Related Notes：
- International Trade Theory (ch.1-4)
- International Trade Policy (ch.5-6)
- International Investment (ch.7-9)
- International Finance (ch10-14)
CH05 Trade Restrictions: Tariffs
5.1 Introduction
Questions:
- Why is complete free trade seldom practiced?
- The benefits of free trade may take years, whereas the costs of free trade are immediate.
- What are the effects of deviating from free trade?
- surplus.
5.2.Types of Tariffs
- Import vs. export tariffs
- Ad valorem tariff vs. Specific tariff
- A compound tariff
- Tariff rates
5.3 Effects of A Tariff
5.3.1 Small Country
Welfare changes:
- price (+)
- producer surplus (+)
- consumer surplus (-)
- government revenue (+)
- total welfare (-)
- loss: potential deadweight loss of the tariff
- distort- little triangles
- distort- little triangles
5.3.2 Large Country
Welfare changes:
- price (domestic +; international -)
- increasing of domestic supply effects world supply
- decreasing of domestic demand effects world demand
- producer surplus (+)
- consumer surplus (-)
- government revenue (+)
- total welfare (uncertain = a rectangle – two triangles)
- gains (rectangle)—- improvement in the terms of trade effect of the tariff(Px/Pm)
- loss (triangle)—- potential deadweight loss of the tariff
The Optimum Tariff and Retaliation
- It is possible for the imposition of a tariff in a large county to improve societal welfare.
- An optimal tariff is the tariff rate that maximizes the benefit resulting from the imposition of a tariff.
- However, the positive welfare gains exist only if there is no retaliation.
Elasticity effect on welfare
- The greater the elasticity the greater the gains.
5.4 The Theory of Tariff Structure
- Nominal tariff
- Percentage increase in the price of the final commodity
- Rate of effective protection
- Calculated on the increase in domestic value added offered by tariff protection.
- ERP = (gain/loss in value added)/ (original value added) = (v’ – v)/v
5.5 Export Tariff & Tax
5.5.1 Export Tariff: Small Country
Before: domestic price = world price
After: domestic price = world price – tariff
- if domestic price > world price – tariff, all producers will supply the domestic market.
- if domestic price < world price – tariff, all producers will supply the foreign market.
5.5.2 Export Tariff: Large Country
Before: domestic price = world price After: domestic price = new world price – tariff
- world price will rise while domestic price will fall
5.5.3 Tax
Tax will move the supply or demand curve directly.
CH06 Nontariff Trade Barrier and the Political Economy of Protectionism
6.1 Import Quotas
A quota is a numerical limit on the number of allowed imports.
- The initial effects of a tariff and a quota are similar.
- Tariff will change domestic supply or demand but quotas won’t.
- Quotas benefits domestic producer to exploit their monopoly power.
- quotas’ welfare effect depends on how governments allocates the licenses.
6.2 Voluntary Export Restraints (VERs)
A voluntary export restraint exists when the exporting nation voluntarily restricts its exports to a numerical limit.
- Generally, this action is taken to reduce the likelihood of the importing country imposing some other form of barrier to trade.
- The welfare effects are similar to quotas but with the quota rent going to the foreign producer.
- In 1981, Japan and the US agreed to a VER of 1.68 million automobiles to be imported annually by the US from Japan.
6.3 Regulations
- Health and safety regulations may serve as barriers to international trade by raising the costs of imported products
- Government purchasing restrictions may be biased against foreign goods
- The Buy American Act of 1933
- An international cartel may form to limit sales
- OPEC (the Organization of Petroleum Exporting Countries) acts to limit exports of petroleum.
6.4 Dumping & Export Subsides
Dumping exists when
- the sales price in the importing country is lower than the sales price in the exporting country or
- the sales price in the importing country is below the costs of production.
Types of dumping
- Persistent
- Predatory
- Sporadic
Countervailing duty
Tariffs imposed on imports to offset subsides by foreign government.
Export Subsidies
Export subsidies are direct payments or granting of tax relief and subsidized loans to the nation’s exporters or potential exporters, so as to stimulate the nation’s exports.
6.5 The Political Economy of Protectionism
Fallacious argument 1
- “Trade restrictions are needed to protect domestic labor against cheap foreign labor.”
Fallacious argument 2
- “Scientific tariffs are needed so that domestic producers can compete.”
Questionable argument 1
- “Trade restrictions are needed to reduce domestic unemployment.”
Questionable argument 2
- “Trade restrictions are needed to cure a balance of payments deficit.”
A qualified argument
- “Infant industries need to be protected so that they can become established industries.”
- must be of limited duration
- A production subside is the lowest cost tool
6.6 Strategic Trade and Industrial Policies
Oligopolistic markets subject to external economies may benefit from government intervention.
