D2.Eco.15.6-8: Who Gains and Who Pays When Nations Make Trade Policies

Overview

Lesson Procedure

65-70 minutes of class time across 5 phases.

1. Warm-Up5 minutes
2. Direct Instruction15-20 minutes
3. Guided Practice15 minutes
4. Independent Practice20 minutes
5. Closure10 minutes

1. Warm-Up5 minutes

   Warm-Up Prompt

   "Your town has a skateboard factory that employs 40 people. Skateboards from another country sell for $10 less, and the factory owner asks the government to tax imported skateboards. Name one person who would be glad about the tax and one person who would be unhappy. Who else might feel the effect?"

   Give students two minutes to write, then collect answers on the board in two columns, "glad" and "unhappy". Students usually name the factory owner and workers as glad and skateboard buyers as unhappy. Push for a third name: the skate shop that sells imported boards, the government that collects the tax, or a business in the other country. Tell students that today they will learn to sort every answer into three groups (individuals, businesses and society) and to back each one with evidence.

2. Direct Instruction15-20 minutes

   Key terms. A trade policy is a government rule about trade with other countries. An import is a good bought from another country; an export is a good sold to another country. Four common trade policies:

   • Tariff: a tax on an imported good, paid when it crosses the border. The government collects the money.
   • Quota: a limit on how much of a good may be imported. A quota raises the price because less of the good arrives, but the government collects no money from it.
   • Subsidy: money the government pays to producers at home, so they can sell more cheaply. Taxpayers provide the money. Clay calls a subsidy a bounty in Source 1.
   • Trade agreement: a deal in which countries agree to lower tariffs and quotas on each other's goods.

   Tariffs and quotas are often called protection, because they protect home producers from foreign competition. When one country puts up a barrier, the other country may answer with its own barrier against the first country's goods. This is called retaliation.

   The three groups. Individuals are people as buyers (consumers), as workers and as taxpayers. Businesses include companies that compete with imports, companies that buy imported goods to use in their own products, and companies that sell exports. Society means the country as a whole: the government's budget, jobs in a town or region, safety in wartime, relations with other countries, and whether the country's workers and materials go to their best use.

   Kestland's bicycle tariff (invented data for an invented country)

   	Before the tariff	After the 25 percent tariff
   Price of a bicycle imported from Pellara	$200	$250
   Price of a Kestland-made bicycle	$240	$240
   Imported bicycles bought per year	80,000	50,000
   Kestland-made bicycles bought per year	20,000	40,000
   Workers at Kestland's bicycle factory	150	300
   Tariff money collected by Kestland's government	$0	$2,500,000
   Kestland apples sold to Pellara (tons per year)	30,000	21,000

   Walk through the table one row at a time. Ask: which rows show a benefit, and to whom? Which rows show a cost, and to whom? Then work the examples. Remind students that the data are invented: Kestland and Pellara are not real countries.

   • Tariff and price (invented data)

     Kestland's tariff is 25 percent of the $200 price of an imported bicycle. What does an imported bicycle cost now, and which bicycle is cheaper?

     Result: Tariff = 25% of $200 = 0.25 x $200 = $50. New price = $200 + $50 = $250. The Kestland-made bicycle ($240) is now $10 cheaper, so some buyers switch to it.

   • Cost to individuals (invented data)

     How much more do Kestland families pay in total for bicycles after the tariff than they would have paid at the old import price?

     Result: 50,000 families still buy imports and pay $50 more each: 50,000 x $50 = $2,500,000. 20,000 families switched from a $200 import to a $240 home bicycle: 20,000 x $40 = $800,000. Total extra cost: $2,500,000 + $800,000 = $3,300,000. Another 10,000 families (100,000 - 90,000) no longer buy a bicycle at all.

   • Benefits to businesses and society (invented data)

     Who gains from the tariff, and how much?

     Result: The Kestland factory sells 40,000 bicycles instead of 20,000: sales rise from 20,000 x $240 = $4,800,000 to 40,000 x $240 = $9,600,000, and it hires 150 more workers (300 - 150). The government collects 50,000 x $50 = $2,500,000, money it can spend on roads or schools.

