Instruments and Uses of Trade Policy

Abstract

THE ISSUES The trade models developed in earlier chapters illustrated two basic propositions. Under competitive conditions, free trade can maximize the value of global output. Furthermore, it is beneficial to each trading country. It relaxes the constraints imposed by a country's endowment of labor, capital, and natural resources, permitting households to consume better collections of goods than the country can produce on its own. Look around the world, however, and you will find that all countries use import tariffs, and many use other trade barriers as well. In most countries, moreover, important economic and political groups want even more protection from foreign competition. Is something wrong with the case for free trade? The answer to this question has two parts. Some well-known arguments for protection are fallacious and easily refuted. Nevertheless, their superficial plausibility and political popularity gives them immunity from economic logic. Some other arguments stand up to analysis, but they must be carefully qualified. It is almost always possible to show that there is a less costly way of achieving the same policy objective. In other words, trade barriers usually prove to be second-best policy instruments. To develop these propositions convincingly, we must first acquire the tools needed to represent and analyze tariffs and other trade barriers, then use them to study the principal arguments for departing from free trade. The first part of this chapter will therefore be concerned with the representation of tariffs and other trade barriers.