Máster en Relaciones Internacionales y Comercio Exterior Módulo Unión Europea

1. Máster en Relaciones Internacionales y Comercio Exterior Módulo Unión Europea Página web de la asignatura: www.aeue.weebly.com Profesor Alberto Romero Ania 3 de marzo de 2010

2. Welcome to Our 2nd Meeting

3. European Union • Why the international trade? • The determinants of trade • The equilibrium without trade • The world price and comparative advantage • The winners and losers from trade • The gains and losses of an exporting country • The gains and losses of an importing country • The effects of a tariff • Answers to the key questions on trade policy • The arguments for restricting trade • Trade agreements and the role of institutions (NAFTA, GATT, EU) European Union Lecturer: Alberto Romero Ania

4. 1.- Why the international trade? • Benefits from international trade • Benefits from specialization • Worldwide market benefits based on the comparative advantage • Graphic analysis European Union Lecturer: Alberto Romero Ania

5. Benefits from international trade: Graphic analysis European Union Lecturer: Alberto Romero Ania

6. Production and consumption possibilities before trade More developed country Less developed country Food (Kg) Food (Kg) Tools (Units) Tools (Units) European Union Lecturer: Alberto Romero Ania

7. Production and consumption possibilities before trade More developed country Less developed country Slope (Opportunity cost) = 1/2 Slope (Opportunity cost) = 2/1 Food (Kg) Food (Kg) Tools (Units) Tools (Units) European Union Lecturer: Alberto Romero Ania

8. Production and consumption possibilities before trade More developed country Less developed country Food (Kg) Food (Kg) Tools (Units) Tools (Units) European Union Lecturer: Alberto Romero Ania

9. Production and consumption possibilities before trade More developed country Less developed country Slope (Opportunity cost) = 1/1 Slope (Opportunity cost) = 1/1 Food (Kg) Food (Kg) Tools (Units) Tools (Units) European Union Lecturer: Alberto Romero Ania

10. Production and consumption possibilities before trade Produce: 1000 Kg of food Imports: 600 tools Exports: 600 Kg of food Produce: 2400 tools Exports: 600 tools Imports: 600 Kg of food Food (Kg) Food (Kg) Tools (Units) Tools (Units) Less developed country More developed country Both of them are better off after trade European Union Lecturer: Alberto Romero Ania

11. 1.- Why the international trade? • International economic trade policy • Free trade or trade restrictions? • Comparative advantage: All countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. European Union Lecturer: Alberto Romero Ania

12. 1.- Why the international trade? Free international trade increase the gains, but … • How does international trade affect the well-being? • Who gains and who losses from international trade? • How the international marketplace achieve this benefits? • How the gains are distributed among various economic actors? European Union Lecturer: Alberto Romero Ania

13. 2.- The determinants of trade • Case of study: Steel worldwide market • Steel is made in many countries around the world • Let´s examine the gains and losses from international steel trade ! European Union Lecturer: Alberto Romero Ania

14. 3.- The equilibrium without trade • Case of study: One autarkic (self-sufficient) country without international trade called “Isoland” • Isolandian steel markets are isolated from the rest of the world. It is not allowed to import or export steel. • No international trade, so only Isolandian buyers and sellers European Union Lecturer: Alberto Romero Ania

15. 3.- The equilibrium without trade • The price adjust to balance domestic supply and demand. • The figure shows the consumer and producer surplus in an equilibrium withoutinternational trade European Union Lecturer: Alberto Romero Ania

16. 3.- The equilibrium without trade European Union Lecturer: Alberto Romero Ania

17. 3 questions about its international economic policy A new government wants to know: • If the government allowed Isolandians to import and export steel, what would happen to the price of steel and the quantity of steel sold in the domestic steel market. • Who would gain from free trade in steel and who would lose, and would the gains exceed the losses? • What happens if the government have a new trade policy with a tariff-tax on steel imports? European Union Lecturer: Alberto Romero Ania

