ECON 342 Batu
经济代写 – 这道题目是经济方面的代做
Lecture 8
Chapter: Instruments of Trade Policy
Usually, policy is imposed to influence trade flows.
- mainly two ways: reducing imports and/or encouraging exports
Our focus: How trade policies influence trade and welfare?
To analyze the effects of the trade policy, we assume:
- the effect of the trade policy is small relative to the size of the economy
- no spillover effects (= what happens in one market does not affect other markets)
- use standard supply & demand analysis for a single industry
- compare before & after to examine the impact of the trade policy
Supply, Demand & Trade in a Single Industry
- two countries: Home & Foreign
- assume:
- the good is homogeneous in both countries
- in each country, the good market is perfectly competitive
- no transportation costs
Each countrys own supply & demand determine the autarky price. Notations:
!
: Home autarky price
!
: Foreign autarky price
Recall: If autarky prices in the two countries differ, then trade will arise.
For example: Suppose !
<
!
. Then, under free trade:
- Home has an incentive to import the good from Foreign.
- Foreign has an incentive to export the good to Home.
Homes Import Demand Curve (MD):
- for any price p that is lower than !
, Home imports the good
MD(p) = D(p) - S(p)
where
D: Home demand for the good S: Home supply of the good
Note: The MD curve is flatter (= more elastic) than the D curve.
_Foreigns Export Supply Curve (XS):_*
- for any price p that is higher than !
, Foreign exports the good
XS*(p) = S*(p) - D*(p)
where
D: Foreign demand for the good S: Foreign supply of the good
Note: The XS* curve is flatter (= more elastic) than the S* curve.
Free Trade World Equilibrium:
- the intersection of MD and XS*
- world equilibrium price:
#
At
, Home imports = Foreign exports.
(
#
)(
#
)=
(
#
)
(
#
)
Equivalently, world demand for the good = world supply of the good.
(
#
)
+
(
#
)
=
(
#
)
+
(
#
)
– Import Tariff Analysis
- a tax on imports
- forms:
(i) specific tariff
- levied () as a fixed charge for each unit of imported goods
- for example: $3 per barrel of oil
(ii) ad valorem tariff
- levied as a fraction of the value of imported goods
- for example: a 25 percent US tariff on imported trucks
Suppose Home imposes a specific tariff on the imports from Foreign.
For Foreign producers, a tariff is like transportation cost of shipping to Home.
Foreign producers will not sell to Home unless:
the price difference between Home and Foreign the import tariff
We will first discuss: The Case where Home is a Large Country
Notations:
$
: price in Home after Home imposes the tariff
$
: price in Foreign after Home imposes the tariff
In equilibrium:
=
(
)=
(
)
Free trade world equilibrium price:
#
With Home tariff in place,
Home price rises to
$
(increases by less than the tariff )
Foreign price falls to
$
(decreases by less than the tariff )
Compared to free trade levels, Home imports & Foreign exports decrease.
That is, the volume traded decreases from
#
to
$
.
We want to do the welfare analysis.
- look at impact on the welfare of consumers, firms, and government
Recall:
Consumer Surplus: measures the amount that a consumer gains from a purchase
- determined by the difference between the willingness to pay and the price paid
demand curve
Producer Surplus: measures the amount that a producer gains from a sale
- determined by the difference between price received and the willingness to sell
supply curve
Cost and Benefits of a Tariff for the Importing Country:
At the free trade price
#
:
imports=D
&
S
&
With tariff in place and Home price
$
:
imports=(D
'
S
'
)<(D
&
S
&
)
tariff revenue =
$
= (D
'
S
'
) = Area (+) since
$
$
=
- impact on consumers:
consumer surplus decreases by Area (+++)
- impact on producers:
producer surplus increases by Area ()
- impact on government:
government gains the tariff revenue = Area (+)
Assume at the margin, a dollars worth of gain or loss to each group is of the same social worth.
