ECON GU4500
International Trade
Jonathan Dingel
Spring 2026
Assignment 3
Instructions
You can work on problem sets in groups of up to three people. List the names and UNIs of
all group members who contributed on the first page of the uploaded assignment. You each
need to join an Assignment 3 group on the Courseworks groups page so that grading of the
assignment applies to all members.
This assignment is worth 100 points in total. Assignments submitted after the deadline
incur a 25% penalty. Submissions that are more than 24 hours late will receive zero credit.
See the syllabus for details on permitted use of AI tools.
This assignment may require you to draw diagrams. Embed all of them into a single
PDF that you upload on CourseWorks. To produce diagrams, you can use computer tools
(e.g., TikZ in LATEX) or you can draw them by hand and then scan/photograph them.
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Export pioneers (40 points)
So far, our export decision model has considered a firm’s productivity z to be exogenously
given. This exercise asks you to think about the nature and cultivation of managerial capabilities in the context of an article about Argentinian export pioneers by Artopoulos, Friel,
and Hallak in the Journal of Development Economics.
As in the model seen in class, assume that πd (z) and πx (z) are increasing functions,
the former starting at the origin (πd (0) = 0) and the latter at a negative value due to
the fixed cost (πx (0) = −fx ). Total profits are the sum of domestic and export profits:
π(z) = πd (z) + max{0, πx (z)}.
a) Suppose that productivity z can be acquired at some cost. What is the value of increasing
z (what is the increase in profits) at any given level of z? Which firms have the largest
marginal return to increasing z? How does this marginal return relate to exporting?
b) In our model thus far, firms differ in their productivities z but incur the same marginal
and fixed costs of exporting, mx and fx . Discuss one of the case studies in Section
3 of Artopoulos, Friel, and Hallak (2013). How well does that case line up with the
assumption of heterogeneous productivities and common export costs? Which facts from
the case does our model from week 2 match and which does it not?
c) In the week 2 model, every firm faced the same demand curve, but higher-z firms had
lower marginal costs (m = ρ/z). Let’s now assume that z represents better product
quality rather than higher productivity. Relative to the model in week 2, change the
inverse demand curve to be
Dℓ (qℓ ) = zqℓρ−1
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(higher z is a demand shifter that increases quantity purchased at a given price) and
change the marginal cost function to be
m=ρ
(marginal cost of production is a constant that is independent of z). Plot the resulting
πd (z) and πx (z) functions. Which firms export? Compare the outcomes in this z-isproduct-quality model with the outcomes in the z-is-productivity model. Does this model
with product quality better match the facts in the case from Section 3 of Artopoulos,
Friel, and Hallak (2013)?
d) Continuing with the product quality interpretation of z, suppose that z is a number
between zero and one (when discussing productivity, z was between zero and positive
infinity). Now suppose that the domestic market and export market have different tastes:
the two inverse demand curves are Dd (qd ) = zqdρ−1 and Dx (qx ) = (1 − z)qxρ−1 . Thus,
domestic consumers like a high value of z, while foreign consumers like a low value of z.
Plot the resulting πd (z) and πx (z) functions. Which firms sell to the domestic market?
Which firms sell to the export market?
e) In light of the previous result and the case studies in Artopoulos, Friel, and Hallak,
discuss how the correlation between a firm’s domestic sales and its export sales depends
on product-market fit and the (heterogenous) costs of exporting.
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Washer tariffs (20 points)
In January 2018, the White House announced that it would take safeguard action after
the USITC determined that a surge of washing-machine imports was harming the domestic
industry. President Trump announced a 20% tariff on the first 1.2 million imported washers
and a 50% import tax rate for additional washers imported in 2018.
At the time, a South Korean report said that LG “was planning to raise prices of its
washing machines in the United States by about 4-8 percent in March.” Goldman Sachs
forecast “an 8 percent to 20 percent increase in the price of a new washing machine in the
next year.” In particular,
The Trump administration announced Monday it will impose a 20 percent tariff
on the first 1.2 million imported large residential washing machines in the first
year and a 50 percent tariff on machines above that number. For his part,
Samuel Eisner expects the same level of imports in 2018 as in years past, around
3.4 million washing machines. His assumption implies an effective tariff rate of
roughly 40 percent, and if international suppliers pass along half the cost of the
tariff, Americans could wind up shelling out a premium.
