From: curt@ekhadafi.austin.ibm.com (Curt Finch 903 2F021 curt@aixwiz.austin.ibm.com 512-838-2806)
Subject: Re: Protectionism and Japan and Fred's dumb quote.
Date: Tue, 15 Dec 1992 23:02:10 GMT
Distribution: usa,tx
Organization: IBM AWD, Austin

mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:

>In point of fact, it is quite possible that a large nation may benefit
>from the imposition of tariffs.  

>From _International Economics_, Dominick Salvatore:

>As we saw in section 8.3b and Figure 8-2, when a large nation imposes
>a tariff, the volume of trade declines but the nation's terms of trade
>improve.  The decline in the volume of trade, by itself, tends to
>reduce the nation's welfare.  On the other hand, the improvement in
>its terms of trade, by itself, tends to increase the nation's welfare.

>The *optimum tariff* is that rate of tariff that maximizes the net
>benefit resulting from the improvement in the nation's terms of trade
>against the negative effect resulting from reduction in the volume of
>trade.  That is, starting from the free trade position, as the nation
>increases its tariff rate, its welfare increases up to a maximum (the
>optimum tariff) and then declines as the tariff rate is raised past
>the optimum, eventually pushing the nation back toward th autarky
>point with a prohibitive tariff.

>However, as the terms of trade of the nation imposing the tariff
>improve, those of the trade partner deteriorate, since they are the
>inverse, or reciprocal, of the terms of trade of the tariff-imposing
>nation.  Facing both a lower volume of trade and the deterioriating
>terms of trade, the trade partner's welfare definitely declines.  As a
>result, the trade partner is likely to retaliate and impose an optimum
>tariff of its own.  While recapturing most of its losses and even
>improving its terms of trade, retaliation by the trade partner will
>definitely reduce the volume of trade still further.  The first nation
>may then itself retaliate.  If the process continues, all nations
>usually end up losing all or most of the gains from trade.

>Note that even when the trade partern does not retaliate when one
>nation imposes the optimum tariff, the gains of the tariff-imposing
>nation are less than the losses of the trade partner, so that the
>world as a whole is worse off than under free trade.  It is in this
>sense that free trade maximizes world welfare.
    
Here's what my friend John says about Fred's quote:
----------- ----------- ----------- ----------- ----------- -----------
    For grins I just reread the piece Fred McCall posted from his
    economics textbook last week.  I read it more carefully this time,
    and I would say that it pretty clearly argues in favor of *free*
    trade, not protection.  Is this supposed to be his proof text in
    favor of protectionism?  The only qualification it makes to a black
    and white endorsement of free trade is to say that in theory a
    unilateral advantage may be achieved using protection to increase
    one's terms of trade, but then the author hastens to point out that
    such calculations assume the trading partner will let *you* set the
    mix of trade and protection at *exactly* the level (the "optimal"
    level) you choose with no retaliation for restrictions you impose.
    Does that seem likely in the real world?

    BTW, note that his quotation *does* assert that protectionism
    reduces collective (ie. world-wide) wealth 100% of the time.  In
    other words, trade and protection is NOT a zero-sum game.  If I win
    through protection, someone loses in even greater measure than I
    win, and if I win through free trade, someone else is likely to win
    *also*, increasing overall wealth for both of us.

    A lot of left-wing economics starts with the assumption that econ-
    omic relationships are zero-sum (if someone wins, someone else has
    to lose, and in exactly the same measure).  This assumption is anal-
    ogous to their assumption that markets are hopelessly inelastic.

    Definition, LEFT THINKING: every economic relationship is inelastic
    and all economic sums are zero sums.

    - John
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-- 
curt@aixwiz.austin.ibm.com (Curt L. Finch) | AIX NFS/NIS Field Quality 
My views are unrelated to my employer's    |        Austin, TX
 There'll be too many elderly in 30 years for your kids to afford all the FICA.
Newsgroups: tx.politics