1 Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani Week Seven

2 Week Seven: Class One Tuesday, October 16 Tuesday, October 16 14:10-15:00 AC :10-15:00 AC 202

3 Your exams are graded. I am so I will bring them to class tomorrow I will bring them to class tomorrow Is it ok if I post the results on my webpage based on your ID numbers? Is it ok if I post the results on my webpage based on your ID numbers? If you have any objection to this method, please let me know before the end of this week. If you have any objection to this method, please let me know before the end of this week. If I dont hear from you, I assume that you are ok it. If I dont hear from you, I assume that you are ok it.

4 News Still no news about a new room for us Still no news about a new room for us Library had not ordered the book; the first time we placed the order Library had not ordered the book; the first time we placed the order –We placed another rush order

5 I received information My book arrived the day before the exam. ……… My book arrived the day before the exam. ………

6 A request Dear coach Jacqueline, please don't give us a ICA this week !!! we studied so much for the exam last week so...we need a rest!!! thank you very much Dear coach Jacqueline, please don't give us a ICA this week !!! we studied so much for the exam last week so...we need a rest!!! thank you very much Oooops!!! I have one planned for today. Oooops!!! I have one planned for today.

7 In which case the domestic bike producer is more protected? Scenario 1: Scenario 1: –You impose a tariff of 50% on imported bikes –And 80% tariff on imported wheels Scenario 2: Scenario 2: –You impose a tariff of 50% on imported bikes –And 20% tariff on imported wheels

8 Effective Rate of Protection (ERP) Measure the rate of protection of domestic bike producers from foreign completion Measure the rate of protection of domestic bike producers from foreign completion ERP = (T f – aT c )/(1-a) where, T f = tariff rate on imported final product T c = tariff rate on the imported components a= the ratio of the value of imported component to the value of final good

9 Assuming that the wheels represent 60 percent of the value of the bike, What is the ERP in each scenario? 1. ERP = ( (0.5 – (0.6 * 0.8))/(1-0.6) ERP = ( )/0.4 ERP = ( )/0.4 ERP = 0.02/0.4 = 0.05 or 5% ERP = 0.02/0.4 = 0.05 or 5% 2. ERP = ( (0.5 – (0.6 * 0.2))/(1-0.6) ERP = ( )/0.4 ERP = ( )/0.4 ERP = 0.38/0.4 = 0.95 or 95% ERP = 0.38/0.4 = 0.95 or 95%

10 Just In time ICA4 (in teams of 2 or 3) Please, only one assignment per team Please, only one assignment per team Q # 7, Page 153 Q # 7, Page 153

11 International Economics Week Seven- Class 2 Week Seven- Class 2 –Wednesday, October 17 –11:10-12:00 –Tyndall

12 Q # 7, Page 153 Suppose that the free trade price of a domestic product is $10,000 and contains 25 percent imported components. Assume that the tariff on final product is 10 percent and a 5 percent tariff is imposed on the imported components. Suppose that the free trade price of a domestic product is $10,000 and contains 25 percent imported components. Assume that the tariff on final product is 10 percent and a 5 percent tariff is imposed on the imported components. A) What is the products price after the imposition of tariff? A) What is the products price after the imposition of tariff? B) What is the domestic value added before and after the imposition of tariff? B) What is the domestic value added before and after the imposition of tariff? C) What is the effective rate of protection? C) What is the effective rate of protection?

13 Answer? a.After the imposition of tariff, domestic price goes up by 10% to $11,000 b.Before the tariff, domestic value added is (10,000 – 2500 =$7,500) and after the tariff the domestic value added is [11,000-( (.05*2500)) =$8,375]. c.T f = 10%, T c = 5%, and a = 25%. ERP = (0.1 – 0.25 × 0.05) / (1 – 0.25) = 11.67%.

