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Ten Principles of Economics - Part 20

Ten Principles of Economics - Part 20. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 9 APPLICATION INTERNATIONAL TRADE 197 Tariffs and Trade GATT which is a continuing series of negotiations among many of the world s countries with the goal of promoting free trade. The United States helped to found GATT after World War II in response to the high tariffs imposed during the Great Depression of the 1930s. Many economists believe that the high tariffs contributed to the economic hardship during that period. GATT has successfully reduced the average tariff among member countries from about 40 percent after World War II to about 5 percent today. The rules established under GATT are now enforced by an international institution called the World Trade Organization WTO . What are the pros and cons of the multilateral approach to free trade One advantage is that the multilateral approach has the potential to result in freer trade than a unilateral approach because it can reduce trade restrictions abroad as well as at home. If international negotiations fail however the result could be more restricted trade than under a unilateral approach. In addition the multilateral approach may have a political advantage. In most markets producers are fewer and better organized than consumers and thus wield greater political influence. Reducing the Isolandian tariff on steel for example may be politically difficult if considered by itself. The steel companies would oppose free trade and the users of steel who would benefit are so numerous that organizing their support would be difficult. Yet suppose that Neighborland promises to reduce its tariff on wheat at the same time that Isoland reduces its tariff on steel. In this case the Isolandian wheat farmers who are also politically powerful would back the agreement. Thus the multilateral approach to free trade can sometimes win political support when a unilateral reduction cannot. I QUICK QUIZ The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make.