Episode 35: Why do countries restrict trade?

Summary

Highlights

• Why every country restricts trade despite the allure of free trade's benefits. 🤔
• Governments protect industries with a comparative disadvantage to save jobs. 👷‍♂️
• Trade restrictions, like tariffs, can lead to higher consumer prices. 💰
• The national defense argument: Ensuring critical industries are protected. 🚀
• The slippery slope of defining 'fair' in global trade practices. 🌐
• National revenue from tariffs is minor compared to income taxes in wealthy countries. 🏦

Key Takeaways

• Countries impose trade restrictions to protect domestic industries that face competitive disadvantages. 🛡️
• Trade barriers can create jobs in protected industries but may lead to job losses in others. ⚖️
• 'Fairness' in trade is subjective and can lead to international disputes and trade wars. 🌍
• Trade restrictions can also raise government revenue, albeit minimally in wealthy countries. 💸
• National defense and cultural preservation are often cited as reasons for restricting trade. 🎯
• Infant industries are protected until they can compete on their own. 👶

Overview

Chapters

• 00:00 - 00:30: Introduction to Free Trade and Trade Restrictions The chapter discusses the concept of free trade and its impact on global economics. It explains that free trade, based on the principle of comparative advantage, leads to benefits such as lower buying prices, higher selling prices, and increased global production, contributing to improved living standards. However, it also points out the paradox that while every country is involved in trade, none practices completely unrestricted free trade.
• 00:30 - 01:00: Role of Governments in Trade Restrictions The chapter discusses why despite the advantages of free trade, countries impose trade restrictions. The primary reason is that governments, which have the power to implement these restrictions, aim to protect domestic industries from foreign competition. However, not all domestic producers seek such protection; some already have natural production advantages.
• 01:00 - 01:30: Domestic Industries and Protectionism This chapter discusses the concept of protectionism in domestic industries and why it might be necessary. It highlights that only domestic producers who are at a comparative disadvantage and would be driven out of business without protection would need government support. The chapter explores various arguments these disadvantaged producers might use to gain governmental protection, such as the impact on domestic jobs.
• 01:30 - 02:30: Argument 1: Domestic Jobs The chapter discusses the impact of trade protections, like tariffs and quotas, on domestic jobs. It argues that these measures lead consumers to buy more domestic goods, thereby increasing the demand for workers in domestic industries. The US steel industry is cited as an example where such protections have resulted in more domestic employment. The chapter emphasizes that the domestic jobs argument is compelling for politicians, as it aligns with the interests of voters who prioritize job security.
• 02:30 - 03:00: Impact of Trade Barriers on Other Industries The chapter discusses the impact of trade barriers, such as tariffs, on various industries. While these barriers may protect jobs within the industry that benefits directly (such as the US steel industry), they can lead to job losses in other industries that rely on the protected goods, because the increased costs affect their production capabilities and pricing. For example, industries like automobile manufacturing, construction, and steel drum manufacturing, which use steel as a raw material, may be negatively impacted by the higher prices resulting from tariffs.
• 03:00 - 04:00: Argument 2: Level Playing Field The chapter titled 'Argument 2: Level Playing Field' discusses the economic impact of rising steel costs on various industries. It highlights that while the increase may benefit steelworkers by creating more jobs, it simultaneously leads to job losses in downstream industries like automotive and construction due to higher operational costs. The discussion underlines the broader economic repercussions, particularly in a country like the United States, where disadvantaged areas rely heavily on raw materials, resulting in a net loss of jobs.
• 04:00 - 04:30: Trade Wars and International Fairness The chapter discusses the concept of a level playing field in international trade, focusing on what constitutes an unfair advantage for foreign producers over domestic ones. It argues that trade restrictions might be implemented to even things out if a foreign producer is receiving government subsidies that reduce costs and allow their products to be sold cheaply in another country's market. However, it raises the question of whether all advantages held by foreign producers are inherently unfair.
• 04:30 - 05:30: Argument 3: Government Revenue The collapse of the Thai baht in 1997 initiated a financial crisis across Southeast Asia, causing Asian currencies to sharply decline in value. This devaluation made Asian products, including steel, very cheap on the global market. As a result, US steel producers faced stiff competition from inexpensive Asian steel imports, prompting them to seek governmental protection. The chapter poses a critical inquiry into whether Asian producers gained an unfair advantage from this currency collapse and questions whether it was a deliberate strategy to boost sales by drastically reducing currency value.
• 05:30 - 06:30: Argument 4: National Defense The chapter discusses the complexities surrounding national defense in the context of international trade. It highlights the subjective nature of 'fairness' in trade restrictions, pointing out that disagreements over what is considered fair can lead to retaliatory measures and potentially escalate into a trade war. The chapter also explores the revenue generation aspect of trade restrictions, noting that tariffs and the sale of quota licenses can provide additional government income. However, for countries like the US, such revenue constitutes only a small percentage of overall government income.
• 06:30 - 07:30: Argument 5: Infant Industries The chapter discusses the implications of imposing trade restrictions on imported goods, focusing on its impact on both government revenue and consumers. It questions whether it makes sense to increase the cost of imported goods at the expense of consumers, considering that a significant portion of government revenue comes from other sources like income and corporate taxes. The argument for revenue generation through trade restrictions is particularly relevant for poorer nations that lack substantial income tax revenues. The chapter also briefly touches on the national defense argument as a rationale for trade restrictions.
• 07:30 - 08:30: The Role of ITC in Managing Trade Policies The chapter titled 'The Role of ITC in Managing Trade Policies' explores the rationale behind protecting certain industries that are deemed critical to national defense. It argues that industries such as tanks, munitions, aircraft, and shipbuilding should be protected to ensure their availability during wartime. Furthermore, it extends the logic of protection to industries that supply essential materials and goods, like metals, food, uniforms, and even buttons for military uniforms. The chapter essentially questions which industries should be considered vital for national security and thus deserving of protective trade policies.
• 08:30 - 09:30: Creating International Dominance through Subsidies This chapter discusses how the lines between industries critical to national defense and those that are not can often become blurred. This ambiguity intensifies when considering not just national defense, but national interest as a whole. The example given is of countries limiting US entertainment and publications to preserve their cultural identity, which they view as not aligning with their national interest. The chapter delves into the concept of using subsidies as a means to assert international dominance, touching upon the complexities and consequences that follow such strategies.
• 09:30 - 10:00: Conclusion and Preview of Next Episode The chapter discusses the infant industry argument, suggesting that new industries should be protected and supported until they can compete independently. It draws parallels to a local economic incubator where entrepreneurs can launch businesses with benefits like lower rent and access to consultants.

