chapter
International Trade Policy
After studying this chapter you
will be able to
Explain how markets work with
international trade
Identify the gains from
international trade and its
winners and losers
Explain the effects of
international trade barriers
Explain and evaluate
arguments used to justify
restricting international trade
iPods, Wii games, and surfboards are just three of the items you
might buy that are not produced in Australia. In fact, most of the goods
that you buy are produced abroad, often in Asia, and transported here
29
in container ships or cargo jets. And it’s not only goods produced abroad
that you buy—it is services too. When you make a technical support
call, most likely you’ll be talking with someone in India, or to a
voice-recognition system that was programmed in India. Satellites or fibre
cables will carry your conversation along with huge amounts of other voice
messages, video images, and data. We pay for all these goods and
services with coal and other items that Australia exports.
All these activities are part of the globalisation process that is having a
profound effect on our lives. Globalisation is controversial and generates
heated debate. Many Australians want to know how we can compete with
people whose wages are a fraction of our own. Why do we go to such
lengths to trade and communicate with others in faraway places? You will
find some answers in this chapter. And in Reading Between the Lines at
the end of the chapter, you can apply what you’ve learned and examine
the changes in Australian international trade policy in the car industry.
689
PA R T 6 MACROECONOMIC POLICY
How Global Markets Work
Because we trade with people in other countries,
the goods and services that we can consume are
not limited by what we can produce. The goods
and services we buy from other countries are our
imports; and the goods and services we sell to
people in other countries are our exports.
INTERNATIONAL TRADE TODAY
Global trade today is enormous. In 2008, global
exports and imports were more than half the value
of global production. The United States is the
world’s largest international trader. Germany and
China, which rank second and third behind the
United States, lag by a large margin. Australia is a
small but important player on the global stage.
In 2007/08, Australian exports were $234 bil-
lion, which is about 21 per cent of the value of
Australian production. Total Australian imports
were $255 billion, which is about 23 per cent of the
value of total expenditure in Australia.
Australia trades both goods and services. In
2008, exports of services were about 22 per cent of
total exports, and imports of services were about
20 per cent of total imports.
WHAT DRIVES INTERNATIONAL TRADE?
Comparative advantage is the fundamental force
that drives international trade. Comparative
advantage (see Chapter 2, p. 42) is a situation in
which a person can perform an activity or produce
a good or service at a lower opportunity cost than
anyone else. This same idea applies to nations.
We can define national comparative advantage
as a situation in which a nation can perform an
activity or produce a good or service at a lower
opportunity cost than any other nation.
The opportunity cost of producing a car is lower
in Japan than in Australia, so Japan has a com-
parative advantage in producing cars. The oppor-
tunity cost of producing coal is lower in Australia
than in Japan, so Australia has a comparative
advantage in producing coal.
You saw in Chapter 2 how Liz and Joe reap gains
from trade by specialising in the production of the
good at which they have a comparative advantage
and trading with each other. Both are better off.

690
Items Most Traded by Australia
Trading Coal for Cars
The figure shows the five largest exports and imports for
Australia. Our coal, iron ore, and education services
exports pay for our petroleum (crude and refined) and
car imports. Our personal travel is a large item of both
exports (foreigners visiting Australia) and imports (our
travel overseas).
Exports
Coal
Iron ore
Education services
Gold
Personal travel
Imports
Crude petroleum
Cars
Personal travel
Refined petroleum
Freight services
0 5 10 15 20
Value (trillions of dollars per year)
Australian Exports and Imports
Source of data: ABS, Cat. No. 5386.0.
This same principle applies to trade among
nations. Because Japan has a comparative advan-
tage at producing cars and Australia has a com-
parative advantage at producing coal, the people
of both countries can gain from specialisation and
trade. Japan can buy coal from Australia at a lower
opportunity cost than that at which Japanese firms
can produce it. And Australians can buy cars from
Japan at a lower opportunity cost than that at
which firms in Australia can produce them. Also,
through international trade, Japanese producers
can get higher prices for their cars and Australian
producers can sell coal for a higher price. Both
countries gain from international trade.
Let’s now illustrate the gains from trade that
we’ve just described by studying demand and
supply in the global markets for cars and coal.
 INTERNATIONAL TRADE POLICY CHAPTER 29

WHY AUSTRALIA IMPORTS CARS The price would be $24,000 a car and 2 million
Australia imports cars because the rest of the world cars a year would be produced by Australian car
has a comparative advantage in producing cars. makers and bought by Australian consumers.
Figure 29.1 illustrates how this comparative advan- Figure 29.1(b) shows the market for cars with
tage generates international trade and how trade international trade. Now the price of a car is deter-
affects the price of a car and the quantities mined in the world market, not Australia’s domes-
produced and bought. tic market. The world price is less than $24,000 a
The demand curve DA and the supply curve SA car, which means that the rest of the world has
show the demand and supply in Australia’s domes- a comparative advantage in producing cars. The
tic market only. The demand curve tells us the world price line shows the world price at $15,000
quantity of cars that Australians are willing to buy a car.
at various prices. The supply curve tells us the The Australian demand curve DA tells us that at
quantity of cars that Australian car makers are $15,000 a car Australians buy 3 million cars a year.
willing to sell at various prices—that is, the quant- The Australian supply curve SA tells us that at
ity supplied at each price when all cars sold in $15,000 a car Australian car makers produce
Australia are produced in Australia. 1 million cars a year. To buy 3 million cars when
Figure 29.1(a) shows what the Australian car only 1 million are produced in Australia, we must
market would be like with no international trade. import 2 million cars.

FIGURE 29.1

A Market with Imports

Price (thousands of dollars per car)

Price (thousands of dollars per car)

45 45

SA SA
Quantity Quantity
produced bought
No trade decreases increases
equilibrium
30 30
Price with
no trade
24 24
Price World
falls price

15 15
Quantity
bought equals DA Quantity DA
quantity imported
produced Quantity Quantity
produced bought

0 1 2 3 0 1 2 3
Quantity (millions of cars per year) Quantity (millions of cars per year)
(a) Equilibrium with no international trade (b) Equilibrium in a market with imports

Part (a) shows the Australian market for cars with no inter-
national trade. The domestic demand curve DA and domestic
supply curve SA determine the price of a car at $24,000 and
the quantity produced and bought in Australia at 2 million
cars a year.
Part (b) shows the Australian market for cars with inter-
national trade. World demand and world supply determine
the world price of a car, which is $15,000. The price in the
Australian market falls to $15,000 a car. Australian purchases
of cars increase to 3 million a year, and Australian produc-
tion of cars decreases to 1 million a year. Australia imports
2 million cars a year.

animation

691
PA R T 6 MACROECONOMIC POLICY

FIGURE 29.2

A Market with Exports

Price (dollars per tonne)

Price (dollars per tonne)

100 100
Quantity Quantity
bought produced
decreases increases
SA SA

75 75
No trade
equilibrium World
Price price
Price with rises
no trade
50 50

25 25
Quantity bought Quantity
equals quantity exported DA
DA
produced Quantity Quantity
bought produced

0 50 100 150 175 0 50 100 150 175 200

Quantity (millions of tonnes per year) Quantity (millions of tonnes per year)
(a) Equilibrium with no international trade (b) Equilibrium in a market with exports

In part (a), the Australian market with no international trade,
the domestic demand curve DA and the domestic supply curve
SA determine the price of coal at $50 a tonne and 100 mil-
lion tonnes are produced and bought each year.
In part (b), the Australian market with international trade,
animation
world demand and world supply determine the world price of
coal at $75 a tonne. The price in Australia rises. Australian
coal mines increase production to 175 million tonnes a year,
and Australians decrease their purchases to 50 million tonnes
a year. Australia exports 125 million tonnes of coal a year.

