Class 20 April 5 Last class: Midterm exam Today: 4. Trade policies of importing nations

1. Class 20 April 5 Last class: Midterm exam Today: 4. Trade policies of importing nations Next class: Result of the midterm exam 4. Trade policies of importing nations 5. Trade policies of exporting nations Reading: Important date:

2. 4. Trade policies of importing countries 4.1. Major types of import barriers 4.2. Reasons for import barriers 4.3. Effects of specific import policies 4.4. Related issues

3. 4.1. Major types of import barriers (a) Import tax (tariff) -- Fixed amount per unit (e.g., $0.5 per unit) -- A percentage of the price (e.g., 5%) -- A combination of the two (b) Import quota -- Quota on total import -- A quota on a country basis (c) Tariff rate-quota: a combination of tariff & quota e.g., First 200 mmt, 2% tariff 201 -- 500 mmt, 4% Above 500 mmt, 6%

4. 4.1. Major types of import barriers (d) Other import restrictions -- State trading (e.g., China’s grain import) -- Technical restrictions (e.g., high quality standards) 4.2. Major reasons for import barriers (a) Redistribution of welfare (b) National security (e.g., food) (c) Protest new industries (d) Protect producers and farmers (e) Other reasons (e.g., health, public safety, etc.)

5. 4.3. Effects of specific import policies (a) Small vs. large importing nations A small importing nation: it has no ability to affect the international market price (the price is a constant to this nation) (e.g., the US is a small importer of wheat) A large importing nation: a change in the nation’s import will affect the international market price (e.g., the US is a large importer of oil and the international market oil price will likely decrease if we cut our oil import) (b) A graphic analysis -- A small importer -- A large importer

6. 4.3. Effects of specific import policies (c) A mathematical analysis of the impacts of trade -- A small importer Qd = 20 - 1 P Qs = -1 + 2 P Market equilibrium without trade: P* = Q* = CS = PS = CS + PS = Under free trade: ED = Qd - Qs = 21 - 3P ES faced by the importer: Pw = 5 P* after trade = Quantity of import = Change in CS = Change in PS = Gains from trade = change in (CS + PS) =

7. 4.3. Effects of specific import policies (c) A mathematical analysis of the impacts of trade -- A large importer Qd = 20 - 1 P Qs = -1 + 2 P Market equilibrium without trade: P* = Q* = CS = PS = CS + PS = Under free trade: ED = 21 - 3P ES faced by the importer: ES = -1.5 + 2 P Price after trade = Quantity of import = Change in CS = Change in PS = Gains from trade = change in (CS+PS) =

8. 4.3. Effects of specific import policies (d) Impacts of an import tax: a small importer Qd = 20 - 1 P Qs = -1 + 2 P ES faced by the importer: Pw = 5 --------------------------------------------------------------------------------------------------- Import P* Qs Qd CS PS Tax CS+PS+Tax --------------------------------------------------------------------------------------------------- No trade 0 7 13 13 84.5 42.25 0 126.75 Free trade 6 5 9 15 112.25 20.25 0 132.50 An import tax of $1 per unit 3 6 11 14 98 30.25 3 131.25 ---------------------------------------------------------------------------------------------------

9. Class exercise (Thursday, April 5) Suppose that a nation has the following supply and demand functions for a product: Qd = 12 – 0.5P Qs = - 3 + 1 P We also know that the excess supply for this product in the world market FACED by this nation is Pw = 6 (1) Is this nation a small or large importer of this product? (2) Draw two graphs to show the impacts of free trade and calculate the quantity of this nation’s import. (3) If an import tax of $1 per unit is imposed, what will be the new quantity of import? Take-home exercise: calculate CS and PS under (a) no trade, (b) free trade, and (c) trade with a $1 import tax