This section of the paper will define and explain the origins of economic nationalism in the United States, and elaborate on some of the most common protectionist policies. There is a consensus among economists that markets free from trade restrictions maximize national welfare. This idea is a central tenet of neoclassical economics: a theory of economics which assumes individuals are rational and able to maximize their utility or profit.In the latter half of this section, I will focus on three liberal economics trade models to compare the benefits and drawbacks of free trade and economic nationalism, and to illustrate that the simplest and most complete models point to the fact that free trade is superior to economic nationalism.Economic nationalism is an economic theory which promotes the domestic control of a country’s economy and the enforcement of trade barriers such as tariffs and import and export subsidies. Economic nationalism in the United States is not a novel concept, nor is it unique to the Trump administration, in fact, it originated during the American Revolution. Alexander Hamilton was the Secretary of the Treasury during George Washington’s time as president, and Hamilton believed “the United States could not become fully independent until it was self-sufficient in all necessary economic products.” Hamilton did not want the United States to financially depend on Europe because he believed this would threaten the United States’ political independence, so he championed a form of economic nationalism called the “American System.” The American System has many similarities to the ideas that President Trump promotes, most notably: supporting industries, introducing tariffs to protect vulnerable domestic industries, the creation of a national bank and federal subsidies for infrastructure and agriculture.Although economic nationalism may have good intentions, it is an outdated concept that is inferior to free trade. I will explain this using three economic trade models. The most basic model, the Ricardian model, tells us that free trade is more efficient than protectionism because countries have different levels of productivity and they all stand to profit more if they specialize in what they are good at and then trade with other countries; this is comparative advantage and specialization. By examining Japan’s rice market using the Ricardian trade model, we can conclude that free trade (absent of protectionist trade policies) would drive Japanese rice manufacturers out of business because other nations can produce rice more efficiently. Countries such as the United States – which have an abundance of land – could produce rice by more cost-effective means because they have a lower opportunity cost which gives them a comparative advantage over Japan. Unfortunately though, the Ricardian model does not account for the distribution of income within a country; which is why we must seek alternative models.A more comprehensive trade theorem is the Specific Factors Model, which specifies that free trade generates winners and losers within a country. The people who stand to gain the most are those who are in possession of the abundant factor of production (i.e. labour, capital and/or land). If one wanted to be more precise, the Specific Factor Model could be used to illustrate why Japan’s rice industry would crumble if the industry was no longer receiving subsidies from the government. In this scenario, the United States would produce rice because it has an abundance of capital – and more importantly land – the latter of which Japan lacks, and mass quantities of land and water are necessary to produce rice. However, the economy is obviously more complex than what is contained within the Specific Factor model, so it is important to further evaluate the patterns of trade using the Heckscher-Ohlin Model. The last model to consider is the Stolper-Samuelson theorem using the Heckscher-Ohlin Model, which is a “long-run model in the sense that it allows factors of production to move between industries.” According to the Stolper-Samuelson theorem, “an increase in the relative price of a particular good will increase the income of the factor used intensively in the production of that good, and decrease the income of the factor used less intensively.” The theory would support the notion that trade positively affects a country’s abundant factor and hurts its scarce factor, reinforcing the idea that trade creates winners and losers. To determine the validity of the Stolper-Samuelson theorem, Donald Davis and David Weinstein performed an empirical analysis of trade data in 2001 and found that, when certain assumptions are relaxed (common technologies and identical goods between countries), “the predictions for the direction and volume of the factor content of trade are very well supported with empirical evidence.” After critically analyzing the Ricardian, Specific Factor and Heckscher-Ohlin models, it is obvious that free trade improves national welfare, but with the downside of unequal distribution. However, inequality should not support protectionist trade policies because it is irrational to assume that a form of trade should be preferred only if it does not hurt anyone. Although the effects of free trade are felt unequally amongst a populous, policy makers should redistribute wealth by collecting taxes and providing public services instead of restricting free trade. So, why do Canada, the United States and China have protectionist trade policies in place if free trade maximizes national welfare? Perhaps protectionist policies are viable in certain circumstances.The most common type of protectionist trade policy is called a tariff which is a “duty that must be paid on a specific type of import or export.” When a country enacts a tariff it raises the cost of goods for consumers just like a sales tax, but by how much the price will increase in the domestic economy depends on whether the domestic market is small or large compared to the world market for that good. When a relatively small country like Canada imposes a tariff on imports, the domestic price of the imported good will increase approximately by the amount of the tariff. An increase in the domestic price over the foreign price leads to consumers paying more for a product than they normally would, thereby decreasing national welfare. By contrast, when a large country such as the United States enacts a tariff, the effects on national national welfare can be positive because large countries have sufficient market power to influence foreign prices as well. If, for example, American producers are able to manipulate the market to lower the foreign price and achieve a lower “terms of trade” (ratio of export prices to import prices) then government income from the tariff could be greater than the efficiency loss. Another protectionist trade policy is an export subsidy: “a payment by a government to domestic producers for goods exported abroad.” If the American government were to implement an export subsidy, producer surplus would increase because of subsidized costs and higher world prices as a result of the increased supply. However, the overall welfare of the US would fall because export subsidies increases prices for consumer and decrease government funds. The last protectionist policy worth mentioning is an import quota: a restriction on the quantity of a good that may be imported from a foreign country. The effects of an import quota on national welfare are ambiguous because producer surplus tends to rise whereas consumer surplus falls, due to lower supply and higher prices. It is clear that protectionist trade policies can increase national welfare, but only in unique circumstances. If the Trump administration is considering implementing tariffs – from a purely economic viewpoint – they should only consider imposing tariffs on markets where American producers have the power to influence demand.

Post Author: admin


I'm Irvin!

Would you like to get a custom essay? How about receiving a customized one?

Check it out