18. 4.- The world price and comparative advantage • First issue is to know if Isoland will become a steel importer or exporter. Would it end up buying or selling steel in the world market? • If the the world price* of steel is higher (lower) than the domestic price, then will become an exporter (importer). • The price of national steel is the opportunity cost of steel (says how much should give up for one unit of steel) • If the domestic price of steel is lower means that Isoland has a comparative advantage producing steel relative to the rest of the world *The world European Union Lecturer: Alberto Romero Ania

19. 5.- The winners and losers from trade • The small economy assumption: To analyze the welfare effects, winners and losers from free trade, it is generally assumed that the small economy (compared with the rest of the world) actions have no effect on the worldwide markets. • So we assume that the Isoland´s trade policy will not affect the world price of steel. • Isoland is “price taker” in the world economy. The price is given. European Union Lecturer: Alberto Romero Ania

20. 6.- The gains and losses of an exporting country • Isoland is an exporting country because the domestic equilibrium price before trade is below the world price. • With free trade domestic pricesrises to equal the world price • No seller would accept less than the world price • No buyers would pay more than the world price European Union Lecturer: Alberto Romero Ania

21. 6.- The gains and losses of an exporting country • Now the domestic price is equal to the world price • But the domestic quantity supplieddiffersfrom the domestic quantity demanded. • Because the domestic quantity supplied is higher than the domestic quantity demanded, steel will be exported European Union Lecturer: Alberto Romero Ania

22. Analysis of an exporting country: European Union Lecturer: Alberto Romero Ania

23. The world price demand curve • Although domestic demand and supply differs the market continue in equilibrium because of the new actor: the world price demand curve. • This world demand curve is perfectly elastic* because it is possible to sell as much steel as Isolate wants in the world market at the world market price. *it describes how sensitive the price is to a quantity change European Union Lecturer: Alberto Romero Ania

24. After opening up free trade no everyone benefits • Domestic prices rise to the world price. • Domestic producers are better off because now they sell at higher price • Domestic consumers are worse off because they have to buy at a higher price • How to measure winners and losers ? • By looking at the changes in consumer and producer surplus ! European Union Lecturer: Alberto Romero Ania

25. Analysis of an exporting country: European Union Lecturer: Alberto Romero Ania

26. Conclusions for an exporting country: • When a country allows trade and becomes an exporter of a good, because it has a comparative advantage (domesticprice is lower than world price): • domestic producers of the good are better off • domestic consumers of the good are worse off • Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. European Union Lecturer: Alberto Romero Ania

27. 7.- The gains and losses of an importing country • Now the domestic price before trade is above the world price • After international free trade, domestic price must equal the world price • Domestic quantity supplied is less than domestic quantity demanded. • This quantity is imported from other countries European Union Lecturer: Alberto Romero Ania

28. Analysis of an importing country: European Union Lecturer: Alberto Romero Ania

29. Analysis of an importing country: • The horizontal line represents the supply of the rest of the world. It is horizontal because as small economy it can buy as much steel as it wants at the world price. • Not everyone benefits from trade. • Trade forces the domestic price to fall • Domestic consumers are better off (they can buy at lower price) • Domestic producers are worse off (they have to sell at lower price) • Changes in the producer and consumer surplus show gains and losses European Union Lecturer: Alberto Romero Ania

30. Analysis of an importing country: European Union Lecturer: Alberto Romero Ania

31. Conclusions for an importing country: • When a country allows trade and becomes an importer of a good, because it has not a comparative advantage (domesticprice is higher than world price): • domestic consumers of the good are better off • domestic producers of the good are worse off • Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. European Union Lecturer: Alberto Romero Ania

32. CONCLUSION ! • It doesn´t matter if the country is importer or exporter, after trade the gains of winners exceed the losses of the losers, so the winners could compensate the losers and still be better of Trade can make everyone better off !!! European Union Lecturer: Alberto Romero Ania

33. But, will trade make everyone better off? • Probably not, because compensation for the losers from international trade is rare. • Without the compensation, opening the economy to international trade could be a policy that expands the size of the economic pie, while perhaps leaving some participants in the economy with a smaller slice. European Union Lecturer: Alberto Romero Ania

