Tariffs and Protectionism

We’ll look at the costs and consequences of tariffs, quotas, and protectionism. How do tariffs affect consumers? What about producers? Who wins and who loses? Find out with this video.
We’ll apply the fundamentals we learned in the supply, demand, and equilibrium section of this course to real-world examples — like that of protectionism in the U.S. sugar industry — to determine lost gains from trade or deadweight loss, the tariff equilibrium vs. the free trade equilibrium, and the value of wasted resources as a result of tariffs.

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[davidzubiria]

Coming from a South American country, I can tell you that massive tariff on imports and extensive protectionism is a well-paved highway to poverty. People think that Americans would know better, but is never too late to start going in the wrong direction. Being rich, it would take longer to reach to the bottom. But you can do it, step by step. The reasons are many, not only those described in the video but I simply don´t have enough energy today to make a long list. Hope I'll do it in the future.

[poojaverma]

There are almost no vedio with such detailed quick explanation on youTube. Good job. Keep the good work doing.

[troooooper]

If you country has nothing but costlier form of production for everything than you have no choice but to have tariffs. The implied point is that free trade eliminates higher-cost supplier thus allocating resources to production of other products that may have more efficient production within the country. However, if 100% efficiency means you will become a deserted island, are you content with that?
Another point these static charts miss is that world is dynamic. You may not have low-cost production, but if you give time the domestic supply chain might mature enough to be more cost efficient as they learn, deploy new technologies, and get economies of scale.

Possible scenarios:
Without tariff

1. Market price fall
2. Local suppliers are out priced
3. Consumer enjoy savings
4. Local supplier infrastructure crumbles and loses economies of scale
5. Local supply curve shifts left, thus local supply falls off more.
6. Country becomes dependent on external countries.
7. Influence of external countries start dictating politics.
8. External countries change laws giving international organizations more edge.
9. Local supply is eliminated.
10. Now all profits flow out, outflow, we get huge trade deficit.
11. With unlimited money supply, other local service businesses are defeated.
12. Now politicians consult to foreign companies before the people of that country.
13. Due to trade deficit currency starts to devalue.
14. Necessities continue being imported, inelastic, thus now costing more. Imports for certain things do fall. But not enough to make any difference.
15. Cost of living go up
16. More service businesses disappear as they can't function as minimum wage is too high to due to high cost of living
17. Quality of products go down due to people being broke, leading to more expenditure cheap = high cost in long run.

End Result: higher cost of living, shitty products, corrupt govt. Nice!!!

With tariffs:

1. Market price rise.
2. Consumers are unable to buy many products.
3. Over time supply curve shifts right due to improvements in the industry.
4. Govt is able to stand on moral grounds and reject nefarious govts without much hit.
5. Domestic supply keep profit inside the country, creating more jobs, decrease trade deficit.
6. Increasing currency value.
7. Increasing consumer buying power.
8. Increasing quality of Goods.

End Result: Morally upstanding Govt, Low cost-of-living, and High Quality products.

I propose microeconomics add two more dimensions to their tools.
- Time
- Product Quality Line (you can get same product for $50 or $5000 with very different ROI, buying for life results in best ROI)

[breannawalker]

You make the content understandable which is amazing.

[abirsarkar]

I have some questions which are as follows 1) derive the formula for optimum tariff 2)explain - the effect of barriers to Trade is to validate the presumption that an international transfer worsens the donor's term s of Trade 3) justify the following statement - the effective rate of protection is expected to decrease under globalization.

[BrantCasteel]

One thing he didn't quite call out... The tariff revenue that goes to the government is *only* on the imported goods. Thus, the price paid for the imported good partly goes to the government, and partly to the foreign company (and its local distributors). However, for the domestic producer, the entire price goes to the domestic seller because there is no tariff on domestic production..

[FA-tqip]

Another way to look at protectionism:
1) A nation state's self-sufficiency grows which means it becomes less dependent on foreign nations who may pose a future threat from conventional war/trade war.
2) The so-called 'wasted resources' also go towards ensuring the high wage of people within your own country while disincentivising de-facto slave labour abroad.

[shahidmaqbool]

thanks for making economics so interesting.

[MominNz]

Top top top video. this is the best video on the YT. intelligently put together. Thanks.

[devondevon]

Good point at 9:03 as I thought that since tariff would result in domestic supplier producing more goods that this would be a benefit and you are showing that it could be a waste . But other hand even if tariff could be waste, , producers need to stay in business and elected officials have to answer to workers want to keep their jobs.