WHY AUSTRALIA EXPORTS COAL Australia has a comparative advantage in produc-

Figure 29.2 illustrates international trade in coal. ing coal. The world price line shows the world price
The demand curve DA and the supply curve SA at $75 a tonne.
show the demand and supply in Australia’s domes- The Australian demand curve DA tells us that at
tic market only. The demand curve tells us the $75 a tonne Australian power stations buy 50 mil-
quantity of coal that power stations in Australia lion tonnes a year. The Australian supply curve SA
are willing to buy at various prices. The supply tells us that at $75 a tonne Australian mines pro-
curve tells us the quantity of coal that Australian duce 175 million tonnes a year. The quantity pro-
mines are willing to sell at various prices. duced in Australia minus the quantity purchased
Figure 29.2(a) shows what the Australian market by Australian power stations is the quantity
for coal would be like with no international trade. exported, which is 125 million tonnes a year.
The price of coal would be $50 a tonne and
100 million tonnes a year would be produced by WINNERS, LOSERS, AND THE NET GAIN FROM
Australian mines and bought by Australian power TRADE
stations. International trade has winners but it also has los-
Figure 29.2(b) shows the Australian market for ers. That's why you often hear people complaining
coal with international trade. Now the price of coal about international competition. We're now going
is determined in the world market and the world to see who wins and who loses from international
price is higher than $50 a tonne, which means that trade. You will then be able to understand who

 692

complains about international competition and
why. You will learn why we hear producers com-
plaining about cheap foreign imports. You will also
see why we never hear consumers of imported
goods and services complaining and why we never
hear exporters complaining except when they
want greater access to foreign markets.
Gains and Losses from Imports
We measure the gains and losses from imports by
examining their effect on the price paid and the
quantity bought by domestic consumers and the
effect on the price received and the quantity sold by
domestic producers.
Consumers Gain from Imports
When a country freely imports something from the
rest of the world, it is because the rest of the world
has a comparative advantage at producing that
item. Compared to a situation with no internation-
al trade, the price paid by the consumer falls and
the quantity consumed increases. It is clear that the
consumer gains. The greater the fall in price and
increase in quantity consumed, the greater is the
gain to the consumer.
Domestic Producers Lose from Imports
Compared with a situation with no international
trade, the price received by a domestic producer of
an item that is imported falls. Also the quantity
sold by the domestic producer of an item that is
imported decreases. Because the domestic producer
of an item that is imported sells a smaller quantity
and for a lower price, this producer loses from inter-
national trade. Import-competing industries shrink
in the face of competition from cheaper foreign-
produced imports.
The profits of firms in import-competing indus-
tries fall, so these firms cut their workforce. In these
industries, unemployment increases and wage
rates fall.
Gains and Losses from Exports
Just as we did for imports, we can measure the
gains and losses from exports by looking their
effect on the price paid and quantity bought by
domestic consumers and the effect on the price
received and quantity sold by domestic producers.
Domestic Consumers Lose from Exports
When a country exports something to the rest of
INTERNATIONAL TRADE POLICY CHAPTER 29
the world, it is because the country has a compar-
ative advantage at producing that item. Compared
to a situation with no international trade, the price
paid by the consumer rises and the quantity
consumed in the domestic economy decreases. The
domestic consumer loses. The greater the rise in
the price and decrease in the quantity bought, the
greater is the consumers' loss.
Domestic Producers Gain from Exports
Compared with a situation with no international
trade, the price received by a domestic producer of
an item that is imported rises. Also, the quantity
sold by the domestic producer of a good or service
that is also exported increases. Because the dom-
estic producer of an item that is exported sells a
larger quantity and for a higher price, this produc-
er gains from international trade. Export industries
expand in the face of global demand for their
product.
The profits of firms that produce exports rise, so
these firms expand their workforce. Unemploy-
ment in these industries decreases and wage rates
rise. When these industries have a geographical
concentration, such as coal and iron ore in Queens-
land and Western Australia, an entire region can
boom.
Net Gain
Producers of exported goods and consumers of
imported goods gain. Consumers of exported goods
and domestic producers of imported goods lose. But
the gains are greater than the losses. In the case of
imports, the consumer gains what the producer
loses and then gains even more on the cheaper
imports. In the case of exports, the producer gains
what the consumer loses and then gains even more
on the items it exported. So international trade
provides a net gain for a country.
■ REVIEW QUIZ
1 Explain the effects of imports on the domestic price and
quantity, and the gains and losses of consumers and
producers.
2 Explain the effects of exports on the domestic price and
quantity, and the gains and losses of consumers and
producers.
Work Study Plan 29.1
and get instant feedback.
693
PA R T 6 MACROECONOMIC POLICY

International Trade Restrictions tariffs is a strong one. First, they provide revenue
to the government. Second, they enable the gov-
Governments use four sets of tools to influence ernment to satisfy the self-interest of the people
international trade and protect domestic industries who earn their incomes in the import-competing
from foreign competition. They are industries. But as you will see, tariffs and other
Tariffs restrictions on international trade decrease the
Import quotas gains from trade and are not in the social interest.
Other import barriers Let’s see why.
Export subsidies The Effects of a Tariff
To see the effects of a tariff, let’s return to the exam-
TARIFFS ple in which Australia imports cars. With free
A tariff is a tax on a good that is imposed by the trade, the cars are imported and sold at the world
importing country when an imported good crosses price. Then, under pressure from Australian car
its international boundary. For example, the gov- makers, the government imposes a tariff on
ernment of India imposes a 100 per cent tariff on imported cars. Buyers of cars must now pay the
wine imported from Australia. So when an Indian world price plus the tariff. Several consequences
firm imports a $10 bottle of Australian wine, it follow, as Fig. 29.3 illustrates.
pays the Indian government a $10 import duty. Figure 29.3(a) shows the situation with free
The temptation for governments to impose international trade. Australia produces 1 million

FIGURE 29.3

The Effects of a Tariff

Price (thousands of dollars per car)

Price (thousands of dollars per car)

45 45

SA SA

Tariff
revenue
30 30
World price
plus tariff
World 21
price Tariff

15 15
Imports DA
with free DA Imports
trade with tariff
World
price

0 1 2 3 0 1 2 3
Quantity (millions of cars per year) Quantity (millions of cars per year)
(a) Free trade (b) Market with tariff

The world price of a car is $15,000. With free trade in part Australia rises to $21,000 a car. Australian production
(a), Australians buy 3 million cars a year, produce 1 million increases, purchases decrease, and imports decrease. The
cars a year, and import 2 million a year. government collects a tariff revenue of $6,000 on each car
With a tariff of $6,000 a car in part (b), the price in imported, which is shown by the purple rectangle.

