Trade Policies

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
The Large Country Case
P
Sd
Sdw 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
Tariffs and Offer Curves
Y
TT
A
A
TT
B
A tariff is imposed by Country A Note the change
in the terms pf tradeTT
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 (mr) 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
Sd
P
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
Pos
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-sc
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
Q
Q
o
Qo Q1 Q2
Qo Q1 Q2
25
The Optimal Tariff
Sd
Sdw t
Sdw
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
Dq
MRq
0
Q1 Q2 Q3
Q4
29
Trade and Externalities
EB
EB
Q
q1 q2
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