Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani

1. Welcome to EC 382: International EconomicsBy:Dr. Jacqueline Khorassani Week Eight

2. Week Eight: Class One • Tuesday, October 23 • 14:10-15:00AC 202 • Your grades are now available on line at www.marietta.edu/~khorassj • I have some graded assignments here; please pick them up

3. I received a request • Could you please go over the effective rate of protection again.  Specifically on pg 145.  There is the example of DVD players in the US.  I did not get the same answer as the book. 

4. Thanks for the question; here is the answer • ERP = (Tf – aTc)/(1-a) • In the book’s first DVD Player example (P 145) a = 0.5, Tf = 0.2 and Tc= 0 • ERP = (0.2/0.5) = 0.4 or 40 percent • The book is right.

5. In the book’s second example (P 146) • Everything is the same only now there is a 10% tariff on the component (tc= 0.1) • ERP = (0.2– 0.5 (0.1))/(0.5) • ERP = (0.2-0.05)/0.5 = 0.15/0.5= 0.3 or 30% • The book is right

6. You sent me information • Also in class previously some one asked you about tariff escalation.  This is referred to on pg 146 2nd paragraph down.

7. Thanks so much for this one • Tariff Escalation • Refers to the fact that a small Tf coupled with a large “a”  high effective rate of protection • Even when the tariff on final good is small, given that a high percentage of the value of the good is imported and there is little or no tariff on the imported components, the effective rate of protection is high.

8. I received a question • In the last study guide you haven't mentioned "The Evolution Of US Trade Policy", "The history of Antidumping Law in the US" and the "Escape Clause". Are we suppose to study these topics as well or not?

9. Answer: Thanks for paying attention. • In general I will not cover US specific laws in this class • In some cases I will replace it with international laws or EU laws • In other cases we will simply drop them

10. Other Nontariff Distortions 1. Industrial Policy • Domestic regulations can distort international trade. • Regulations sometimes have the intent of directly impacting trade. • Regulation effects are difficult to quantify.

11. Examples • Guaranteed low interest government loans for domestic producers • Tax advantage to exporting industries

12. Other Non-tariff Distortions 2. Government Procurement • Laws that direct a government to buy domestically-made products unless comparable foreign products are substantially cheaper. • Spending of public funds places restrictions on funds. • Justification that buying domestic is better for the country. • Similar to Mercantilist’s view

13. Other Non-tariff Distortions • In countries where government owns industry and has government procurement, trade is severely restricted.

14. Other Non-tariff Distortions 3. Technical Barriers to Trade • Laws that apply technical standards to goods or services that may distort trade. • Domestic country’s national standards for safety, health, and product labeling • Some goods must meet technical standards like cars exported from the U.S. to Ireland.

15. Other Non-tariff Distortions 4. Subsidies • Governments subsidies distort trade flows. • Such subsidies can be directly tied to exports, or more commonly they are domestic subsidies that indirectly influence trade.

16. Other Non-tariff Distortions 5. Labor and Environmental Standards • Countries differ in regulations for workers with respect to safety and work conditions. • Developed countries argue they cannot compete with wages in countries with less strict labor laws. • Empirical evidence has not shown significant effects on trade.

17. International Economics • Week Eight- Class 2 • Wednesday, October 24 • 11:10-12:00 • Tyndall

18. A question • Is there a book in the library that we could use while the textbook is not available? • Please check, they should have 5 copies

19. A correction • In Ireland we use a hyphen when spelling non-tariff, not nontariff. I think this was causing a lot of confusion in class. thanks • Sorry for confusing you.

20. Other Non-tariff Distortions • Labor standards • Laws that apply labor standards to manufactured products that may restrict imports. • Pollution intensive industry feels disadvantaged in countries with high pollution regulations. • Little of no empirical evidence of effects • WTO: Countries cannot impose standards by limiting imports.

21. Transportation Costs and Trade • Transportation costs tend to reduce the quantity of trade between countries by raising the price of imported goods. • A good will be traded internationally if transportation costs are low enough so that it is profitable to international trade the goods between countries.

22. Price of Cloth Price of Cloth SUS SINDIA 10 7 7 5 DUS DINDIA 50 100 150 Quantity of Cloth 50 100 150 Quantity of Cloth free trade in the absence of transportation cost E F U.S. Cloth Market India’s Cloth Market

23. Price of Cloth Price of Cloth SUS SINDIA 8 7 7 2 6 6 DUS DINDIA 80 130 130 80 50 150 Quantity of Cloth 50 150 Quantity of Cloth Now lets add transportation Cost = $2 per unit paid by the US US demand for India cloth goes down P India goes down to 6 U.S. Cloth Market India’s Cloth Market

24. Questions • What is Fair Trade? • Is it a distortion to free trade?

25. Fair trade is an organized social movement that promotes the payment of a fair price as well as social and environmental standards in areas related to the production of a variety of goods. • The movement focuses on exports from developing countries to developed countries, most notably handicrafts, coffee, cocoa, tea, bananas, honey, cotton, wine, fresh fruit etc.

