Chapter 9 The Political Economy of Trade Policy
Chapter 9 ▪ The Political Economy of Trade Policy
Chapter Organization Introduction The Case for Free trade National Welfare Arguments against Free Trade Income Distribution and Trade policy a International Negotiations and Trade Policy Summary Appendix: Proving that the Optimum Tariff is Positive Copyright C 2003 Pearson Education, Inc Slide 9-2
Copyright © 2003 Pearson Education, Inc. Slide 9-2 ▪ Introduction ▪ The Case for Free Trade ▪ National Welfare Arguments against Free Trade ▪ Income Distribution and Trade Policy ▪ International Negotiations and Trade Policy ▪ Summary ▪ Appendix: Proving that the Optimum Tariff is Positive Chapter Organization
Introduction Free trade maximizes national welfare. but it is associated with income distributional effects Most governments maintain some form of restrictive trade policies This chapter examines some of the reasons governments either should not or do not base their policy on economists cost-benefit calculations Copyright C 2003 Pearson Education, Inc Slide 9-3
Copyright © 2003 Pearson Education, Inc. Slide 9-3 Introduction ▪ Free trade maximizes national welfare, but it is associated with income distributional effects. • Most governments maintain some form of restrictive trade policies. • This chapter examines some of the reasons governments either should not or do not base their policy on economists’ cost-benefit calculations
Introduction What reasons are there for governments not to interfere with trade? There are three arguments in favor of free trade Free trade and efficiency Economies of scale in production Political argument Copyright C 2003 Pearson Education, Inc Slide 9-4
Copyright © 2003 Pearson Education, Inc. Slide 9-4 Introduction ▪ What reasons are there for governments not to interfere with trade? • There are three arguments in favor of free trade: – Free trade and efficiency – Economies of scale in production – Political argument
The Case for Free Trade Free Trade and efficiency The efficiency argument for free trade is based on the result that in the case of a small country, free trade is the best policy a tariff causes a net loss to the economy A move from a tariff equilibrium to free trade eliminates the efficiency loss and increases national welfare Copyright C 2003 Pearson Education, Inc Slide 9-5
Copyright © 2003 Pearson Education, Inc. Slide 9-5 ▪ Free Trade and Efficiency • The efficiency argument for free trade is based on the result that in the case of a small country, free trade is the best policy. – A tariff causes a net loss to the economy. – A move from a tariff equilibrium to free trade eliminates the efficiency loss and increases national welfare. The Case for Free Trade