   • Retaliation (invented data)

     Pellara answers with a tariff on Kestland apples. Apple sales to Pellara fall from 30,000 tons to 21,000 tons a year. By what percent did they fall, and who pays?

     Result: Drop = 30,000 - 21,000 = 9,000 tons. Percent drop = 9,000 / 30,000 = 0.30 = 30%. Kestland apple growers (businesses) and their pickers (individuals) pay this cost, even though they never asked for the bicycle tariff.

   • Subsidy (invented data)

     Instead of a tariff, Kestland pays its sweater makers $4 for every sweater they make. They make 250,000 sweaters a year, and Kestland has 2,000,000 taxpayers. What does the subsidy cost, and who pays?

     Result: Cost = 250,000 x $4 = $1,000,000 a year. Spread over 2,000,000 taxpayers: $1,000,000 / 2,000,000 = $0.50 each. Sweater makers and their workers gain; every taxpayer pays a little, even those who never buy a sweater. This is the objection Clay reports in Source 1, paragraph 2: a bounty taxes "the whole for the benefit of a part."

   The six-box chart: who gains and who pays from Kestland's bicycle tariff

   Group	Benefit	Cost
   Individuals	Factory workers: 150 new jobs	Bicycle buyers: $3,300,000 more in total; 10,000 families go without
   Businesses	Kestland bicycle factory: sales double	Apple growers: sales to Pellara fall 30 percent; shops that sell imported bicycles sell fewer
   Society	Government: $2,500,000 in tariff money	Kestland uses $240 of workers and materials to make a bicycle it could buy for $200; relations with Pellara get worse

   Point out two patterns. First, the gains are easy to see (a factory, its new jobs) and fall on a few, while the costs are spread thinly over many buyers or taxpayers. Second, the people who pay are often not the ones who asked for the policy: Kestland's apple growers lose sales because of a tariff on bicycles. Supporters of the tariff would answer that the factory jobs keep a town alive and that a country should be able to make important goods itself; critics would answer that buyers and exporters pay more than the factory gains. Both arguments use the same chart.

3. Guided Practice15 minutes

   Read Source 3 aloud with the class. It is a history of a real tariff, written by historians at the U.S. Department of State. Gloss: beleaguered = in trouble; special interest groups = groups that ask the government for policies that help their own members; entrenched = fixed firmly in place; retaliation = answering one barrier with another; contraction = shrinking; liberalization = removing barriers. Then show Diagram 1 and work through the steps together.

   1Despite the Fordney-McCumber tariff, the plight of the American farmer continued. The wartime expansion of non-European agricultural production had led, with the recovery of European producers, to overproduction during the 1920s. This in turn had led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had produced a piece of legislation, the Tariff Act of 1930, more commonly known as the Smoot-Hawley tariff, that entrenched the protectionism of the Fordney-McCumber tariff.

   2Scholars disagree over the extent of protection actually afforded by the Smoot-Hawley tariff; they also differ over the issue of whether the tariff provoked a wave of foreign retaliation that plunged the world deeper into the Great Depression. What is certain, however, is that Smoot-Hawley did nothing to foster cooperation among nations in either the economic or political realm during a perilous era in international relations. It quickly became a symbol of the “beggar-thy-neighbor” policies of the 1930s. Such policies, which were adopted by many countries during this time, contributed to a drastic contraction of international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.

   3Smoot-Hawley marked the end of the line for high tariffs in 20th century American trade policy. Thereafter, beginning with the 1934 Reciprocal Trade Agreements Act, the United States generally sought trade liberalization through bilateral or multilateral tariff reductions. To this day, the phrase “Smoot-Hawley” remains a watchword for the perils of protectionism.

