PARTⅡTrade theory ch811.docx
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PARTⅡTradetheorych811
Chapter8
TheInstrumentsofTradePolicy
*Theinstrumentoftradepolicyandtheirobjective.
Instrument:
(1)tariff
(2)nontariffbarriers:
exportsubsidies、importquotas、voluntaryexportrestraints、localcontentrequirements……
Objective:
toprotectparticulardomesticsectors.
*Thischapterfocuseson:
theeffectsofthemostimportantinstrumentsoftradepolicy─costsandbenefitsanalysis
§1.Basictariffanalysis
Specifictariff:
afixedchargeforeachunitofgoodsimported.
advaloremtariff:
afractionofthevalueoftheimportedgoods.
1.Supply,demand,andtradeinasingleindustry
·ToderiveanddecideMDorXSinasinglecountry:
MD=D−SXS=S*−D*
Figure8-1DerivingHome’sImportDemandCurve
·Todeterminetheworldpriceandthetradedquantity:
worlddemand=worldsupplyor∑D=∑Sor∑MD=∑XS
D+D*=S+S*
Figure8-3WorldEquilibrium
2.Effectsoftariff
·AtariffraisethepriceinHomewhilelowerthepriceinForeign,PT=PT*+t.
ATariffinaLargeCountry
·Thesizeofthiseffectontheworldpriceisoftenverysmall.For“smallcountry”,PT=PW+t.
ATariffinaSmallCountry
3.Measuringtheamountofprotection
·Tariffsmayhaveverydifferenteffectsondifferentstagesofproductionofagood.
·Nominaltariffmaynotreflecttheeffectiverateofprotection.
ERP=(VT−VW)/VW
VT:
valueaddedinthepresenceoftradepolicies
VW:
valueaddedatworldprice
E.g.X2andX3aretheinputsofX1,theinput─outputcoefficienta21=0.2,a31=0.3.Ift1=50%、t2=40%、t3=10%.HowmuchistheERPofX1?
VW=(1–0.2–0.3)=0.5VT={[(1+0.5)–0.2×(1+0.4)–0.3×(1+0.1)]–(1–0.2–0.3)}=0.89
ERP=(VT−VW)/VW=(0.89–0.5)/0.5=58%
§2.Costsandbenefitsofatariff
1.Consumerandproducersurplus
·Consumersurplusisequaltotheareaunderthedemandcurveandabovetheprice.
·Producersurplusisequaltotheareaabovethesupplycurveandbelowtheprice.
Figure8-7Figure8-8
2.Measuringthecostsandbenefits
Figure8-9CostsandBenefitsofaTarifffortheImportingCountry
consumersurplus:
–(a+b+c+d)
producersurplus:
+a
governmentrevenue:
+(c+e)
nationalwelfare:
e–(b+d)
e:
termsoftradegain
b+d:
efficiencyloss(b:
productiondistortionloss;d:
consumptiondistortionloss)
·HowmuchdoesPWdecrease?
Itdependson:
“smallcountry”:
PW,T=PW,e=0;eXS,eMD
·Home’sgainfromtermsoftradeisattheexpenseofForeign’s“beggartheneighbour”
Thecostsandbenefitsanalysisabovearecorrectifonly:
(1)Thedirectgainstoproducersandconsumersinagivenmarketaccuratelymeasurethesocialgains.(withoutmarketfailure)
(2)Adollar’sworthofbenefitstoeachgroupisthesame.
§3.Otherinstrumentsoftradepolicy
1.Exportsubsidies:
Theory
·Whenthegovernmentoffersanexportsubsidy,shipperswillexportthegooduptothepointwherethedomesticpriceexceedstheforeignpricebytheamountofthesubsidy,PS=PS*+S
·Anexportsubsidyraisespriceinexportingcountrywhileloweringtheminimportingcountry.
Figure8-11EffectsofanExportSubsidy
·consumersurplus:
–(a+b)··nationalwelfare:
–(b+d+e+f+g)
·producersurplus:
+(a+b+c)–(b+d):
consumptionandproductiondistortionlosses
·governmentsubsidy:
–(b+c+d+e+f+g)(e+f+g):
termoftradeloss
Casestudy:
Europe’scommonagriculturepolicy
·AgriculturalpricesarefixednotonlyaboveworldmarketlevelsbutabovethepricethatcleartheEuropeanmarket.Aexportsubsidyisusedtodisposeoftheresultingsurplus.
Figure8-12Europe’sCommonAgriculturalProgram
·Thereasonstosubsidy:
economicsifscale;economicgrowthandemployment;strategy
2.ImportQuotas:
Theory
·Animportquotawillraisedomesticpricebythesameamountasatariffthatlimitsimportstothesamelevel.
AQuotainaSmallCountry
AQuotainaLargeCountry
·Thedifferencebetweenaquotaandatariffisthataquotathegovernmentreceivesnorevenue.Themethodtoallocatethequotadetermineswhogetsthequotarents.Thesemethodsare:
a.competitiveauction
b.allocatetosomebodyfirmly
c.orderlyapplicationofusingresources
·Inassessingthecostsandbenefitsofanimportquota,itiscrucialtodeterminewhogetstherents.
CASESTUDY:
AnImportQuotainPractice:
U.S.Suager(P190-191)
3.VoluntaryExportRestraints
·AVERisaquotaimposesfromtheexportingcountry’ssideinsteadoftheimporter’s.
·AVERisexactlylikeanimportquotawhichthelicenseareassignedtoforeigngovernment.
·VERSaremuchmorecostlythantariffs.
ImportquotasandVERSaremuchmorestrictthantariff,becausetheexportercan’tincreasethequantityofexportinggoodseveniftheyhavegreatadvantagesinpriceandquality.
