Welcome to
EC 382: International
Economics
By: Dr. Jacqueline Khorassani
Week Seven
1
Week Seven: Class One


Tuesday, October 16
14:10-15:00
AC 202
2
Your exams are graded. I
am so




I will bring them to class tomorrow
Is it ok if I post the results on my
webpage based on your ID numbers?
If you have any objection to this
method, please let me know before
the end of this week.
If I don’t hear from you, I assume that
you are ok it.
3
News


Still no news about a new room for us
Library had not ordered the book; the
first time we placed the order
– We placed another rush order
4
I received information

My book arrived the day before the
exam. ………
5
A request


Dear coach Jacqueline, please don't
give us a ICA this week !!! we studied
so much for the exam last week
so...we need a rest!!! thank you very
much
Oooops!!! I have one planned for
today.
6
In which case the domestic
bike producer is more
protected?

Scenario 1:
– You impose a tariff of 50% on imported
bikes
– And 80% tariff on imported wheels

Scenario 2:
– You impose a tariff of 50% on imported
bikes
– And 20% tariff on imported wheels
7
Effective Rate of
Protection (ERP)

Measure the rate of protection of domestic
bike producers from foreign completion
ERP = (Tf – aTc)/(1-a)
where,
Tf = tariff rate on imported final product
Tc = tariff rate on the imported components
a= the ratio of the value of imported component to the
value of final good
8
Assuming that the wheels represent 60
percent of the value of the bike, What is
the ERP in each scenario?
1. ERP = ((0.5 – (0.6 * 0.8))/(1-0.6)
ERP = (0.5 -0.48)/0.4
ERP = 0.02/0.4 = 0.05 or 5%
2. ERP = ((0.5 – (0.6 * 0.2))/(1-0.6)
ERP = (0.5 -0.12)/0.4
ERP = 0.38/0.4 = 0.95 or 95%
9
Just In time ICA4 (in
teams of 2 or 3)


Please, only one assignment per team
Q # 7, Page 153
10
International Economics

Week Seven- Class 2
– Wednesday, October 17
– 11:10-12:00
– Tyndall
11
Q # 7, Page 153



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Suppose that the free trade price of a
domestic product is $10,000 and contains
25 percent imported components. Assume
that the tariff on final product is 10 percent
and a 5 percent tariff is imposed on the
imported components.
A) What is the product’s price after the
imposition of tariff?
B) What is the domestic value added before
and after the imposition of tariff?
C) What is the effective rate of protection?
12
Answer?
a. After the imposition of tariff, domestic price
goes up by 10% to $11,000
b. Before the tariff, domestic value added is
(10,000 – 2500 =$7,500) and after the tariff
the domestic value added is [11,000-(2500
+ (.05*2500)) =$8,375].
c. Tf = 10%, Tc = 5%, and a = 25%. ERP =
(0.1 – 0.25 × 0.05) / (1 – 0.25) = 11.67%.
13
Arguments for Tariffs
1.
2.
3.
4.
5.
Infant Government Argument
National Defense Argument
Infant Industry Argument
Senile Industry Protection
Job Protection Argument
14
Facts
1.
Tariff creates losses in efficiency
 Deadweight loss
2.
3.
Economies that have adapted the
policy of protectionism have grown
slower
Subsidy may be a better way to
protect domestic producers
15
The effects of a subsidy
equivalent to tariff in a
•no loss in CS
small nation
• higher imports
Price
S
S’
•no dead weight
loss d
• no revenue for
government
Subsidy = 2 • cost of subsidy
= €30
10
a
Tariff = 2
c
b
8
d
D
10
15
35
40
Quantity
• b is still a loss
in efficiency but it
is covered by
government
16
Nontariff Barriers to Trade
(Chapter 7)

1.
In the study guide, I asked you:
What are GATT and WTO and what is their
role in international trade?

There is little on WTO in you book
17
GATT: General Agreement
on Tariff and Trade