   1. Who was it for? Prompt: in paragraph 1, which group did Herbert Hoover promise to help with higher tariffs, and why did that group need help? Teacher note: farmers, because farm prices had been falling during the second half of the 1920s.
   2. Who else asked? Prompt: what happened once Congress started revising the tariff? Teacher note: industrial groups also asked for protection, so a bill meant for farmers raised tariffs "in all sectors of the economy." Ask: are these groups individuals, businesses or society?
   3. Fact or interpretation? Prompt: paragraph 2 says scholars "disagree" about two things. What are they? What does the paragraph call "certain"? Teacher note: have students underline the two disagreements and box the sentence that begins "What is certain." Historians can disagree about causes even when they agree on the facts.
   4. Use the numbers. Prompt: U.S. imports from Europe fell from $1,334 million in 1929 to $390 million in 1932. By what percent did they fall? Teacher note: (1,334 - 390) / 1,334 = 944 / 1,334, about 0.708, or about 71 percent. Remind students to divide by the starting amount. Stress that many countries raised barriers in these years and the Great Depression also cut trade, so the drop has more than one cause.
   5. What changed after? Prompt: paragraph 3 names the law that came next. What did the United States do differently? Teacher note: beginning with the Reciprocal Trade Agreements Act of 1934, it sought to lower tariffs through agreements with other countries.
4. Independent Practice20 minutes

   Students read two arguments from the 1800s, one for protecting home industry and one against it. Source 1 is from a speech by Henry Clay of Kentucky in the U.S. Senate in 1810. The Senate was debating whether the Navy should prefer American-made rope, sailcloth and hemp (a plant used to make rope). Gloss: tillage = farming; inimical = unfriendly; bounties = subsidies; protecting duties = tariffs meant to protect home producers; stimulus = encouragement; maritime operations = the navy and shipping; manufactories = factories.

   1[...] It is certainly desirable, that the exports of the country should continue to be the surplus production of tillage, and not become those of manufacturing establishments. But it is important to diminish our imports; to furnish ourselves with clothing, made by our own industry; and to cease to be dependent, for the very coats we wear, upon a foreign and perhaps inimical country. The nation that imports its clothing from abroad is but little less dependent than if it imported its bread.

   [...]

   2Aid may be given to native institutions in the form of bounties and of protecting duties. But against bounties it is urged, that you tax the whole for the benefit of a part only, of the community; and in opposition to duties it is alleged, that you make the interest of one part, the consumer, bend to the interest of another part, the manufacturer. The sufficiency of the answer is not always admitted, that the sacrifice is merely temporary, being ultimately compensated by the greater abundance and superiority of the article produced by the stimulus. [...]

   3I consider the amendment, under consideration, of the first importance, in point of principle. It is evident, that whatever doubt may be entertained, as to the general policy of the manufacturing system, none can exist, as to the propriety of our being able to furnish ourselves with articles of the first necessity, in time of war. Our maritime operations ought not, in such a state, to depend upon the casualties of foreign supply. It is not necessary that they should. With very little encouragement from government, I believe we shall not want a pound of Russia hemp. The increase of the article in Kentucky has been rapidly great. Ten years ago there were but two rope manufactories in the state. Now there are about twenty, and between ten and fifteen of cotton bagging; and the erection of new ones keeps pace with the annual augmentation of the quantity of hemp. [...]

   Source 2 is a satire, a piece of writing that makes fun of an idea by pushing it to a silly extreme. Bastiat imagines French candle makers asking the government to protect them from a foreign rival. Gloss: inundate = flood; custom = customers; perfidious = untrustworthy; dormers and vasistas = kinds of windows; tallow = animal fat used for candles; invariably = always.

   1"We are subjected to the intolerable competition of a foreign rival, who enjoys, it would seem, such superior facilities for the production of light, that he is enabled to inundate our national market at so exceedingly reduced a price, that, the moment he makes his appearance, he draws off all custom from us; and thus an important branch of French industry, with all its innumerable ramifications, is suddenly reduced to a state of complete stagnation. This rival, who is no other than the sun, carries on so bitter a war against us, that we have every reason to believe that he has been excited to this course by our perfidious neighbor England. (Good diplomacy this, for the present time!) In this belief we are confirmed by the fact that in all his transactions with this proud island, he is much more moderate and careful than with us.

