International Economics NYU Spring '24

ad valorem tariff

ad valorem tariff is expressed as a fixed percentage of the value of the imported product. primarily used with manufactured goods because it can be applied to products with range of grade variations, maintains constant degree of protection for domestic producers through the business cycle

maintenance of the domestic standard of living

advocates of trade barriers often contend tariffs are useful in maintaining high levels of income and unemployment in home nation

tariff-rate quota

allows specified number of goods to be imported at a lower tariff rate (within quota rate). Any imports above this level face higher tariff rate (the over-quota rate)

outsourcing

competitive strategy for producers, each production stage located in country where it incurs least cost

social regulations

correct a variety of undesirable side effects markets ignore like health, safety, environment

consumption effect

decrease in consumption resulting from tariff's artificially increasing price

when firm's average costs decrease as industry's output increases, the cost reduction could be caused by

decrease in resource prices or the amount of resources per unit

customs valuation

determining value of imported product is complex, subject to disagreement

consumer surplus

difference between what buyers are willing and able to pay and the amount they actually pay, so inverse relationship between change in market price and CS

producer surplus

difference between what producers are willing and able to receive and the amount they actually receive, direct relationship between change in price and PS

effect of resource endowments on comparative advantage

differences in relative resource endowments, differences in relative resource prices, differences in relative product prices

Increase in tariff falls on

domestic consumer

fairness in trade: a level playing field

domestic producers say import restrictions need to offset foreign advantages to create level playing field, rationale for restrictions is that foreign governments play by different rules, giving foreign firms unfair competitive advantage, trade benefits domestic economy even if foreign nations impose trade restrictions, and fair trade argument overlooks potential impact of trade restrictions on global trade

export subsidy

domestic production subsidy is granted to producers of import-competing goods, an export subsidy goes to producers of goods to be sold overseas, for both, net price received by producer equals price paid by purchases plus subsidy, and subsidy revenue is redistributed in form of producer surplus.

foreign market value price based definition

dumping occurs when foreign firm sells good at price in US below home price

gains from trade for US significantly determined by

dynamic balance between its rate of technological innovation and rate of technological diffusion to other countries

effective rate

e=(n-ab)/(1-a) where n=nominal tariff rate on final product, a=ratio of value of imported value to value of finished product, and b=nominal tariff rate on imported input

Should average variable cost be yardstick for defining dumping?

economists argue that fair value should be based on average variable cost rather than average total costs, especially when domestic economy experiences temporary downturns in demand, under competitive conditions, firms price goods at average variable cost, antidumping laws punish competitive behavior, US firms selling at home not subject to same rules

tariff evasion

evading tariffs by illegal means such as smuggling imported goods into a country

policy implications of stolper-samuelson theory

even though free trade may provide overall gains for a country, there are winners and losers. owners of abundant resources tend to favor free trade while owners of scarce factors tend to favor trade restrictions

inter-industry trade

exchange between nations of products of different industries based on inter-industry specialization and each nation specializes in industries in which it enjoys comparative advantage

why do small countries have higher measures of openness

exports are significantly tied to international trade

stolper-samuelson theory

extension of factor-price equalization theory. export of product that embodies large amounts of relatively cheap, abundant resource makes resource scarcer, driving up its price/income. import of product that embodies large amounts of relatively expensive, scarce resource makes resource less scarce driving down its price/income. thus, the increase in the income to each country's abundant resource comes at the expense of the scarce resource's income

economies of scale

factors that cause a producer's average cost per unit to fall as output rises. Exit when expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output

sporadic dumping

firm disposes of excess inventories in foreign markets by selling at price below domestic price

specific tariff

fixed amount of money per physical unit of imported product, relatively easy to apply and administer, degree of protection varies inversely with changes in import prices, and provides domestic producers increased protection during recession

Should antidumping laws reflect currency fluctuations?

foreign producers often must set their prices for foreign customers in terms of a foreign currency, fluctuations in exchange rates can cause them to dump according to legal definition, under US antidumping law, American firms are not required to meet the standard imposed on foreign firms selling in the US

free trade

free trade argument posits that open markets foster most efficient use of world resources, policies often meet resistance among companies and workers who face losses in income and jobs because of import competition, and policymakers torn between global efficiency and needs of voting public

revenue tariff

generates tax revenues by placing tariffs on either imports or exports, many developing nations rely on tariffs as major source of income

persistent dumping

goes on indefinitely; to maximize economic profits, a producer may consistently sell abroad at lower price than at home

