Trade Policies
•
Tariffs: import tax
–
Specific tariffs
• Taxes that are levied as a fixed charge for each unit of
goods imported
– Example: A specific tariff of €10 on each imported
bicycle with an international price of €100 means that
customs officials collect the fixed sum of €10.
–
Ad valorem tariffs
• Taxes that are levied as a fraction of the value of the
imported goods
– Example: A 20% ad valorem tariff on bicycles generates
a €20 payment on each €100 imported bicycle.
Trade Policies
•
Why does one country impose tariffs?
–
–
•
Protection of national competitors;
Source of revenues: particularly true for LDCs.
• In the 1970s petroleum chocks: arguments for government
intervention in trade emerged in advanced countries.
• Over the 1980s: new technologies and protection of high
technological industries.
• In the 1990s a dispute arose over the effects of growing
international trade on workers in developing countries.
“New” forms of protection non-tariffs barriers:
–
–
–
–
Quotas: quantitative restrictions on imports;
Voluntary export restrictions;
Subvention
Regulatory and technical standards…
Trade Policies
•
Different form of protection
Commercial Policy Instruments
Trade Contraction
Price
Quantity
Tariff
Export tax
Import quota
Voluntary Export
Restraint (VER)
Trade Expansion
Price
Import subsidy
Export subsidy
Quantity
Voluntary Import
Expansion (VIE)
1
Trade Policies
• Controversies 1970s-1990s.
– In the 1970s petroleum chocks: arguments for government
intervention in trade emerged in advanced countries.
– Over the 1980s: new technologies and protection of high
technological industries.
– In the 1990s a dispute arose over the effects of growing
international trade on workers in developing countries.
• Two kinds of market failure that seem to be present and
relevant to the trade policies of advanced countries:
– Technological externalities (see last lecture);
– Monopoly profits in highly concentrated industries.
Trade Policies
•
How to measure trade restriction
–
–
–
Negotiated bound tariffs (WTO) and effective (observed) tariffs
rates; most of the time different. Higher bound tariffs than
effective tariffs rate for LDCs;
Mean values over detailed product level (HS-6 classification).
Æ BUT aggregate mean tariffs suppress tariffs peaks;
Non-trade policies: difficult to measure (Antidumping: number
of cases, …)
Trade Policies
• Supply, Demand, and Trade in a Single Industry
– Suppose that there are two countries (Home and Foreign).
– Both countries consume and produce wheat, which can be
costless transported between the countries.
– In each country, wheat is a competitive industry.
– Suppose that in the absence of trade the price of wheat at Home
exceeds the corresponding price at Foreign.
• This implies that shippers begin to move wheat from Foreign
to Home.
– The export of wheat raises its price in Foreign and lowers
its price in Home until the initial difference in prices has
been eliminated.
2
Trade Policies
• Supply, Demand, and Trade in a Single Industry
– Suppose that there are two countries (Home and Foreign).
– Both countries consume and produce wheat, which can be
costless transported between the countries.
– In each country, wheat is a competitive industry.
– Suppose that in the absence of trade the price of wheat at Home
exceeds the corresponding price at Foreign.
• This implies that shippers begin to move wheat from Foreign
to Home.
– The export of wheat raises its price in Foreign and lowers
its price in Home until the initial difference in prices has
been eliminated.
Trade Policies
• To determine the world price (Pw) and the quantity trade
(Qw), two curves are defined:
– Home import demand curve
• Shows the maximum quantity of imports the Home country
would like to consume at each price of the imported good.
– MD = D(P) – S(P)
– Foreign export supply curve
• Shows the maximum quantity of exports Foreign would like to
provide the rest of the world at each price.
– XS = S*(P*) – D*(P*)
Trade Policies
S
Price, P
Price, P
A
PA
2
P2
1
P1
MD
D
S1 S2
D2 D1 Quantity, Q
D 2 – S2
D 1 – S1
Quantity, Q
Properties of the import demand curve:
• Intersects the vertical axis at the closed economy price of the importing country;
• Downward sloping;
• Flatter than the domestic demand curve in the importing country.