   2"Our petition is, that it would please your honorable body to pass a law whereby shall be directed the shutting up of all windows, dormers, sky-lights, shutters, curtains, vasistas, oeil-de-boeufs, in a word, all openings, holes, chinks and fissures through which the light of the sun is used to penetrate into our dwellings, to the prejudice of the profitable manufactures which we flatter ourselves we have been enabled to bestow upon the country; which country cannot, therefore, without ingratitude, leave us now to struggle unprotected through so unequal a contest.

   [...]

   3"If more tallow be consumed, there will arise a necessity for an increase of cattle and sheep. Thus artificial meadows must be in greater demand; and meat, wool, leather, and above all, manure, this basis of agricultural riches, must become more abundant.

   [...]

   4"Do you tell us, that if we gain by this protection, France will not gain, because the consumer must pay the price of it?

   5"We answer you:

   6"You have no longer any right to cite the interest of the consumer. For whenever this has been found to compete with that of the producer, you have invariably sacrificed the first. You have done this to encourage labor, to increase the demand for labor. The same reason should now induce you to act in the same manner.

   Working alone, students fill a T-chart for each source: on the left, every benefit the writer claims and the group that would receive it; on the right, every cost the writer names and the group that would pay it. Then they answer three prompts in writing:

   1. In Source 1, paragraph 1, what benefit does Clay see for the whole nation in making its own clothing?
   2. In Source 1, paragraph 3, how many rope factories did Kentucky have ten years earlier, and about how many now? Which group does that number show gaining?
   3. In Source 2, paragraph 1, whom do the candle makers blame for their rival's low prices? What does this suggest about how people who ask for protection sometimes talk about foreign competitors?

   Circulate and ask each student which writer they find more convincing and why. Accept either answer when it is backed by the text.

5. Closure10 minutes

   Exit ticket. On an index card, students choose one trade policy from today (Kestland's tariff, the sweater subsidy, Smoot-Hawley, or the Navy preference Clay supported) and write three sentences: one benefit or cost for individuals, one for businesses and one for society. Each sentence names who gains or who pays.

   Share out. Ask two students with different policies to read their cards. Ask the class: is there a trade policy with only benefits, or only costs? Students should see that every policy in the lesson has both, and that people disagree about which ones matter more.

   Teacher note on the sources. Source 2 is satire and should not be read as a real petition. Source 1 reflects its time: the National Park Service notes that Clay was "himself a slaveholder," and Kentucky was a slave state, so ask students who is missing from Clay's picture of the people who would gain. The language in both sources is old but contains no offensive terms.

Differentiation Strategies

Assessment Guidance

1. Question 1 of 20 · Multiple Choice

   An invented country puts a tariff on imported tennis shoes. Which group in that country is most likely to gain from it?

   AFamilies who buy tennis shoes BStores that sell imported tennis shoes CHome companies that make tennis shoes DShoe makers in the exporting country

2. Question 2 of 20 · Multiple Choice

   For the same tariff on tennis shoes, which is a cost to individuals in the country that sets it?

   AThe government collects tariff money BHome shoe factories hire more workers CForeign shoe makers sell fewer pairs DShoe buyers pay higher prices

3. Question 3 of 20 · Multiple Choice

   The invented country of Brenvik puts a 20 percent tariff on imported blenders that sold for $45. If stores pass the whole tariff on to buyers, what does an imported blender cost now?

   A$9 B$65 C$56.25 D$54

4. Question 4 of 20 · Multiple Choice

   After the tariff, Brenvik still imports 30,000 blenders a year. How much tariff money does its government collect each year?

   A$270,000 B$1,620,000 C$1,350,000 D$600,000

5. Question 5 of 20 · Multiple Choice

   A government pays its rice farmers a subsidy for every bag of rice they grow. A family that never buys rice says the subsidy costs it nothing. Is the family right?

   AYes, because only rice buyers pay for it BNo, because it pays as a taxpayer CYes, because foreign farmers pay for it DNo, because it pays a tariff on rice

6. Question 6 of 20 · Multiple Choice

   The rice subsidy is $3 per bag on 400,000 bags a year, and the country has 600,000 taxpayers. If they share the cost equally, how much does each taxpayer pay per year?

   A$0.50 B$3 C$2 D$1.20

7. Question 7 of 20 · Multiple Choice

   Country A puts a tariff on cars imported from Country B. Country B answers with a tariff on soybeans from Country A. Who in Country A pays a cost they never asked for?