26. Fair trade's strategic intent is to deliberately work with marginalized producers and workers in order to help them move from a position of vulnerability to security and economic self-sufficiency. • It also aims at empowering them to become stakeholders in their own organizations and actively play a wider role in the global arena to achieve greater equity in international trade. • Fair trade proponents include international religious, development aid, social and environmental organizations such as Oxfam, Amnesty International, and Caritas International.

28. Controversy • Some economists see fair trade as a type of subsidy that distorts free trade. • Segments of the left criticize fair trade for not doing enough.

29. Let’s start Chapter 8 with a game.I need 12 volunteers. (bring a pen with you.) • Round 1: Direct Democracy • No communication • Proposal: A new tariff on imported widgets • Everyone has one vote • You may vote for or against the proposed tariff • Secret Ballet

30. Round 2: Representative Democracy • No communication • In order to make your representative aware of your wish you need to hire a lobbyist (Jackie) who charges €170 • Who will hire Jackie?

31. Facts • If the tariff goes into effect • Total loss in consumer surplus = 10 x €100 = €1000 • Total gain in producer surplus = 2 x €300 = €600 • Gain < Loss • The action should not be taken

32. Round 1 • Direct Democracy • Tariff was not imposed • Why?

33. Round 2 • Representative Democracy • Tariff was imposed • Why? • This is called rent –seeking behavior • Occurs when government approves a program that benefits only a small group within society, but the society as a whole pays the cost.

34. International Economics • Week Eight- Class 3 • Wednesday, October 24 • 15:10-16:00 • AC 201 • Please minimize note taking and maximize learning today

35. This morning, we played a game (my sincere thanks to the participants) • 10 consumers of widgets, each were told • Widget is something you cannot live without. That is, you buy 1 widget regardless of price. • If the proposed tariff on imported widgets goes into effect the market price of widgets will go up by €100. • Important: You can’t communicate with anyone else

36. We had 2 producers • Each were told • You are a domestic producer of widgets. • If the proposed tariff on imported widgets goes into effect you will gain €300. • Important: You can’t communicate with anyone else

37. Round 1: Direct Democracy • Proposal: A new tariff on imported widgets • Everyone had one vote • Tariff did not go into effect because • Total loss to consumers> Total gain to producers

38. Round 2: Representative Democracy • In order to make your representative aware of your wish to impose tariff, you need to hire a lobbyist (Jackie) who charges €170 • Who will hire Jackie? • A couple were willing to hire me • Tariff went into effect

39. This is called rent –seeking behavior • Occurs when government approves a program that benefits only a small group within society, but the society as a whole pays the cost.

40. What if communication was allowed in our game? • Would it change the outcome of direct democracy? • Most likely not • Would it change the outcome of representative democracy? • Most likely not • It is harder for 10 consumers than 2 producers to get organized . • Is that one reason why we still have protectionism in the world? • Is it because of the way our political system works? • Chapter 8 says: YES

41. Average Tariff Rate(Source: World Bank)

42. Total trade barriers (tariff and non tariff) in comparison Source: World Bank

43. The Political Economy of Protectionism • Facts: • Imports and exports have conflicting effects. • Free trade benefits consumers but firms and workers in importing industry can be harmed. • Regulation can favor one segment of society. • Domestic industries and firms have a demand for government regulation. 5. Special interest groups lobby for changes that benefit them.

44. What is the public choice theory? • It is the economic analysis of the political process and government decision-making. • Assumptions • Politicians attempt to maximize utility • Utility comes in the form of votes • Question • Since trade benefits the country as a whole and there are more consumers (voters) than firms, shouldn’t we expect politicians to favor free trade?

45. Answer • Not necessarily; • The loss in one consumer’s surplus due to trade restriction may not even be noticeable to him. • Consumers cannot easily form groups, get organized and let politicians hear them but firms can. • Given group support, votes to politician may increase. • Politicians favor programs having immediate and clear-cut benefits with vague or deferred costs. • Detailed tariff schedule allows politician to pick up votes for protecting specific good without protests from average consumer. • Tariffs on very similar goods may be very different.

46. Who does what? • Firms with comparative advantage lobby foreign governments for free trade of exports. • Firms that compete with imports would lobby for protection from imports.

47. Who gets more protection and why? 1. Industries that are more important to a country are more likely to receive protection. 2. More concentrated an industry, more likely to have protection. • Easier for firms to organize and lobby 3. Intermediate products easier to gain protection • Voters unlikely to notice 4. Industries with a larger number of employees are more likely to get protection. 5. Regionally concentrated or unionized industry are more likely protected. 6. Industries with comparative disadvantage are more likely protected.

48. What is dumping? • Two definitions: • Cost-based dumping • A firm sells a product at a price below its cost of production in a foreign market. • Price-based • A firm sells a product in a foreign market at a price lower than the price charged in its home market.

49. Types of Dumping • Sporadic dumping • occasional dumping • Persistent dumping • Because there is more competition in the foreign market than at home. • Predatory dumping • Temporary • To drive competing firms out of business.