[malter]

Great video. Every politician should be required to watch. I have a couple of questions about taxes in general.
Could the same argument be made about a sales tax? For example, a good sells for $1, with a ten cent sales tax. The consumer demands less at $1.10 than at $1, so domestic trade is reduced. It may even be possible that the tax prohibits the transaction (the buyer values the good at $1.05, so would pay $1, but not $1.10).
Income tax. A worker values his time at $50/hour and produces $60/hour benefit to the employer. So maybe they settle on a wage of $55 and they're both happy. But if the employee is taxed at 20%, he receives only $44, below where he values his time, so no employment agreement is reached.

[platoscavealum]

If you disagree with this video, read this:

🧠 "Confirmation bias is the tendency to search for, interpret, favor, and recall information that confirms or support one's prior personal beliefs or values. It is an important type of cognitive bias that has a significant effect on the proper functioning of society by distorting evidence-based decision-making. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way.

For example, a person may cherry-pick empirical data that supports one's belief, ignoring the remainder of the data that is not supportive.

The effect is strongest for desired outcomes, for emotionally charged issues, and for deeply entrenched beliefs."

[kenpca]

Good info! :)
just a question to the authors of the video. Do you have a video that also addresses foreign tariffs and how tarrif wars between the US and Foreign Nations effect the economy both US and global? Also how tariffs on one industry may save some jobs in that industry but cause a loss of jobs in other industries indirectly etc.

thanks

[justpostit]

Not wasted resources, if it means flow on effect, people employed, no crime, less money spent on healthcare.

[bodyevolution]

The wasted resources is to pay domestic workers more than foreign labor, as well as other domestic businesses that may arise to help in the production of sugar (in this example).

It seems that Tariffs have a nominal zero net effect but have a real effect that it protects national interest.

[damnseagulls]

Nice explanation, however the graphs are hypothetical. Ideally, everything is expensive to make in the US (from manufacturing to software services), considering this theory, we can virtually import all of the items because we will be wasting resources and there will be dead weight loses. The important point to note is that we import for consumers and the companies here must sell the item for a price which is the world price. The other half of the equation is the consumer, in order for the consumer to buy these imported goods, they need money. Where does the consumer get the money from, they have to earn which means they need to have a job. Without job and money, the demand is going to shrink, to compensate for the shrink in demand, the supply shrinks, this cycle continues and the demand curve move slowly towards the Y-axis and the saturation point, it no longer slopes and becomes a straight line exactly perpendicular to the X-axis which means that the quantity demanded is the same regardless of the supply. In practical terms, this means that only the wealthy few can afford to buy the imported item.

[albert_chen]

Holy shit, Tyler Cowen's in here. What a legend!

[momergil]

I found odd that or economy professors discarded the money that go to government as not affecting welfare. AFAIK government normally is less economically efficient then the private sector, that is, for each dolar that goes to the government instead of staying in people's pockets we will overall have a less value in society then otherwise. Once that is the case, then the extra revenue that goes to gov's pockets instead of to buying more of that product in global trade means a decrease in overall welfare.

[longnewton]

Well explained.  But ... In your discussion you miss out the impact on the environment, I.e. externalities. Take palm oil for example. Food producers like it because it is cheap, so reducing food prices. However, producing palm oil causes deforestation and climate change. The deforestation and climate change externality doesn’t appear in the import cost so an import tariff or carbon tax should be applied. Similarly, your sugar example where the imported sugar is produced in Brazil. This leads to massive deforestation and therefore contributes to climate change. Another example is the increased transportation cost and carbon impact of this.

Another issue is, from a climate change perspective, it is not desirable to maximise consumption. Global GDP growth is closely correlated with climate change.

Conventional economics does not cost in externalities and this is a huge issues. Not just for the environment, but increasingly individual wellbeing. Poor working conditions in producing countries and declining health in the home market. US life expectancy is falling and poverty and inequality increasing.

[martman]

If the tariff revenue were given to the consumers (e.g. divided up equally every year and paid out tax free to all adult citizens) then domestic consumption would not fall as much and domestic production would rise more than otherwise.

In addition there would be more tax revenue from a higher GDP (from higher revenue from more domestic profits and from more paid in wages) and a lesser amount being needed to be paid out in welfare payments.

Theoretically, this higher tax revenue and lower welfare payment savings by the govt. could also be given out also to the consumers thus increasing both domestic consumption and production even more....although with less effect than paying the tariff revenue out.