been
condemned in statements from the G7 meetings. The Finance Ministers and Central
Bank Governors asked the US Treasury Secretary to share their “unanimous
concern and disappointment” with regards to the tariffs
The purpose of these tariffs, according to the Trump
administration, was to adversely affect China and their flooding of US domestic
markets with cheap metals
As illustrated in Appendix
A, there is an inherent net loss to society at large that results from the
government’s issuance of tariffs. The reality of what happened to domestic
industries and price levels following the implementation of these tariffs
reflects what the economic theory suggests.
The Trade Partnership Worldwide - a consulting firm that
applies economic analysis to produce useful, clear, and concise information
about the impact of trade policies - conducted an analysis of the estimation of
the effects that these tariffs would have
The sectors of the domestic economy that would be positively
affected as a result of tariffs, quotas, and retaliatory measures include steel
producers, aluminum producers, and several other sectors that are able to
attract capital and labor from those displaced from sectors harmed by the
tariffs and resulting retaliation. The GDP of the United States as a result is
projected to decrease by 0.2 percent annually in the short-term along with a
decrease in projected exports
Employment in the steel and aluminum producing sectors is
projected to increase by 26,280 jobs, but reduce employment by 432,747 jobs throughout
the rest of the economy. The resulting total net loss is 400,445 jobs. In other
words, every one job gained in the aluminum and steel industries would come at
a cost of sixteen jobs lost in other sectors of the economy. The projected net
loss of jobs would be found in every state
Not only is there an inherent net loss resulting from using
tariffs as a tactic to protecting domestic industries, but, as previously
mentioned, retaliatory measures from the affected countries are almost
inevitable. Canada, the European Union, as well other affected countries say
that they have no choice but to respond with retaliatory sanctions of their own
Additional studies of the projected impacts of these tariffs
from other institutes expected similar economic woes. Dan Ciuriak and Jingliang
Xiao from the C.D. Howe Institute analyzed the reality of retaliatory measures
that would take place resulting from the steel/aluminum tariffs – a reality
that the Trump administration assumed would not occur. In their summary, they
found that the effects of the tariffs would result in the following: reduce US
imports by $23.4 billion; reduce US exports by $5.9 billion; reduce exports and
increase import penetration in user sectors, thereby worsening the US trade
balance (in the user sector) by $12.2 billion; reduce US shipments of user
products by $12.7 billion
† User sectors are defined by the Bureau of Industry and Security as the product that the purchaser of ultimately uses and is not re-exported (The Bureau of Industry and Security, 2018). These sectors in Ciuriak and Xiao’s study includes automotive, transportation equipment, machinery and equipment, and electronic equipment.
Their study and simulations further concluded that the
Section 232 tariffs would result in an artificially increased price level of US
goods. While higher price levels may yield some benefits for domestic
producers, it ultimately undermines the ability for the US sectors of steel and
aluminum-producing industries to remain competitive in the international market
as well as the competitiveness of user sectors
Apart from China and a few other countries, the US has
remained relatively friendly in terms of trade policies with our allies in
trade. The steel/aluminum tariffs, however, may be changing such a view from
other countries. Rather than remaining consistent with historical policies of
mutual benefit, the US appears to be flaunting its entrenched position of
trading power rather than making policy decisions that have the aim of positive
economic development and the promotion welfare (both for the US and its given
trading partner)
Ciuriak and Xiao analogized such demonstrations of power to
that of the Soviet Union prior to their fall. The implications of presenting
such a demeanor may unfold additional changes in our relationships with current
trading partners that could result in unfavorable consequences for the US in
the future
Furthermore, it is not possible to maximize the benefit of
the consumer when holding the interests of producers as a priority. Consider
the example of the “Negative Railroad” proposed by French economist Frederic
Bastiat in his first series of Economic
Sophisms in 1845
The idea of the negative railroad sprung from the
advancements in technology (e.g. locomotives) that allowed for transportation
to occur via land routes rather than being predominantly restricted to
waterways around the time of the Industrial Revolution. As a result of cheaper
transportation, producers were able to expand their market reach, thus breaking
up local monopolies (which are associated with higher prices and less power to
the consumer). With the railroad analogy, Bastiat made the connection of
tariffs and other protectionist measures having the same net effect as physically
destroying the rails and resulting in a reversion back to using more-costly
transportation methods
Measures that effectively restrict free trade and the resulting
subsequent negative unintended consequences are not unique to the current administration.