3
Trade Policies
Price, P
S*
Price, P
XS
P2
P1
P *A
D*
D*2 D*1
S*1S*2 Quantity, Q
S*1 – D*1 S*2 – D*2 Quantity, Q
Properties of the export supply curve:
• Intersects the vertical axis at the closed economy price of the exporting country;
• upward sloping;
• flatter that the domestic supply curve in the exporting country.
Trade Policies
Trade Policies
• Effects of a Tariff
– Assume that two large countries trade with each other.
– Suppose Home imposes a specific tariff on every unit of wheat
imported.
4
Trade Policies
• In the absence of tariff, the world price of wheat (Pw) would be equalized in both
countries.
Trade Policies
• With the tariff in place, the price of wheat rises to PT at Home and
falls to P*T (= PT – t) at Foreign until the price difference is €t.
• In Home: producers supply more and consumers demand
less due to the higher price, so that fewer imports are
demanded.
• In Foreign: producers supply less and consumers demand
more due to the lower price, so that fewer exports are
supplied.
• Thus, the volume of wheat traded declines due to the
imposition of the tariff.
Trade Policies
If Home is a small country and
imposes a tariff, the foreign
export prices are unaffected.
The domestic price at Home (the
importing country) rises by the
full amount of the tariff.
5
Trade Policies
• Measuring the Amount of Protection: How protection a
trade policy actually provides?
– One can express the amount of protection as a percentage of
the price that would prevail under free trade;
– Two problems arise from this method of measurement:
– In the large country case, the tariff will lower the foreign
export price;
– Tariffs may have different effects on different stages of
production of a good.
• Effective rate of protection
– One must consider both the effects of tariffs on the final price of
a good, and the effects of tariffs on the costs of inputs used in
production.
Trade Policies
• Effective rate of protection: example
– A US airplane that sells for €50 million has cost €60 million to
produce;
– half of the purchase price of the aircraft represents the cost of
components purchased from other countries;
– A subsidy of €10 million from the US government cuts the cost of
the value added to purchasers of the airplane from €30 to €20
million. Thus, the effective rate of protection is (30-20)/20 = 50%.
Æ The actual protection provided by a tariff will not equal the tariff
rate if imported intermediate goods are used in the production of
the protected good.
Trade Policies
Source: CEPII N° 195 - NOVEMBER 2000
6
Trade Policies
• Costs and Benefits of Tariffs
– A tariff raises the price of a good in the importing country and
lowers it in the exporting country.
Æ Consumers lose in the importing country and gain in the
exporting country;
Æ Producers gain in the importing country and lose in the exporting
country;
Æ Government imposing the tariff gains revenue.
• To measure and compare these costs and benefits, we need to
define consumer and producer surplus.
Trade Policies
Consumer surplus
Measures the amount a consumer
gains from a purchase by the
difference between the price he
actually pays and the price he would
have been willing to pay.
Derived
curve.
from
the
market demand
Graphically, it is equal to the area
under the demand curve and above the
price.
Trade Policies
Producer surplus
Measures the amount
a producer gains from
a
sale
by
the
difference between the
price
he
actually
receives and the price
at which he would
have been willing to
sell.
Derived
from
the
market supply curve.
Graphically, it is equal
to the area above the
supply
curve
and
below the price.
7
Trade Policies
Importer is a large economy
b and d measure the loss to the nation as a
whole (efficiency loss) and the area of the
rectangle e measures an offsetting gain (terms
of trade gain).
The efficiency loss arises because a tariff
distorts incentives to consume and produce.
Producers and consumers act as if imports
were more expensive than they actually are.
Triangle b is the production distortion loss and
triangle d is the consumption distortion loss.
The terms of trade gain arises because a tariff
lowers foreign export prices.
Trade Policies
Trade Policies
• Optimal tariff in the case of large country
– Tariff Æ term of trade gains
– What is the tariff that maximizes country’s welfare?
