2000 word report (international trade)

3001ibalectureslidesweek4_2015.pptx

Home >Business & Finance homework help >Economics homework help >2000 word report (international trade)

3001BA Lecture Notes 4 Week 4 Topic: Trade Policy and Competition Tariffs & Nontariff Trade Barriers Text: Carbaugh R J (2013), International Economics, 14th Edition

Chapters 4 & 5 and 6 (pp. 188-191)

Learning Objectives

Define the instruments of Trade Policy

Discuss in detail tariffs with examples

Explain the basic concepts of Consumer & Producer Surplus

Analyse the economic or trade welfare effects of tariffs

Discuss traditional arguments for trade restrictions

Analyse the economic welfare effects of non-tariffs – quotas & subsidies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use

Restricted Trade and Instruments

Strategic Trade Policy

Is a set of government policies which interfere with free trade flows, in order to protect or promote certain industries. (Why choose? – “winners”

Strategic trade policy theories suggest how individual countries can benefit over time from the active use of trade policy instruments

The major trade Policy instruments are tariffs and non-tariffs – examples of the latter being import and export quotas and production subsidies

The Tariff

Tariff

Definition A tax (duty) levied on a product when it crosses national boundaries

Import tariff – much more common

Tax levied on an imported product

Export tariff –less common mainly used as an additional revenue source

Tax imposed on an exported product

Often used by developing nations

Raise revenue, increase the world price

Purposes

Protective tariff – designed to reduce the amount of imports entering a country; increases sales for domestic producers

Revenue tariff – designed to generate additional funds for domestic governments

Types of Tariffs

specific tariff (T) – fixed monetary amount per unit of the imported good; P = Pw + T where P is price and Pw is the world price

ad valorem tariff (t) – fixed percentage of the value of the imported good; P = Pw.(1 + t)

customs valuation – process of determining the value of an imported good

free-on-board (FOB) valuation – tariff applied as product leaves country

cost-insurance-freight (CIF)valuation – tariff applied as product enters country

compound tariff – combines the elements of both specific and ad valorem tariffs

Tariff revenues as a percentage of government revenues, 2007: selected countries

TABLE 4.1

Developing Countries	Percentage		Industrial Countries	Percentage
The Bahamas Guinea Ethiopia Ghana Sierra Leone Madagascar Dominican Republic Jordan	51.2 47.9 33.5 28.5 27.6 26.9 20.9 11.3		New Zealand Australia Japan Canada Switzerland United States United Kingdom Iceland	2.6 2.5 1.2 1.2 1.2 1.1 1.0 1.0

Examples of tariffs, selected countries (in %)

TABLE 4.3

Effective Rate of Protection

Nominal tariff rate

Published in the country’s tariff schedule

Applies to the value of a finished product that is imported into a country

Effective tariff rate

Takes into account the nominal tariff rate

On a finished product

And any tariff rate applied to imported inputs

Used in producing the finished product

Effective Rate of Protection

Effective tariff rate, e

e = The effective rate of protection

n = the nominal tariff rate on the final product

a = the ratio of the value of the imported input to the value of the finished product

b = the nominal tariff rate on the imported input

Effective Tariff Rate – Example TABLE 4.4 p. 116 of Carbaugh

e = = = 0.5 = 50%

(n-ab)

(1-a)

0.1-0.8(0)

1-0.8

for this example:

n = $50/($100 + $400) = 0.1 = 10%

a = $400/($100 + $400) = 0.8

b = $0/($400) = 0

So in this case, e is much larger than n

Tariff Escalation

tariff escalation – higher tariffs on intermediate and finished goods and lower tariffs on raw materials examples – cases at right from the TABLE:

incentive for developing nations to expand production

of raw materials

disincentive for developing nations to compete in market for finished goods

Tariffs often rise significantly with the level of processing (tariff escalation) in many industrial countries. This is especially true for agricultural products. Tariff escalation in industrial countries has the potential of reducing demand for processed imports from developing countries, hampering diversification into higher-value added exports.

Tariff escalation on industrial countries’ imports from developing countries

FIGURE 4.1

Outsourcing and Offshore-Assembly Provision

Outsourcing

Certain aspects of a product’s manufacture are performed in more than one country

Low costs labor intensive produc

OAP - tariffs applied only to portion of production occurring in another country

reduces effective tariff rate for domestic consumers

incentive for foreign producers to use home country components in production

detrimental to home country workers who also produce the same finished goods

Postponing Import Tariffs

Bonded warehouse

Dutiable imports can be brought into the U.S. and temporarily left in a bonded warehouse, duty-free

Imported goods - stored, repacked, or further processed - for up to five years

No customs duties are owed until the goods are withdrawn for domestic consumption

Postponing Import Tariffs

Foreign-trade zone (FTZ)

An area within the U.S.