On June 27, 1973, the Nixon administration placed an embargo on the US
exportation of soybean products. The intended purpose of this embargo was to
combat high levels of exports and high prices that were the result of
government stock elimination
Prior to the 1973 embargo, Brazil’s soybean production
consisted of only about 18 percent of international sales, while the United
States help approximately 80 percent of worldwide sales
The United States’ decline market share in soybean
production can be connected back to the issue created with the Trump administration’s
tariffs on steel on aluminum. China is the world’s largest importer of
soybean-products, with demand topping 94 million metric tons
Quotas and Dumping
The negative implications of import quotas (a legal limit
imposed on the amount of a given good that may be imported) have a net loss to
society similar to that of a tariff. Refer to Appendix C for a further
explanation of the theory behind quotas.
Proponents of protectionist trade policies cite quotas as
being a beneficial means of preventing/combating import dumping. Dumping is
defined as the sale of goods in a foreign market below the price charged in the
given domestic market
Many economists, however, suggest an inherent infeasibility
with such a tactic. In the short-run, domestic firms may be at a disadvantage
as a result of foreign dumping. In the long-run, once the dumpers raise their
prices after establishing a dominant market share, the domestic competition is
likely to return. The dumping country would then have then only incurred a
long-term loss as a result from selling goods below costs. In addition,
domestic consumers benefit from the lower prices and can then use such price savings
to add to demand in other sectors of the domestic economy.
Consumer Benefit Derived from Free Trade
When producers are required to compete amongst each other
for the demand of consumers, price differentiation is commonly used tactic. Assuming
the quality of the goods from competing producers are the same, consumers will
be more attracted to the lowest prices. As a result, if producers want to
remain competitive with other producers in the industry, they will have to have
similar (if not lower) prices.
Consider the literature of Murray Rothbard, an American economist
and political theorist. Rothbard illustrated the benefits of trade with the
example of the trading relationship between the US and Japan – Japan being a significant
trading partner with the US that has the world’s third largest GDP valued at
approximately $5,070 billion
The effects of being trade allies with such a large economy
is found ubiquitously in American society with the products that consumers
purchase, especially electronics such as television sets, cars, microchips, and
etcetera. The reason consumers so readily purchase Japanese-produced goods over
American-produced goods is because Japanese prices are often lower and
therefore more competitive compared to American-produced prices
In the example of electronic product trade between Japan and
the United States, the transactions are mutually beneficial to each party.
Japanese producers are better off having a larger market to sell their product
and American consumers are better off by having an international purchasing
option with lower prices compared to domestic prices. Instituting any sort of
protectionist trade policies with the aim of benefiting domestic producers
would result in a deduction of American living standards who are rendered
unable to purchase high-quality and lower-priced electronics
Two countries engage in trade only if such a relationship is
mutually beneficial. Any sort of restrictions that inhibit the trading
relationship results in a reduction in benefits for both parties.
