1. 1 ECONOMICS 3150N Winter 2013 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 10: April 4 Ch. 9, 10, 12

3. 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. 4 P1 Y1 D(B) D(A) MR(B) MR(A) MC(A) P1(A) P1(B)

5. 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. 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. 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. 8 Trade Barriers Tariffs –Import vs. export –Ad valorem vs. specific –Commodity classification –Base price for applying tariff Import Tariffs – protect domestic suppliers

9. 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 world’s total supply of steel

10. 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. 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. 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. 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. 14 P1 Y1 S(A) S(World) D(A) 0 P1 0 Y1 1 Y1 Imports = 1 Y1 – 0 Y1

15. 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. 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. 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

18. 18 Non-Tariff Measures (NTMs) Procurement Preferences –Preferential price advantage given to domestic suppliers – government will buy from domestic supplier as long as price is no more than X% greater than that of foreign supplier  similar to tariff –Similar to restrictive quota or tariff when foreign suppliers prevented from bidding Red Tape Barriers –Health and safety standards – infected cattle, SARs –Customs classifications –Harassment potential

19. 19 Non-Tariff Measures (NTMs) Domestic taxes and terms of trade –Carbon taxes in US and world price of oil Changing environmental rules to allow the use of fracking technologies for oil and gas

20. 20 Non-Tariff Measures (NTMs) Contingency Protection –Security of access issue related to FTA –Countervailing duties – in case of subsidies; definition of subsidies –Anti-dumping – predatory, sporadic, persistent (price discrimination) –Balance of payments, employment safeguards

21. 21 Non-Tariff Measures (NTMs) Countervailing duties –Definition of subsidies – health care system, education, etc. –Value of subsidies –Terms of trade –Costs to domestic industry – distinct from economic shocks, competition –Magnitude of tariff to level playing field –Duration of protection

22. 22 Non-Tariff Measures (NTMs) Anti-dumping –Distinguish among predatory, sporadic, persistent –Does nature of dumping matter? –Degree of dumping – price differential –Costs to domestic industry – distinct from economic shocks, competition –Magnitude of tariff to level playing field –Duration of protection

23. 23 Non-Tariff Measures (NTMs) Safeguards –Flexible exchange rates as shock absorber –Global shock or country-specific shock –Herd effect – pace of outsourcing accelerates –Costs to domestic industry – labor adjustment policies, unemployment insurance, training programs –Magnitude of tariff –Duration of protection

24. 24 Non-Tariff Measures (NTMs) Unfair Trade (S. 301) –3 rd country and home country effects –Definition of unfair trade – wide ranging and ambiguous –Harassment – who pays for investigation and legal proceedings (asymmetric costs of fighting complaints) –Ambiguous interpretation of law – susceptibility to political pressures Definition of injury (threshold for injury for retaliation), causation (links between cause and effect, external variables) –US domestic laws including trade remedy laws supersede international obligations of US

25. 25 Non-Tariff Measures (NTMs) Foreign investment restrictions –Rights of establishment – limits on foreign investment and control (airlines, telecommunications, broadcasting, cable, banks) –Performance requirements –National treatment

26. 26 Canada-US FTA Gains from trade –Traditional: comparative advantage, new products –Larger markets: economies of scale, plant economies (specialization), learning curves –Increased competition: new products, higher quality, lower prices (border shopping), efficiency –Minimize trade disputes – less likely to be side-swiped when trading partner initiates trade dispute against other countries; dispute resolution mechanism fairer and quicker in resolving trade disputes Consider softwood lumber under NAFTA, subsidies for regional jets

27. 27 Canada-US FTA Losses –Income losses for owners of relatively abundant resources Implications for income inequality – skilled vs. unskilled workers; owners of capital vs. workers –Adjustment to new trade patterns – unemployment during transition –Race to the bottom – “Right to work” laws in the US; lower minimum wage rates