14 Arguments for Tariffs 1. Infant Government Argument 2. National Defense Argument 3. Infant Industry Argument 4. Senile Industry Protection 5. Job Protection Argument

15 Facts 1. Tariff creates losses in efficiency Deadweight loss Deadweight loss 2. Economies that have adapted the policy of protectionism have grown slower 3. Subsidy may be a better way to protect domestic producers

16 The effects of a subsidy equivalent to tariff in a small nation S D Price Quantity a b c d Tariff = 2 S Subsidy = 2 no loss in CS higher imports no dead weight loss d no revenue for government cost of subsidy = 30 b is still a loss in efficiency but it is covered by government

17 Nontariff Barriers to Trade (Chapter 7) In the study guide, I asked you: In the study guide, I asked you: 1. What are GATT and WTO and what is their role in international trade? There is little on WTO in you book There is little on WTO in you book

18 GATT: General Agreement on Tariff and Trade Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II.Bretton Woods ConferenceWorld War IIBretton Woods ConferenceWorld War II The GATT's main objective was the reduction of barriers to international trade. The GATT's main objective was the reduction of barriers to international trade.trade This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements.tariff quantitative restrictionssubsidiestariff quantitative restrictionssubsidies Originally, the GATT was supposed to become a full international organization called the International Trade Organization. Originally, the GATT was supposed to become a full international organization called the International Trade Organization.International Trade OrganizationInternational Trade Organization However, the agreement was not ratified, so the GATT remained simply an agreement. However, the agreement was not ratified, so the GATT remained simply an agreement. The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s. The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s.World Trade OrganizationWorld Trade Organization

19 International Economics Week Seven- Class 3 Week Seven- Class 3 –Wednesday, October 17 –15:10-16:00 –AC 201

20 In this weeks study guide, I asked: What are Non-tariff barriers to trade and how common are they? The answer is in the book The answer is in the book Problems: Problems: 1.These types of protection are increasing as tariffs are decreasing. 2.They are less visible than tariff but in many cases they are more restrictive than tariffs.

21 A government policy that limits imports of a product to a certain number of units. A government policy that limits imports of a product to a certain number of units. It is banned by the WTO but it still exists. It is banned by the WTO but it still exists. What are Quotas?

22 How common is quota? In 1955 Ireland suspended its import quota on fertilizers. In 1955 Ireland suspended its import quota on fertilizers. China's Grain and sugar import quotas remain unchanged in 2008 China's Grain and sugar import quotas remain unchanged in 2008 In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year In 2005 the European Union decided to increase quotas for Chinese textiles In 2005 the European Union decided to increase quotas for Chinese textiles In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT. In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT.

23 1. Not all countries are members of the WTO 2. Members of WTO are allowed to maintain quotas for a specified period of time. Transition periodTransition period 3. How much power does WTO have? Some countries implement quotas defying WTO rules.Some countries implement quotas defying WTO rules. Facts

24 Quota on textile Quota on textile Uruguay Round negotiations of GATT have led to phasing out of the MFA. Uruguay Round negotiations of GATT have led to phasing out of the MFA. What are Multifibre Arrangements?

25 It is an agreement by a country to limit its exports to another country to a certain number of units. It is an agreement by a country to limit its exports to another country to a certain number of units. It differs from a quota because the exporting country administers VER It differs from a quota because the exporting country administers VER Since it is voluntary it is legal under WTO regulations. Since it is voluntary it is legal under WTO regulations. VER is difficult to negotiate VER is difficult to negotiate What are Voluntary Export Restraint (VER) ?

26 Examples of VERs In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States. In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States. In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear. In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear. In 1991 a VER was established between the European Union (EU) and Japan that established voluntary quotas on Japanese cars until In 1991 a VER was established between the European Union (EU) and Japan that established voluntary quotas on Japanese cars until 1999.

27 S D E Price of Cloth Quantity of Cloth Moving from no trade to free trade World Price = 10, Domestic Price = 20 Imports = 50, CS goes up

28 S D Price of Cloth Quantity of Cloth a b c d G S + Q Quota The Economic Effects of a Quota Quota = 30 Supply curve shifts right by 30 At P =10 there is a shortage of ______ Price goes up to ____ CS goes down by? Who gets a? What is b? What is d? Who gets c?

29 Who gets c? In case of tariff c went to government. In case of tariff c went to government. In case of quota: In case of quota: 1. Domestic license holders, if they buy 30 units at p =10 and sell it at p = Domestic government, if it sells licenses at $2 per unit of imported good. 3. Foreign producer, if this is VER.

30 Suppose initially quota has the same effect as tariff S D Price of Cloth Quantity of Cloth S + Q Tariff The only difference may be in who gets c c

31 Now domestic demand grows to D S D Price of Cloth Quantity of Cloth b c d S + Q Tariff D 13 Under tariff, P is still 12, import grows to 40, CS Under quota, at p =12 there is a shortage P up to 13, CS? a Quota is more restrictive