Voluntary Export Restraints
Even when two voluntarily agree to limit trade, there are still
negative implications to society at large similar to that of unilateral trade
restrictions. Consider the voluntary export restraints between Japan and the
United States with respect to the automotive industry in the late 1970s and
early 1980s. Due to competition from enhanced quality of imported cars, sales
of domestically produced cars in fell from 9 million in 1978 to an average of 6
million between 1980 and 1982
As a result of the declining profits from domestic
manufacturing, automakers and autoworker unions pushed for protection from
international competition. In May of 1981, Japanese car companies (one of the
primary sources of imports) agreed to restrictions of US sales of Japanese cars
to 1.68 million cars each year
Japan agreed to these conditions because it was their
least-costly option with regards to the US’s pursuit of protection for domestic
industries from foreign competition. The other option the US could have chosen
would have been tariffs on imports of Japanese cars, which would have cost
Japan an estimated $11 billion over the lifespan of the agreement
The limited supply of imported Japanese cars lead to an
increase of the prices of the imports by an average of about $1,200, around 14
percent higher than would have otherwise been without the restrictions
For many domestic manufacturers, this was an ideal situation
because they faced a considerable amount less of foreign competition. From 1986
to 1990, profits of domestic auto-manufacturers increased over 8 percent – this
increase amount to over $2 billion without adjustments for inflation
Not only did consumers face higher prices for Japanese cars
by a considerable margin, the decrease in competition enabled domestic
manufacturers to increase their prices. Because of the high price-demand elasticity
(defined as the responsiveness of quantity demanded to a change in price)
between quantity demanded and price of cars, domestic producers were only able
to raise their prices by approximately 1 percent, which equated to an average
of $400 unadjusted for inflation
The total net loss consumers in 1983 along was $4.3 billion
– the annual cost to the public was forecasted to (an in fact did) increase in
the following years
Even when adjusting the net effect to include gains to
domestic producers, the net loss to society was still upwards of $3 billion (or
$7.6 billion in 2018 dollars)
Robert Crandall, a senior fellow at the Brookings
Institution, estimated that the amount of jobs saved as a result of the import
restrictions was around 26,000
While we can observe the adverse effect on society at large (especially
consumers) in the automotive sector that were directly affected as a result of
the trade restrictions, the ultimate effect on the rest of society is difficult
to observe. It is safe to say, however, that the rest of society on average was
negatively affected.
When the United States restricts imports, our trading
partners as a result earn less revenue and can no longer can spend as much on
domestic exports. This decline in foreign demand results in a decline of
exports from domestic industries that export more-heavily. Less trade then
results in less demand for labor that services the international trade, such as
truck drivers for cross-country transportation and stevedores (those who unload
ships) for reception of shipments at ports
Protectionist Policies in the Form of Subsidization
Another tactic that is used in an attempt to protect
domestic industries from threats of global competition is in the form of
subsidization. Refer to Appendix D for an economic analysis of the net
effect of subsidies.
One example of government subsidization of domestically
produced goods is found throughout the agricultural industry. These policies
were initially implemented following the Great Depression where adverse
economic conditions and an unfavorable growing environment resulted in prices
farmers were able to sell their goods dropping by nearly two-thirds
To prevent a situation that could have resulted in the
agricultural industry’s inability to produce crops, the government became
involved with setting minimum prices - commonly referred to as price floors -
for crops produced and subsidizing farmers the difference between the natural
market price and the price
The result is an increase in the quantity supplied and a
decrease in the domestic demand. When only considering the domestic market, the
result of the price floor affects consumers in the form of either higher prices
or in the form of taxes paid for subsidization programs (see Appendix E). The opportunity cost of
those tax dollars otherwise going to other perhaps more economically efficient
government expenditure programs.
International demand for US agriculture products it at its
lowest point since 2010, with a trend of gradual decline since 2015
International Support for Free Trade
In more recent economic-history, The General Agreement on
Trade and Tariffs (GATT) was an organizational established to help promote the
mutually-beneficial principles of freer trade promoted by economists throughout
history. The GATT was a multilateral agreement signed in 1947 with the purpose
of the “substantial reduction of tariffs and other trade barriers and the
elimination of preferences, on a reciprocal and mutually advantageous basis"
On January 1, 1995 the World Trade Organization (WTO)
replaced the GATT. Following the WTO’s birth/transformation, it now serves as a
permanent organization with an increased scope of coverage, helping to
establish international economic regulations and settle disputes between member
countries. There are 164 member currently part of the WTO and adhere to the
organizations principles and legal requirements
Trade Agreements
The enabling of competition on the international level has
effectively raised the standards of living of consumers from all countries
involved by providing consumers with access to lower prices. One route that the
federal government can take to obtain such benefits is by taking entering trade
agreements
One type of foreign trade policy that pursues the goal of
more open trade is with regional trade agreements. The WTO defines regional
trade as agreements as reciprocal trade agreements between two or more partners
– they include free trade agreements and customs unions
Another type of trade agreement are preferential trade
agreements. These are defined by the Congressional Budget Office as treaties
between two or more countries that remove barriers to trade and establish rules
and regulations for international commerce between the involved parties
One economic benefit of more open trade (that can result from
trade agreements) in an increase in workers’ productivity in the long-term.