- net change in welfare:
(
+++
)
+
(
)
+
(
+
)
=(+)+()
the welfare effect of a tariff levied by a large country is ambiguous, depending on the size of
+ versus
Interpretation:
+: the efficiency loss (DWL) due to the tariff
: the consumption distortion loss
: the production distortion loss
: terms of trade gain
- terms of trade increases since the tariff lowers foreign export prices
Note:
(i) part of government revenue (rectangle ) represents the terms of trade gain
(ii) part of government revenue (rectangle ) represents some of the loss in consumer surplus
The government gains at the expense of consumers and foreigners.
Home is a large economy case.
Important to note: When Home imposes an import tariff,
- the price always rises in the Home market
- only if Home is a large economy, then the price will fall in the Foreign market
The Case where Home is a Small Country
- when a country is small, it will have no effect on the foreign (world) price of good
- reason: the countrys demand for the good is an insignificant part of world demand
Suppose the world price of the good is given:
. Suppose Home is a small country.
- Foreign export supply curve is perfectly elastic at the world price
When Home imposes a specific tariff on the imports from Foreign, the world price will not be
lowered.
Homes domestic price with tariff in place is given by: $
=
#
+
Cost and Benefits of a Tariff for the Importing Country:
At the free trade price
:
imports=D
&
S
&
With tariff in place and Home price $
:
imports=(D
'
S
'
)<(D
&
S
&
)
tariff revenue = $
=
(
D
'
S
'
)
= Area () since
$
#
=
- impact on consumers:
consumer surplus decreases by Area (+++)
- impact on producers:
producer surplus increases by Area ()
- impact on government:
government gains the tariff revenue = Area ()
- net change in welfare:
(+++)+()+()=(+)
a tariff levied by a small country makes the small country worse off
Effective Rate of Protection:
- measures how much protection a tariff (or other trade policy) provides an industry
- represents the change in value that an industry adds to the production process when trade
policy changes, which depends on the change in prices the trade policy causes
- often differs from tariff rates, because tariffs affect other sectors than the protected sectors
with impacts on the value added for the protected sector
For Example: Suppose the car production takes place in two stages:
(i) production of components
(ii) assembly () of components into a car
Suppose both industries are import-competing industries.
A tariff imposed on the imports of either components or cars will increase the domestic prices.
- the tariff imposed on cars will increase the price of cars
beneficial to the car industry
- the tariff imposed on components will increase the price of components
harmful to the car industry
To determine the net effect of the tariff structure on the car industry, we examine the effect of
the tariff structure on the industrys value-added (VA) and effective rate of protection.
Definition:
()=
%
where
$
: industrys value-added when tariffs are in place
)$
: industrys value-added with free trade
Suppose the world price of a car is $8000, and the world price of car components is $6000.
Under Free Trade:
- the value added of the car industry:
)$
= $ 8000 $6000 = $
Consider three scenarios:
Example 1: The country imposes a 25% tariff on cars, with no tariff imposed on components.
- domestic price of a car = ( 1 +25%)$8000 = $
- the value added of the car industry:
$
= $10000$6000 = $
ERP =
*+++,'+++
'+++
100% = 100%
Example 2: The country imposes a 10% tariff on components, with no tariff imposed on cars.
- domestic price of components =
(
1 +10%
)
$6000 = $
- the value added of the car industry: $
= $8000$6600 = $
ERP =
&*++,'+++
'+++
100% = 30%
Example 3: The country imposes a 25% tariff on cars and a 10% tariff on components.
- domestic price of a car =
(
1 +25%
)
$8000 = $
- domestic price of components = ( 1 +10%)$6000 = $
- the value added of the car industry:
$
= $10000$6600 = $
ERP =
-*++,'+++
'+++
100% = 70%
– Export Subsidy Analysis
- export subsidy: a payment to firms that ship the good abroad
- forms:
(i) specific export subsidy: a payment per unit exported
(ii) ad valorem export subsidy: a proportion of the value exported
Suppose Home government gives a specific subsidy on the exports to Foreign.
The Case where Home is a Large Country
Notations:
.
: price in Home after Home imposes the export subsidy
.
: price in Foreign after Home imposes the export subsidy
In equilibrium:
=
(
)
=
(
)
Free trade world equilibrium price:
#
With Home export subsidy in place,
Home price rises to .
