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Chapter 9

Chapter 9. Supplementary Notes. A crazy world of trade protection Examples . US Import Quota on Sugar Trade in Agriculture Multi-Fiber Agreement (MFA). 1. US Sugar Quota. 2. Trade in Agriculture.

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Chapter 9

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  1. Chapter 9 Supplementary Notes

  2. A crazy world of trade protectionExamples • US Import Quota on Sugar • Trade in Agriculture • Multi-Fiber Agreement (MFA)

  3. 1. US Sugar Quota

  4. 2. Trade in Agriculture • EU’s Common Agricultural Policy (CAP): Due to export subsidies, a number of agricultural products sell at two or three times world prices. • Japan’s rice policy: Domestic price of rice higher than 5 times the world price due to banned imports. In 1998, Japan imposed a 1000-percent tariff on rice imports.

  5. 3. Multi-Fiber Agreement • The clothing industry (Textiles and apparel) has been heavily protected by tariffs and import/export quotas • MFA sets both import and export quotas for a large number of countries. • The industry is labor intensive. • In advanced countries, it is well-organized. • In the US, it accounts more than ¾ of consumer costs of protection in 1990.

  6. Trade protection in the U.S.

  7. The cases for FREE TRADE • Efficiency • Economies of scale • Competition • Political economy argument

  8. The cases for PROTECTIONISM • Optimal tariff • Domestic market failure • Infant industry • How convincing are they?

  9. Optimum tariff

  10. Domestic market failure

  11. World Trade Organization • Created 1995, replaced GATT (General Agreements for Tariffs and Trade) • Set rules for goods and services trade, international investment, and protection of intellectual property rights. • Strengthen disputes settlement procedure • Home Page: http://www.wto.org/

  12. Preferential Trading Agreements • Free Trade Area: Eliminate internal trade barriers but maintain existing barriers to nonmembers NAFTA, LAFTA, EFTA • Customs Union: Eliminate internal trade barriers and erect common barriers to nonmembers European Community (European Union now), Mercosur (the Southern Cone Common Market).

  13. Trade Creation & Trade Diversion Initial situation in Country A: • A levies100 % tariff on imports from B and C. Products from B and C are $2.00 and $1.50. • A imports from C of EF. • A’s consumers pay $3. • A’s gov’t collects $1.50 for each unit of imports. A forms an FTA with B and eliminates the tariff. The consumer price declines to $2. Imports increase to GH, all from B.

  14. Trade creation: As domestic price declines, consumption increases and production declines. Imports increase by GE and FH. Trade diversion: A now imports from B. The source of imports diverts from C (the world’s lowest-cost producer) to B (the lowest-cost member producer). As a result, A pays more for its imports.

  15. Regional trade liberalization

  16. Welfare Analysis Consumers gain from a lower price + (a+b+c+d) Producers lose due to a lower price - a Government loses tariff revenue (__________) Net gain ( ) Gains from trade creation: Losses from trade diversion:

  17. Regionalism vs. Multilateralism Why are regional trade blocs getting more popular? • Willing to trade with countries sharing similar culture, geographical proximity, etc. • Disillusioned by the slow pace and inability of GATT in dealing with trade disputes

  18. Problems with Regionalism • Discrimination against nonmembers • Cause trade diversion • Some Justifications for Regionalism • Complementary to the process of multilateral liberalization under GATT, thus not inconsistent with GATT: the current official position of the US • Most trade blocs are natural. Trade diversion is small and the benefit of trade creation is much greater. (Krugman)

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