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Trade Policy. Global Trade and Finance Prof. Bryson, Marriott School. Part I. Tariffs. A tariff is a tax, usually ad valorem (“on the value” or some percentage of the estimated market value of a commodity). It is imposed as a commodity crosses the frontier of the importing country. - PowerPoint PPT PresentationTRANSCRIPT
Trade PolicyTrade Policy
Global Trade and FinanceGlobal Trade and Finance
Prof. Bryson, Marriott SchoolProf. Bryson, Marriott School
Part I. TariffsPart I. Tariffs
A tariff is a tax, usually ad valorem (“on the value” or some percentage of the estimated market value of a commodity).
It is imposed as a commodity crosses the frontier of the importing country.
First, they create revenues Second, they hinder foreign
competition.
The Two Functions of Tariffs
Sd
Dd
World Price
Imports
Because the world price is below the domestic price, imports are equal to the shortage between Dd and Sd at the world price.
Trade Before TariffsTrade Before Tariffs
TariffsTariffs
Now, this country imposes a tariff,
World Price
Pw plus tariff
and the price rises from Pw to Pw + Tariff.
TariffsTariffs
We get the famous areas a,b,c, and d.
World Price
Wp plus tariff
Imports after tariff
a b c d
Imports before tariff
Consumers lose areas a+b+c+d in consumer’s Consumers lose areas a+b+c+d in consumer’s surplus as the tariff raises the price.surplus as the tariff raises the price.
World Price
Wp plus tariffa b c d
Producers gain Area ASmaller than what consumers lost
Net national loss from the quota: areas b and d. Net national loss from the quota: areas b and d. These are losses in consumer surplus not offset by These are losses in consumer surplus not offset by gains made elsewhere.gains made elsewhere.
World Price
Wp plus tariffa b c d
Government collects area c as tariff revenuesGovernment collects area c as tariff revenues
World Price
Wp plus tariffa b c d
b is the “Production effect.” This is a deadweight loss. Consumers purchases are shifted to the more expensive, less-efficient domestically produced product.
d is the “consumption effect,” also deadweight loss, resulting from the reduction in consumption due to the higher price.
World Price
Wp plus tariffa b c d
So the net national welfare loss is b + d.
More about b and dMore about b and d
The net losses, b and d, don’t appear The net losses, b and d, don’t appear very large, but very large, but 1% of US GNP is still well over $100 1% of US GNP is still well over $100
billionbillion Net national loss is substantially less Net national loss is substantially less
than consumer loss.than consumer loss.
More about b and dMore about b and d
There is also an administrative cost to a There is also an administrative cost to a tariff (part of c must be added to b and tariff (part of c must be added to b and d).d).
Protection has dynamic (technological Protection has dynamic (technological effects).effects).
Stagnation.Stagnation.
Part II. QuotasPart II. Quotas
Import QuotasImport Quotas
Historically, as tariffs decrease through the efforts of GATT/WTO, other barriers replace them. This has gone on since the early 1950s.
Import Quotas, a most popular substitute for tariffs, are limits on the total Q of imports permitted.
Import QuotasImport Quotas
With quotas, importing countries have absolute assurance about import quantities.
With tariffs, countries have less control over import volumes, since foreign exporters can cut prices to increase sales when they face tariffs.
QuotasQuotas Analytically speaking, quotas are not better and are
usually worse than tariffs. Total market supply is the domestic supply curve
plus the fixed quota at all prices above the world price.
Pw
Sd
Sd + Quota
Imports, limited to the Quota, simply shift the S curve out.
Quantities are determined by the Intersection of D and Sd + Quota.
Dd
Imports before quota
Imports after
But stop! But stop!
Let’s compare this to a tariff and we Let’s compare this to a tariff and we will notice they are almost identical will notice they are almost identical analyses.analyses.
Tariffs and Quotas ComparedTariffs and Quotas Compared
This country has imposed a tariff. How would a quota look?