Economist Dani Rodrik tweeted that “if retail prices of washers-dryers increase only by
around $50, this will be a big ‘net gain’ for the US economy.” Let’s figure out why Rodrik
said this. Start from our partial-equilibrium diagram for a small economy that is a price
taker. The key ingredients in this model are: domestic demand slopes downward, domestic
supply slopes upward, and the world price is below the autarky price.
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Please answer the following questions:
a) In this model, by how much should the domestic price of washing machines increase when
a 40% tariff is imposed and consumers still import washers?
b) In this model, should we expect the same level of imports in 2018 as in years past?
c) Now suppose that this economy is “large”, which means that its policies can affect the
world price of washing machines. That is, international suppliers do not necessarily keep
the same world price and simply “pass along” the tariff. What must happen for a 40%
tariff to cause an 8% increase in the domestic price of washing machines?
d) Analyze the welfare consequences of a 40% tariff imposed by a large economy that causes
an 8% increase in its domestic price of washing machine. Assume the US previously
did not tax washer imports and now it charges a 40% tariff. Your diagram should show
welfare consequences for consumer surplus, producer surplus, and government revenue.
They will show up as triangles, rectangles, and trapezoids. Who wins, who loses, and
what is the net effect on welfare?
e) Suppose that the 40% effective tariff rate causes the domestic price of washing machines
to increase by only 8%. What government actions are necessary for this outcome to be
welfare-improving for all US consumers and producers?
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Tariff peaks (40 points)
This question asks you to look for tariff peaks. In class, we highlighted examples of tariff
peaks within men’s and women’s suits of artificial and synthetic fibers in the US tariff
schedule. Your assignment is to find some more examples for the United States or another
country. You may not use HS headings that appeared in the slides in your response to this
question (do not use 6103, 6104, 9502, 9503, nor the codes in the Dian Zhang graphic). You
may not use heading 9903, which has the trade-war tariffs.
a) First, identify at least one 4-digit HS code in which there is substantial variation in the
applied MFN tariff rates across the 6-digit HS codes within that 4-digit category. Second,
identify at least one 6-digit HS codes in which there is substantial variation in the applied
MFN tariff rates across the 8-digit HS codes within that 6-digit category. For our purpose
here, there is “substantial variation” when one of the following is true:
• Ad valorem tariffs: The maximum ad valorem tariff is at least 5 percentage points
greater than the minimum ad valorem tariff and at least twice the minimum ad
valorem tariff.
• Specific tariffs: The minimum specific tariff is at least $0.04/kg and the maximum
specific tariff is at least 2 times the minimum.
b) For each of the HS codes, can you provide an economic rationale for the variation that
you observe?
c) Preferential trade agreements (PTAs) reduce tariff rates below their MFN levels. Identify
a case in which the rate of duty applied to PTA partners notably varies within a 6-digit HS
code. This could be variation in duties across 8-digit products or across partner countries
for the same product. For example, the slide presenting HS heading 6103 reveals that
Oman faces more variation within 6103.10 than other PTA partners.
Suggested methodology
You are welcome to study any country’s tariff rates.1 If you choose the United States, here
is a suggestion for working with the US tariff schedule:
• Go to http://tariffdata.wto.org/ReportersAndProducts.aspx and select United
States (2017) as reporter and select all products. Download the Excel file, which will
be about 17MB after unzipping it.
• Within the Excel file, look for 4-digit or 6-digit HS subheadings that have more than
one tariff line (TL).
• Search for those HS codes in the 2021 Harmonized Tariff Schedule to obtain the 8-digit
HS code tariff rates. Look for peaks.
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For example, the EU tariff schedule is available on the European Commission website.
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If you would prefer to use statistical software, the entire US HTS is posted on Canvas in
a 3.7MB file called 2021USHTS.csv.2 You could write code that identifies the peaks in these
data.
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You could download this from https://hts.usitc.gov/export by selecting HS codes 0101 to 9999.
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