Trade Policy Chapter 2

Tariffs  We will study the effects of trade barriers. Our analysis begins by examining the most basic barrier to trade-the tariff. Also, we cover some of the common arguments in favor of tariffs and show that there is usually a better public policy than imposing tariffs.  Import tariffs Specific tariffs: A specific tariff is an import duty that assigns a fixed monetary tax per physical unit of the good imported. Ad valorem tariffs: The ad valorem tariff is levied as a constant percentage of the monetary value of 1 unit of the imported good. Compound tariff (duty) is a combination of an ad valorem and a specific tariff.

Other features of tariff schedules  Preferential duties are tariff rates applied to an import according to its geographical source; a country that is given preferential treatment pays a lower tariff.  Generalized system of preferences (GSP) are offered by developed countries to developing countries for their manufactures and semi-manufactures. Most-favored-nation treatment (MFN/NTR): It represents an element of nondiscrimination in tariff policy.

The Economic Effects of Tariffs  The effects of a Tariff for a small country

The effects of a Tariff for a small country  The tariff placed on imported cloth raises the price of cloth from P w to P t  As a result of the price increase, consumer surplus declines and producer surplus expands. The country’s welfare falls by the amount equal to the production effect- triangle b-and the consumption effect- triangle d.

The Economic Effects of Tariffs  The effects of a Tariff for a large country

The effects of a Tariff for a large country  In a large country, a tariff on imports may be partially shifted to the domestic consumers through a higher price, P * toP 1, and partially shifted to foreign producers through a lower export price, P * to P 2. The country’s welfare effects are: (1)the loss of consumer surplus, area b+d, and (2)the gain of welfare through the terms of trade effect, area e.

The effects of a Tariff for a large country Costs and Benefits of a Tariff (summary)  A tariff raises the price of a good in the importing country and lowers it in the exporting country.  As a result of these price changes: Consumers lose in the importing country and gain in the exporting country Producers gain in the importing country and lose in the exporting country Government imposing the tariff gains revenue  To measure and compare these costs and benefits, we need to define consumer and producer surplus.

Arguments for Tariffs  One: Infant Government arguments Tariff be an attractive form of taxation for several reasons: Imports legally must pass through customs. A country’s tariff structure can be structured to accomplish the tax income. Tariffs may be levied on intermediate goods or capital equipment that is going to be purchased only by producers of final goods.

Arguments for Tariffs  Two: National Defense A tariff is a costly means of accomplishing the aim of national defense, the optimal policy is a domestic production subsidy. A government subsidy leads to an increase in domestic output with less dead weight loss than an equivalent tariff. Notice: Most kinds of subsidies are forbidden according to WTO.

Arguments for Tariffs  Three: Infant Industry It states that developing countries have a potential comparative advantage in manufacturing and they can realize that potential through an initial period of protection. It implies that it is a good idea to use tariffs (or import quotas) as temporary measures to get industrialization started.

Arguments for Tariffs  Four: Tariffs, Trade, and Jobs If there are enough tariffs on imports, the total number of jobs may be less than without tariff. The tariff has created jobs in this particular industry, but there are fewer jobs in other industries. In the long run, tariffs may reduce the overall level of employment. Discussion: Shall a senile industry be protected?

Antidumping, Countervailing Duties, and the Escape Clause  Industries may be able to obtain protection from imports competition using three forms of administered protection. Antidumping Countervailing duties The escape clause

 Antidumping Duties Types of dumping: sporadic dumping, persistent dumping and predatory dumping Antidumping laws protect domestic products from products being imported when the price is either below the foreign cost of production or the price in the exporters domestic.

 Countervailing Duties Countervailing duties is a tariff designed to offset the effects of foreign government subsidies for exports. Countervailing duties can be imposed to offset foreign government subsidies on exports.  Antidumping and Countervailing Duties-The problem for China.

 The Escape Clause The escape clause is designed to temporarily protect domestic industries from import competition in the hope that the domestic industry will be able to become competitive.

 Something may appear in the course of export An export tax is levied only on home-produced goods that are destined for export and not for home consumption. An export subsidy, which is really a negative export tax or a payment to a firm by the government when a unit of the good is exported, attempts to increase the flow of trade of a country. We will discuss it again later.

Non-tariff Distortions to Trade  Nontariff barriers to trade (NTBs) are government policies other than tariffs that tend to distort trade. These forms of protection are less visible but they have a significant impact on international trade in many industries.  We will mainly talked about quotas and why quotas provide domestic firms with a more certain form of protection.  We also talked about ways in which governments attempt to protect domestic industries without being so obvious about it.

Quotas  Import Quotas is a direct restriction on the quantity of a good that is imported.  Various forms of quotas.  Pay attention to “Voluntary” export restraints (VERs). It originates primarily from political considerations.

The Economic Effects of a Quota

The Economic Effects of a Quota  A quota placed on imported cloth raises the price of cloth from P w to P q. This higher price of cloth results in a decrease in consumer surplus. The welfare loss to the importing country consists of the production effect-triangle b, the consumption effect- triangle d, and the revenue effect-box c-that is captured by the foreign exporters.

The Economic Effects of a Quota  Welfare analysis of import quotas versus of that of tariffs: The difference between a quota and a tariff is that with a quota the government receives no revenue.  In assessing the costs and benefits of an import quota, it is crucial to determine who gets the rents.  When the rights to sell in the domestic market are assigned to governments of exporting countries, the transfer of rents abroad makes the costs of a quota substantially higher than the equivalent tariff.

The Economic Effects of a Quota  Methods that government can capture area c from the foreign products: auction quotas to foreign producers in a free market equivalent tariff  Why quotas reduce foreign competition in the short run, but the long-run anticompetitive effects be greatly diminished?

Other Non-tariff Distortions  Industry Policy Industrial Policies are government policies designed to create new industries or to support existing ones.  Consider taxes and labor regulations as examples National differences in the level of business taxes have the potential to distort trade. National differences in labor regulations can distort trade.

 Subsidies An export subsidy raises prices in the exporting country while lowering them in the importing country. I n addition, and in contrast to a tariff, the export subsidy worsens the terms of trade. An export subsidy unambiguously leads to costs that exceed its benefits.

 Government Procurement Introduction of government procurement In general, these provisions restrict the purchasing of foreign products by home government agencies. Purchases by the government can be directed towards domestic goods, even if they are more expensive than imports. Effects of government procurement to international trade.

 Domestic content provisions It attempts to reserve some of the value added and some of the sales of product components for domestic suppliers.  Labor and Environmental standards Labor standards: All countries regulate their domestic labor markets with respect to wages, conditions of work, and occupational safety. Environmental standards are laws that apply environmental standards to manufactured products.

 Technical Barriers To Trade Technical barriers refer to a country’s national standards for health, safety, and product labeling. How technical barriers distort trade  Examples Economic effect of technical barriers to Chinese exporters (in 2012)  23.9% Chinese exporters were influenced  Direct loss caused by technical barriers was USD68.6 billion, USD6.2 billion more than that in  Cost occurred to overcome technical barriers was USD28.0 billion, USD2.1 billion more than that in

 Try to think about all kinds of technical barriers How to overcome the technical barriers in foreign countries? How to use technical barriers to protect your own industries (or even economy).