WELFARE AND TRADE POLICY

Abstract

We have looked at some questions of welfare in previous chapters. In Chapter 3 we established the gains from trade in single- and manyconsumer economies. In Chapter 5 we looked at the welfare effects of income transfers, changes in technology, growth in factor endowments, and international factor movements–all in the context of one-consumer countries. We also saw how such a country could gain from the imposition of trade taxes if the world excess supply function facing it was less than perfectly elastic. Thus, we have already looked at a number of welfare implications of trade, and at some issues relating to trade policies. When we now turn to general questions of welfare and trade policy, therefore, it is merely a change in emphasis as compared to the previous chapters. In particular, this chapter looks explicitly at the optimum formulation of trade policy from the point of view of a single country. By trade policy we shall mean the imposition of positive or negative trade taxes, i.e. specific departures from a policy of free trade. Such a departure could be rationalized on four grounds: (i) trade taxes could be used to affect world market prices, and thereby to achieve better terms of trade, (ii) trade taxes could be used to achieve an optimum domestic distribution of income, (iii) trade taxes could be used to achieve exogenously given targets for trade, production, or consumption at home, and (iv) trade taxes could be used to correct distortions due to market failure.We shall consider each of these separately.