lecture 9: barriers to trade - dornsifecms.usc.edu€¦ · lecture 9: barriers to trade benjamin...

Lecture9:BarrierstoTradeBenjaminGraham


ReadingQuiz(1)• Which of the following statements is true?

A.  China currently has lower tariffs than the U.S. and those tariffs have been lowering even further in recent recent years

B.  China has lower tariffs than the U.S. but China has been raising its tariffs in recent years

C.  China currently has higher tariffs than the U.S. but those tariffs have been falling in recent years

D.  China currently has higher tariffs than the U.S. and those tariffs have been geBng even higher in recent years


ReadingQuiz(2)• Why were farmers protesDng in 2015?

A.  Prices were too low

B.  New government regulaDons were driving up their costs

C.  The government removed most of their subsidies

D.  The government was financing development projects that threatened cropland


ReadingQuiz(3)• Part of why China gets access to the U.S. market at low tariff rates is

because it joined what organizaDon in 2008?

A.  The World Trade OrganizaDon

B.  The OrganizaDon for Economic CooperaDon and Development

C.  The InternaDonal Monetary Fund

D.  The North AtlanDc Treaty OrganizaDon

E.  The United NaDons


Notaquiz:Whydoesn’tthelawofonepricehold?• Why do things cost more in one country than in another?

A.  Because of tariffs and import quotas and capital restricDons

B.  Because shipping costs money

C.  Because migraDon is restricted

D.  A and B

E.  All of the above


WhatcausedglobalizaKonoverthelast50years?• Cost of shipping and communicaDng fell

• InternaDonal phone calls, the internet

• ContainerizaDon

• Tariffs fell worldwide

• General Agreement on Tariffs and Trade (GATT) and World Trade OrganizaDon

• Looking forward: Formerly poor countries are becoming major consumers.


ContainerizaKon


WhydoesaBigMaccostsomuchinNorway?

• Because labor is expensive, real estate is expensive, and ingredients are expensive.

• But why are these things expensive? Why doesn’t the law of one price hold?


TheBasicToolsofTradeProtecKon

• Tariffs: Taxes on imports (or someDmes, but only rarely, on exports)

• DomesDc Price > World Price

• Quotas: Limits on the amount of foreign goods that can be imported

• DomesDc Price > World Price

• Subsidies: ArDficially raise prices paid to farmers

• DomesDc Taxes go up, world price goes down (a liale)

• DomesDc content requirements (some of the product must be made domesDcally)

• Local price goes up, world price is mostly unaffected

• These are all subsDtutes for one another

• They all help producers (specifically, owners of scarce factors) and harm consumers


HowTariffsWork


HowSubsidiesWork


HowQuotasWork


ExamplesofUSTariffs


ExamplesofUSQuotas


IndustrialProductsvs.AgriculturalProducts


Whydoesn’tthelawofonepricehold?

• Lets assume French and US sales tax are the same and tariffs on French wine are 0. How much would a boale of French wine cost in the US?

A.  The same as in France

B.  The French price + shipping costs

C.  The French price + shipping costs - a liale bit because the labor in the US wine shop is cheaper

D.  The French price + shipping costs - shop labor difference - a liale bit more because demand in the US is lower.


Whobenefitsfromtariffs?

• In the country that implements the tariffs, who benefits from tariffs on agricultural goods and texDles?

A.  Unskilled workers and people who own farmland

B.  Skilled workers and people who own farmland

C.  People without farmland land and skilled workers

D.  People who eat food and people who buy clothes


Tariffsarealsoaneasytaxhandle


•  Tariffs as a share of government revenues

TradeandincomedistribuKon

• Free trade makes a country richer in total

• But it hurts some people and helps others

• Government redistribuDon can help even this out and get everyone to support free trade

• Tax beneficiaries of free trade, give it to those who lose out

• Unemployment benefits, job training, etc.


Source:Rodrik1998“WhyDoMoreOpenEconomiesHaveBiggerGovernments?

TradeandincomedistribuKon

• What is the effect of trade on inequality?

• Depends on who owns the scarce factors

• Should (generally) reduce inequality in poor countries and increase inequality in rich countries

• This is empirically muddy


Theeffectoftariffsonconsumers

• What do tariffs on texDles and agriculture do to prices in the US?

• Whom does that hurt?

• What do tariffs on texDles and agriculture do to prices in developing countries?

• Whom does that hurt?


lecture 9: barriers to trade - dornsifecms.usc.edu€¦ · lecture 9: barriers to trade benjamin...

Documents