Tariffs and Protectionism
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0:02 - 0:05♪ [music] ♪
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0:09 - 0:14- [Alex] Okay, now we're going
to discuss international trade -
0:14 - 0:16and how to model international trade
using demand and supply. -
0:16 - 0:19We'll also look at how to model
the consequences of a tariff, -
0:19 - 0:21a tax on trade.
-
0:21 - 0:24We'll look at the consequences
and also the cost of the tariff -
0:24 - 0:30and the cost
of protectionism in general. -
0:30 - 0:33By the way, remember
when we did demand and supply, -
0:33 - 0:35I said that these concepts
are really, really important? -
0:35 - 0:38Well now you see why:
it's because we're simply applying -
0:38 - 0:41the same tools
over and over again. -
0:41 - 0:44If you understand the fundamentals,
-
0:44 - 0:49then the applications
become much, much easier. -
0:49 - 0:52So do make sure you understand
the fundamentals. -
0:54 - 0:57Okay, let's get going.
-
0:58 - 0:59First, some quick definitions.
-
0:59 - 1:01Protectionism:
This is the economic policy -
1:01 - 1:05of restraining trade
through tariffs, quotas, -
1:05 - 1:09or other regulations
that burden foreign producers -
1:09 - 1:12but not domestic producers.
-
1:12 - 1:15In particular, a tariff is simply
a tax on imports -
1:15 - 1:18and a quota is
a quantity restriction on imports. -
1:18 - 1:24For example, a quota may say
you're only allowed -
1:24 - 1:27to import 10,000 automobiles
from Japan. -
1:27 - 1:30Okay, let's get right into it.
-
1:30 - 1:31Here is the domestic supply curve.
-
1:31 - 1:33This is the supply curve
of the home country firms, -
1:33 - 1:36if we're thinking about the US,
-
1:36 - 1:39this is the supply curve
from US firms. -
1:39 - 1:41Here is the demand curve,
domestic demand, -
1:41 - 1:44this is demand from US consumers.
-
1:44 - 1:46If we had no international trade
then as usual, -
1:46 - 1:49we would find the equilibrium
where the quantity demanded -
1:49 - 1:50is equal to the quantity supplied.
-
1:50 - 1:52That would give us the price
with no international trade -
1:52 - 1:58and the quantity
both produced and consumed -
1:58 - 2:01with no international trade
down here. -
2:01 - 2:04Now let us suppose that the
consumers in this country -
2:04 - 2:07can go out into the world
and they can buy -
2:07 - 2:10as much of these semi-conductors
as they want at the world price. -
2:11 - 2:13So in that case
if we had complete free trade, -
2:13 - 2:16consumers would be able to buy
as much as they want -
2:16 - 2:18at the world price or as given
by this world supply curve. -
2:21 - 2:26The free trade equilibrium, then,
would involve greater consumption. -
2:26 - 2:28That is at the high price,
-
2:28 - 2:31with no international trade
the quantity demanded is here. -
2:31 - 2:34With international trade,
-
2:34 - 2:37consumers get to buy
at the lower world price -
2:37 - 2:39so their quantity demanded
increases. -
2:39 - 2:42In terms of the diagram
-
2:42 - 2:48the quantity demanded
will increase to QD free trade. -
2:48 - 2:50So domestic consumption
is equal to this distance -
2:50 - 2:51or domestic consumption is equal
-
2:51 - 2:53to the quantity demanded
with free trade. -
2:53 - 2:58Now what about production?
-
2:58 - 3:01Well, the domestic producers
can only charge -
3:01 - 3:04as much as the world producers.
-
3:04 - 3:07They can't charge a higher price.
-
3:07 - 3:10So when the world price falls,
-
3:10 - 3:13when domestic consumers are able
to buy at the world price, -
3:13 - 3:14domestic producers can only sell
at the world price, -
3:14 - 3:17and they're going to be
less willing to sell. -
3:17 - 3:18So the domestic production will fall,
-
3:18 - 3:21domestic production will fall
to this lower amount right here. -
3:21 - 3:24At a lower price
-
3:24 - 3:27the domestic suppliers
are only willing to produce -
3:27 - 3:35a less amount or lower amount
as given by QS free trade. -
3:35 - 3:41Now notice that domestic consumption
is QD free trade, -
3:41 - 3:44domestic production
is QS free trade -
3:44 - 3:46and demanders are demanding
-
3:46 - 3:49more than the domestic suppliers
are willing to supply. -
3:49 - 3:54The difference of course
is made up by imports. -
3:54 - 3:58So with trade, domestic consumption
will be at QD free trade. -
3:58 - 4:01Some of that will come from imports
-
4:01 - 4:05and some of that will come
from domestic suppliers. -
4:05 - 4:09That's it. That's our analysis
of international trade -
4:09 - 4:12using supply and demand.