Reconsider the previous example of the US-Japanese electronics industry
In the long-run, those workers who are displaced from the
relatively inefficient sectors are able to transfer their labor to sectors in
which the US holds a comparative advantage and are thus able to be more
productive. Higher productivity results in higher industry average real wages
and output, benefiting both producers and consumers
In addition to the reallocation of labor/resources into more
productive industries resulting from more global competition, it also forces
firms to make physical capital, production process, and other innovative
investments in an effort to remain globally competitive
This can result in competition amongst producers in the form
of higher wages as an incentive to attract more productive workers. Not only do
these higher-paid workers then have a higher income (and thus are able to add
to demand in other consumption sector of the economy), but their additional
productivity contributes to lower prices for the products produced of the firm by
which they are employed.
Lower prices as a result from the importation of foreign
goods has a greater beneficial impact on lower-income consumers compared to consumers
of other demographics – especially in the sectors of food and clothing
There are also non-direct economic reasons that a country might
be incentivized to enter into a trade agreement. Conditions of an agreement
between two countries could include terms that address protection of
intellectual property rights, phytosanitary/sanitary standards (plant/animal), data
transfer/localization rules, and requirements of certain environmental and/or
labor standards just to list a few
With regards to protectionist policies, trade agreements work
towards the mitigation of tariff and quota rates. Prior to the first Geneva round (which
established the GATT), tariffs rates of major involved countries was 22 percent
Policy Alternatives
One course of action that we could take is to continue with
how the Trump administration is currently attempting to address certain
domestic and political issues with the use of tariffs/other protectionist
policies. While they do result in net losses to society, there are some
benefits that they can bring.
The domestic industries that the tariffs are intending to
protect are in fact working. Domestic steel and aluminum manufactures have
experienced real gains since the issuance of the tariffs that provided benefits
to workers and producers in those industries; however, as we have discussed,
the benefits that they provide to the steel/aluminum industries are
significantly outweighed by the cost to society (in addition to the deadweight
loss paid by society and the inevitable retaliatory measures).
Another argument that is commonly made is with respect to
worker wages. This argument, however, often fails to consider the productivity
of those workers. Productivity and employee wages tend to be positively
correlated.
For example, if an American worker is paid $20 per hour. With
a higher wage incentive and the capital (machinery or other technology) at
their disposal, they can produce 100 units of a given good per hour. In a
foreign economy, a worker may be paid $2 an hours and produce only $5 units per
hour doing their work solely by hand
If the previous example is the case, the discrepancy between
the resulting productivity yielded from wages paid is negligible. If foreign
sub-par treatment of equally productive workers on the other hand is the case,
then domestic producers are in fact at a disadvantage and that must be
acknowledged. Regardless of the potential for such a disadvantage, I believe
there are better ways to deal with those issues (I will elaborate on that in my
policy recommendation section).
As previously mentioned, proponents of protectionist trade
policies may cite tariffs, quotas, or subsidies as a means of preventing and
combating dumping. Even after considering the long-run economic infeasibility
of such a market-penetration strategy, the WTO has the authority to present
legal ramifications against its member countries who attempt to employ such a
strategy.
According to Article VI of the GATT (which is still in
effect as part of the WTO), all member countries are subject to the antidumping
provisions set forth by the WTO (World Trade Organization, 2018).
Rather than incurring the deadweight loss to society as a
result of protectionist policies to combat dumping (the cost of which if often
paid by consumers), the US should let the legal authority of the WTO deal with
foreign economies guilty of such strategies. For countries that are not members
of the WTO, then and only then might protectionist trade policies be the most
beneficial route to take for the welfare of the domestic economy.