animation


694
 INTERNATIONAL TRADE POLICY CHAPTER 29

cars a year and imports 2 million a year at the
world price of $15,000 a car. Figure 29.5(b) shows
what happens with a tariff set at $6,000 a car. The
following changes occur in the market for cars:
The price of a car in Australia rises by $6,000.
The quantity of cars bought in Australia
decreases.
The quantity of cars produced in Australia
increases.
The quantity of cars imported into Australia
decreases.
The Australian government collects a tariff
revenue.
Rise in Price of a Car
Australians must pay the world price plus the
tariff, so the price of a car rises by $6,000 to
$21,000. Figure 29.3(b) shows the new domestic
price line, which lies $6,000 above the world price.
Decrease in Purchases
The higher price of a car brings a decrease in the
quantity demanded along the demand curve.
Figure 29.3(b) shows the decrease from 3 million
cars a year to 2.25 million a year.
Increase in Domestic Production
The higher price of a car stimulates domestic pro-
duction, and Australian car makers increase the
quantity supplied along the supply curve. Figure
29.3(b) shows the increase from 1 million cars to
1.75 million cars a year.
Decrease in Imports
Car imports decrease by 1.5 million, from 2 million
to 0.5 million a year. Both the decrease in pur-
chases and the increase in domestic production
contribute to this decrease in imports.
Tariff Revenue
The government’s tariff revenue is $3 million—
$6,000 a car on 0.5 million imported cars—shown
by the purple rectangle.
Winners and Losers from a Tariff
A tariff on an imported good creates winners and
losers and a social loss. When the government of
Australia imposes a tariff on an imported good,
■ Australian consumers of the good lose.
■ Australian producers of the good gain.
■ Australian consumers lose more than Australian
producers gain: Society loses.
Australian Consumers of the Good Lose
Because the price of a car in Australia rises, the
quantity of cars demanded decreases. The com-
bination of a higher price and smaller quantity

Australian International Trade Restrictions 25

(percentage contribution to gross profit)

Down, But Not Out

Australia imposes tariffs on a wide range of manu- 20 All others
factured goods including cars, textiles, clothing, and
footwear. Before 1970 the average tariff on imports of 15
manufactured products into Australia was among the
highest of the industrialised economies. Only New
10
Zealand had a similarly high level of tariffs.
The mid-1970s was a turning point in Australia’s pro-
tection history. All tariffs were cut by 25 per cent in 1973, 5
Protection

and further cuts in the late 1970s brought the total reduc- Agriculture
tion to 40 per cent. Further tariff cuts during the 1990s
0
put most tariff rates at 5 per cent or less, but those pro- 1945–49 1960–64 1975–79 1990–94 2005–07
tecting the car and textiles producers remained higher. Period
The figure provides an indication of the degree of
Australian International Trade Restriction
protection based on its contribution to gross profits. Contribution to Profit
Source of data: Kym Anderson, ‘Manufacturing Protection’s Impact on Agricultural Incentives in Australia’, School of Economics,
University of Adelaide, Working Paper, November 2008.


695
PA R T 6 MACROECONOMIC POLICY

bought makes the consumer worse off when a tar-
iff is imposed. By comparing Fig. 29.3(a) with free
international trade and Fig. 29.3(b) with a tariff,
you can see the sources of the loss of consumers.
Australian Producers of the Good Gain
Because the price of an imported car rises,
Australian car producers are able to sell their cars
for the world price plus the tariff. At the higher
price, the quantity of cars supplied by Australian
producers increases. The combination of a higher
price and larger quantity produced increases pro-
ducers’ profits. So Australian producers gain from
the tariff.
Australian Consumers Lose More than Australian
Producers Gain
Consumers lose from the tariff for three reasons:
1 They pay a higher price to domestic producers.
2 They consume a smaller quantity of the good.
3 They pay tariff revenue to the government.
The tariff revenue is a loss to consumers but it is not
a social loss. The government can use the tax rev-
enue to buy public services that consumers value.
But the other two sources of consumer loss include
some social losses.
There is a social loss because part of the higher
price paid to domestic producers pays the higher
cost of domestic production. The increased domes-
tic production could have been obtained at a lower
cost as an import. There is also a social loss from
the decreased quantity of the good consumed at
the higher price.
IMPORT QUOTAS
We now look at the second tool for restricting trade:
import quotas. An import quota is a restriction that
limits the maximum quantity of a good that may
be imported in a given period. Australia does not
impose import quotas, but Australian exporters
lose because of other countries’ import quotas.

Failure in Doha nations greater access to the rich world’s markets,

especially for farm products.
Self-Interest Beats the Social Interest
Developing nations, led by Brazil, China, India,
The World Trade Organization (WTO) is an inter-
and South Africa, want access to the farm product
national body established by the world’s major trading
markets of the rich world, but they also want to protect
nations for the purpose of supervising international trade
their infant industries.
and lowering the barriers to trade.
With two incompatible positions, these negotia-
In 2001, at a meeting of trade ministers from all the
tions are stalled and show no signs of a breakthrough.
WTO member-countries held in Doha, Qatar, it was
The self-interest of rich and developing nations is
agreed to begin negotiations to lower tariff barriers and
preventing the achievement of the social interest.
quotas that restrict international trade in farm products
and services. These negotiations are called
the Doha Development Agenda, or the
Doha Round.
In the period since 2001, thousands of
hours of conferences in Cancún in 2003,
Geneva in 2004, and Hong Kong in 2005,
and ongoing meetings at WTO head-
quarters in Geneva, costing millions of
taxpayers’ dollars, have made disappoint-
ing progress.
Rich nations, led by the United States,
the European Union, and Japan, want
greater access to the markets of developing
nations in exchange for allowing those


696
 INTERNATIONAL TRADE POLICY CHAPTER 29

We’ll explain and illustrate the effects of an 45 million tonnes a year, the quantity of beef
import quota on both the importing and the produced increases to 35 million tonnes a year,
exporting country. To be as clear as possible, we’ll and the quantity of beef imported decreases to the
pretend that Australia (exporter) and the United quota quantity of 10 million tonnes a year.
States (importer) are the only countries and we’ll The import quota creates winners and losers.
study the effects of a U.S. quota on beef imports.
Winners and Losers from an Import Quota
A quota on an imported good creates winners and
The Effects on the Importing Country
losers and a social loss. When the U.S. government
When the United States imposes a quota on beef
imposes a quota on an imported good,
imports, the U.S. price rises, the quantity bought
U.S. consumers of the good lose.
decreases, and the quantity produced in the United
U.S. producers of the good gain.
States increases. Figure 29.4(a) illustrates the
U.S. importers of the good gain.
effects.
Society loses.
With free trade, U.S. beef imports are 40 million
tonnes. With an import quota of 10 million tonnes U.S. Consumers of the Good Lose
a year, the U.S. supply curve of beef becomes the Because the price of beef in the United States rises,
domestic supply curve SUS plus the quantity that the quantity of beef demanded decreases. The com-
the import quota permits. So the supply curve is bination of a higher price and smaller quantity
SUS + quota. The price of beef rises to $20 per kilo- bought makes consumers worse off when an
gram, the quantity of beef bought decreases to import quota is imposed.

