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Trade Policies

Trade Policies . Tariffs and Quotas. Tariffs. Tariff: A tax on import Specific tariff: a per unit tax on imports Ad valolrem tariff: a value based tax on imports Why impose tariff? To discourage consumption To raise revenue To discourage imports To protect domestic industries .

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Trade Policies

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  1. Trade Policies Tariffs and Quotas

  2. Tariffs Tariff: A tax on import • Specific tariff: a per unit tax on imports • Ad valolrem tariff: a value based tax on imports • Why impose tariff? • To discourage consumption • To raise revenue • To discourage imports • To protect domestic industries

  3. Tariffs and Economic Welfare • The small country case • The large country case • Effective rate of protection

  4. Measuring Tariff Rates • Tariff rates vary across goods and and services as well over time • An unweighted average tariff rate • A Weighted average tariff rate: the sum of weighted tariff rates; for each good the rate weighted based on the percentage value of the import of that good relative to the total value of all imports

  5. The Small Country Case P S b Pa c f g Pw+ T d i h Tariff e k Pw D Q Q1 o Q3 Qo Q4 Q2

  6. P The Large Country Case Sd Sd+w +t Sd+w P1 m r P0 s P2 D Q o q1 q3 q2 qo

  7. Tariffs and Offer Curves Case of a small country A` TT A Good Y Y1 Y2 Good X X2 X1

  8. Y Tariffs and Offer Curves TT` A` A TT B A tariff is imposed by Country A Note the change in the terms pf trade:TT X 0

  9. Optimal Tariff • For a small country: A zero tariff rate • For a large country that can affect the terms of trade: Maximize the difference between the gain (s) and the losses (m+r) from a tariff • The effect of tariffs on input prices

  10. The Effective Rate of Protection • The protective effect of tariff based on the value added tf - a.ti • ETR = ------------ 1 - a a = value of import as % of the value of final good

  11. Export Tax P P0 Dw g i f h P1 Dw -t Q 0 q2 q1 q4 q3

  12. Non-tariff Barriers to Trade • Quotas Quantitative restrictions on imports • Voluntary export restrictions • Export subsidies • Dumping • Regulatory and technical standards • Government purchasing policies • How to measure non-tariff barriers

  13. Quota Sd p1 a c b d po Dd Y

  14. Tariffs vs Quotas • Greater loss of welfare for the importing country with quotas • Quotas are less flexible

  15. P Sd P Sd Sd +t D’ D’ D D Q Q o o q3 qo q2 q2 q4 q1 q1 q3

  16. Export Policies • Export taxes: • Small counties • Large countries • Export subsidies • Voluntary export restraints • Countervailing Duties (Against subsidies)

  17. P Sd Po+s Dw +S1 b a po Dw c d Po-s Dw-S2 e f Dd Qx o q3 qo q1 q1

  18. Dumping • Sporadic dumping • Persistent dumping • Predatory dumping

  19. Dumping $ $ Ph Pe MC De Dh MR MR Q Q o o

  20. Export Subsidies • An export subsidy lowers the cost of production for the produces in the exporting country. • The cost of a subsidy is borne by the taxpayers in the exporting country. • An export subsidy lowers the price to the importing country, resulting in an increase in the exports for exporting county; that is an increase in imports for the importing country.

  21. An Export Subsidy from the Perspective of the Importing Country: A Small Country Sd Pw = Pw-s+c P2 g s e f h Pw -s P1 D Q 0

  22. Non-Tariff Barriers • Technical standards • Regulatory standards • Administrative standards • Domestic-content requirements • Rules of origin • Government-procurement policies

  23. Arguments for Protection • Infant Industry Argument • Imperfect Competition • The Optimal Tariff • The Case of a Monopoly • Strategic Trade Policy • The Learning Curve • Profit Shifting (The Game Theory) • Externalities

  24. Tariffs vs. Subsidies Sd P P Sd Ss s Sw + t Sw c e Sw f D D o o Q Q Qo Q1 Q2 Qo Q1 Q2

  25. The Optimal Tariff Sd Sd+w +t Sd+w s P2 P0 P2 Dd Q 0

  26. International Trade and a Monopoly • Under autarky a monopoly under-produces • Free trade forces a monopoly to behave like a competitive firm. • A tariff protection for a monopoly is less restrictive than a quota protection.

  27. Monopolies and Tariffs MC Sw +t Sw MR D Q Q1 Q2 Q3 0

  28. A monopoly and a Quota MC D MRq Dq 0 Q1 Q2 Q3 Q4

  29. Trade and Externalities EB EB q1 q2 Q 0

  30. Positive Externalities S Sw +t Sw D Q o CE EB Q o

  31. Negative Consumption Externalities S Sw +t Sw D o Q CE Q o

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