   ACar buyers in Country B BSoybean farmers in Country A CCar makers in Country A DSoybean buyers living in Country B

8. Question 8 of 20 · Multiple Choice

   Two invented countries agree to end their tariffs on each other's cheese. Which pair shows a benefit and a cost inside the same country?

   ACheese buyers pay more; home cheese makers sell more cheese at home BThe government collects more tariff money on imported cheese CCheese buyers pay less; home cheese makers face more competition DCheese makers in both countries lose all of their sales

9. Question 9 of 20 · Multiple Choice

   Source 3, paragraph 2, says Smoot-Hawley became a symbol of "beggar-thy-neighbor" policies. What does that phrase most likely mean here?

   APolicies that help one country by hurting others BPolicies that send aid to poorer neighboring countries CPolicies that ask neighboring countries for loans DPolicies that end all tariffs between neighbors

10. Question 10 of 20 · Multiple Choice

    Which statement does Source 3 present as something scholars disagree about, not as certain?

    ASmoot-Hawley did nothing to foster cooperation among nations BWorld trade fell by some 66 percent between 1929 and 1934 CU.S. imports from Europe fell between 1929 and 1932 DThe tariff set off retaliation that deepened the Depression

11. Question 11 of 20 · Multiple Choice

    Use Source 3. By how many millions of dollars did U.S. exports to Europe fall from 1929 to 1932?

    A944 B1,557 C3,125 D1,951

12. Question 12 of 20 · Multiple Choice

    In Source 1, paragraph 2, what do critics say protecting duties (tariffs) do?

    AThey put manufacturers ahead of consumers BThey tax the whole nation to pay for its navy CThey make producers pay the costs of buyers DThey tax only buyers of goods from England

13. Question 13 of 20 · Multiple Choice

    In Source 1, paragraph 3, Clay says that whatever people think of factories in general, no one can doubt one benefit. Which benefit?

    ALower prices for Kentucky farm families BSupplying our own necessities in wartime CSelling more American cloth to England DHigher pay for the sailors of the U.S. Navy

14. Question 14 of 20 · Multiple Choice

    In Source 2, paragraph 6, the candle makers tell lawmakers they have "no longer any right to cite the interest of the consumer." What point is Bastiat making?

    ACandle buyers should pay a lower tax on candles BConsumers were the ones who asked for the petition CThe sun is a real foreign business that competes DProtection already puts producers first

15. Question 15 of 20 · Multiple Choice

    On which point would Clay (Source 1) and Bastiat (Source 2) agree?

    AProtection costs buyers something BAll tariffs should be ended at once CEvery new factory hurts the nation DThe sun really competes with candle makers

16. Question 16 of 20 · Multiple Choice

    Use the Kestland bicycle table. By what percent did Kestland's imports of bicycles fall after the tariff?

    A30% B62.5% C37.5% D60%

17. Question 17 of 20 · Short Answer

    An invented country puts a tariff on imported steel. Name one business in that country that gains and one business in that country that pays, and explain why each one gains or pays.

    Show model answer

18. Question 18 of 20 · Short Answer

    A classmate says, "A tariff only hurts foreigners, because their goods are the ones being taxed." Explain who in the country that sets the tariff can pay a cost. Give at least two groups.

    Show model answer

19. Question 19 of 20 · Short Answer

    In Source 2, paragraph 3, the candle makers say farmers would gain if their petition passed. Explain why Bastiat thinks this kind of claim is foolish, and name the cost it leaves out.

    Show model answer

20. Question 20 of 20 · Short Answer

    Two invented countries agree to end all tariffs on cars traded between them. Describe one benefit and one cost of the agreement for individuals, for businesses and for society in one of the countries.

    Show model answer

These standards connect to D2.Eco.15.6-8: prerequisites to review first, parallel standards at the same level, and next steps that build on it.

Standard text: National Council for the Social Studies (NCSS), The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History (Silver Spring, MD: NCSS, 2013). NCSS was not involved in the production of this lesson and does not endorse it.