FIGURE 29.4

The Effects of an Import Quota on the Importing Country

Price (dollars per kilogram)

Price (dollars per kilogram)

40 40

SUS SUS

30 30
SUS + quota
Price with
quota

20 World 20 World
price price

15 15
Imports
Quota with quota
10 DUS 10 DUS
Free trade Free trade
imports imports

0 20 40 60 80 0 20 35 45 60 80
Quantity (millions of tonnes per year) Quantity (millions of tonnes per year)
(a) Free trade (b) Market with import quota
With free international trade in part (a), Americans buy 60 supply of beef in the United States. The price of beef rises.
million tonnes of beef, produce 20 million tonnes, and import U.S. production increases along the SUS curve, purchases
40 million tonnes. With an import quota of 10 million tonnes decrease along the DUS curve, and U.S. imports decrease to
of beef a year, the curve SUS + quota in part (b) shows the 20 million tonnes. A social loss results.

animation

 697
PA R T 6 MACROECONOMIC POLICY
U.S. Producers of the Good Gain
Because the price of beef in the United States rises,
U.S. beef producers increase production. The com-
bination of a higher price and larger quantity
produced increases producers’ profits. So U.S. pro-
ducers gain from the import quota.
Importers of the Good Gain
The importer is able to buy beef on the world mar-
ket at the world price and sell it in the U.S. market
at the domestic price. Because the U.S. price
exceeds the world price, the importer gains.
Society Loses
Society loses because the loss to consumers exceeds
the gains of domestic producers and importers. Just
as with a tariff, an import quota creates a social
loss because part of the the higher price paid to
domestic producers pays the higher cost of domes-
tic production. There is also a social loss from the
decreased quantity of the good consumed at the
higher price.
Tariff and Import Quota Compared
The essential difference between a tariff and an
import quota is that a tariff brings in revenue for
the government while the quota brings in revenue
for the importer. All the other effects are the same,
provided that the quota is set at the same quantity
of imports that result from the tariff.
The Effects on the Exporting Countries
An import quota also imposes losses, gains, and a
social loss on the countries whose exports suffer
from the import quota. To see how, we’ll suppose
that Australia supplies all U.S. beef imports. So a
quota on U.S. beef imports imposes a limit on
Australian beef exports.
The U.S. import quota lowers the price of beef in
Australia, increases the quantity of beef bought in
Australia, decreases the quantity of beef produced
in Australia, and decreases Australia’s exports.
Figure 29.5(a) illustrates the effects.
With free trade, Australian beef exports are
40 million tonnes. When the U.S. government
imposes an import quota of 10 million tonnes, the
demand curve for Australian beef becomes the
Australian demand curve DA plus the quantity
that the U.S. import quota permits. So the demand
curve for Australian beef becomes DA + quota. The

698
price of beef falls to $12 per kilogram, the quantity
of beef bought in Australia increases to 35 million
tonnes a year, the quantity of beef produced in
Australia decreases to 45 million tonnes a year,
and the quantity of beef exported by Australia
decreases to the U.S. quota of 10 million tonnes a
year.
Winners, Lossers, and Social Loss from an
Import Quota
A U.S. import quota creates winners and losers in
Australia because
Australian consumers of the good gain.
Australian producers of the good lose.
Society loses.
Australian Consumers of the Good Gain
Because the price in Australia falls, the quantity of
beef demanded increases. The combination of a
lower price and larger quantity bought makes con-
sumers better off when the U.S. import quota is
imposed.
Australian Producers of the Good Lose
Because the price of beef in Australia falls, beef
producers decrease production. The combination of
a lower price and smaller quantity produced
decreases producers’ profits. So Australian produc-
ers lose from the U.S. import quota.
Society Loses
Society loses from the U.S. import quota. The gain
to consumers is a transfer from producers. But pro-
ducers lose even more. They sell a smaller quantiy
of exports at a lower price. This additional loss to
exporters (minus their lower production costs) is a
social loss.
OTHER IMPORT BARRIERS
Two sets of policies that influence imports are
Health, safety, and regulation barriers
Voluntary export restraints
Health, Safety, and Regulation Barriers
Thousands of detailed health, safety, and other reg-
ulations restrict international trade. For example,
Australian food, horticultural, and animal imports
are examined by quarantine officials to safeguard
Australia’s food supply and the plants and animals
on which safe and high-quality food depends.
 INTERNATIONAL TRADE POLICY CHAPTER 29

FIGURE 29.5

The Effects of an Import Quota on the Exporting Country

Price (dollars per kilogram)

Price (dollars per kilogram)

18 18
SA SA
Quota

15 15

12 World 12 World
price price
Price with
quota

DA + quota
Exports
6 6
with quota
Free trade DA Free trade DA
exports exports

0 20 40 60 80 0 20 35 45 60 80
Quantity (millions of tonnes per year) Quantity (millions of tonnes per year)
(a) Free trade (b) Exports when other countries have import quota

With free international trade in part (a), Americans buy 60
million tonnes of beef, produce 20 million tonnes, and import
40 million tonnes.
With a U.S. import quota of 10 million tonnes of
Australian beef a year, the curve DA + quota in part (b) shows
animation
the demand for beef in Australia. The price in Australia falls
below the world price, production decreases along the SA
curve, purchases increase along the DA curve, and exports
decrease. Australian consumers gain, Australian producers
lose, and the loss exceeds the gain. A social loss arises.

Since 1921, Australia has banned imports of for producers in other countries—not only in
apples from New Zealand, making the argument Australia but also in the poorest regions of the
that it wants to stop the spread of fireblight, which world, notably in Africa and Central and South
is a disease that damages apple trees. The ban was America—to compete in global markets.
lifted in 2007, but apples can be imported only
after the use of thorough phytosanitary measures.
■ REVIEW QUIZ
EXPORT SUBSIDIES 1 What tools do governments use to restrict international
An export subsidy is a payment by the government trade?
to the producer of an exported good. Export sub- 2 Explain the effects of a tariff on domestic production,
sidies are illegal under most international agree- the quantity bought, and the price.
ments, including those to which Australia is a 3 Explain who gains and who loses from a tariff and why
party. They are also illegal under the rules of the the losses exceed the gains.
World Trade Organization. 4 Explain the effects of an import quota on domestic
Although export subsidies are illegal, the subsi- production, consumption, and price.
dies that the U.S. and European Union govern- 5 Explain who gains and who loses from an import quota
ments pay to farmers end up increasing domestic and why the losses exceed the gains.
production, some of which gets exported. These Work Study Plan 29.2
exports of subsidised farm products make it harder and get instant feedback.

699
PA R T 6 MACROECONOMIC POLICY
The Case Against Protection
For as long as countries and international trade
have existed, people have debated whether a coun-
try is better off with free international trade or with
protection from foreign competition. The debate
continues, but for most economists a verdict has
been delivered and it is the one you have just seen.
Protection creates deadweight losses. We’ve seen
the most powerful case for free trade in the exam-
ple of how Australia (and all countries) benefit
from their comparative advantage. But there is a
broader range of issues in the free-trade versus
protection debate. Let’s review these issues.
Two classical arguments for restricting inter-
national trade are that protection is needed to:
Establish an infant industry
Counteract dumping
INFANT-INDUSTRY ARGUMENT
An infant industry is a new industry. The infant-
industry argument is that a new industry must be
protected from international competition until it
grows into a mature industry that can compete in
world markets. The argument is based on the idea
of dynamic comparative advantage which can arise
from learning-by-doing (see Chapter 2, p. 45).
Learning-by-doing is a powerful engine of pro-
ductivity growth, and comparative advantage does
evolve and change because of on-the-job experi-
ence. But these facts do not justify protection.
First, the infant-industry argument is valid only
if the benefits of learning-by-doing not only accrue
to the owners and workers of the firms in the infant
industry but also spill over to other industries and
parts of the economy. For example, there are huge
productivity gains from learning-by-doing in the
manufacture of cars.
But almost all of these gains benefit the share-
holders and workers of Ford, Holden, and other car
producers. Because the people making the deci-
sions, bearing the risk, and doing the work are the
ones who benefit, they take the dynamic gains into
account when they decide on the scale of their
activities. In this case, almost no benefits spill over
to other parts of the economy, so there is no need
for government assistance to achieve an efficient
outcome.