World Price
Wp plus tariff
Just add the quota to the supply curve
Sd + QuotaSd
QuotasQuotas Once again, we have the same net
economic welfare situation illustrated by the areas in the strip abcd diagram
Pw
Sd
Sd + Quota
Dd
a b c d
Consumers lose areas a+b+c+d in consumer’s Consumers lose areas a+b+c+d in consumer’s surplus,surplus,
World Pricea b c d
SdSd + quota
Equilibrium price with quota where Dd = Sd + quota
Producers gain area a.Producers gain area a.
a b c d
SdSd + quota
Government Government couldcould collect area c collect area c auctioning import licenses.auctioning import licenses.
World Pricea b c d
SdSd + quota
Equilibrium price with quota where Dd = Sd + quota
Net national loss from the quota:Net national loss from the quota:at leastat least areas b and d areas b and d..
World Pricea b c d
SdSd + quota
Equilibrium price with quota where Dd = Sd + quota
a b c d
b is the “Production effect.” This is a deadweight loss. Consumers purchases are shifted to the more expensive, less-efficient domestically produced product.
d is the “consumption effect,” also deadweight loss, resulting from the reduction in consumption due to the higher price.
SdSd + quota
Additional Quota ProblemsAdditional Quota Problems
First, the quota can create domestic First, the quota can create domestic and foreign monopoly power.and foreign monopoly power.
The domestic firm may have very The domestic firm may have very high prices, and limited high prices, and limited competing imports don’t force competing imports don’t force prices down. prices down.
Additional Quota ProblemsAdditional Quota Problems
The foreign producers can tacitly The foreign producers can tacitly collude and charge the domestic collude and charge the domestic monopoly price.monopoly price.
Additional Quota ProblemsAdditional Quota Problems
Second, efficiency depends on how the rights to import are distributed. Import licenses can be allocated as follows:
1. by competing auctions (generates same as tariff revenues.
2. by sales (or bribes) by corrupt customs officials
Additional Quota ProblemsAdditional Quota Problems
3. by fixed favoritism – some arbitrary method, e.g., on the basis of pre-quota sales proportions
4. by resource-using application procedures. Use the bureaucratic method, viz., queues.
Part III. Part III. Voluntary Export Voluntary Export
RestraintsRestraints
Voluntary Export RestraintsVoluntary Export Restraints
Here, a major exporting partner is Here, a major exporting partner is warned to restrict its sales in your warned to restrict its sales in your country voluntarily. country voluntarily.
Voluntary Export RestraintsVoluntary Export Restraints
The importing country says: The importing country says:
“ “As you invade our market, you had As you invade our market, you had better restrain yourself voluntarily, or better restrain yourself voluntarily, or our parliament will cream you with our parliament will cream you with tariffs or quotas.”tariffs or quotas.”
Voluntary Export RestraintsVoluntary Export Restraints
President Reagan did this with President Reagan did this with Japanese auto exporters. Japanese auto exporters.
Unwittingly, this is like saying,Unwittingly, this is like saying,
““You had better behave like a You had better behave like a monopolist in our market!” (Restrict monopolist in our market!” (Restrict your output and do what you will your output and do what you will with your price.)with your price.)
VER’s, Quotas, and Free Trade, VER’s, Quotas, and Free Trade, See Figure 8.2 in the textSee Figure 8.2 in the text
A VER is, in effect, like a quota.A VER is, in effect, like a quota.
Let’s compare the VER, quota, and Let’s compare the VER, quota, and
free trade.free trade.
VER’s, Quotas, and Free Trade, VER’s, Quotas, and Free Trade,
Free TradeFree Trade
Dm = demand for importsDm
Fs= foreign supply of Ms
Fs
Small Country Large country (w/monopsony power)
With free trade, both countries enjoy same consumers surplus
With free trade, both cases enjoy the same producers surplus.
