Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import Protection: Non-Tariffs Barriers Import Quota Perfect Competition import quota Equivalence to the tariffs Import Quota under Monopoly It causes more deadweight loss compared to the tariffs Voluntary Export Restraints Exporter can control for the export quantity, and catch the “rent”.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import-Related Domestic Policy Direct import policy are restricted by the GATT/WTO. Instead, countries appeal to domestic policies: Industrial policies: production subsidy, cash subsidy, tax reductions, R&D funding. Government procurement Regional Special Supports Bureaucratic regulations
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import-related Industrial Policy
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import-related Industrial Policy
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Welfare Analysis More production, but same consumption. This causes import decrease. Consumer Surplus unchanged Producer Surplus up=a Gov Revenue=-(a+b) DWL=-b DWL under tariffs= -(b+d)
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Bureaucratic regulations Technical Requirement Measurement: feet or meter Transportation Regulations: LHS (HK,UK,JP, AUS) or RHS Safety Regulation: Tire, Glass, Toy Health Regulations: Agreement on the Application of Sanitary and Phytosanltary Measures. Label and Package Regulation: rule of origin, contents.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Other Non-Tariffs-Barriers Specific customs procedure requirement Local Domestic Contents Import Monopoly Behavior Foreign Exchange Rate Manipulation and Foreign Currency Control
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Contingent Protection Anti-dumping duties Anti-export-subsidy duties
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Anti-Dumping Duties Market Structure: Foreign Monopoly No domestic firm No foreign consumers Home imposes anti-dumping duty t Home Gov Revenue=c Home Consumer Surplus=-(b+d) If c>b+d, then home get welfare improve due to the anti-dumping tax; otherwise, it is a loss. Because c can be decomposed into a+b; then home gains provided that a-d>0
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Anti-Dumping Duties
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Anti-Dumping Duties
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. World Welfare Change Importer’s change= a-d Exporter’s production change Price gain-cost soar=b-c=-a Production shrinks=Px*(Qx’-Qx)=e Total welfare change =home +foreign=a-d+ (-a-e) = -(d+e) world Deadweight Loss
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Anti Export Subsidy Duties Japan US
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Now, US imposes an anti export subsidy duty. Such money equals a part of the amount paid from the Japan Government but has effects on the U.S. market. Then, the new equilibrium point is A, export to the U.S. is still X0. US Loss=triangle_acd Japan Gain=Rectangle_abcd
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Analysis of the Welfare Change
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Production Subsidy All subsidies other than export subsidy Without production subsidy, free trade price is pw, and export X1. With production subsidy, Government subsidizes s to each unit produced. Supply shifts rightward due to the cost decrease by s. But consumer still faces the same price since firms don’t need to increase price, they already get support from the government Producer surplus=a+b+C Government expenditure: a+b+c+d DWL=d It is better than the export subsidy: DWL=b+d
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Production Subsidy
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Export Subsidy for Small Country
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Price Floor for Exporting Industries Price floor is not a trade policy, but it would foster or discourage trade when the government uses such a policy on exporting industries. Government always guarantees a price floor to the exporting industries. Accordingly, the export is guaranteed(=X1) regardless of the world price fluctuation.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Price Floor for Exporting Industries
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Price Floor for Exporting Industries Welfare change: Producers gain=a+b+c Consumers loss=a+b Government Expenditure=b+c+d DWL=b+d Different from the export subsidy though they look similar from the diagram. Under export subsidy, the subsidy for each unit of exporting good is a constant; but it is flexible under price floor scheme.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Price Support for Import-Competing Industries Government provide a high fixed price for commodities in some import sectors. This could change the trade pattern! Example: European Agricultural Commodities. Government pays subsidy for the price gap. Products are sold at the guaranteed price in the domestic market, but sold at the world price in the foreign market. The gap is subsidized by the government.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Price Support for Import-Competing Industries
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Trade Sanctions Two types: Export Embargos Import Sanctions Example: the Helms-Burton Act:the Iran/Libya Sanctions Act
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Export Embargos US imposes sanction to Cuba, but Russia still export products to Cuba. This will affect the export supply curve in Cuba. It would be steeper due to the falling foreign supply. Sn: Supply curve for a non-executed country Se: Supply curve for an executed country
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Export Embargos
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Welfare Analysis for Export Embargos Without trade sanction, the gains from trade for the USA=a; the gains from trade for Russia=b; With trade sanction, the supply curve is shifted up. In Cuba, the new quantities supplied is 15 since Russia exports more to Cuba, but consumers in Cuba has to pay more at a higher price. Cuba’s Loss=c+d due to the consumer loss U.S.’s Loss=a Russia’s Gain=c World Net loss=a+d
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import Embargos US imposes sanction to Iran, but Japan still import products from Iran. This will affect the import demand curve in Iran. How does it change? It would be steeper due to the falling foreign demand. Dn: Demand curve for a non-executed country De: Demand curve for an executed country
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Welfare Analysis for Import Embargos
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Welfare Analysis for Import Boycott Without trade sanction, the gains from trade for the USA=a; the gains from trade for Japan=b; With trade sanction, the demand curve is steeper. In Iran, the new quantities demanded is 15 since Japan imports more from Iran, but producers in Iran now earn less for each quantity supplied. Iran’s Loss=c+d due to the producers loss U.S.’s Loss=a Japan’s Gain=c World Net loss=a+d
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Evaluate Trade Sanction Which one is worse? The sanctioned or the killer? Depends If the sanctioned has low export supply elasticity or import demand elasticity, then it will get hurt dramatically due to the trade sanction; otherwise, it would not. Now consider a case that the sanctioned has a high export supply elasticity But the killer faces different import demand elasticity
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Elastic & Inelastic Import Demand Curves
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Elastic & Inelastic Import Demand Curves In case (a), the two countries didn’t get much hurt from the trade sanction since both of them have high elasticities. In case (b), the killer got much hurt from its sanction. Its loss=a >the counterpart’s loss=c+d
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. What factors affect the sanction’s effect? Trade openness: the smaller openness level, the less importance of international trade, the higher the elasticity is. Characteristics of the importing products: luxury or necessity? Duration of the Sanction: the longer the sanction, the smaller the impact is. Sanction Coverage: the more the countries’ participation, the larger the impact is.