Exploring Barriers to Trade

7. In order to help domestic automobile producers during the 1970s, the U.S. government sought ways to restrict sales of foreign automobiles, especially those made in Japan. In terms of a supply-demand diagram, the market would have allowed in Qe automobiles, but the government wanted only Qr to be sold. A restriction that accomplishes this goal will redistribute parts of the consumer and producer surpluses. (The parts that will be affected are labeled a, b, c, and d on the graph.)

Voluntary Quotas
a) One way to restrict is with a tariff. What would happen to areas a, b, c, and d with a tariff?

b) Another way to restrict is with a quota. A quota requires that the right to import be rationed in some way. Suppose that the government gave the right to import to domestic automobile companies. How would such a program have affected the four areas in the graph?

c) The government established neither a tariff nor a quota. Rather, it negotiated an agreement with the Japanese by which the Japanese automobile manufacturers voluntarily limited their sales to the U.S. How would such an agreement affect the four areas?

d) While Ronald Reagan was president, the agreement with the Japanese expired and he did not renew it. The Japanese automobile manufacturers, however, decided to continue limiting their sales to the U.S. Does this action indicate that the Japanese are poor businessmen?

8. When should we protect losers and when should we let them sink? Should we stop the following changes? If so, why? If not, why not?

a) New technology reduces the need for assembly workers by one half.
b) New technology makes an old product obsolete, shutting down the plants that made it.
c) Wal-Mart sells more efficiently than mom-&-pop retailers, forcing the latter out of business.
d) McDonald's outcompetes mom-&-pop cafes, forcing the latter out of business.
e) Call-center workers in India produce customer service more cheaply than call-center workers in Atlanta, leading to layoffs in Atlanta.
f) Textile workers in China can produce shirts at half the cost of workers in the U.S., leading to the elimination of shirt production in the U.S.

9. In addition to tariffs and quotas, safety and environmental regulations can be used to restrict international trade. One of the advantages of this form of protectionism is that it may not be declared illegal by the WTO. Search the internet and find what the WTO is. And then search news and the web for "safety" and "protectionism" and see if you can find examples of countries using regulations in an effort to protect their domestic producers. (Make sure you include those urls!)

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