Episode 35: Why do countries restrict trade? Transcription

• 00:00 - 00:30 In Episode 34, we saw that the practice of free trade according to comparative advantage results in lower buying prices, higher selling prices, and greater global production, all of which means improved living standards. Do you know how many countries in the world are engaged in trade? Every single one -- there's not one country in the world that's completely self-reliant. And do you know how many countries around the world practice completely free trade? None. Not one single country practices trade free of any restrictions.
• 00:30 - 01:00 So if free trade is so fabulous, then why do all countries put restrictions in place? Perhaps it's best to take one step backwards and ask: who has the power to put trade restrictions in place? That would be each country's government. Why would the government put such restrictions in place? The government places trade restrictions in order to protect domestic industries from foreign competitors. Now ask yourself this: which domestic producers would seek such protection? Surely not all of them; some domestic producers already have a natural advantage in production
• 01:00 - 01:30 over the foreign competitors. This is the key; the only domestic producers who would need protection are those who would be driven out of business under free trade -- those who have a comparative disadvantage in production. So what arguments could the weak, disadvantaged producers make to the government to convince it to provide protection in the form of trade restrictions? Well, there are several. First, there's the domestic jobs argument: if some type of trade restriction, say a tax
• 01:30 - 02:00 or a quota, is placed on incoming foreign goods, then consumers will have to purchase domestic goods instead, right? And if the demand for domestic goods is higher, then the need for workers to produce those goods is higher. Look at the US steel industry: with protections in place, more US steel is purchased, and more US steel workers have jobs. The domestic jobs argument is pretty persuasive with politicians, because voters with jobs are happy voters.
• 02:00 - 02:30 Here's the rub, though; while trade barriers mean more jobs in the protected industry, they actually cost jobs in other industries. Think again about the US steel industry: historically, taxes (called tariffs), have been imposed on imported steel, so the US producers don't have to compete at such a low price. But this means that steel will cost more to consumer. Who buys steel? The auto industry, perhaps? Construction firms? Steel drum manufacturers?
• 02:30 - 03:00 Any industry that uses steel is a resource will face rising costs, which will lead to decreased supply, which means fewer jobs in all of those industries. So while steelworkers may have more jobs, workers and all the downstream industries, like auto workers and construction workers, will lose jobs. On net, especially in a country like the United States where disadvantaged areas tend to be oh, raw materials are low-end materials, this will result in a net loss of jobs.
• 03:00 - 03:30 Argument for production number two: level playing field. The logic here is that the foreign producer has some unfair advantage over the domestic producer, and the trade restriction would just… even things up a bit. An unfair advantage might be if, say, the foreign producer was receiving subsidies from its own government, such that costs were reduced, and the foreign producer’s product could be sold very cheaply in our market. But what happens if the foreign producer just has an advantage -- are all advantages unfair?
• 03:30 - 04:00 In 1997, the collapse of the Thai baht kicked off a wholesale financial collapse in Southeast Asia. As Asian currencies lost most of their value, becoming very cheap, Asian products became cheap. Suddenly US steel producers were facing extremely cheap Asian steel, and went to the US government to seek protection. The question I have is this: did the Asian producers have an unfair advantage? Did they deliberately plan for their currencies to lose over 90% of their value, just so they could sell more steel?