-
4:12 - 4:15Now make sure you understand
each step in this diagram -
4:15 - 4:16because the next slide,
-
4:16 - 4:17when we're going to add tariffs
-
4:17 - 4:18it's going to make the diagram
more complicated. -
4:18 - 4:21Each step is actually simple,
-
4:21 - 4:24each step is actually no different
-
4:24 - 4:25than the ones we've already done,
-
4:25 - 4:28but the diagram will look
a little bit messier. -
4:28 - 4:30So if you need to go through
this slide again -
4:30 - 4:33make sure you understand
each step along the way. -
4:33 - 4:38Okay let's do the same diagram
-
4:38 - 4:41but now we're going to do it
with a tax or a tariff. -
4:41 - 4:42Let's remember that here
is the quantity -
4:42 - 4:44demanded with free trade,
-
4:44 - 4:46here is quantity
supplied with free trade. -
4:46 - 4:49The difference
between the quantity demanded -
4:49 - 4:52and the quantity
supplied domestically -
4:52 - 4:55is of course imports,
so this is imports with free trade, -
4:55 - 4:58this distance right here.
-
4:58 - 5:01Now, a tariff is simply
a tax on imports. -
5:01 - 5:04What the tariff does is
it raises the world price -
5:04 - 5:07by the amount
of the tariff or the tax. -
5:07 - 5:14So the world supply curve
or the world price shifts up -
5:14 - 5:18until we get
to the new equilibrium. -
5:18 - 5:21Of course what this means
is at a higher price -
5:21 - 5:29domestic consumers are going
to demand a lower quantity. -
5:29 - 5:32Domestic consumption falls
from Q free trade -
5:32 - 5:33to Q quantity demanded
with the tariff. -
5:33 - 5:36Domestic production falls
by this amount, -
5:36 - 5:40or let's just add that
to the diagram, -
5:40 - 5:42domestic consumption falls
from here to here. -
5:42 - 5:44Okay, what about
domestic production? -
5:44 - 5:47Well with a higher price,
domestic suppliers -
5:47 - 5:49are now willing to supply more.
-
5:49 - 5:52Here is the price
of the world price, -
5:52 - 5:54here's the world price.
-
5:54 - 5:57With a higher world price
domestic suppliers -
5:57 - 5:58are willing to supply more
up until this point. -
5:58 - 6:01Let's add that to the diagram.
-
6:01 - 6:03Domestic production
is going to increase -
6:03 - 6:06from the quantity
supplied with free trade -
6:06 - 6:07to the quantity
supplied with the tariff -
6:07 - 6:09or again just putting that
into the diagram -
6:09 - 6:13it's going to increase
from here to here -
6:13 - 6:16along the domestic supply curve.
-
6:16 - 6:18But what about imports?
-
6:18 - 6:21Imports remember are the difference
-
6:21 - 6:23between the quantity demanded
and the quantity supplied. -
6:23 - 6:26The quantity demanded
with the tariff is here, -
6:26 - 6:29the quantity supplied is here,
-
6:29 - 6:32so imports are the difference
which is this distance right here. -
6:32 - 6:36So notice that imports have fallen.
-
6:36 - 6:39Final thing to add, a tariff
is just a tax on imports, -
6:39 - 6:46this is the quantity of imports,
-
6:46 - 6:49this is the amount
of the tax or the tariff. -
6:49 - 6:52So the tariff will also
generate some revenues. -
6:52 - 6:55This is the revenue from the tariff
-
6:55 - 6:58which is going to go
to the government. -
6:58 - 7:00It's the tax or the tariff amount
-
7:00 - 7:03times the quantity
of imports with a tariff, -
7:03 - 7:09so this is revenue
that flows to the government. -
7:09 - 7:11Okay, that's it,
that's analysis of tariffs, -
7:11 - 7:12now what I want to do
-
7:12 - 7:14is say what are
the welfare consequences of this? -
7:14 - 7:16The welfare consequences
are going to depend -
7:16 - 7:19upon this factor
the domestic production falling -
7:19 - 7:21and this factor
the domestic consumption increasing. -
7:21 - 7:24Let's take a closer look.