Business can operate without the responsibility of paying customs duties on imported products or materials

For as long as they remain within this area

And do not enter the U.S. marketplace

Customs duties are due when goods are transferred from the FTZ for U.S. consumption

Postponing Import Tariffs

Foreign-trade zone (FTZ)

No time limit on how long goods can be stored

General-purpose zones

Public facilities

Used by more than one firm

Subzones

A single firm’s site

Used for more extensive manufacturing or assembly

Tariff welfare effects. Basic Concepts - Consumer & Producer Surplus

1) consumer surplus – additional benefit obtained by the buyer of a good

difference between the maximum that the buyer is willing to pay and the actual price

area below demand and above price

2) producer surplus – additional benefit obtained by the seller of a good

difference between the minimum that the seller is willing to accept and the actual price

area above supply and below price

Consumer surplus is the difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid. Graphically, consumer surplus is represented by the area under the demand curve and above the good’s market price. Producer surplus is the revenue producers receive over and above the minimum necessary for production. Graphically, producer surplus is the area above the supply curve and below the good’s market price.

Consumer surplus and producer surplus

FIGURE 4.2

Tariff Welfare Effects: Small-Nation Model

Small nation

Its imports - a very small portion of the world market supply

Price taker

Tariff effects

Raises the home price of imports by the full amount of the duty

Higher domestic production

Lower domestic consumption

Tariff Welfare Effects: Small-Nation Model

Small nation - Tariff effects on nation’s welfare

Consumer surplus falls

Welfare effects of a tariff

Revenue effect

Redistribution effect

Protective effect

Consumption effect

Additional tax revenue

Benefits domestic producers

Wastes resources

Harms the domestic consumer

For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The small nation’s welfare decreases by an amount equal to the protective effect and consumption effect, the so-called deadweight losses due to a tariff.

Tariff trade and welfare effects: small nation model

FIGURE 4.3

Tariff Welfare Effects – Small Nation

Have small countries and large countries – small countries are defined as those too insignificant in a market to influence the world price. (Large countries definition?) Also, partial equilibrium effects – only 1 industry is considered, not the 2 or more industries in the country’s whole economy

Before Trade:

Home country consumer surplus is area in red.

Home country producer surplus is area in green.

Tariff Welfare Effects – Small Nation

With Free Trade:

CS increases by total area a+b+c+d+e+f

Producer surplus decreases by areas a+e

The overall increase in welfare is [a+b+c+d+e+f] –(a+e) i.e. b+c+d+f.

Tariff Welfare Effects – Small Nation

With Tariff:

CS decreases by a+b+c+d

c = revenue effect = now government revenue.

PS increases by a

= redistributive effect = shift from CS to PS

Total effect of tariff is

a+c –(a+b+c+d) = -(b+d)

a negative effect overall

b + d = deadweight loss = benefits lost to all parties

b = protective effect

d = consumption effect

Trade protectionism intensifies as global economy falls into recession

Global economic downturns - catalyst for trade protectionism; 2007–2009,

Decrease in the demand for goods and services

Decline in international trade

Credit crunch - extra squeeze on trade

Shortfall of some $100 billion in trade finance – 90% of world trade

GLOBALIZATION

Trade protectionism intensifies as global economy falls into recession

Indiscriminate decrease in trade

Exports declined by 30 %

China - targeted by the most governments for protectionist measures

Russia

Increased tariffs on imported automobiles

India

Raised tariffs on steel imports

Argentina

New obstacles to imported auto parts and shoes

GLOBALIZATION

Creeping protectionism during global economic downturn of 2008–2009: number of protectionist measures initiated*

TABLE 4.6

Arguments for Trade Restrictions

Free-trade argument

If each nation produces what it does best and permits trade

In the long term

Lower prices

Higher levels of output, income, and consumption

Arguments for Trade Restrictions

1) Job protection argument

preserve jobs in some industries but decrease employment in others

increased cost to consumer greater than average salary for worker whose job was saved

Job gains for only a few industries

Job losses spread across many industries

Each job saved

Ends up costing domestic consumers more than the worker’s salary

Arguments for Trade Restrictions

2) Protection against cheap foreign labor

productivity and cost relevant factors

relevant to labor intensive production only

Low wages by themselves do not guarantee low production costs

3) Fairness in trade – level playing field

other nations lack of environmental regulations

response to trade barriers of other nations

Arguments for Trade Restrictions

4) Maintenance of the domestic standard of living

One nation imposes a tariff that improves its income and employment

restrictions only improve standard of living at the expense of trading partners

5) equalized production costs

scientific tariff – tariff to offset cost differentials

subsidizes inefficient domestic production

Arguments for Trade Restrictions

6) Infant-industry argument

Trading nations should temporarily shield their newly developing industries from foreign competition

short run protection for new domestic industries against developed foreign competition