• 04:00 - 04:30 The term “fair” is a slippery thing, somewhat subject to interpretation. The other difficulty here is that one country may dispute the “fairness” of another's restrictions, and retaliate with restrictions of its own, eventually escalating into a trade war. A third argument for trade restrictions is that they can raise additional revenue for the domestic government. A tariff (or a tax on imported goods) would generate added dollars, as would revenue from the sale of quota licenses. But in a country like the US, where only a very small percentage of government revenue
• 04:30 - 05:00 comes from traded goods (remember we saw in the budget episode about 90% of federal revenues come from income tax, payroll tax and corporate tax), does it makes sense to harm consumers by making imported goods more expensive? The government revenue argument is likely to be more compelling for governments of poor nations, where there isn't much income to tax; the only place to squeeze additional revenue is from businesses, especially internationally. A fourth argument used in favor of trade restrictions is the national defense argument.
• 05:00 - 05:30 If an industry is critical to the national defense, we should protect it in peacetime to make sure that it's still around in times of war. Some industries may spring to mind immediately as being critical to the national defense: tanks, guns, munitions, aircraft, shipbuilding… but then, what about the metal used in all of these industries? Shouldn't that be protected? What about our food supply, or uniforms for our troops? Or the producers who make buttons for the uniforms?
• 05:30 - 06:00 You can see where this is headed -- it becomes difficult to draw a hard and fast line separating industries that are critical to the national defense from those that are not. This becomes compounded when you realize that in recent years, the argument has been broadened from “critical to the national defense” to “critical to the national interest.” For example, some countries have restricted the amount of US entertainment and publications, like movies and magazines, that are allowed in, because they feel it would not be in their country's national interest to allow their own cultural identities to be swallowed up
• 06:00 - 06:30 by US pop culture. The infant industry argument is number five on our list; this says we should protect and support new industries until they're mature enough to compete on their own. I can understand this; in the town where I grew up there was an economic incubator. If you had an idea for new business, you could put in a proposal. If you were successful, you’d start up your business in the incubator building, enjoying lower rent and immediate access to business consultants.
• 06:30 - 07:00 After a designated period of time, your business would move out and someone else would move in. Here's the drawback with federal support for a new industry: who is in the best position to know when the industry is ready to “leave the nest”? The industry is. So if the government goes to the industry and says, “Hey, you ready yet? Can we take the restrictions away?”, what's industry going to say? “Sure, go ahead”? More likely the response would be, “No, not yet. Ask us again a couple of years.”
• 07:00 - 07:30 In the past, some countries would protect these “infant” industries for decades. In the US, at least, the international Trade Commission (or ITC) places time limits on protection, and usually weans the industry off by progressively decreasing the level of restrictions over that time period. There is one more method that goes against the natural flow of free trade, but it’s less about protecting a weak domestic producer from foreign competition than it is about giving your domestic producer an artificial boost into other countries’ markets by subsidizing them, so they can take over market share abroad.
• 07:30 - 08:00 This method of creating international dominance is, of course, squarely in the arena of “unfair advantage” (see argument number two), and is really an open invitation for other countries to retaliate against you with restrictions of their own. In this episode I went over many reasons why government might agree to protect the economic interests of its domestic producers, even though they have comparative disadvantage in production. Next time, I'll show you in more detail how the government can protect domestic producers
• 08:00 - 08:30 by using tariffs, quotas, voluntary export restraints, or nontariff barriers to trade. NEXT TIME: Types of trade restrictions TRANSCRIPT0 EPISODE 35: WHY DO COUNTRIES RESTRICT TRADE?