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International Trade and Finance



                  Notes          are reelected at a greater rate when the economy is doing well, so you would think it would be in
                                 their self interest to prevent tariffs.
                                 Recall that tariffs are not harmful for everyone, and they have a distributive effect. Some people and
                                 industries gain when the tariff is enacted and others lose. The way gains and losses are distributed is
                                 absolutely crucial in understanding why tariffs along with many other policies are enacted. To
                                 understand the logic behind the policies we need to understand The Logic of Collective Action. My
                                 article titled The Logic of Collective Action discusses the ideas of a book by the same name, written
                                 by Mancur  Olson in 1965. Olson explains why economic policies are often to the benefit of smaller
                                 groups at the expense of larger ones. Take the example of tariffs placed on imported Canadian softwood
                                 lumber. We'll suppose the measure saves 5,000 jobs, at the cost of $200,000 per job, or a cost of
                                 1 billion dollars to the economy. This cost is distributed through the economy and represents just a
                                 few dollars to every person living in America. It is obvious to see that it's not worth the time and
                                 effort for any American to educate himself about the issue, solicit donations for the cause and lobby
                                 congress to gain a few dollars. However, the benefit to the American softwood lumber industry is
                                 quite large. The ten-thousand lumber workers will lobby congress to protect their jobs along with the
                                 lumber companies that will gain hundreds of thousands of dollars by having the measure enacted.
                                 Since the people who gain from the measure have an incentive to lobby for the measure, while the
                                 people who lose have no incentive to spend the time and money to lobby against the issue, the tariff
                                 will be passed although it may, in total, have negative consequences for the economy.
                                 You can meet the workers whose jobs will be lost if tariffs are not enacted by the government. Since
                                 the costs of the policies are distributed far and wide, you cannot put a face on the cost of a poor
                                 economic policy. Although 8 workers might lose their job for every job saved by a softwood lumber
                                 tariff, you will never meet one of these workers, because it is impossible to pinpoint exactly which
                                 workers would have been able to keep their jobs if the tariff was not enacted. If a worker loses his job
                                 because the performance of the economy is poor, you cannot say if a reduction in lumber tariffs
                                 would have saved his job. The nightly news would never show a picture of a California farm worker
                                 and state that he lost his job because of tariffs designed to help the lumber industry in Maine. The link
                                 between the two is impossible to see. The link between lumber workers and lumber tariffs is much
                                 more visible and thus will garner much more attention.
                                 The gains from a tariff are clearly visible but the costs are hidden, it will often appear that tariffs do
                                 not have a cost. By understanding this we can understand why so many government policies are
                                 enacted which harm the economy. If you'd like to ask a question about tariffs, taxation, international
                                 trade or any other topic or comment on this story.




                                              The gains from tariff policies are a lot more visible than the losses. You can see the
                                              saw mills which would be closed down if the industry is not protected by tariffs.

                                 Self-Assessment

                                 1. Choose the correct options:
                                     (i) Over the past several years, the volume of world trade has:
                                        (a) decreased because of increased government regulation of trade through tariffs and quotas
                                        (b) decreased because of the decline in incomes brought on by global recession
                                        (c) increased because of increased government regulation of trade through tariffs and quotas
                                        (d) increased because of improvements in communications and transportation
                                     (ii) A tariff:
                                        (a) raises the price of imported goods, increasing the demand for domestic substitutes
                                        (b) lowers the cost of producing domestic goods
                                        (c) offsets the effect of a quota
                                        (d) raises the price of domestic goods, lowering the demand for them


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