Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 3 Markets and Welfare
Chapter 9 of 36 Application: International Trade
Section 15 of 19
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1· jobs argument
2· national security argument
3· infant industry argument
4· unfair competition argument
5· protection as a bargaining chip argument
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5· Protection as a bargaining chip argument
Policymakers often argue trade restrictions are useful for trade bargaining.
Isoland can threaten to impose a tariff on textiles unless Neighborland removes its tariff on wheat from Isoland.
If Neighborland then removes its tariff, the result is freer trade and both countries benefit.
But, if Neighborland still does not remove its tariff, Isoland must choose between two bad options:
· carry out its threat and implement the trade restriction
· back down from its threat
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Per Figure A
Isoland should not retaliate against Neighborland’s import tariff with its own import tariff, nor even threaten to do so.
A tariff on imports from Neighborland would result in Isoland’s total surplus decreasing from 18 to 16.
Rather, Isoland’s government should pressure Neighborland’s government to remove their tariff.
Key to this pressure is educating the Neighborland people of the consumer surplus gains that would result from lower priced imports from Isoland.
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