700
Second, even if the case is made for protecting
an infant industry, it is more efficient to do so by
giving the firms in the industry a subsidy, which is
financed out of taxes. Such a subsidy would
encourage the industry to mature and to compete
with efficient world producers and keep the price
faced by consumers at the world price.
DUMPING ARGUMENT
Dumping occurs when a foreign firm sells its
exports at a lower price than its cost of production.
Dumping might be used by a firm that wants to
gain a global monopoly. In this case, the foreign
firm sells its output at a price below its cost to drive
domestic firms out of business. When the domestic
firms have gone, the foreign firm takes advantage
of its monopoly position and charges a higher price
for its product. Dumping is illegal under the rules
of the WTO and is usually regarded as a justifica-
tion for temporary tariffs, which are called counter-
vailing duties.
But there are powerful reasons to resist the
dumping argument for protection. First, it is virtu-
ally impossible to detect dumping because it is
hard to determine a firm’s costs. As a result, the test
for dumping is whether a firm’s export price is
below its domestic price. But this test is a weak one
because it can be rational for a firm to charge a low
price in a market in which the quantity demanded
is highly sensitive to price and a higher price in a
market in which demand is less price-sensitive.
Second, it is hard to think of a good that is pro-
duced by a global monopoly. So even if all the
domestic firms in some industry were driven out of
business, it would always be possible to find alter-
native foreign sources of supply and to buy
the good at a price determined in a competitive
market.
Third, if a good or service were a truly global
monopoly, the best way of dealing with it would be
by regulation—just as in the case of domestic
monopolies (see Chapter 10, pp. 235–37). Such reg-
ulation would require international cooperation.
The two arguments for protection that we’ve just
examined have an element of credibility. The
counterarguments are in general stronger, howev-
er, so these arguments do not make the case for

protection. But they are not the only arguments
that you might encounter. There are other new
arguments against globalisation and for protec-
tion. The most common ones are that protection:
Saves jobs
Allows us to compete with cheap foreign labour
Penalises lax environmental standards
Prevents rich countries from exploiting develop-
ing countries
SAVES JOBS
First, free trade does cost some jobs, but it also
creates other jobs. It brings about a global ration-
alisation of labour and allocates labour resources
to their highest-valued activities. International
trade in textiles has cost tens of thousands of jobs
in Australia, Europe, and the United States as tex-
tile mills and other factories have closed. But tens
of thousands of jobs have been created in other
countries as their textile mills opened. And tens of
thousands of Australian, European, and American
workers got better-paying jobs than as textile work-
ers because new export industries expanded and
created new jobs. More jobs have been created than
destroyed.
Although protection does save particular jobs, it
does so at a high cost. This cost has been most thor-
oughly studied in the U.S. economy where it is
estimated that import quotas on textiles (now
removed) cost a typical family $160 a year and
each textile job saved cost $221,000 a year.
Imports not only destroy jobs, but they also
create jobs for retailers that sell imported goods
and for firms that service those goods. Imports
also create jobs by creating incomes in the rest of
the world, some of which are spent on Australian-
produced goods and services.
ALLOWS US TO COMPETE WITH CHEAP
FOREIGN LABOUR
Relatively high wages don’t imply that an econo-
my cannot compete. Wages are higher, other
things being equal, the higher is the productivity of
labour. And even though Australian workers are
more productive on average than lower-paid work-
ers in some of our trading partners, Australian
labour is also relatively more productive at some
activities than others. For example, the productiv-
INTERNATIONAL TRADE POLICY CHAPTER 29
ity of Australian labour may be higher in produc-
ing movies, financial services, and some computer
software than it is in assembling cars.
These are activities in which Australia has a
comparative advantage. By engaging in free trade,
we can increase the production of the goods in
which we have a comparative advantage and
increase the imports of goods in which our trading
partners have a comparative advantage. We can
then make both ourselves and our trading partners
better off.
PENALISES LAX ENVIRONMENTAL STANDARDS
It is argued that because some low-income coun-
tries keep costs low by having a poor environmen-
tal record, we should put a tariff on the goods that
we import from them.
In reply, it isn’t true that all lower-income
economies have lower environmental protection
standards than higher-income economies. While
the environmental record in some poor countries is
low—in particular, in the former communist
economies of Eastern Europe—many do have
similar standards and do enforce them. Also, the
demand for higher environmental standards in
lower-income economies increases with income.
Developing countries have the means to match
their aspirations as their incomes rise. The best
hope for a better environmental record in lower-
income economies is rapid income growth. We
have seen how free trade can contribute to rapid
income growth. Thus free trade, not protection, in
the long run can help the environment.
PREVENTS RICH COUNTRIES FROM
EXPLOITING DEVELOPING COUNTRIES
Another new argument for protection is that inter-
national trade must be restricted to prevent the
people of the rich industrial world from exploiting
the poorer people of the developing countries, forc-
ing them to work for slave wages.
Wage rates in some developing countries are,
indeed, very low, and this fact is disturbing and
calls for intelligent action to remedy the situation.
Trading with developing countries is one such
action. Trade increases the demand for the goods
that these countries produce and, more significant-
ly, increases the demand for their labour. When the
701
PA R T 6 MACROECONOMIC POLICY

demand for labour in developing countries in- you saw in the previous section must be large
creases, the wage rate also increases. So, far from enough to make it worth incurring the costs of
exploiting people in developing countries, inter- communication and transport. If the cost of pro-
national trade improves their opportunities and ducing a T-shirt in China isn’t lower than the cost
increases their incomes. in Australia by an amount that exceeds the cost of
transporting a shirt from China to Australia, then
The arguments for protection that we’ve
it is more efficient to produce shirts in Australia
reviewed leave free trade unscathed. But a new
and avoid the transport costs.
phenomenon is at work in our economy: offshore
If services are to be produced offshore, then the
outsourcing. Surely this new source of foreign com-
cost of delivering those services must be low
petition needs protection. Let’s see if it does.
enough to reduce the buyer’s overall cost. Until the
OFFSHORE OUTSOURCING 1990s, the cost of communicating across large
distances was too high to make the offshoring of
ANZ, Westpac, the Commonwealth Bank, the Coles
business services efficient. But when satellites, fibre-
Group, Qantas, Telstra, Opus: What do these
optic cables, and computers cut the cost of a phone
Australian icons have in common? They have all
call between Australia and India to less than a
sent jobs that were previously done in Australia to
dollar an hour, a huge base of offshore resources
India, Thailand, or even the United Kingdom—
became competitive with resources in Australia.
they are offshoring.
What Are the Benefits of Offshoring?
What Is Offshoring?
Offshoring brings gains from trade identical to
A firm in Australia can obtain the things that it
those of any other type of trade. We could easily
sells in any of four ways:
change the names of the items traded from coal
1 Hire Australian labour and produce in
and cars (the example in the previous sections of
Australia.
this chapter) to banking services and call centre
2 Hire foreign labour and produce in other coun-
services (or any other pair of services). An
tries.
Australian bank might export banking services to
3 Buy finished goods, components, or services
Indian firms, and Indians might provide call centre
from other firms in Australia.
services to Australian firms. This type of trade
4 Buy finished goods, components, or services
would benefit both Australians and Indians pro-
from other firms in other countries.
vided Australia has a comparative advantage in
Activities 3 and 4 are outsourcing, and activities 2
banking services and India has a comparative
and 4 are offshoring. Activity 4 is offshore outsourc-
advantage in call centre services.
ing. Notice that offshoring includes activities that
Comparative advantages like these emerged
take place inside Australian firms. If an Australian
during the 1990s. India has the world’s largest edu-
firm opens its own facilities in another country,
cated English-speaking population and it is located
then it is offshoring.
in a time zone half-way between Australia and
Offshoring has been going on for hundreds of
Europe. Its location facilitates 24 × 7 operations.
years. But the activity expanded rapidly and
When the cost of communicating with a worker in
became a source of concern during the 1990s when
India was several dollars a minute, as it was before
it began to cover activities that went beyond
the 1990s, tapping these vast resources was just too
manufacturing to include information technology
costly. But at today’s cost of a long-distance tele-
services and general office services such as finance,
phone call, some services in Australia can be pro-
accounting, and human resources management.
duced at a lower cost by using resources in India
Why Did Offshoring of Services Boom than is possible by using resources located in
During the 1990s? Australia. And with the incomes that Indians earn
A dramatic fall in the cost of telecommunication from exporting services, some of the services (and
generated the offshoring services boom of the goods) that they purchase are produced in
1990s. The gains from specialisation and trade that Australia—Australian exports.