All aspects of a nation's economy are linked to economies of trading parters through international movements of

goods and services, labor, business enterprise, investment funds, and technology

import licenses

government allocates import licenses to importers, permitting them to import product only up to prescribed limit, regardless of market demand

dynamic comparative advantage

government can establish policies to promote opportunities for change through time, comparative advantage in particular industry can be created through mobilization of skilled labor, technology, and capital

job protection argument

job gains less visible than job losses, trade restrictions result in job gains for a few industries, job losses are spread out, saved jobs cost more than workers' salary

Trend of labor and capital in US in recent decades

labor mobility has not risen, increasingly tied to the rest of the world through capital flows, foreign ownership of US financial assets increasing, concerns over rising cost of debt, international branches of US banks, US securities increasingly globalized

tariff avoidance

legal use of tariff system to company's advantage to reduce the amount of tariff payable by legal means

openness in the US economy 1890-WW2

less open, reduced dependence on trade

antidumping duty

levied (in addition to normal tariff)when US Department of Commerce determines foreign merchandise is being sold at less than fair value and US International Trade Commission determines that these imports are causing or threatening material injury to domestic industry

costs society pays as result of protectionism

loss of consumer surplus because of higher prices, resulting deadweight losses, lost economies of scale as further opportunities are lost, loss of incentive for technological development provided by import competition

protective effect of domestic

loss to domestic economy from wasted resources used to produce at increasing unit costs

protection against cheap foreign labor

low wages abroad makes it hard for US firms to compete with firms using cheap foreign labor, fails to recognize links among efficiency, wages, and production costs, as low wages do not guarantee low costs, and low wage nations have competitive advantage only in goods requiring greater labor and few other factor inputs

manufactured goods stages

manufactured goods is introduced to home market, domestic industry shows export strength, foreign production begins, domestic industry loses competitive advantage, import competition begins

optimal tariff

maximizes positive difference between gain of improving terms of trade and loss in economic efficiency from the protective effect and consumption effect. only beneficial to importing nation

import quotas

may lead to domestic monopoly of production and higher prices

Risks of withdrawing from free-trade agreements such as the Trans-Pacific Partnership

may place America at competitive disadvantage as other countries form trade pacts with each other, resulting in rising tariffs on American exports that dampen sales abroad. Detracts from America's role as a leader in international cooperation making it harder to achieve agreements on the environment, immigration, and national security

to limit outsourcing, labor lobbied for domestic content requirements

minimum percentage of a good's value must be produced locally to qualify for zero tariff rates, pressure domestic/foreign firms to use domestic inputs/workers, can result in higher input and product prices and loss of competitiveness, subsidizes by domestic consumers

product life cycle theory

nations differ in rates of technological innovations, result in new methods of producing existing commodities, production of new commodities, and commodity improvements

Economic interdependence

no nation exists in economic isolation

Do import restrictions result in more jobs for domestic workers?

no, a reduction in imports does not occur in isolation. Jobs promoted by import barriers tend to be offset by jobs lost from falling exports

Threat of imports

not all workers gain from international trade, some jobs are lost to cheap imports, concerns over mass immigration for low-wage work, particular threat to unskilled workers in developed countries

global quota

permits specified quantity of goods imported each year; does not specify from where product is shipped or who imports, plagued by accusations of favoritism

absolute quota

physical restriction on quantity of goods imported during a specific time period

nontariff barriers

policies other than tariffs that restrict international trade, best-known is the import quota which limits the total quantity of goods that may enter a country within a given time period

