Protectionist versus Free Trade Policies

• This exercise should come after the chapters on welfare analysis and on international trade and tariffs in a principles of microeconomics or principles of macroeconomics course.
• Students should be knowledgeable about welfare analysis and be able to identify changes in consumer surplus, producer surplus, government revenue, and total welfare.
• There are no class size limitations
• This activity will take up to a class period, depending on the discussion length.

Overview

Prior to class, students listen and read the following:

• http://freakonomics.com/podcast/china-eat-americas-jobs/. In this episode, Steven Dubner, Freakonomics host, interviews David Autor, an MIT economist, about his research on the effects of trade on manufacturing jobs, paying particular attention to imports from China to the U.S.
• https://www.npr.org/sections/money/2018/03/30/598365735/episode-833-worst-tariffs-ever. In this NPR Planet Money episode, the Smoot-Hawley tariff act of 1930 is discussed, which provides an example of the negative consequences of tariffs.
• https://www.npr.org/sections/money/2018/04/13/602300490/episode-835-tariffied. In this NPR Planet Money episode, recent tariffs imposed by the U.S. and China are discussed.
• https://www.nytimes.com/2018/03/01/upshot/trump-tariff-steel-aluminum-explain.html. This NY Times article analyzes a steel tariff imposed by President Trump.

As the benefits of free trade have been questioned by some politicians, pundits, and voters, this activity asks students to consider winners and losers of free trade agreements. This activity is directly connected to the welfare analysis of trade policies covered in some principles of microeconomics and principles of macroeconomics courses. Recognizing that some workers may be hurt, students are asked to choose a trade policy that will maximize the well-being of all U.S. workers.

Throughout this exercise, students discuss the benefits and costs of different trade policies using welfare analysis, focusing on changes in consumer surplus, producer surplus, and government revenue. Students are asked to consider whether protectionist policies such as pulling out of free trade agreements or imposing tariffs are beneficial for the U.S. In particular, students should consider winners and losers from each policy. At the same time, students are asked to contemplate trade policies that maintain free trade agreements while imposing social safety nets for workers hurt by free trade. After this activity is completed, students are expected to understand that while free trade is beneficial overall, some workers may be hurt. To diminish some of the negative effects of free trade on some workers, free trade agreements could be accompanied by social programs.

Expected Student Learning Outcomes

Using a supply and demand diagram, students show the gains from trade for an importing country.

Using a supply and demand diagram, students identify the gains/losses to consumers and producers from trade.

Using a supply and demand diagram, students show the effect of a tariff on producer surplus, consumer surplus, government revenue, and total welfare.

Information Given to Students

We have learned about the benefits of trade. While economic analysis shows that free trade increases consumption for all trading partners, criticism against free trade has been expressed by several policy makers and voters. Trade proponents emphasize the positive net benefits of trade, increasing the economic pie for each trading partner and benefiting each country as a whole. Critics point to the distributional effects of trade in primarily importing countries, benefiting consumers with lower prices and harming some producers. In the U.S. some manufacturing workers have been made worse off as their labor is demanded less.

What is the best policy for the U.S. to follow to maximize the well-being of all U.S. workers?
A. Pull out of free trade agreements such as NAFTA that potentially harm U.S. manufacturing workers, in the hope that jobs in the manufacturing industries will return to the U.S.
B. Impose tariffs on imported manufactured goods to protect domestic manufacturing jobs that will reemploy workers.
C. Keep tariffs on imported goods low but provide special unemployment insurance for workers who lose their jobs due to free trade agreements in order to guarantee displaced workers retain their same living standard while they find a new job.
D. Keep tariffs on imported goods but establish and subsidize educational, training, and placement programs for workers who lose their jobs due to free trade agreements.

Protectionist versus Free Trade Policies (Microsoft Word 2007 (.docx) 15kB Jul16 18)

Prefatory Remarks:

President Trump has tweeted multiple times about trade during his campaign and while in office. He expressed his rejection for the TPP and he wants to renegotiate NAFTA. He has questioned the benefits of trade for the U.S. and has advocated for protectionist policies such as tariffs. Today, you are asked to use microeconomic theory to consider the benefits and costs of free trade and ways in which current trade policies can be improved.

During AE:

Each team should simultaneously reveal its choice. Teams are expected to choose between C and D. As long as the choices are supported by clear reasoning that uses welfare analysis and course materials, students attain the learning outcomes. Teams that base their choice on opinions or who choose A or B do not attain the learning outcomes.

Debriefing notes, including discussion questions:

• What is the most important reason for your choice?
• Consider the U.S. as an importer country, who, within the U.S., benefits from trade? Who is harmed by trade?
• What are ways to diminish the harm?
• Do tariffs benefit all workers? Do tariffs benefit the workers it intends to protect?
• Can tariffs bring back manufacturing jobs?
• Looking at the four policy alternatives, what are the arguments in favor and against them? What are their benefits? What are their costs?

Closing Remarks:
While economists generally agree that free trade makes trading partners better off as a whole, some underestimate the negative effects of trading policies on certain populations. While they acknowledge that some producers and workers would be worse off from free trade, they argue that the markets would adjust on their own. Specifically, economists assume unemployed workers can easily relocate to other jobs. This smooth transition to other occupations has been challenging for many unemployed workers. Looking back, more policies could have been implemented to help manufacturing unemployed workers transition to new jobs and occupations.

This activity can be assessed through exam or homework problems, in which students are asked to do the welfare analysis on a country that starts trading and that becomes an importing country. Each student can compare the consumer surplus, producer surplus, government revenue, and total welfare before and after trade is established.

Prior to class,
Listen to:

• http://freakonomics.com/podcast/china-eat-americas-jobs/. In this episode, Steven Dubner, Freakonomics host, interviews David Autor, an MIT economist, about his research on the effects of trade on manufacturing jobs, paying particular attention to imports from China to the U.S.
• https://www.npr.org/sections/money/2018/03/30/598365735/episode-833-worst-tariffs-ever. In this NPR Planet Money episode, the Smoot-Hawley tariff act of 1930 is discussed, which provides an example of the negative consequences of tariffs.
• https://www.npr.org/sections/money/2018/04/13/602300490/episode-835-tariffied. In this NPR Planet Money episode, recent tariffs imposed by the U.S. and China are discussed.

Read:

• https://www.nytimes.com/2018/03/01/upshot/trump-tariff-steel-aluminum-explain.html. This NY Times article analyzes a steel tariff imposed by President Trump.