-
7:24 - 7:27Okay let's take a closer look
at the welfare costs -
7:27 - 7:29and here I'm going to look
at the net costs. -
7:29 - 7:32What I mean by that is
we could actually find the cost -
7:32 - 7:33in two different ways.
-
7:33 - 7:35We could look at the costs
and the benefits to the consumers, -
7:35 - 7:36the costs and benefits
to the producers, -
7:36 - 7:39the cost and benefits
to government. -
7:39 - 7:40We could sum all those up,
that would give us the net cost. -
7:41 - 7:45I want to jump straight
to the net welfare costs -
7:45 - 7:48of protectionism
and I'm going to do that -
7:48 - 7:51by focusing on
the real factors which change -
7:51 - 7:54and these are two;
-
7:54 - 7:57first domestic consumption
as I said falls, -
7:57 - 8:00second domestic production
increases. -
8:00 - 8:03Notice I haven't said anything here
-
8:03 - 8:05about the revenue from the tariff,
-
8:05 - 8:08that's because that's
a cost to consumers, -
8:08 - 8:10they've got to pay more
-
8:10 - 8:11but it's a benefit
to the government, -
8:11 - 8:13they have this revenue
that nets out -
8:13 - 8:16so it's not going
to affect the net welfare. -
8:17 - 8:19Instead the net welfare
-
8:19 - 8:22is going to depend
upon these two real changes. -
8:22 - 8:27What I'm going to show is
that both of these effects -
8:27 - 8:31somewhat surprisingly
reduce welfare. -
8:31 - 8:34Why is this?
Well domestic consumption falls, -
8:34 - 8:35the reason that reduces welfare
-
8:35 - 8:37is because there are
lost gains from trade -
8:37 - 8:39and I'll say more
about that in a minute. -
8:39 - 8:44Second, domestic production
increases, -
8:44 - 8:47you might think that's
a good thing, except, however, -
8:47 - 8:50we're going to have
wasted resources -
8:50 - 8:53because the domestic producers
have higher costs -
8:53 - 8:54than the world producers.
-
8:54 - 8:56On a net level there's going to be
-
8:56 - 9:01more resources going to production
than are necessary, -
9:01 - 9:04there's going to be wasted resources.
-
9:04 - 9:06Can we measure
the value of these losses? -
9:06 - 9:08In fact we can and I'll show that
in the next slide -
9:08 - 9:12in a little bit more detail.
-
9:12 - 9:13In order to focus
on the welfare costs, -
9:13 - 9:16I'm going to make
two simplifying assumptions. -
9:16 - 9:18First I'm going to assume
that the world price is so low -
9:18 - 9:21that if there were
complete free trade -
9:21 - 9:24there would be
no domestic supply whatsoever. -
9:24 - 9:26Think about a good like sugar,
-
9:26 - 9:27if we had complete
free trade in sugar -
9:27 - 9:28we in the United States
-
9:28 - 9:30would probably import
all of our sugar. -
9:30 - 9:35It's simply much more expensive
to produce sugar in Florida -
9:35 - 9:40than it is to produce sugar
in a country such as Brazil. -
9:40 - 9:41The problem is is that in Florida
-
9:41 - 9:42the opportunity cost of land
is very high -
9:42 - 9:45and the climate in Florida
is not ideal for growing sugar -
9:45 - 9:48so you have to invest
more real resources -
9:48 - 9:51to produce sugar in Florida
-
9:51 - 9:53than you do
to produce sugar in Brazil. -
9:53 - 9:56So if we had complete free trade,
there would be no domestic supply. -
9:56 - 10:02I'm also going to assume
that with the tariff or the tax -
10:03 - 10:04that it raises
the cost of imports so much -
10:04 - 10:07that there are no imports,
-
10:07 - 10:09that it's simply too expensive
to import the good. -
10:09 - 10:12Again this is actually
quite accurate or quite similar -
10:12 - 10:15to what we have
for the case of sugar. -
10:15 - 10:21With this very high tariff,
-
10:22 - 10:26the entire domestic consumption
is produced by domestic suppliers. -
10:26 - 10:29Our tariff equilibrium
is given by this point -
10:29 - 10:32and notice that
domestic consumption is lower. -
10:32 - 10:35Okay, so what are
the costs of the tariff? -
10:35 - 10:39There are two.
-
10:39 - 10:40First of all
the lost gains from trade. -
10:40 - 10:42The demand curve can be read
as the willingness to pay. -
10:42 - 10:47This is the willingness
to pay for sugar -
10:47 - 10:51by domestic consumers.