702

Rent Seeking and the Australian Car Industry
Subsidies Accompany Tariff Cuts
Cartoonist Nicholson provides a perceptive view of
the process of rent seeking in the Australian car market in
this cartoon entitled ‘Car industry protection subsidy
causes economic distortion’. The car industry has faced
increased international competition from tariff cuts
(examined in Reading Between the Lines on pp.
704–05), but the industry has been successful in seeking
government help to boost its profits.
Why Is Offshoring a Concern?
Despite the gains from specialisation and trade
that offshoring brings, many people believe that it
also brings costs that swamp the gains. Why?
The reason is that offshoring is taking jobs in
services. The loss of manufacturing jobs to other
countries has been going on for decades. But the
Australian service sector has always expanded by
enough to create new jobs to replace the lost man-
ufacturing jobs. Now that service jobs are also
going overseas, the fear is that there will not be
enough jobs for Australians. This fear is misplaced.
It is true that some service jobs are going over-
seas. But many service jobs are expanding.
Australia imports call centre services, but it exports
education, health care, legal, financial, and a host
of other types of services. Jobs in these sectors are
expanding and will continue to expand. The num-
bers reinforce the view that the fear of job loss is
misplaced. The exact number of jobs that have
moved to lower-cost offshore locations is not
known, and estimates vary. But the number is tiny
compared with the normal rate of job creation.
Winners and Losers
Gains from trade do not bring gains for every
individual. Australians on average gain from off-
shoring. But some lose. The losers are those who
have invested in human capital to do a specific job
that has now gone offshore.
Unemployment benefits provide short-term tem-
porary relief for these displaced workers. But long-
term solutions require retraining and the acquisi-
tion of new skills. Beyond providing short-term
relief through unemployment benefits, there is a
large role for government education and training
INTERNATIONAL TRADE POLICY CHAPTER 29
policies to ensure that the labour force of the 21st
century becomes increasingly flexible and capable
of taking on new jobs that today we can’t foresee.
AVOIDING TRADE WARS
One counter-argument to protection is overwhelm-
ing: Protection invites retaliation and can trigger a
trade war. The best example of a trade war
occurred during the Great Depression of the 1930s
when the United States raised its tariffs. Country
after country retaliated with its own tariff and in a
short time world trade had almost disappeared.
The costs to all countries were large and led to a
renewed international resolve to avoid such self-
defeating moves in future. They also led to inter-
national agreements and eventually to the cre-
ation of the WTO, the European Union, and APEC.
■ REVIEW QUIZ
1 What are the infant-industry and dumping arguments
for protection? Are they correct?
2 Can protection save jobs and the environment and pre-
vent workers in developing countries from being
exploited?
3 What is offshore outsourcing? Who benefits from it,
and who loses?
4 What are the main reasons for imposing a tariff?
5 Why don’t the winners from free trade win the political
argument?
Work Study Plan 29.3
and get instant feedback.
We end this chapter in Reading Between the
Lines on pp. 704–05, which looks at the effects of
continued cuts in the Australian tariff on cars.
703
 Address: business.theage.com.au

$6.2bn Plan Steers Industry towards

Fuel-Efficient Cars
A CARROT and stick policy that aims to help Australia’s automotive industry build
green, fuel-efficient vehicles is at the heart of the Federal Government’s $6.2 billion,
13-year car plan. ...
Under the fund, the Government will match industry investment in green cars on a
$1-to-$3 basis over 10 years from 2009.
The Government expects the assistance to stimulate industry investment of at least
$16 billion in new capacity and new technologies. ...

Reading Mr Rudd said the plan was about manufacturing competitive, low-emission, fuel-
efficient vehicles in Australia.

between
‘It will create well-paid, high-skilled green jobs for the future,’ he said.
‘It … feeds directly into the Government’s efforts to beat climate change, to beat the
global financial crisis, and to make Australia stronger, smarter and fairer.’

the lines Car tariffs will be cut from 10% to 5% in 2010 in line with the recommendations.
Mr Rudd said this would give Australia the third lowest tariff regime among
economies with a well-developed automotive industry.
‘Australia will continue to pursue a free-trade agenda because the future of the
industry lies in innovation and global integration, not industry protection with old-
fashioned quotas and tariffs,’ he said.
Mr Rudd said the automotive industry was a first-class one that deserved support. It
contributed $5.6 billion in exports, had 3000 scientists and engineers involved in
research, and employed 60,000 workers directly and 200,000 indirectly.
Mr Rudd said he had emphasised before the election he did not want to live in a
country that ‘no longer makes anything’. ‘I meant it then, I mean it now and I’ll
mean it in the future,’ he said. …
Philip Hopkins
The Age
11 November 2008 ▲
Reprinted with permission ▲

Essence of the Story

The Australian government will At the same time, the tariff on car
continue to support the car industry. imports will be cut in 2010 from
The industry will receive subsidies 10 per cent to 5 per cent.
for investment in research and
development, including new funds
to develop a green car.

704
 INTERNATIONAL TRADE POLICY CHAPTER 29

Economic Analysis

Figure 1 shows the market for cars

in Australia with a tariff of 10 per

Price (thousands of dollars per car)

cent—the current tariff rate. SA is
the supply curve of cars made in SA
Australia. DA is the demand curve
for cars by Australian consumers.
Cars can be imported from the
world market, and because
Australia is a small buyer we face
a perfectly elastic supply curve at
the world price of $20,000 a car. 22
If imported cars are perfect 10% tariff
substitutes for locally made cars, 20
the price of a car in Australia is the
Imports with
world price plus the tariff of 10 per 10% tariff DA
Quantity Quantity
cent, or $22,000 a car. produced bought
The quantity sold was QA and the
0 QB QA
quantity produced in Australia was Quantity
QB. Imports were QA minus QB.
Figure 1 The car market with a 10 per cent tariff
Australian consumers are worse off
than they would be with free trade
because they pay more for a car
and buy fewer of them.
Price (thousands of dollars per car)

Australian car producers are better

off with the tarrif than with free SA

trade because they sell more cars

and for a higher price. But the
gain by car producers is smaller
than the loss to car buyers.
In 2010, the tariff will be cut to
5 per cent. Figure 2 shows the Tariff cut

effects of this action in the 22

Australian car market. 21

5% tariff
The Australian price will fall to the 20
world price plus the 5 per cent Imports with
5% tariff
tariff, or $21,000 a car. DA
The quantity sold will increase to
Q 'A and the quantity produced in 0 QB' QB QA QA'
Australia will decrease to Q 'B. Quantity
Car imports will increase to Q'A Figure 2 The car market with a 5 per cent tariff
minus Q 'B.
Consumers will benefit, car
producers will lose, but the
economy as a whole will gain from
the tariff cut.


