Aspects of the Theory of Tariffs (Collected Works of Harry Johnson)

Harry Johnson

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415831772
• eBook ISBN: 9781134624195
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

An internationally acknowledged authority on all aspects of the theory of international trade and payments, this book collects Harry Johnson's contributions to the study of international trade, including a critique of the theory of effective protection. The book discusses:

• the integration of income distribution and other aspects of the economy into the positive theory of tariffs
• the issues raised by the use of tariffs to promote economic development
• the implications of distortions of various kinds in the working of competition for tariff theory and policy
• the costs of protection
• the implications of effective protection for world economic development and the economic effects of trade preferences
• the question of free trade and the extent to which it requires the harmonization other aspects of economic policy.

PART I:

The Positive Theory of Tariffs

1. International Trade, Income Distribution, The Offer Curve, and the Effects of Tariffs*

Theoretical analysis of two important problems – the effects of protection on real wages, and the effects of free international trade on factor prices – has clarified the relationship between the commodity prices established in international trade equilibrium and the corresponding prices of factors of production, within the framework of the Heckscher-Ohlin model of international trade.¹ Both the central theoretical principle – that an increase in the relative price of a commodity shifts production towards that commodity and so increases the demand for and marginal productivity of the factor in which the good is intensive – and the diagrammatic apparatus for analysing it – the Edgeworthian production-contract box, and the functional relationship between relative commodity prices and relative factor prices – are now well established in the literature of international trade theory. But the parallel interconnection between the distribution of income between factors and the country’s demand for imports, which is one determinant of the equilibrium of international trade, has not so far been explored with the same thoroughness. On the contrary, the offer curve is generally derived without reference to the distribution of income, usually from a set of community indifference curves assumed to be invariant. This assumption implies either a social policy governing income distribution or identity of tastes and factor ownership among residents, both of which make the problem of the effect of trade on factor prices uninteresting. Moreover, without an analysis of the connection between distribution and international demand, the general equilibrium model of international trade is logically incomplete – a state of affairs not only aesthetically unsatisfactory but also (as will appear subsequently) capable of permitting erroneous theoretical conclusions to be drawn.

This chapter attempts to fill the gap, by introducing the distribution of income between factors into the derivation of the offer curve itself. Part I states that assumptions of the analysis and develops two alternative methods of representing the distributions of income corresponding to points on the transformation curve between commodities; the technique for doing this was originally developed in connection with the general equilibrium analysis of excise tax incidence.² Part II derives the country’s free-trade offer curve, analyses the nature of international trade equilibrium with a given foreign offer curve and the effects of shifts in the foreign offer curve, and discusses briefly the effect of trade on welfare. Part III discusses the nature of the displacement of the offer curve resulting from the imposition of a tariff, and the ‘normal’ effect of a tariff on international equilibrium, Part IV analyses two well-known ‘exceptional’ cases; Part V considers in greater detail the effects of the tariff on internal income distribution, and Part VI analyses the conditions on which a tariff may reverse the direction of a country’s trade.

PART I. THE DISTRIBUTION OF INCOME

The following analysis assumes, in general conformity with the Heckscher-Ohlin model of international trade, that there are two countries, the home country and the foreign country, producing and trading two commodities, X and Y. For present purposes, the foreign country may be represented simply by its offer curve, expressing the quantities of one good it is prepared to exchange for quantities of the other at the price expressed by the ratio of the two quantities; the foreign offer curve will be assumed to have the normal Marshallian shape. The home country is assumed to have a fixed endowment of two factors, labour and capital, which can be used according to given production functions to produce the two commodities; each production function is assumed subject to constant returns to scale and diminishing marginal rate of substitution between factors, and X is assumed to be more labour-intensive than Y. Perfect competition is assumed, so that factors are paid the values of their marginal products, which are equal in the two industries; and the tastes of the factor owners are assumed to be given, and describable, for each factor separately but not for the two together, by a set of indifference curves of the normal shape, neither good being ‘inferior’ in the consumption of either factor. It is further assumed that foreign demand is such that X will be the home country’s import good, and Y its export good.

The home country’s factor endowment and the available technology determine its production possibilities, which can be represented by a transformation curve between the two commodities. For each combination of the commodities on the transformation curve, there is an allocation of labour and capital between the two industries, a corresponding ratio between their marginal productivities common to the two industries, and, since their quantities are fixed, a corresponding distribution of the national product between them. Since there are only two factors, this distribution can be conceived of in terms of the total output, and the income earned by one factor, since the residue is the income of the other. The income earned by a factor, in turn, can be envisaged in two alternative ways: as an amount which the factor itself produces, and as a share of the total which both factors together produce. The former notion leads to the concept of a ‘production block’ representing the income the factor would produce for itself at different relative commodity prices, the latter to the concept of an ‘income-distribution curve’ showing the share of total output the factor would receive at different points on the country’s transformation curve. Both of course amount to the same thing, but each has its own advantages and disadvantages.

The concept of the income-distribution curve is fairly obvious, as is its chief characteristic: that the share of a factor rises as production shifts along the transformation curve towards the good which uses that factor relatively intensively. The concept of a factor’s production block requires more explanation, since factors always produce in co-operation with each other; and it involves introducing the concept of negative production of a commodity. But the central idea is simply an extension of existing analysis, notably the Rybczynski proof³ that if commodity prices are constant, an increase in the supply of one factor must reduce production of the good which uses that factor relatively less intensively.

The initial problem is to determine, given the amounts of X and Y produced by the economy with both factors together, how much X and how much Y can be said to be produced by one factor – say labour – alone. The answer is derived along the following lines: At the factor prices corresponding to the total quantities of X and Y produced in the economy, there is an optimum capital: labour ratio in each industry, and this ratio is higher in Y than in X by assumption. Now suppose all labour is employed in producing X; to do so efficiently, labour must be assisted by capital in the optimum ratio. Where is this capital to come from? Suppose that negative production of Y is possible; this will release capital and labour, which can be put to producing still more X; and since the capital: labour ratio in Y is higher than in X, there will be a net release of capital which can be put to co-operating with the initial stock of labour. Thus labour can be conceived of as contributing to total production a positive quantity of the labour-intensive good (larger than the economy’s actual production of it) and a negative quantity of the capital-intensive good, the negative production of the latter providing all the capital and some of the labour required to produce the former. Similarly, capital can be conceived of as producing a positive quantity of the capital-intensive good (larger than the economy’s actual output of it) and a negative quantity of the labour-intensive good; and total output of each good can be conceived of as comprising a positive contribution by one factor and a negative contribution by the other. The combination of positive quantities of one good and negative quantities of the other ‘produced’ by a factor at different points on the economy’s transformation curve constitute the ‘production block’ for the factor; like the transformation curve, and for the same reasons, the production block will be characterized by a diminishing marginal rate of transformation of one good into the other.

The derivation of the income-distribution curve and the factor production blocks just described from the factor endowment and technology of the economy is illustrated in Figure 1, which reproduces the familiar production contract box. O_xA = O_yB represents the economy’s labour endowment, O_xB = O_yA its capital endowment; production indifference curves for X originate at O_x, for Y at O_y, ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Dedication
• Contents
• Introduction
• I THE POSITIVE THEORY OF TARIFFS
• II TARIFFS AND DISTORTIONS
• III THE COST OF PROTECTION
• IV THE THEORY OF EFFECTIVE PROTECTION
• V TARIFF REDUCTION AND POLICY HARMONIZATION
• Index of Subjects
• Index of Names