VER’s, Quotas, and Free TradeVER’s, Quotas, and Free Trade
Using a Using a QuotaQuota
Dm = demand for importsDm
Fs= foreign supply of Ms
Fs
Small Country Large country (with monopsony power)
With a quota, the small country loses consumer surplus, but can get the yellow area by auctioning import licenses.
With a quota, the large country gains the larger yellow box.
VER’s, Quotas, and Free TradeVER’s, Quotas, and Free Trade
Using a Using a QuotaQuota
Dm = demand for importsDm
Fs= foreign supply of Ms
Fs
Small Country Large country (with monopsony power)
With a quota, the exporter loses the larger green area of producer surplus.
VER’s, Quotas, and Free TradeVER’s, Quotas, and Free Trade
A VER is, in effect, like a quota.
Let’s compare the three types of protection VER, quota, and free trade.
Using a Using a VERVER
Dm = demand for importsDm
Fs= foreign supply of Ms
Fs
Small Country Large country (with monopsony power)With a VER, the small country loses consumer surplus. It gives the yellow box to the foreign monopolist.
With a VER, the large country is like the small one, exceptit gives its larger yellow box to the foreign monopolist.
Trade and Historical SocietiesTrade and Historical Societies
Contrast the cases of the USSR and ChinaContrast the cases of the USSR and China
The case of the Lamanites and NephitesThe case of the Lamanites and NephitesTHE BOOK OF HELAMAN, CHAPTER 6THE BOOK OF HELAMAN, CHAPTER 6
The righteous Lamanites preach to the wicked Nephites—Both peoples prosper during an era of peace and plenty—
7 And behold, there was peace in all the land, insomuch that the Nephites did go into whatsoever part of the land they would, whether among the Nephites or the Lamanites. 8 And it came to pass that the Lamanites did also go whithersoever they would, whether it were among the Lamanites or among the Nephites; and thus they did have free intercourse one with another, to buy• and to sell, and to get gain, according to their desire. 9 And it came to pass that they became exceedingly rich, both the Lamanites and the Nephites; and they did have an exceeding plenty of gold•, and of silver, and of all manner of precious metals, both in the land south and in the land north.
1010 Now the land south was called Lehi• and the land north was called Mulek•, which was after the son• of Zedekiah; for the Lord did bring Mulek into the land north, and Lehi into the land south.
11 And behold, there was all manner of gold in both these lands, and of silver, and of precious ore of every kind; and there were also curious workmen, who did work all kinds of ore and did refine it; and thus they did become rich.
12 They did raise grain in abundance, both in the north and in the south; and they did flourish exceedingly, both in the north and in the south. And they did multiply and wax exceedingly strong in the land. And they did raise many flocks and herds, yea, many fatlings.
13 Behold their women did toil and spin, and did make all manner of cloth•, of fine-twined linen and cloth of every kind, to clothe their nakedness. And thus the sixty and fourth year did pass away in peace. 14 And in the *sixty and fifth year they did also have great joy and peace, yea, much preaching and many prophecies concerning that which was to come. And thus passed away
the sixty and fifth year.
And what was the result?
How well did the Nephites handle How well did the Nephites handle their wealth?their wealth?
17 For behold, the Lord had blessed them so long with the 17 For behold, the Lord had blessed them so long with the riches of the world that they had not been stirred up to riches of the world that they had not been stirred up to anger, to wars, nor to bloodshed; therefore they began to anger, to wars, nor to bloodshed; therefore they began to set their hearts upon their riches; yea, they began to seek set their hearts upon their riches; yea, they began to seek to get gain that they might be lifted up one above another; to get gain that they might be lifted up one above another; therefore they began to commit secret• murders, and to therefore they began to commit secret• murders, and to rob and to plunder, that they might get gain.rob and to plunder, that they might get gain.
18 And now behold, those murderers and plunderers were 18 And now behold, those murderers and plunderers were a band who had been formed by Kishkumen and a band who had been formed by Kishkumen and Gadianton•. Gadianton•.