Question

Give two reasons why actual trade policy might not always be the policy that maximizes national welfare but rather something that prioritizes the welfare of certain groups more than others?

Answer 1

Few countries have anything approaching completely free trade. The city of Hong Kong, which is legally part of China but maintains a separate economic policy, may he the only modern economy with no tariffs or import quotas. Nonetheless, since the time of Adam Smith economists have advocated free trade as an ideal toward which trade policy should strive. The reasons for this advocacy are not quite as simple as the idea itself. At one level. theoretical models suggest that free trade will avoid the efficiency losses associated with protection. Many economists believe that free trade produces additional gains beyond the elimination of production and consumption distortions. Finally, even among economists who believe free trade is a less than perfect policy, many believe free trade is usually better than any other policy a government is likely to follow.There has long been a solid argument in favour of free trade based on economic efficiency. This paper examines the extent to which the emerging world trading regime
leaves nations the “policy space” to deploy effective policy for long-run diversification and development and the extent to which there is a convergence of such
policy space under global and regional trade regimes. We examine the economic theory of trade and long-run growth and underscore the fact that traditional theories lose luster in the presence of the need for long-run dynamic comparative advantages and when market failures are rife. We then review a “toolbox” of
policies that have been deployed by developed and developing countries past and present to kick-start diversity and development with the hope of achieving longrun growth. Next, we examine the extent to which rules under the World Trade Organization (WTO), trade agreements between the European Union (EU)
and developing countries, trade agreements between the United States (US) and developing countries, and those among developing countries (South-South, or
S-S, agreements) allow for the use of such policies. We demonstrate that there is a great divergence among trade regimes over this question. While S-S agreements provide ample policy space for industrial development, the WTO and EU agreements largely represent the middle of the spectrum in terms of constraining policy space choices. On the far end, opposite S-S agreements, US agreements place considerably more constraints by binding parties both broadly and deeply in their trade commitments. A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. Traditionally, states have used them as a source of income. Nowadays, they are among the most widely used instruments of protectionism, along with import and export quotas.
Tariffs can be fixed (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies according to the price). Taxing imports means people are less likely to buy them as they become more expensive. The intention is that they buy local products instead – boosting the country's economy. Tariffs therefore provide an incentive to develop production and replace imports with domestic products. Tariffs are meant to reduce pressure from foreign competition and reduce the trade deficit. They have historically been justified as a means to protect infant industries and to allow import substitution industrialization. Tariffs may also be used to rectify artificially low prices for certain imported goods, due to 'dumping', export subsidies or currency manipulation.Economists have had an enormous impact on trade policy, and they provide a strong rationale for free trade and for removal of trade barriers. Although the objective of a trade agreement is to liberalize trade, the actual provisions are heavily shaped by domestic and international political realities. The world has changed enormously from the time when David Ricardo proposed the law of comparative advantage, and in recent decades economists have modified their theories to account for trade in factors of production, such as capital and labor, the growth of supply chains that today dominate much of world trade, and the success of neomercantilist countries in achieving rapid growth.