34. The political battle on trade policy • Nations sometimes failtoenjoythe gains from trade simply because the losers from free trade have more political influence power than the winners • The losers lobby for trade restrictions, such as tariffs. European Union Lecturer: Alberto Romero Ania

35. The effects of a tariff P Sdom World price PW Ddom O Q European Union Lecturer: Alberto Romero Ania

36. The effects of a tariff P Sdom a c b World price PW Ddom O Q2 Q1 Q European Union Lecturer: Alberto Romero Ania

37. The effects of a tariff P Sdom World price PW Imports Ddom O Q2 Q1 Q European Union Lecturer: Alberto Romero Ania

38. The effects of a tariff P Sdom a PW + t World price + tariff Tariff c b World price PW Ddom O Q2 Q1 Q European Union Lecturer: Alberto Romero Ania

39. 8.-The effects of a tariff • A tariff has no effect if it is an exporting country • So let´s analyze the effects of a tariff on an importing country • To this aim we have to compare welfare with and without the tariff • Under free trade, the domestic price equals the world price. • A tariff raises the price of imported steed above the world price by the amount of the tariff. European Union Lecturer: Alberto Romero Ania

40. 8.-The effects of a tariff • Domestic suppliers of steel, who compete with suppliers of imported steel, can now sell their steel for the world price plus the amount of the tariff • So the price of steel (both imported and domestic) rises by the amount of the tariff and is closer to the price that would prevail without trade European Union Lecturer: Alberto Romero Ania

41. 8.-The effects of a tariff • The changes in price affects the behavior of domestic buyers and sellers. • Price rises, so it reduces the domestic quantity demanded • Price rises, so it rises the domestic quantity supplied • The tariff reduces the quantity of imports • The tariff moves the domestic market equilibrium closer to its equilibrium without trade European Union Lecturer: Alberto Romero Ania

42. 8.-The effects of a tariff • The tariff rises the domestic price, so: • Domestic sellers are better off • Domestic buyers are worse off • And the government obtains a revenue • To analyze the gains and losses, • we look at the changes in consumer surplus, producer surplus and the government revenue. European Union Lecturer: Alberto Romero Ania

43. The effects of a tariff P Sdom a PW + t World price + tariff Tariff c b World price PW Ddom O Q4 Q2 Q3 Q1 Q European Union Lecturer: Alberto Romero Ania

44. The effects of a tariff P Sdom a e d PW + t World price + Tariff Tariff b c World price PW Imports with tariff Ddom Imports without tariff O Q4 Q2 Q3 Q1 Q European Union Lecturer: Alberto Romero Ania

45. The effects of a tariff P Sdom a e d PW + t World price + tariff Tariff E F c b D World price PW f Ddom O Q4 Q2 Q3 Q1 Q European Union Lecturer: Alberto Romero Ania

46. The effects of a tariff P Sdom a A B e d PW + t World price + tariff Tariff C E F b D World price c PW f G Ddom O Q4 Q2 Q3 Q1 Q European Union Lecturer: Alberto Romero Ania

47. The effects of a tariff P Sdom a A B e d PW + t World price + tariff Tariff E C F b D World price c PW f G Ddom O Q4 Q2 Q3 Q1 Q European Union Lecturer: Alberto Romero Ania

48. 8.-Conclusion about effects of a tariff The imported quantity is reduced European Union Lecturer: Alberto Romero Ania

49. 8.-Conclusion about effects of a tariff • Change in consumer surplus: -C-D-E-F • Before tariff: A+B+C+D+E+F • After tariff: A+B • Change in producer surplus: +C • Before tariff: G • After tariff: C+G • Change in the government revenue: +E • Total surplus: -D -F European Union Lecturer: Alberto Romero Ania

50. 8.-Conclusion about effects of a tariff • A tariff causes a deadweight loss simply because a tariff is a type of tax • Tax distorts incentives and pushes the allocation of scarce resources awayfrom the optimum European Union Lecturer: Alberto Romero Ania