International Trade

International Trade Assignment 3

Due date November 24, 2015

Fall 2015 Professor H. Moussa

Instructions: Attempt the following exercises.

Exercise 1: You have been asked to quantify the welfare effects of the US sugar duty. The following table gives the estimates of the US consumption and production of sugar under the current duty and after the removal of the duty.

Situation with import tariff

Situation with zero import tariff

Wold price of sugar $0.10 per pound $0.10 per pound

Tariff (duty) $0.02 per pound 0

US consumption in billions of pounds per year 20 22

US production in billions of pounds per year 8 6

a) Estimate the consumer’s gain or loss from removing the tariff b) Estimate the producers gain or loss from removing the tariff c) Estimate the net effect of the US national well being d) Discuss the effect of the removal of the tariff on the income distribution in the US between the

farm sector and the US relatively abundant factor of production e) Read case study 9-1 the effect of the US quota on sugar imports. Was it better to replace the

tariff by a quota equal to billions of pounds of sugar?

Exercise 2: Answer the following independent questions. Justify your answer a) How could there be an optimum tariff when most economists champion free trade? How can a

country gain from imposing a tariff Are the economists dead wrong about free trade? b) Does the infant industry argument justify the imposition of tariffs on imports?

Exercise 3: Answer the following independent questions. Justify your answer a) Why does the world trade organization urge its members to replace a quota by a tariff despite the

fact that quotas like tariffs are harmful?

b) Does the removal of a tariff cause a change in the income distribution of a country?