AP Macro: Trade Barriers

While consumers and the nation may benefit from trade, less efficient domestic firms and their employees are hurt by the drop in domestic demand. Protectionists argue that trade barriers must be used to limit trade. Tariffs, quotas, non-tariff barriers, voluntary export restraints (VER), and export subsidies can all be used to protect domestic industries from foreign competition. The direct effects of these trade barriers include reduced consumption of goods, increased domestic consumption, a reduction in sales for foreign firms, and increased tariff revenue for the government. Indirect effects include a reduction in exports because of the reduced incomes of foreigners, the resulting cuts in output and employment in U.S. export industries, and a reduction in the efficiency of production. Studies of trade barriers have demonstrated that the increased costs to consumers are greater than the gains for domestic industries and the government.

Protectionists argue that trade barriers are important for other reasons beyond protection of American industries and jobs. Protectionists argue that we must remain self-sufficient and protect industries vital to national defense. Free traders argue such a policy is subject to significant abuse. Protectionists argue that economies must be diversified to maintain economic stability, but free traders note that this argument is not relevant for an economy as diversified as the United States. Protectionists argue that infant industries must be shielded with temporary tariffs from the pressures of international competition until they are mature enough to fully compete with foreign firms. Free traders argue that direct subsidies would more effectively promote the growth of new firms and that so many new firms emerge each year that directed, temporary tariffs would be impossible to impose. Protectionists also argue what widespread tariffs must be used to prevent dumping of imports below cost. Free traders counter that such low-cost goods may be the result of a strong comparative advantage, rather than dumping, and punishments can be narrowly targeted at those guilty of dumping. While protectionists argue that trade barriers protect jobs, free traders argue that trade also creates jobs in more efficient industries; further, retaliatory trade barriers can lead to trade wars. Finally, protectionists argue that trade will reduce U.S. wages, as firms are forced to compete with low-cost foreign labor. Free traders contend that U.S. wages will remain higher than wages in most countries because of the higher productivity of U.S. workers.



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