Another route we could take is one of eliminating all
tariffs, quotas, and other forms of trade restrictions/protectionist policies
in all forms. Theoretically speaking, the benefits of allowing free trade speak
for themselves; however, there would be numerous implications to such a
strategy.
For one, we must consider the reasons we having some of our
current trade restrictions. If countries that are not subject to the
jurisdiction of the WTO are engaging in unfair trading practices, then pursing
this route regarding protectionist trade policies would leave the US unable to
combat such unfair practices.
In addition, such a radical change would most likely not be
viewed very favorably in the eyes of the public (especially for domestic
producers who may be put at a significant comparative disadvantage).
Policy Recommendation
An alternative route that I believe would be our best option
would be an approach that is more mutually-beneficial. That approach would
consist of the elimination (if not, a significant reduction) in the amount of
protectionist trade polices federally legislated. In further pursuit of the
benefits obtained by free trade, we ought to engage more in free trade
agreements with other countries (especially with historically adversarial
trading partners).
Consider the dynamics of the US’s trade relationship with
China (the United States’ biggest trading partners, especially in terms of
imports). I suggest we enter negotiation with the goal of a bilateral preferential
trade agreement.
I believe that this route could change the dynamic of economic
relationship between the US and China. This way, we could set terms and
conditions regarding how we can maintain a trading relationship that brings
benefits to both parties, rather than the current dynamic of attempts at benefiting
each respective domestic economy at the cost of the other. In terms of game
theory, we ought to purse a tit-for-tat strategy using compromise/cooperation
rather than retaliation compared to the mentality of a zero-sum game (our
benefits coming at China’s loss).
As mentioned previously, foreign wages (as a result from
insufficient foreign labor laws) may be putting domestic firms at a
disadvantage. Rather than a series of subsidies or retaliatory tariffs/quotes,
negotiations through the process of trade agreements can help to address the
issue.
Consider the recent renegotiation of North American Free
Trade Agreement (NAFTA) regarding automotive manufacturing wages with respect
to Mexico. Under the renegotiation of NAFTA (now the US-Mexico-Canada
Agreements, or USMCA), 40-45 percent of automotive content must be made by
workers earning at least $16 USD per hour
I believe we could use a similar tactic to achieve both
political objectives and eliminate unfair competition with other countries by
pursing this route.
While this option may the most pragmatic approach to take, a
significant issue with pursing such a route is with public support. Some of the
population will view an anti-protectionist approach to trade policy as
“un-patriotic” considering it might result in the displacement of jobs in
domestic industries, such as those in manufacturing or agriculture as
previously discussed. This is when the role of government suasion comes to be a
necessity
In order to gain public approval, the government has the
responsibility of using relevant data at its disposal to demonstrate that an
anti-protectionist approach is best way improve societal benefit with the least
cost. A cost-benefit analysis of the effects of removing protectionist trade
policies can be published that show a forecasted impact of policy decisions
Such an analysis can be done by constructing statistical models
based off of historical numbers (adjusted for inflation) that represent the
effect on employment and consumer benefit gained following the elimination of
protectionist trade policies. These models could then be used to forecast the
results that my suggested approach would have on the current economy.
Even with the best models and attempts at forecasting, it is
still impossible to predict the future with 100 percent accuracy. An
incremental approach would be the best way to minimize the short-term effects.
With this tactic, we would be better able to monitor deviations from model
predictions between actual results and adjust policy measures accordingly prior
to the implementation the next stage of protectionist-reduction. The stages of
implementation of reduction in protectionist policies would be a gradual
decrease in rates of tariffs/quotas/subsidies/etcetera rather than an immediate
elimination).
Even after illustrating the benefits that consumers would
experience, there are still issues presented with those whose jobs are
displaced as a result of these policy changes. Some of those displaced will be
low-skilled blue-collared workers that do not have skills that are easily
transferable to other industries (or who have high-skills that are still not readily
transferable).
