Free trade controversies – protectionism
Redistributive effects of free trade
falling production on some sectors/regions
How to improve cost/benefit in regions with negative ratios
flexible operation of the economy
establish appropriate safety nets
proceed gradually in trade liberalization
rely on international agreements.
Instruments for trade contraction
Tariff (taxes on imports)
Specific: levied as a fixed charge for each unit of imported goods.
Ad valorem: is levied as a fraction of the value of imported goods.
Compound duty:combination of an ad valorem and a specific tariff.
Welfare effects of tariffs?
The price of the good in the importing country increases:
Domestic producers are better off
Domestic consumers are worse off
The government gets some revenue from the tariff
For a small country, the losses will always be greater than the gains.
For a large country the effects are ambiguous because the imposition of a tariff may cause a decrease in demand large enough to reduce the world price of the good
Import quota:restriction on the quantity of a good that may be imported
government receives no revenue. Instead, the revenue from selling imports at high prices goes to quota license holders. These extra revenues are called quota rents.