Question

International Trade Homework  
1. How does the cost of “saving” jobs in protected industries compare to the workers’ wages and salaries? Provide some examples.

2. Why is the national security argument not convincing?

3. Name and Define three policy tools for enacting protectionism.

4. How does protectionism affect the price of the protected good in the domestic market?

5. Does international trade, taken as a whole, increase the total number of jobs, decrease the total number of jobs, or leave the total number of jobs about the same?

6. How is international trade, taken as a whole, likely to affect the average level of wages?

7. Is it legitimate to impose higher safety standards on imported goods than exist in the foreign country where the goods were produced?

8. In principle, the benefits of international trade to a country exceed the costs, not matter whether the country is importing or exporting. In practice, it is not always possible to compensate the losers in a country, for example, workers who lost their jobs due to foreign imports. In your opinion, does that mean that trade should be inhibited to prevent the losses?

Answer 1

1. How does the cost of “saving” jobs in protected industries compare to the

workers’ wages and salaries? Provide some examples.

- Meaning: Protection policy is used to protect domestic industries from foreign

competition by imposing restrictions on import of low-priced products.
- Governments support/protect targeted industries with subsidies, selective

procurement, and trade protection by imposing heavy import duties on foreign

goods etc. Thus, it will help in developing the domestic industries and increase

employment in that industry.
- But due to these trade barriers and the protection of domestic industries from

low-priced imported goods results in rise in the price of goods in protected

industries. And if those products are intermediate goods in other industries, it

results in increase in their production costs as well.
- And as a result the Workers working the protected industry and other sectors

see a decrease in their real wages due to decrease in their purchasing power due

to rise in prices.
- example 1: If the government imposes higher tariffs on the imports of cotton

cloth from India and China, to protect the domestic producers, as their cost of

production and hence prices are higher than the foreign companies. But due to

this protection the prices of cotton cloth in domestic market increase.

- example 2: The government imposes tarriff barriers to protect its

pharmaceutical companies form cheaper medicines produced other countries and

thus help in growth of domestic industries, which will also increase employment.

But this results in increase in prices of medicines, which will in turn reduce

the real wages of the workers.

- Thus the cost of “saving” jobs in protected industries is increase in cost and

prices of goods and thus decrease in their real wages of the workers/consumers.

2. Why is the national security argument not convincing?

- In The Wealth of Nations, Adam Smith made a few exceptions for his theory of

free trade, "when some particular sort of industry is necessary for the defence

of the country." He thought it was "perhaps" justifiable to subsidize some

strategic domestic industries such as gunpowder manufacturing to maintain

domestic suppliers.
- Another common argument is that it is risky to depend on potentially hostile

countries for vital goods and services (like oil and petroleum, iron and steel,

food grains etc.)
- But many economists who support free trade argue that it is often applied much

more broadly to preserve the interests of domestic producers at the expense of

consumers.
- Example 1: Recently President Donald Trump announced his intention to impose

special tariffs on steel and aluminum for reasons of national security. In this

case only around 3% of American steel is consumed by National defense and

homeland security. Also according to the Commerce Department, 18% of the

imported steel and 46% of imported primary aluminum come from Canada (which

currently poses no security threats).
- Example 2 : Several times in the last few decades, when disruptions in the

Middle East reduced the supply of oil and sharply raised the price, the effects

have been felt across the United States economy. However, it is not a very

convincing argument for restricting imports of oil. Instead it can import extra

oil and maintain a strategic oil reserve for use in an emergency, as the United

States government did by in 1977.

3. Name and Define three policy tools for enacting protectionism.

There are a number of common arguments which are used as reasons for providing protection to the domestic industries from foreign competition. We will discuss three such reasons.

1) Employment: This is one of the most common reasons for reducing inemployment in the domestic market. As the imposition of tariff reduces the imports and encourages growth and expansion in the import competing industry and thus increasing employment.

2) Infant industry argument:
This is generally applicable to Least Developed Countries (LDCs). An infant industry has small level of production and lack of knowledge and technology, as a result its production costs are very high and would not survive in the face of competition form a well developed foreign industry with low production costs.

3) Balance of Payment argument: Again an important for protection by LDCs. Tariffs are imposed on unnecessary and luxury goods to reduce the import bill and thus reduce the balance of payment deficit.

4. How does protectionism affect the price of the protected good in the domestic

market?
Ans: The tariffs are imposed on low cost goods imported from foreign countries to protect the domestic industries whose cost of production of the imported goods are high. Thus by protecting these industries the government is removing the competion factor which results in lower prices in the market. and dus to high costs of production and lack of competition in the market the prices of these goods are high. Thus by protection helps the industries but the consumers have to pay higher prices for the goods.