The government can alleviate this burden by using some of
the benefits gained by consumers (resulting from lower prices) to provide
short-term assistance to those displaced (short-term assistance because
structural changes of the economy over the long-run will negate the negative short-term
impact).
The collection of programs underneath the Trade Adjustment
Assistance (TAA) for Workers Program part of the Department of Labor could be
used to help with such a process. The purpose of the TAA is to provide
assistance to workers who have been adversely affected by foreign trade
Not only would this provide direct benefits to the displaced
workers, but it would also minimize those becoming reliant on the welfare
system. Proper usage of the TAA program could provide the displaced workers with
transferable skills, who could then add to productivity in other sectors of the
domestic economy in additional to no longer needing government benefits.
Regardless of the specificities of the program, government
intervention to address the needs of those workers is a necessity as stated by
the Founding Fathers regarding the role of the government – to “promote the
general welfare [of the people]”. This approach that I suggest would
immediately benefit consumers and over the long-run and set the trend of
increased productivity in domestic production for generations to come.
Appendix A – Economic Analysis of Tariffs
The term consumer
surplus is defined as the difference between the prices that a consumer/buyer
is willing to pay for a service or good compared to the price that they
actually pay. It is calculated by subtracting the price paid from the maximum
buying price. When being derived graphically, it is the area below the demand
curve and above the effective price.
Similarly, the term producers’
(or sellers’) surplus is defined as the difference between the prices that a
seller/producer receives for a good compared to the lowest or minimum price
that they would have been willing to sell the good. It is calculated by
subtracting the minimum selling price from the price received. When being
derived graphically, it is the area above the supply curve and below the
effective price
A deadweight loss is
a term used to refer to the loss to society of not producing at the naturally
competitive level of output. When the market is at a state of perfect competition, the given market
meets four basic assumptions: there are many sellers and buyers, the sellers
sell a homogenous good, buyers and sellers have all relevant information, and
entry into and exit from the market is relatively easy. In such a scenario, the
price is determined by the market and producers must respond accordingly
|
(Arnold, 2016)
While the reality of the free-market is seldom (if ever) at a state of perfect
competition, it helps with the comprehension of the economic models that can be
useful when applied to real-world situations. With an understanding of the
elementary economic terms, we are able to observe the effects of government
interventionist policies on the natural state of the supply and demand of the
otherwise free-market. Consider the following graph:
Prior to the effects of the tariff, the consumer equilibrium
consisted of the area marked by 1-6 and the consumer surplus is the areas
marked by 7. Because there is no interference in the market at this point,
there is no revenue collected by the government.
Following the implementation of the tariff, there are
changes in the consumer surplus, produce surplus, and amount of revenue
collected by the government. The consumer surplus decreases by the areas market
3-6, leaving the surplus to be the areas marked by 1 and 2. The produced
surplus increase by the area marked 3, thus increasing the consumer surplus to
3 and 7. The amount of revenue generated by the tariff collected by the
government is market by the areas 5 (which can also be calculated by multiplying
the amount of the tariff by the market quantity).
After considering the effect on the producer surplus, the
consumer surplus, and the amount collected by the government, there still
remains the areas marked by 4 and 6. These two areas represent the deadweight
loss to society – the value that is not gained by producers, consumers, nor in
the form of revenue collected by the government, thus resulting in a net loss
to society as a whole.
Appendix B – Game Theory
Game theory is
defined as “a mathematical technique used to analyze the behavior of decision
makers who try to reach an optimal position for themselves through game playing
or the use of strategic behavior who are fully aware of the interactive nature
of the process at hand, and who anticipate the moves of other decision makers”
in a competitive environment
There are different types of “games” that can be applied to
real-world situations. A zero sum game
is a scenario when the benefit achieved by one participating party comes at the
expense of the other party. Zero sum games are exemplified in the world of
business when two businesses are competing for a customer. There can only be
one party involved to win the business of the customer.