(increases by less than the subsidy s)
Foreign price falls to
.
(decreases by less than the subsidy s)
Compared to free trade levels, Home exports & Foreign imports both increase.
Cost and Benefits of an Export Subsidy for the Exporting Country:
At the free trade price
#
:
exports=S
&
D
&
With export subsidy in place and Home price
.
:
exports=(S
'
D
'
)>(S
&
D
&
)
export subsidy cost =
(
S
'
D
'
)
= Area (+++++) since
.
.
=
- impact on consumers:
consumer surplus decreases by Area (+)
- impact on producers:
producer surplus increases by Area (++)
- impact on government:
government incurs the export subsidy cost = Area (+++++)
- net change in welfare:
(+)+(++)(+++++)=(++++)
an export subsidy provided by a large country makes the large country worse off
Interpretation:
+: the efficiency losses or DWL due to the export subsidy
: the consumption distortion loss
: the production distortion loss
++: terms of trade loss
- terms of trade decreases since the export subsidy lowers foreign import prices
Note: We can do a similar analysis for the small country case, and we will find that:
an export subsidy provided by a small country makes the small country worse off
Conclusion: No matter a country is small or large, an export subsidy always decreases its
domestic welfare.
Export Subsidy in Europe: European Unions Common Agricultural Policy (CAP)
Background Knowledge:
Generally, EU autarky agricultural prices are greater than world agricultural prices.
Under free trade, EU would be an importer of most agricultural products.
CAP began as an effort to guarantee high prices for agricultural products to European farmers.
- whenever prices fall below specified support level, EU will buy agricultural products
- also, to prevent large quantities of imports, EU imposes tariffs to offset the difference
between European and world agricultural prices
However, the support prices set by EU is too high, and EU is producing more than what
consumers are willing to buy. As a result, EU is obliged to buy and store huge quantities of food.
To dispose of () excess production, CAP subsidizes exports of agricultural products.
Note 1 : The subsidized exports would reduce world prices of agricultural products, increasing
the required subsidy.
Note 2: The net costs of CAP to EU consumers and taxpayers are considerable.
Recent reform of CAP: EU has proposed that farmers will increasingly receive direct payments
that is independent of the amount of their production, to help lower EU agricultural prices and
reduce production.
– Import Quota () Analysis
- a restriction on the quantity of a good that may be imported
- that is, a direct quantity restrictions imposed from the importing countrys side
- the restriction is usually enforced by issuing quota licenses or quota rights
The Case where Home is a Small Country
Free trade world equilibrium price:
#
imports=
&
&
Suppose Home government imposes a binding import quota
l
on the imports from Foreign.
- the import quota is binding means:
l
<
&
&
- since Home is a small country, the world price will not change (still
)
As a result of the import quota, the domestic price has to rise.
- otherwise, there is excess demand in the Home market
The domestic price has to rise to a level
01234
such that (
01234
)(
01234
)=
l
.
This means: Quota license holders are able to buy imports and resell them at a higher price in
the domestic market. The extra revenue is known as quota rents.
Now we know: with binding import quota
l
, domestic price rises to
01234
quantity demanded by domestic consumers = ‘
quantity supplied by domestic producers =
'
quantity of imports = ‘
'
=
l
Cost and Benefits of an Import Quota for the Importing Country:
- impact on consumers:
consumer surplus decreases by Area (+++)
- impact on producers:
producer surplus increases by Area ()
Here, Area () is the quota rents.
But when assessing the costs and benefits of the import quota, it is crucial to determine who
gets the quota rents.
There are a number of possibilities. For example: Home government could give it away, Home
government could hold an auction, …
auction off the quota licenses:
In a well-organized, competitive auction, the revenue collected should exactly equal the value
of the rents, Area ().
In this case, Home government captures the quota rents. We have:
change in consumer surplus: (+++)
change in producer surplus: +
Home government (auction) revenue: +
net change in Home welfare:
(
+++
)
+
(
)
+
(
)
=(+)
Interpretation:
+: the efficiency loss (DWL) due to the import quota
: the consumption distortion loss
: the production distortion loss
Important to note:
For every level of import quota, there is an equivalent import tariff: =
01234
#
.
