ch 9: instruments of trade policy - Krugman/Obstfeld/Meltz

nontariff barriers

- import quotas - export restraints

Pure monopoly protected by *tariff, t*

Domestic industry produces the same Q it would if it were perfectly competitive ↑ domestic P ↑ domestic Q ↓ domestic demand

result of *tariff* - Home consumers (implemented by Home country - raises the price of shipping to Home country)

Home price increase: from P∨w to P∨T - is less than t because par of the tariff is reflected in a decline in F's export price and thus not passed onto the consumers at H

consumer surplus

P consumer pays - P consumer would have been willing to pay = area under the demand curve and above the price

VER v. tariff

VER is more costly to importing country than an = tariff revenue of tariff →→ rents earned by foreigners

efficiency loss

caused because tariff distorts incentives to consume & produce = b + d

terms of trade gain

caused because tariff foreign export P = e if TOT gain = 0 → tariff reduced welfare

net cost of tariff

consumer loss - producer gain - gov. rev. (b+d-e)

how to measure costs/benefits of a tariff

consumer/producer surplus

import demand curve, *MD*

excess of what consumers D & producers S within a country

export supply curve, *XS*

excess of what producers S over what consumers D within a country

how much protection does a tariff/other trade policy actually provide

expressed as: percentage of the price that would prevail under free trade "could raise the price received by US sugar producers by 35%." ad valorem: protection=tarif rate specific: ad valorem protection equivalent = tariff/price net of tariff [[(??? p211)]]

multi-fiber agreement

famous (VER) OMA limited textile exports from 22 countries until 2005

specific tariffs

fixed charge for each unit of goods imported effect = raise the cost of shipping to a country

compare *tariff v. quota* that lead to the same level of imports

if gov. is concerned about domestic monopoly power, tariff is better than quota

when will trade arise in a competitive industry?

if prices are different in the absence of trade

who gain/loses from tariff

importing country consumers - lose exporting country consumers - gain importing country producers - gain exporting country producers - lose importing country gov - gain

import quota

limitation on the quantity of imports

export restraint

limitations of the quantity of exports - usually imposed by an exporting country at an importing country's request

net welfare effects of a tariff

losses set against *The TOT Gain* (=e) that results from the ↓P of foreign exports caused by the tariff

orderly market agreement (OMA)

multilateral VER covering > 1 country

how does a *local content requirement* affect the P for consumers?

no gov. revenue or quota rents p of imports-domestic goods is averaged in final goods and passed onto consumer

domestic monopolist faces competition from imports... free trade v. no trade (D: demand by domestic residents Pw: world P MC: price of single firm)

no trade → D = MR curve *profit maximizing output (of a monopolist)*: MR = MC free trade → [[*w/ free trade, the fact that the dom. industry is a monopoly doesn't make a difference. industry is perfectly competitive*]] monopolists price must be Pw *profit maximizing output (of a monopolist)*: MC = Pw imports = Df-Qf

tariffs/import quotas w/ MONOPOLY

p 232 - 235 try problems first. see if I need to do this

read europes common ag policy

p219

export credit subsidy

p227

national procurement

p227

red-tape barriers

p227

tariff-inclusive domestic price

paid for import

export subsidy

payment to a firm that ships a good abroad - ad valorem / specific shippers export good up to the point where P_dom - P_foreign > subsidy

effective rate of protection of a tariff rate/ad valorem tariff (p211) t = rate

profitable if: c ≤ (P_good) - (P_capital_good) before: (P_good) = (P_good) after: (P_good) = (P_good)×1.t

voluntary export restraint (VER) or voluntary restraint agreement(VRA)

quota on trade imposed from the exporting country's side ex: limit on auto exports to US enforce by japan, 1981

overall point of a tariff

raise max. P domestic industry can charge → Pw + t

local content requirement

requires some specified fraction of a final good to be produced domestically used by developing countries - shift manufacturing base from --assembly-- to --intermediate goods-- + to local producers of parts - to firms that must buy locally ←effective price to firm is ave of price of imported and dom produced inputs (ex. p227)

effects of export subsidy on P

reverse of tariff (read p218 if don't understand)

world equilibrium w/ tariff, t per unit (of wheat)

suppliers will only ship wheat from F to H if the P at home exceeds that of foreign by at least t → ↑P @ Home → ↓P @ Foreign until P home - P for. ≥ t

consumption distortion loss

tariff leads consumers to consume too little of the good

production distortion loss

tariff leads domestic producers to produce too much of this good = b

ad valorem tariffs

taxes levied as a fraction of the value of imported goods effect = raise the cost of shipping to a country

↓ the tariff-imposing country can drive down foreign export prices (A SMALL COUNTRY)...

the smaller the TOT gain

result of *tariff* - Home producers

↑P received by domestic producers of that good

costs/benefits of tariffs for importing country

↑P_dom ↓P_for ↑production_dom ↓consumption_dom

producer surplus

=P×Q-area under supply curve up to Q

gov revenue =

=volume of imports × tariff rate =Q×t

why is the tariff so inefficient?

???? p 216 Dom. economy produces additional units of good that it could purchase more cheaply abroad

result of a *tariff* implemented by a [[small]] country

A tariff on imports to a [[small]] country cannot affect foreign export prices → raises P of the import in that [[small]] country by the full amount of the tariff, [[t]]! home price increase = P∨w + t → --imports fall in home country but production of that imported good rises [[(why??? p 210)]]

result of *tariff* - Foreign

Smaller export supply because lower P* → reduced supply and increased demand volume of trade declines

compare the effect of 4 major kinds of trade policy on consumer welfare

TABLE 9-1 P228 DRAW