28. 28 Canada-US FTA Argument in favor of FTA with US based on Canada exploiting economies of scale and gaining secure access to US market (required to encourage investment in Canada and restructuring) –Productivity levels in Canada 25% below US because Canadian branch plant replica of US Same number of varieties and shorter production runs; Less competition thus X-inefficiency and less incentive to innovate –Plant economies of scale Standard internal economies of scale and per unit costs decrease with reduction in number of products produced in each plant

29. 29 Canada-US FTA Problems with argument: –If economies of scale so important why did some firms not specialize and drive competitors out of the market? –Tariff barriers had been declining since 1947 – what if management a problem? –Security of access limited incentives to restructure

30. 30 FTA, NAFTA Objectives –Eliminate barriers to trade in goods and services –Expand liberalization of conditions for cross-border investments –Dispute resolutions – more binding, more effective enforcement –Facilitate conditions for fair competition (labor and environment codes) –Rules of origin: 50% of value added (62.5% for autos) must originate in free trade area –Eliminates import and export restrictions on energy products, no price discrimination between domestic and foreign consumers of energy products –National treatment Trade in services – subject to regulation (professional services); labor mobility; foreign ownership restrictions (financial services, broadcasting, transportation)

31. 31 NAFTA Ch. 11 Allows companies to sue any of the NAFTA governments for violation of that government’s commitments under the agreement Allows company to sue if it believes it has experienced either expropriation or government conduct tantamount to nationalization or expropriation – any regulation or policy change that reduces a firm’s profits and value

32. 32 GATT GATT/WTO [General Agreement on Tariffs and Trade/World Trade Organization] –3 basic principles Nondiscrimination (MFN) – preferential trading arrangements violate this principle; NAFTA an example of preferential trading arrangement Elimination of quotas (except for balance of payments problems) – international system of quotas in textiles, proliferation of VERs, exploitation of escape clause Consultation to solve trade disputes – weak enforcement mechanism; US domestic laws supersede GATT, NAFTA –As Tariffs , NTMs  because D for protection constant –NTMs higher cost form of protection –Canada essentially bystander in MTNs – EU, US and Japan dictated outlines of agreements

33. 33 GATT 9 Rounds of multilateral trade negotiations – Kennedy, Tokyo, Uruguay and Doha rounds addressed NTMs as first 5 focused on tariffs only –Tokyo, Uruguay and Doha also attempted to extend trade rules to services and establish investment rules –WTO created to replace GATT secretariat Responsible for enforcement of agreement and dispute resolution More formal procedures with tighter deadlines –GATS (General Agreement on Trade in Services) –TRIPS (Agreement on Trade-Related Aspects of Intellectual Property

34. 34 GATT Difficulties in reducing NTMs –Definition of subsidies –Escape clause provisions –Dispute settlement mechanism with effective enforcement – market power of different countries –Trade-offs: Problems in measuring concessions –North-South issues: need to develop economies –Agriculture sector and political importance of farmers Major problem for Doha Round

35. 35 Agriculture Support Government support, 2008: % of gross farm receipts Canada: 13.0% Australia: 5.9% Brazil: 5.0% China: 8.6% EU27: 24.9% Japan: 47.8% Russia: 10.8% S. Korea: 51.7% Mexico: 13.1% Turkey: 24.5% US: 6.8%

36. 36 GATT GATT includes articles on anti-dumping (Article 6), countervail (Article 16) and escape clause (Article 19) –Dumping: export price below domestic market price (below cost of production or normal home market price) –Escape clause: temporary protection to limit imports causing serious injury to domestic producers –Countervail: tariffs to offset effects of subsidies –Problems: defining subsidies, determining existence of dumping, measuring degree of dumping, measuring injury, determining causation

37. 37 GATT and US Trade Laws US contingency protection legislation – countervail, anti-dumping, escape clause and unfair trade (S. 301) –First three deal with imports, unfair trade deals with exports as well –US definitions of injury and causation differ from spirit and letter of GATT –Unfair trade not part of GATT – trade panel has found S. 301 to violate GATT Issue of sovereignty for US