Æ Optimal tariff
welfare
Optimal
tariff
Prohibitive
tariff
tariff
8
Trade Policies
• Optimal tariff in the case of large country
– If C is the cost of importing, and M the quantity of imports:
C = pT* M
– Marginal Cost is thus:
∆C = pT* ∆M + M∆pT*
∆C
∆M
= pT* + M
⎛ M ∆p * ⎞
∆pT*
= pT* ⎜⎜1 + * T ⎟⎟
∆M
p ∆M ⎠
⎝
⎛
1
MC = pT* ⎜1 +
⎜ ε
⎝
⎞
⎟
⎟
⎠
Foreign Exports’ elasticity
Trade Policies
– Marginal cost of importing = Marginal Revenue
MC = pT = pT* (1 + t )
⇒t =
1
εA
– Optimal tariff depends on the elasticity of foreign exports. The
more elastic is foreign export, the smaller the tariff
• The large country set a tariff to max. its welfare…
• …BUT, risk of creating a trade war
Trade Policies
Price, P
S
In the case of a small country,
country the
tariff reduces welfare for the
importing country because no
positive terms of trade effects.
PT
PW
a
b
c
d
D
S1 S2
D2 D1 Quantity
QT
= consumer loss (a + b + c + d)
= producer gain (a)
= government revenue gain (c )
9
Trade Policies
• Export Subsidies (specific or ad valorem)
• A payment by the government to a firm or individual that
ships a good abroad
– When the government offers an export subsidy, shippers
will export the good up to the point where the domestic
price exceeds the foreign price by the amount of the
subsidy
Trade Policies
Effects of an Export Subsidy
An export subsidy raises prices in the
exporting country while lowering
them in the importing country.
In 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.
Trade Policies
Europe’s Common Agricultural Program
10
Trade Policies
• Quotas
– An import quota is a direct restriction on the quantity of a good
that is imported;
– Usually enforced by issuing licenses to some group of
individuals or firms (auction of quota rights).
• Import quota always raises the domestic price of the
imported good.
– License holders are able to buy imports and resell them at a
higher price in the domestic market.
– The profits received by the holders of import licenses are known
as quota rents.
Trade Policies
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.
Price in
EU Market
World Price
Quota
– In assessing the costs and
benefits of an import quota, it
is crucial to determine who
gets the rents.
Trade Policies
• Voluntary Export Restraints
– A voluntary export restraint (VER) is an export quota
administered by the exporting country;
– VERs are imposed at the request of the importer and are agreed
to by the exporter to forestall other trade restrictions.
• A VER is exactly like an import quota where the licenses
are assigned to foreign governments and is therefore
very costly to the importing country.
• A VER is always more costly to the importing country
than a tariff that limits imports by the same amount.
• A VER produces a loss for the importing country.
11
Trade Policies
• Summary
Trade Policies
• Tariffs and quotas in the presence of domestic monopoly
A Monopolist Under Free Trade
The threat of import competition
forces the monopolist to behave like a
perfectly competitive industry.
Trade Policies
• Tariffs and quotas in the presence of domestic monopoly
A Monopolist Protected by a Tariff
The tariff allows the monopolist to
raise its price, but the price is still
limited by the threat of imports.
12
Trade Policies
• Tariffs and quotas in the presence of domestic monopoly
A Monopolist Protected by an Import
Quota
The monopolist is now free to raise
prices, knowing that the domestic
price of imports will rise too.
Trade Policies
• Tariffs and quotas in the presence of domestic monopoly
Comparing a Tariff and a Quota
A quota leads to lower domestic
output and a higher price than a tariff
that yields the same level of imports.
Trade Policies
• Tariffs analysis in General Equilibrium
Food
CF
Free Trade Equilibrium for a Small
Country
The country produces at the point on
its production frontier that is tangent
to a line whose slope equals relative
prices, and it consumes at the point
on the budget line tangent to the
highest possible indifference curve.
UF
PF
p* =
pT
pF
Textile
13
Trade Policies
• Tariffs analysis in General Equilibrium
Food
UT
CF
Tariff on food
UF
CT
PT
PF
p tariff
p*
Textile
Trade Policies
• Tariffs analysis in General Equilibrium
Food
UT
CF
Equivalence between tariffs and
production subsidy and consumption
tax
UF
CT
CT1
PT
UT1
p tariff
PF
p
tariff
p*
Textile
14