1 ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich

2 Lecture 21: March 31 Ch. 9, 10, 12

3 Dumping Requirements: –Imperfect competition – price setters rather than price takers –Segmented markets – no arbitrage By firms in A into B: –Price in B below price in A –P(B) < AC(A) –P(B) < AVC(A) Price discrimination –Elasticity of demand differs between A and B –Prevent arbitrage Warranties Price discrimination model: –MC(A) = MR(A) = MR(B) –P(A) > P(B)

4 P1 Y1 D(B) D(A) MR(B) MR(A) MC(A) P1(A) P1(B)

5 Dumping P(B) < AVC(A) –Beach-head strategy –Price in short run < price in long run Improved competitive position in future and ability to charge higher price P(B) < AVC(A) –Learning curve –AVC in short run > AVC in long run Pricing to move down learning curve and develop cost-based competitive advantage Lower price increases demand and production per period of time

6 Dumping P(B) < AVC(A) –Objective: drive competitors out of market to monopolize market –How to distinguish predatory dumping from dumping based on competitive behavior not aimed at monopolization? –Substitute domestic competition law for anti-dumping provisions in trade agreements companies may be driven out of market before case is resolved

7 Trade Barriers Tariffs Export subsidies Quotas Local content requirements Preferential procurement Red tape barriers Foreign investment restrictions Contingency protection –Countervail –Anti-dumping –Safeguards –Unfair trade

8 Trade Barriers Tariffs –Import vs. export –Ad valorem vs. specific –Commodity classification –Base price for applying tariff Import Tariffs – protect domestic suppliers

9 Trade Barriers Export tariffs –Government extracts rents rather than domestic producers when domestic price < world price oil & gas under NEP in Canada –Canada receives revenues rather than US Treasury – case of lumber –China – tariffs on exports of steel Produces 1/3 of worlds total supply of steel

10 Trade Barriers Who pays tariff? –Terms of trade effects, incidence Small country –No market power – no terms of trade effects –Domestic consumers pay entire tariff –Revenues collected by government – costs of administration of tariff system and collection of revenues –Income distribution effects, employment effects

11 Trade Barriers Large country –Market power – terms of trade effects –Foreign suppliers pay tariff because world price lowered by full extent of tariff –Decrease in value of imports, but no change in volume of imports – no change in domestic production of goods –No income distribution effects other than as a result of use of tariff revenues; no employment effects other than as a result of use of tariff revenues

12 Non-Tariff Measures (NTMs) Export subsidies and auto bail-outs –Terms of trade effects –Production subsidies –Income tax holidays –Capital grants –Labor subsidies ($X per hour) – difference between labor and direct production subsidies –Below market rate export financing (export credit subsidy) – low interest rate loans for foreign customers –Government guarantees for receivables – enhances ability of domestic suppliers to borrow from banks at lower rates of interest to finance working capital –Government needs to raise revenues to pay for subsidy – incentive effects, administration and collection costs –Income distribution effects; employment effects

13 Non-Tariff Measures (NTMs) Import quotas –Small country – price taker in world markets –Tariff rate can be estimated to produce same outcomes as quota that is auctioned –Income distribution effects –Increase in domestic price economic rents created –Who gets the rents? If licenses for quotas given away, recipients of licenses (domestic – distributors; or foreign recipients – exporters) obtain rents If licenses auctioned – government receives rents similar to tariff –WTO decision against China China violated international free trade rules by limiting imports of books and movies Implications for control of information?

14 P1 Y1 S(A) S(World) D(A) 0 P1 0 Y1 1 Y1 Imports = 1 Y1 – 0 Y1

15 P1 Y1 S(A) S(World) D(A) 0 P1 0 Y1 1 Y1 Quota = 2 Y1 – 0 Y1 2 Y1 TS(A) 2 P1 3 Y1 3 Y1 + Quota

16 Non-Tariff Measures (NTMs) Voluntary export restraints (VERs) –Quotas on exports imposed by exporting country effectively a quota given away to foreign suppliers –Favored by exporting country as compared to tariffs or quotas that are auctioned economic rents/revenues accrue to exporting firms rather than to treasury of importing country –More costly to importing country but politically appears that exporting country admits to unfair trade practice and voluntarily agrees to rectify practice importing country does not appear to act as bully –Example of Japanese autos in 1970s and 1980s – more expensive models with higher profit margins exported to US enabled Japanese auto producers to gain foothold in this segment of market –China (January 2008): 10-15% tariff on exports of stainless steel sheets, 15% on steel tubes, 15% on cold-rolled sheets Reduce trade surplus – under pressure from EU and US (both threatening to impose tariffs Cut energy consumption and pollution

17 Non-Tariff Measures (NTMs) Local Content Requirements –Specified fraction of final good to be produced domestically – X% of sales price; Y% of total units sold domestically (case of autos under the Auto Pact; Canadian content provisions for broadcasting) –Under NAFTA: what constitutes domestically produced good (Mexico, US, Canada) exempt for tariffs within North American market – most goods include some value added from foreign (ex. NA) suppliers –Comparable to import quota with license given to foreign producers of intermediate inputs –Employment guarantees –Domestic suppliers may have competitive advantage but face market obstacles: overcoming reputation advantage of long-established foreign suppliers; late entrant needing to overcome learning curve advantage of first mover – foreign suppliers