-
10:51 - 10:54The world supply curve can be read
as the cost of producing sugar. -
10:54 - 10:57This is the price
at which world suppliers -
10:57 - 11:00are willing to supply the sugar.
-
11:00 - 11:05So there's lots of gains
from trade here. -
11:05 - 11:08Consumers
are willing to pay more than the suppliers -
11:08 - 11:14require in order to produce the good. So
by getting together the consumers and the -
11:15 - 11:22world suppliers can earn these gains from
trade. With the tariff however, that's not -
11:22 - 11:26possible. With the tariff, we have reduced
consumption and with that reduced -
11:26 - 11:34consumption is lost gains from trade given
by this purple area. What else? Well the -
11:34 - 11:40US supply curve can be read as US costs.
So what happens with the tariff is instead -
11:40 - 11:45of producing the sugar in Brazil where
it's cheap to produce sugar we produce the -
11:46 - 11:50sugar in Florida where it's expensive to
produce sugar where we have to invest more -
11:50 - 11:56real resources in producing sugar. We've
got to invest more in irrigation, more in -
11:56 - 12:02valuable land, more in fertilizer. So
these are wasted resources, when the -
12:02 - 12:08domestic industry expands. Because of the
tariffs we invest more resources in -
12:08 - 12:10producing sugar than are necessary.
-
12:10 - 12:18It would be cheaper, we would be able to
import sugar using fewer resources. We -
12:18 - 12:23would be able to produce that sugar
internationally using fewer resources than -
12:23 - 12:29we can produce it in the Unites States.
What the tariff does is it switches -
12:29 - 12:34production from the low-cost world
producers to the high-cost domestic -
12:35 - 12:41producers, and that generates wasted
resources. Now in fact, with these numbers -
12:42 - 12:47we can calculate the sizes of the amount
of these wasted resources. What economists -
12:47 - 12:51do quite often is they make assumptions
about these supply curves and these demand -
12:51 - 12:57curves and they can make some of these
calculations. Let's take a quick look. So -
12:57 - 13:03with these numbers, we can calculate these
areas. This triangle for example is half -
13:03 - 13:08base times height. So the base is 20,
this is a base of 20. -
13:08 - 13:12The height is 20 minus 9, there's the 20,
there's the 9. -
13:12 - 13:18So the area of the triangle
is half base times height or 1.1 billion. -
13:18 - 13:23What about the deadweight loss triangle?
You do the same calculation it's 0.22 -
13:23 - 13:28billion. So with these kind of numbers we
can find out the cost of the sugar tariff -
13:28 - 13:35are $1.32 billion and economists do these kinds of
calculations all the time. Okay, let's -
13:36 - 13:40summarize and point out some further
reading. First, tariffs increase prices to -
13:40 - 13:44consumers so domestic consumption falls
and that creates a deadweight loss. -
13:45 - 13:51Second, tariffs divert production from low
cost world producers to high cost domestic -
13:51 - 13:56producers and that wastes resources. Now I
haven't said much here about the -
13:56 - 14:01distribution of the losses and gains,
exactly who benefits and who loses. -
14:01 - 14:06Let me give you just a short story.
Tariffs are bad for consumers who have to -
14:06 - 14:10pay more, they're good for domestic
producers who get to expand production. -
14:11 - 14:14They're bad overall precisely because of
these two reasons which I've just -
14:15 - 14:20described. If you want to look in detail,
I focused on the bad overall, if you want -
14:20 - 14:24more detail on dividing in between
consumers and producers and the political -
14:24 - 14:29economy of this, take a look at a lot of
different textbooks but the one of course -
14:29 - 14:33I would recommend, Cowan and Tabarrok,
Modern Principles of Economics, that will -
14:33 - 14:38go into more detail on the distribution.
Thanks. -
14:38 - 14:43- [Male] If you want to test yourself
click Practice Questions. Or, if you're -
14:43 - 14:45ready to move on just click Next Video.
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14:46 - 14:48♪ [music] ♪
- Title:
- Tariffs and Protectionism
- Description:
-
We’ll look at the costs and consequences of tariffs, quotas, and protectionism. How do tariffs affect consumers? What about producers? Who wins and who loses? Find out with this video.
We’ll apply the fundamentals we learned in the supply, demand, and equilibrium section of this course to real-world examples — like that of protectionism in the U.S. sugar industry — to determine lost gains from trade or deadweight loss, the tariff equilibrium vs. the free trade equilibrium, and the value of wasted resources as a result of tariffs.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomicsAsk a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/tariffs-quotas-protectionism-definition#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/arguments-against-trade
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 14:51
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