In this case, the effects under import quota is the same as those under import tariff.
quota licenses are given to domestic producers:
In this case, the quota rents accrue to () Home firms. We have:
change in consumer surplus: (+++)
change in producer surplus: +
quota rents earned at Home: +
net change in Home welfare:
(+++)+()+()=(+)
In this case, the DWL under import quota is the same as that under import tariff.
quota licenses are given to foreigners:
In this case, the quota rents accrue to foreigners. We have:
change in consumer surplus: (+++)
change in producer surplus: +
net change in Home welfare:
(
+++
)
+
(
)
=(++)
In this case, the DWL under import quota is greater than that under import tariff.
Some real-life examples:
- Sugar Quota in the US
- the imports of sugar into the US are limited, and quota rights are allocated to foreign
governments
- data shows: if the sugar quota is eliminated, then:
- about 5 00 – 2 ,000 jobs might be lost in sugar producing industry
- but, about 17,000-20,000 new jobs would be generated in sugar using industry
quota may not be great at protecting jobs overall
However, the sugar producers are better lobbyists than the sugar-containing food sector.
Consequently, this protection has been extended.
- Dairy Quota in Canada
- indeed, this is a combined tariff quota:
7.5% tariff on small volume of quota imports
230 %-270% import on tariffs above quota
- an effectively strict quantity limit, especially for the price elastic goods, milk
- Canadian dairy farmers want to get the quota rents, and this may lead to lobbying activities
– Voluntary Export Restraint (VER, ) Analysis
- also called Voluntary Restraint Agreement (VRA)
Voluntary export restraints are generally imposed at the request of the importer and are
agreed to by the exporter to forestall () other trade restrictions.
- VER: a direct quantity restrictions imposed from the exporting countrys side
VER works like an import quota, but:
With VER, quota rents are earned by foreign governments or foreign producers.
For example: Suppose Foreign imposes a VER, with world price remains unchanged.
Cost and Benefits of a VER for the Importing Country:
With binding VER
l
, Home domestic price rises to
0
.
change in consumer surplus: (+++)
change in producer surplus: +
net change in Home welfare:
(
+++
)
+
(
)
=(++)
In this case, the DWL under VER is greater than that under import tariff.
Question: Why would an importing country do this?
Answer: The exporting country is less likely to retaliate () since they gain the quota rents.
Thus, by doing this, the importing country can avoid a tariff war or quota war.
A real-life example: Japanese Auto
To summarize:
- For each trade policy, the price rises in the Home country adopting the policy.
- Home producers supply more and gain.
- Home consumers demand less and lose.
- All these trade policies create production distortions and consumption distortions.
- The welfare effect of each trade policy is measured by:
- efficiency loss from consumption and production distortions
- terms of trade gain or loss
- If Home is a large country, then the world price of the good will fall.
– Local Content Requirement ()
- a regulation that requires a specified fraction of a final good to be produced domestically
- may be specified in value terms, by requiring that some minimum share of the value of a good
represent domestic value added, or may be specified in physical units
- for domestic input producers,
a local content requirement provides protection in the same way as an import quota
- for firms that must buy domestic inputs,
- a local content requirement does not place a strict limit on imports
- instead, it allows firms to import more if they also use more domestic parts
the effective price of inputs to the firm is an average of the price of imported inputs and the
price of domestically produced inputs
- the difference between the prices of imported inputs and domestically produced inputs gets
averaged into the price of the final good and is passed on to consumers
- does not provide government revenue
- does not provide quota rents
– Other Trade Policy Instruments
- Export Credit Subsidies ()
- a subsidized loan to exporters
For example: The US has a government institution, the Export-Import Bank, devoted to
providing at least slightly subsidized loans to aid exports.
- National Procurement Requirements ()
- government agencies are sometimes obligated to () purchase from domestic suppliers,
even when they charge higher prices (or have inferior quality) compared to foreign suppliers
For example: buy America policies in the US
- Bureaucratic Regulations (Red-Tape barriers )
- safety, health, quality, or customs regulations () can act as a form of protection and
trade restrictions