4.LocalContentRequirement
·Localcontentrequirement:
Specifiedfractionofafinalgoodmustbeproduceddomestically.
·Localcontentlawshavebeenwidelyusedbydevelopingcountriestryingtoshifttheirmanufacturingfromassemblybackintointermediategoods.
·Fromthepointofviewofthedomesticproducersofparts,itprovidesprotectioninthesamewayanimportantquotadoes.
·Fromthepointofviewofthefirmsthatmustbuylocally,theeffectivepriceofinputsisanaverageofthepriceofimportedanddomesticallyproducedinputs.
·Alocalcontentrequirementproducesneithergovernmentrevenuenorquotarents.Thefinalpriceispassedontotheconsumers.
5.OtherTradepolicyinstruments
·Exportcreditsubsidies
·Nationalprocurement
·Red-tapebarriers
§4.Theeffectofatradepolicy:
ASummary
Table8-1EffectsofAlternativeTradePolicies
Tariff
Exportsubsidy
Importquota
VER
Producersurplus
Increases
Increases
Increases
Increases
Consumersurplus
Falls
Falls
Falls
Falls
Government
Increases
Falls
Nochange
Nochange
revenue
(government
(rentsto
(rentsto
spendingrises)
licenseholders
foreigners)
Overallnational
Ambiguous
Falls
Ambiguous
Falls
welfare
(fallsfor
(fallsfor
smallcountry)
smallcountry)
Chapter9
ThePoliticalEconomyofTradePolicy
*Whydocountriesperusetradepoliciessuchastarifforimportquota,whichproducemorecoststhanbenefits?
——tradepolitics.
*Thischapterfocuseson:
(1)Thecasefor/againstfreetrade
(2)Incomedistributionandtradepolicy
(3)Internationalnegotiationsandtradepolicy
§1.Thecaseforfreetrade
1.Freetradeandefficiency(“static’s”gains)
Amovetofreetradeeliminatestheproductionandconsumptiondistributioncausedbytradeprotectionandincreasenationalwelfare.(Table9-1)
2.Additionalgainsfromfreetrade(“dynamic”gains)
(1)Economiesofscale:
Freetradecandeterexcessiveentryandtheresultinginefficientscaleofproduction.
(2)Learningandinnovation:
Freetradeprovidesanincentivetoseeknewwaystoexportorcompetewithimports,offersmoreopportunitiesforlearningandinnovation.
3.Politicalargumentforfreetrade
Apoliticalcommitmenttofreetrademaybeagoodideainpracticeeventhoughtheremaybebetterpoliciesinprinciple:
Anygovernmentagencyattemptingtoperuseasophisticatedprogramofinterventionintradewouldprobablybecapturedbyinterestgroupsandconvertedintoadeviceforredistributionincometopoliticallyinfluentialgroups.
§2.Nationalwelfareargumentagainstfreetrade
Deviationsfromfreetradecansometimesincreasenationalwelfare.
1.Thetermsoftradeargumentforatariff
·Forasufficientlysmalltariffthetermsoftradegainoflargecountrymustoutweightheefficiencyloss.
Figure9A-2WelfareEffectsofaTariff
Gain–Loss=ut–vt2=–v(t–u/2v)2+u2/4v
Figure9-2TheOptimumTariff
Theoptimumtariffrate(to=u/2v)isalwayspositivebutlessthantheprohibitiverate(tp):
0·Thetermsoftradeargumentagainstfreetradeisintellectuallyimpeccablebutofdoubtfulusefulness.
for“smallcountry”:
Thereisnotermsoftradegains.
for“largecountry”:
AcycleofretaliatorytrademoveswouldunderminethecoordinationininternationaltradepolicysuchasWTO,etc.
2.Thedomesticmarketfailureargumentagainstfreetrade.
·Domesticmarketfailure:
duallabormarket;imperfectcapitalmarket;technologicalspillover,∙∙∙∙∙∙
·Technologicalspillovercaseforprotection
Iftheproductionofagoodyieldsexperiencethatimprovethetechnologyoftheeconomyasawholebutthefirmscan’tgetthisbenefit(themarketfailureofexternality),asufficientlysmalltariffthatyieldsmarginalsocialbenefitmustoutweightheefficiencyloss.
Figure9-3TheDomesticMarketFailureArgumentforaTariff
TRADEPOLICY(tariff):
P:
+(a+b)
C:
-(a+b+c+d)
MSB:
+e
N:
e-(b+d)
3.Howconvincingisthemarketfailureargument?
(1)·”Specificrule”:
domesticmarketfailureshouldbecorrectedbydomesticpoliciesaimeddirectlyattheproblem’ssources.
Ifthesameproductionincrease(S1toS2)wereachievedviaaproductionsubsidyratherthanatariff,theconsumptionlossbwillbeavoided.Figurer9-3.
·Tradepoliciesarealways“second-best”ratherthan“first-best”policies——eventhoughthecostofthetradepoliciesarelessapparent.
Mostdeviationsfromfreetradeareadoptednotbecausetheirbenefitexceedtheircostsbutbecausethepublicfailstounderstandtheirtruecosts.
(2)Economistscan’tdiagnosemarketfailurewellenoughtoprescribepolicy.
·Wagedifferentialscaseforprotection:
AtarifftoprotecturbanindustrialsectorsinLDCSwilldrawtheunemployedintoproductiveworkandthusgeneratesocialbenefitsthatmorethancompensateforitscost.
·However,thispolicywillencouragesomuchmigrationtourbanareasthatunemploymentwill,infact,increase.
·Thedifficultyofascertainingtherightsecond-