Consider a game-theoretical analysis in the example of the ‘prisoner’s dilemma’. In this example, each party knows the options of the other party and are unable to communicate with the other to formulate any sort of strategy. The outcome as a result of each combination of actions is listed as follows:
In this situation, regardless of whether or not Bob
confesses, Nathan will be better off by confessing. Similarly for Bob,
regardless of whether or not Nathan confesses, Bob will be better off by
confessing. As a result, both parties will end up confessing and end up in box
4, with each paying a $3,000 fine; however, if they would have been able to cooperate, they could have both chosen not
to confess and each only face a $2,000 fine.
A tit-for-tat game
theory strategy is a game theory strategy that realizes the benefit of
cooperation in competitive games and utilizes such a benefit until otherwise
provoked (such as the negotiation of trade deals). This strategy was discovered
by Robert Axelrod as an application for the prisoner’s dilemma example except
lasting multiple rounds. The mathematically-optimal scenario throughout
multiple tests was to begin by not confess and continue to not confess until
the opponent confessed. Once the opponent confessed, the program would then
“punish” the opponent by confessing
For a more applicable example, consider two national economies. Economy A may attempt to utilize the benefits of free trade by not imposing tariffs on economy B as a gesture of preliminary cooperation. If economy B chooses not to impose tariffs and allow free trade with economy A, then the two economies would continue with cooperation and both benefiting; however, in economy B chooses to implement tariffs, then economy A would subsequently retaliate with tariffs.
Appendix C – Economic Analysis of Quotas
(Arnold, 2016)
Consider an import quota on a given good imposed by the US government. Prior to the implementation of the quota, domestic demand matches the price world price at its state of equilibrium. If domestic production does not meet domestic demand, then the difference in demand is imported into the US (the difference is that area marked Q2 – Q1). As a result, the consumer surplus is market by the areas 1 – 6 and the producers’ surplus is the area marked 7. Foreign suppliers are benefiting by the areas marked 4 – 6.
Following the implementation of the quota, the domestic
price is increased (as a result of the decrease of supply of the good) to the
point marked PQ. The consumer surplus is decreased to the areas
marked 1 and 2 (because they can no longer enjoy the relatively cheaper
imported good). Producers surplus increases to the areas now marked 3 and 7
(because of less competition from imports, demand for domestically produced
goods will increase despite higher price levels). The benefits that foreign
producers receive from exporting their good to the US decrease to the area
market 5.
Similar to the net effect from a tariff, the areas marked by
4 and 6 are not gained by producers, consumers, or from foreign producers, and
is thus a deadweight loss/net loss to society.
Appendix D – Economic Analysis of Subsidies
For simplicity of analysis, we will consider the scenario of
a government-issued subsidy per unit produced provided to consumers. Consider
the following graph:
(Landsburg, 2008)
Prior to the subsidy, the economy remains at a state of
equilibrium where supply is equal to demand. This results in a consumer surplus
of A and C and a sellers’ surplus of F and H. Consequently, the total net
benefit to society at such a market-state is represented by the areas A, C, F,
and H.
A per unit subsidy on consumers results in the demand curve effectively
shifting to the right (because at any given quantity, consumers are willing to demand
a higher quantity of the given good because of the incentive of the subsidy).
As a result, the consumer surplus consists of the area marked by A, C, F, and G. The suppliers’ surplus now consists of the area marked by C, D, F, and H. The cost of the subsidy to taxpayers (which can,
similarly to the cost of a tariff, be calculated by multiplying the quantity
times the quantity of the good consumers/produced) is composed of the area marked by C, D, E, F, and G.
After considering the additional consumer and supplier
surplus, the total benefit to society consists of the areas marked A, C, F, and
H. After considering the cost of the subsidy to taxpayers, the difference is the
cost paid by taxpayers in the area market E. In this case, E represents a
deadweight loss to society.
Appendix E
When a price floor is implemented, the government sets the market price for a given good above that of the otherwise equilibrium price of the natural market. Consider the following graph:
(Arnold, 2016)
Government-set maximum pricing, also referred to as price
ceilings, has a similar net effect on society (such as rent control in the
real estate market).
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