7) Noneconomic arguments

National security argument, Cultural and sociological considerations

Arguments for Trade Restrictions

Supply of protectionism

By the domestic government

Depends on:

The costs to society

The political importance of import-competing producers

Adjustment costs

Public sympathy

Import Quota

Import quota

Physical restriction on the quantity of goods that can be imported during a specific time period

Require an import license

Specifies the total volume of imports allowed

On manufactured goods

Outlawed by the World Trade Organization

Global quota

Permits a specified number of goods to be imported each year

Does not specify from where the product is shipped or who is permitted to import

Plagued by accusations of favoritism

Selective quota

Import quota allocated to specific countries

May lead to a domestic monopoly of production and higher prices

Examples of U.S. import quotas*

TABLE 5.1

Import Quota Welfare Effects

With Import Quota:

a = redistributive effect = shift from CS to PS

b + d = deadweight loss

b = protective effect

d = consumption effect

c = revenue effect

“windfall profit”/

“quota rent”

portion to foreign exporters and portion to home country importers

Total effect of quota is

c – (b+d)

Import Licenses

With an import quota, the government must find method to allocate limited supply of imports to domestic importers.

historical market share – bias against new importers

pro rata – each importer receives fraction of its demand

auction import licenses to highest bidder(s) – allows the domestic government to capture the windfall profits (area c = revenue effect)

If import quota = area c, effects are same as tariff except government does not have tariff revenue. However, if the quota is auctioned, the government gains area c and the welfare loss is same as in the tariff case.

If the quota is not auctioned, the rent-seeking loss = area c

Quota vs. tariff:

Initially similar - however if demand increases, tariff leads to more imports at the same price, whereas quota leads to a higher price & more imports

Thus an import quota can be more restrictive.

Tariff-Rate Quota

allows specified number of goods at one tariff rate – “within quota rate”

additional imports are subject to higher tariff rate – “over quota rate”

in principle - less restrictive than a quota

in practice - may be as restrictive if the over quota rate is prohibitively high

license on demand allocation – importers apply for licenses on first come-first served basis – if demand exceeds quota, volume is reduced proportionally for all importers

Export Quota

domestic government limiting the exports of a certain good to another country

voluntary export restraint (VER) agreement or orderly marketing agreement – administered by the exporting country.

economic impact identical to import quota, although area c (see previous diagrams) may be lost to the foreign exporters)

common on television sets, steel, textiles, autos and ships

increases costs to consumers

translates to higher profits for foreign exporters

Domestic Content Requirement

minimum percentage of product’s total value produced domestically required to qualify for zero tariff rate

popular argument for organized labor

common in auto industry

Subsidies

government funding to domestic producers

include: tax concession, low interest loans, insurance arrangement & cash disbursements

allows producers to sell goods for a lesser price

domestic production subsidy – granted to producers of import competing goods

export subsidy – granted to producers of goods that are to be sold in other countries – will consider later, in Part II Topic 4.0

Domestic Production Subsidy-Welfare Effects

With Domestic Production Subsidy

increases domestic supply but price does not change

PS increases due to greater sales; this increase was partially redistributed consumer surplus

and partially protective effect/deadweight loss

Result: *Subsidies do not decrease welfare as much as tariffs or quotas

Using areas from Tariff/Quota graphs:

PS increases by a+b

CS decreases by b

Govt. subsidy paid is a+b

Total effect is a+b –b – (a+b) = -b (*smaller loss than –(b+d))

Product Dumping

charging foreign buyers a lower price than domestic buyers for an identical product

also called international price discrimination – is a further type of trade restriction

sporadic dumping – firm disposes of excess inventory on foreign markets

predatory dumping – temporary reduction in price designed to force foreign competitors out of business to gain monopoly power

persistent dumping – indefinite reduction in foreign price in order to maximize profits

Generally prohibited under WTO rules and under various countries’ regulations

Is Antidumping Law Unfair?

Antidumping laws

Ensure a level playing field by offsetting artificial sources of competitive advantage

Protected industries gain

Consumers of the protected good lose more

Whole economy lose more

Dumping

When a foreign producer sells goods in U.S. at less than fair value

Other Nontariff Trade Barriers

Government Procurement Policies: National and local governments buy many goods but many have buy-national policies giving preference to domestic over foreign goods.

Social Regulations: Governments attempt to correct health and environmental side effects of trade; examples: fuel economy standards and limits on hormone-treated meats

Sea Transport & Freight Regulations: Nations can use restrictive practices on unloading cargo to serve as a barrier to trade.

(

)

(

)

nab