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
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Was originally created by the Bretton Woods Conference as part
of a larger plan for economic recovery after World War II.
The GATT's main objective was the reduction of barriers
to international trade.
This was achieved through the reduction of tariff barriers,
quantitative restrictions and subsidies on trade through a series
of agreements.
Originally, the GATT was supposed to become a full international
organization called the International Trade Organization.
However, the agreement was not ratified, so the GATT remained
simply an agreement.
The functions of the GATT were taken over by the World Trade
Organization which was established during the final round of
negotiations in the early 1990s.
18
International Economics

Week Seven- Class 3
– Wednesday, October 17
– 15:10-16:00
– AC 201
19
In this week’s study guide, I asked:
What are Non-tariff barriers to trade and
how common are they?
The answer is in the book
• Problems:
1. These types of protection are
increasing as tariffs are decreasing.
2. They are less visible than tariff but in
many cases they are more restrictive
than tariffs.
•
20
What are Quotas?


A government policy that limits imports of a
product to a certain number of units.
It is banned by the WTO but it still exists.
21
How common is quota?

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In 1955 Ireland suspended its import quota on
fertilizers.
China's Grain and sugar import quotas remain
unchanged in 2008
In 2002 the European Commission announced plans
to impose a wheat import quota of 2.3 million tones
a year
In 2005 the European Union decided to increase
quotas for Chinese textiles
In 1989 we learned that the sugar import
restrictions and the quota regime for imports,
maintained by the United States since 1982, has
been held by a three-member GATT panel to be
illegal in terms of U.S. obligations in GATT.
22
Facts
1.
2.
Not all countries are members of the
WTO
Members of WTO are allowed to
maintain quotas for a specified period
of time.
•
3.
Transition period
How much power does WTO have?
•
Some countries implement quotas defying
WTO rules.
23
What are Multifibre Arrangements?
•
•
Quota on textile
Uruguay Round negotiations of GATT
have led to phasing out of the MFA.
24
What are Voluntary Export Restraint
(VER)?



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It is an agreement by a country to limit its
exports to another country to a certain number
of units.
It differs from a quota because the exporting
country administers VER
Since it is “voluntary” it is legal under WTO
regulations.
VER is difficult to negotiate
25
Examples of VERs



In May 1981, Japanese car makers agreed
to limit exports of passenger cars to the
United States.
In late 1970s, UK negotiated VERs
restrictions on the imports of two types of
leather footwear.
In 1991 a VER was established between the
European Union (EU) and Japan that
established “voluntary” quotas on Japanese
cars until 1999.
26
Moving from no trade to free
trade
World Price = 10, Domestic Price = 20
Imports = 50, CS goes up
Price of Cloth
S
E
20
10
D
20
70
Quantity of Cloth
27
The Economic Effects of a Quota
Quota = 30
Supply curve shifts right by 30
12
20
At P =10 there is a shortage of ______ Price goes up to ____
Price of Cloth
S
S+Q
CS goes
down by?
Who
gets a?
Who
gets c?
G
12
a
What is
b?
What
is d?
c
b
10
d
D
Quota
20
30
50
60
70
Quantity of Cloth
28
Who gets c?


1.
2.
3.
In case of tariff c went to government.
In case of quota:
Domestic license holders, if they buy 30
units at p =10 and sell it at p = 12
Domestic government, if it sells licenses at
$2 per unit of imported good.
Foreign producer, if this is VER.
29
Suppose initially quota has the
same effect as tariff
Price of Cloth
The only
difference
may be in
who gets c
S
S+Q
12
c
Tariff
10
D
20
30
60
70
Quantity of Cloth
30
Now domestic demand grows to
D’
Under quota, at p
=12 there is a
shortage P up to
13, CS?
Under tariff, P is still 12,
import grows to 40, CS↑
Price of Cloth
S
S+Q
Quota is
more
restrictive
13
12
a
Tariff
b
10
c
d
D’
D
20
30 35
60
70
65
Quantity of Cloth
31