705
summary
Key Points
HOW GLOBAL MARKETS WORK (PP. 690–93) Key Figures
Comparative advantage drives international trade.
Figure 29.1 A Market with Imports, 691
If the world price of a good is lower than the domestic
Figure 29.2 A Market with Exports, 692
price, the rest of the world has a comparative
Figure 29.3 The Effects of a Tariff, 694
advantage in producing that good and the domestic
Figure 29.4 The Effects of an Import Quota on the
country gains by producing less, consuming more,
Importing Country, 697
and importing the good.
Figure 29.5 The Effects of an Import Quota on the
If the world price of a good is higher than the
Exporting Country, 699
domestic price, the domestic country has a
comparative advantage in producing that good and
gains by producing more, consuming less, and
Key Terms
exporting the good. Doha Development Agenda (Doha Round), 696
Compared with a no-trade situation, in a market with Dumping, 700
imports, consumers gain, producers lose, but the gains Exports, 690
are greater than the losses. Import quota, 696
Compared with a no-trade situation, in a market with Imports, 690
exports, consumers lose, producers gain, but the gains Infant-industry argument, 700
are greater than the losses. Offshoring, 702
Outsourcing, 702
INTERNATIONAL TRADE RESTRICTIONS (PP. 694–99) Tariff, 694
Countries restrict international trade by imposing World Trade Organization (WTO), 696
tariffs, import quotas, and other import barriers.
Trade restrictions raise the domestic price of imported
goods, lower the quantity imported, decrease
consumer surplus, increase producer surplus, and
create a deadweight loss.

THE CASE AGAINST PROTECTION (PP. 700–03)

Arguments that protection is necessary for infant
industries and to prevent dumping are weak.
Arguments that protection saves jobs, allows us to
compete with cheap foreign labour, is needed to
penalise lax environmental standards, and prevents
exploitation of developing countries are flawed.
Offshore outsourcing is just a new way of reaping
gains from trade and does not justify protection.
Trade restrictions are popular because protection
brings a small loss per person to a large number of
people and a large gain per person to a small
number of people. Those who gain have a stronger
political voice than those who lose and it is too costly
to identify and compensate losers.


706
 problems and applications
Work problems 1–11 in Chapter 29 Study Plan and get instant feedback.
Work problems 12–20 as Homework, a Quiz, or a Test if assigned by your lecturer.
1 The figure illustrates the market for T-shirts in table provides information about the wholesale
Australia. The demand for T-shirts is DA and the market for roses. The demand schedule is the
supply by Australian producers is SA. The world wholesalers’ demand and the supply schedule is the
price of a T-shirt is $5. Australian rose growers’ supply.
Price Quantity Quantity
Price (dollars per T-shirt)

8 SA (dollars demanded supplied

per container) (millions of containers per year)

7 100 15 0
125 12 2
6 150 9 4
175 6 6
5 200 3 8
225 0 10
4 DA
Australian wholesalers can buy roses at auction in
Aalsmeer, Holland, for $125 per container.
a Without international trade, what would be the
0 40 60 80 100
price of a container of roses, and how many
Quantity (thousands of T-shirts per year)
containers of roses a year would be bought and
a Does Australia have a comparative advantage in sold in Australia?
producing T-shirts?
b At the price in your answer to (a), does Australia
b With free trade, does Australia import or export or the rest of the world have a comparative
T-shirts? Who in Australia gains from free trade advantage in producing roses?
in T-shirts? Who loses? What are the gains from
c If Australian wholesalers buy roses at the lowest
trade?
possible price, how many do they buy from local
2 Australia produces both wine and cars. Australia growers and how many do they import?
exports wine and imports cars. The rest of the world
d Draw a graph to illustrate the Australian
imports Australian wine and exports cars to Australia.
wholesale market for roses. Show the equilibrium
a If Australia did not trade with the rest of the in that market with no international trade and the
world, compare the equilibrium prices of wine equilibrium with free trade. Mark the quantity of
and cars in Australia with the world prices of roses produced locally, the quantity imported,
wine and cars. and the total quantity bought by Australians.
b Does Australia or the rest of the world have a 4 Use the graph in problem 1. If the Australian
comparative advantage in producing wine? government levies a 10 per cent tariff on imported
Does Australia or the rest of the world have a T-shirts, what is
comparative advantage in producing cars?
a The quantity of T-shirts produced in Australia,
c Compare the quantities of cars that Australia bought by Australians, and imported into
produces and that Australians buy with and Australia?
without trade with the rest of the world.
b Do Australian producers gain or lose? Why?
d Compare the quantities of wine that the rest of
c What is the tax revenue collected by
the world produces and that it buy with and
government?
without trade with Australia.
d Do Australian consumers gain or lose? Why?
e What are the gains from the trade in wine and
cars between Australia and the rest of the world? e Is there a social loss? Why or why not?
3 Wholesalers of roses (the firms that supply local 5 Australia exports and imports education services.
flower shops with roses for Valentine’s Day) buy and a What are some of the ways in which international
sell roses in containers that hold 120 stems. The trade in educational services takes place?

 707
problems and applications
b Provide some examples of policies that impede
international trade in education services.
c What arguments might be made for barriers to
international trade in education services?
d What arguments might be made for free
international trade in education services?
e Who gains and who loses from the removal of
barriers to international trade in education
services?
6 Use the information on the wholesale market for
roses in problem 3.
a If a tariff of $25 per container is imposed on
imports of roses, what happens to the Australian
price of roses, the quantity of roses bought, the
quantity produced in Australia, and the quantity
imported by Australian wholesalers?
b Who gains and who loses from this tariff?
c Draw a graph to illustrate the gains and losses
from the tariff, and the tariff revenue, and the
deadweight loss created by the tariff.
7 Use the information on the wholesale market for
roses in problem 3.
a If an import quota of 5 million containers is
imposed on roses, what happens to the
Australian price of roses, the quantity of roses
bought, the quantity produced in Australia, and
the quantity imported by Australian wholesalers?
b Who gains and who loses from this quota?
c Draw a graph to illustrate the gains and losses
from the import quota, the importers’ profit, and
the deadweight loss created by the import quota.
8 Underwater Oil Discovery to Transform
Brazil into a Major Exporter
A huge underwater oil field discovered late last year
has the potential to transform [Brazil] into a sizable
exporter. ... Just a decade ago the notion that Brazil
would become self-sufficient in energy, let alone
emerge as an exporter, seemed far-fetched.
International Herald Tribune, 11 January 2008
a Brazil has been an oil importer, but two years
ago it became self-sufficient in oil. Describe
Brazil’s comparative advantage in producing oil
and explain why it has changed.
b Draw a graph to illustrate the Brazilian market
for oil and explain why Brazil was an importer of
oil until a few years ago.

708
c Draw a graph to illustrate the Brazilian market
for oil and explain why Brazil may become an
exporter of oil in the near future.
9 Postcard: Bangalore
Hearts set on joining the global economy, Indian IT
workers are brushing up on their interpersonal skills.
The huge number of Indian workers staffing the
world’s tech firms and call centres ... possess cutting-
edge technical knowledge, [but] their interpersonal
and communication skills lag far behind. ...
Time, 5 May 2008
a What comparative advantages does this news
clip identify?
b Using the information in this news clip, what
services do you predict Bangalore (India) exports
and what services do you predict it imports?
c Who will gain and who will lose from the
international trade that you described in (b)?
10 Product Safety
China has leapt to the defence of its manufacturing
industry after Mattel Inc announced it was recalling
1.5 million Chinese-made toys worldwide because
their paint may contain too much lead. There are
about 43,000 of the defective items in Australia.
ABC News, 2 August 2007
a What does the news clip imply about the
comparative advantage of producing toys in
China and Australia?
b Could product quality be a valid argument
against free trade?
c How would the product-quality argument against
free trade be open to abuse by domestic
producers of the imported good?
11 Suppose that the world price of eggs is $1 a dozen,
Australia does not trade internationally, and the
equilibrium price of eggs in Australia is $3 a dozen.
Now Australia begins to trade internationally.
a How does the price of eggs in Australia change?
b Do Australians buy more or fewer eggs?
c Do Australian egg farmers produce more or
fewer eggs?
d Does Australia export or import eggs, and why?
e Would employment in the Australian egg industry
change? If so, how?
 problems and applications
12 A semiconductor is a key component in laptops, cell 14 Suppose that the world price of steel is $100 a
phones, and iPods. The table provides information tonne, India does not trade internationally, and the
about the market for semiconductors in South Korea. equilibrium price of steel in India is $60 a tonne.
Price Quantity Quantity India then begins to trade internationally.
(dollars demanded supplied a How does the price of steel in India change?
per unit) (millions of units per year)
b How does the quantity of steel produced in India
10 25 0 change?
12 20 20 c How does the quantity of steel bought by India
14 15 40 change?
16 10 60
d Does India export or import steel, and why?
18 5 80
20 0 100 15 In 2008, some countries banned beef imports from
the United States. Previously there had been a
Producers of semiconductors can get $18 a unit on concern that imports from the United States
the world market. contained the risk of mad cow disease. Australia
a With no international trade, what would be the continued to export beef, while U.S. imports were
price of a semiconductor and how many banned.
semiconductors a year would be bought and sold a Suppose that the United States had been banned
in South Korea? all beef exports. Draw a graph of the market for
b At the price in your answer to (a), does South beef in the United States. Who gains and who
Korea have a comparative advantage in loses from the export ban. Is there a social loss?
producing semiconductors? b Explain how the U.S. ban on exports of beef
c If South Korean producers of semiconductors sell would have affected the world price of beef.
at the highest possible price, how many do they c Draw a graph of the market for beef in Australia
sell in South Korea and how many do they to show the effect of the U.S ban on beef exports
export? on Australian beef producers and consumers.
13 Ukraine Lifts Food Export Restrictions 16 Act Now, Eat Later
World Bank President Robert Zoellick has lauded … Looming hunger crisis in poor countries … has its
Ukraine, an important food producer, for lifting grain roots in … misguided policy in the United States and
export restrictions, saying the move would boost Europe of subsidising the diversion of food crops to
global supplies at a time of shortages and rising produce biofuels. ... [That is,] doling out subsidies to
food costs. put the world’s dinner into the [petrol] tank.
The Age, 25 April 2008
Time, 5 May 2008
a What are the benefits to a country from a What is the effect on the world price of corn of
importing food? the increased use of corn to produce biofuels in
b What costs might arise from relying on imported the United States and Europe?
food? b How does the change in the world price of corn
c If a country restricts food exports, what effect affect the quantity of corn produced the poor
does this restriction have in that country on developing country with a comparative
(i) The price of food? advantage in producing corn, the quantity it
consumes, and the quantity that it either exports
(ii) The quantities of food produced, consumed,
or imports?
and exported?
c Draw a graph of the market for corn in a poor
d Draw a graph of the market for food in a country
developing country to illustrate your answer to (b).
that exports food. On the graph show how the
Identify the changes in consumption, production,
price of food and the quantities of food
international trade, and the price that consumers
consumed, produced, and exported change
pay.
when food exports are restricted.

709
problems and applications
17 With free trade between Australia and the United
States, Australia would export beef to the United
States. But the United States imposes an import
quota on Australian beef.
a Explain how this import quota influences the
price that U.S. consumers pay for beef, the
quantity of beef produced in the United States,
and the U.S. and the Australian gains from trade.
b Explain who in the United States gains from the
quota on beef imports and who loses.
c Explain who in Australia gains from the U.S.
quota on beef imports and who loses.
18 Six of the 10 members of Asean will reduce tariffs
between then and have free trade in 2010. Other
Asean countries will gradually join the others in free
trade.
a Explain how the price that Thai consumers pay
for goods from a South Korea and the quantity of
Thai imports from South Korea will change. Who
will be the winners from free trade? Who will be
the losers?
b Explain how the quantity of Thai exports to South
Korea and the Thai government’s tariff revenue
from trade with South Korea will change.
19 Until 2008, France subsidised the production of
agricultural products. The subsidies were paid as set
amounts per tonne of output. In some cases, the
government purchased and stockpiled agricultural
products. This led to the creation of so-called lakes or
mountains or wine, butter and wheat. These products
were then sold in agricultural markets in the rest of
the world. In 2008, this policy was scrapped.
a Assume that with free trade France would be an
importer of agricultural products, but that France
imposed a trade barrier that closed the domestic
market for agricultural products. Imports of
agricultural products were zero. Draw a graph
for the market for an agricultural product in
France and explain the effects of the import ban
on the price and quantity produced.
b Draw a graph of the world market for the
agricultural product. What is the effect of
France’s withdrawal from the world market as an
importer and France’s release of its stockpile on
the world market?
c Use you answer to (a) and (b) to comment on the
effect of the proposed policy changes in 2008.

710
20 Study Reading Between the Lines (pp. 704–05)
and then answer the following questions.
a Who gains and who loses from the cut in car
tariffs?
b Show the reduction in the deadweight loss
created by the tariff as a result of its reduction
from 10 per cent to 5 per cent.
c What changes might shift the Australian demand
curve for cars? Show the effects of one of these
on the quantity of imports of cars.
d The Prime Minister said that ‘the
automotive industry was a first-class one that
deserved support’. What arguments are there for
government support for the automotive industry?
How valid are these arguments?
e What will be the effects of the government
support for research and development on the
supply of Australian cars? Show the effects on
the quantity of imported of cars.
f Why is the government increasing the subsidies to
research while at the same time cutting tariffs on
car imports? Do you agree with this substitution in
the form of government support to the industry?
21 Use the link on MyEconLab (Chapter Resources,
Chapter 29, Web links) to read about the review of
Australia’s textile and clothing industry.
a What have been the changes in the measures
and levels of protection applied in this sector?
b How have the price of clothing in Australia and
the amount of imported clothing changed?
c Why did China become such a large producer
and supplier of clothing to Australia?
d What strategies have Australian producers
adopted in response to the change in protection?
e Will Australia run out of activities in which it has
a comparative advantage? Explain your answer.
22 Use the links on MyEconLab (Chapter Resources,
Chapter 29, Web links) to read materials about
Australia’s application of anti-dumping rules for
imports from China.
a What is the argument made in the application?
b Evaluate the argument. Is it correct or incorrect in
your opinion? Why?
c Should different rules on dumping be applied to
imports from China compared with those from
other countries?