Effects of tariff on import

prices increase for domestic consumers, quantity demanded decreases, effect shared between domestic consumers, who pay higher price, and foreign producers, who receive lower price than under free trade

allocating quota licenses methods

pro-rata basis: US importers receive a fraction of their demand equal to the ratio of the import quota to the total quantity demanded collectively by US importers auction import licenses to the highest bidder in a competitive market

globalization

process of greater interdependence between countries and their citizens and increased interaction of product and resource markets via trade, immigration, and foreign investment. Includes noneconomic elements (ideas, culture, environment)

tariff escalation

processed goods have higher import tariffs, raw materials often imported at zero or low tariff rates, and nominal and effective protection increases at each production stage

international price discrimination

producer charges higher price at home and lower price overseas, submarkets' demand conditions must differ(different demand elasticities between home/foreign), firm must be able to separate submarkets (prevents arbitrage, resale of goods at higher price), markets are easier to separate internationally (higher transport costs, trade restrictions)

predatory dumping

producer temporarily reduces price charged abroad to drive foreign competitors out of business

advantages of globalization

productivity increases faster when countries produce goods and services in which they have a comparative advantage, living standards can increase more rapidly, global competition and cheap imports keep a constraint on prices so inflation is less likely to disrupt economic growth, open economy promotes technological development and innovation with fresh ideas from abroad which promotes economic growth and more jobs, jobs in export industries typically pay up to 18% more than jobs in import-competing industries, unfettered capital movements provide the US access to foreign investment and maintain low interest rates

industrial policy

promote industrial policy in order to achieve comparative advantage in certain industries, a strategy to revitalize improve and develop an industry (encourage development of emerging sunrise industries, and direct resources to industries in which productivity is highest, linkages to the rest of the economy are strong, and future competitiveness is important)

national security argument

protect essential industries (cultural and sociological considerations). assumption that national and individual's welfare enhanced by tariffs

bias in the political system favors

protectionism

deadweight loss

protective effect and consumption effect combined

Protective tariff

protects domestic producers from foreign competition and facilitates increase in output of import-competing producers

internal economies of scale

provide additional cost incentives for specialization in production. countries will specialize in products that have a large domestic demand. expansion of the firm itself, lower long run average cost, efficiencies from larger scale production, range of economies e.g. technical and financial

offshore assembly provision

provides favorable treatment to products assembled abroad from US made components, incentivizes foreign manufacturers to purchase components from US sources

nominal tariff rate

rate published in country's tariff schedule and applied to value of finished product

Openness in the US economy late 1800s

relatively high, rise in world trade

Corporate average fuel economy (CAFE) standards

represent foundation of US energy-conservation policy, by 2026 passenger cars are required to reach 54.5 miles per gallon and light trucks 40.3 miles per gallon

1933 Buy American Act

requires federal agencies to purchase materials and products from US suppliers if prices not unreasonably higher than foreign, domestic product must be 50% domestic component content and be manufactured in US. In 2021, most end products and construction materials increased to 55%. Iron and steel, domestic content threshold set at 95%

openness

rough measure of the importance of international trade in a nation's economy. Sum of nation's exports and imports as a percentage of its GDP

equalization of production costs

scientific tariff to eliminate unfair competition from abroad. Problems: - different costs across business - higher domestic prices which benefit efficient domestic companies but domestic consumer subsidizes inefficient production -approximates prohibitive tariff which contradicts comparative advantage and eliminates basis/gains for/from trade

higher costs of protection, the less likely a government is to

shield an industry from import competition

domestic production subsidy

subsidies may take form of outright cash disbursements, tax concessions, insurance arrangements, and subsidized loans. results in higher output, redistributive efforts-increase in producer surplus for most efficient producers, deadweight loss-protective effect, lower welfare losses than a tariff/quota, financed by taxpayers

antidumping laws

supporters claim such laws are needed to ensure level playing field by offsetting artificial sources of competitive advantage, critics note that although protected industries gain, consumers ose more and economy as whole therefore suffers net loss

free on board valuation

tariff applied to product's value as it leaves exporting country

regressive tariffs

tariffs are inequitable, impost most severe costs on low-income families, higher tariffs imposed on cheap goods than on luxuries, affect different countries in different ways, tend to burden poorer countries that specialize in production and sale of cheaper goods

export tariff

tax imposed on an exported product, less common, illegal under US constitution, commonly used by developing nations

import tariff

tax levied on imported product, most common, and collected before shipment can be unloaded in domestic port

tariff

tax levied on product when it crosses national boundaries

cost insurance freight valuation

taxies levied as percentage of imported commodity's total value upon arrival at final destination

What forces drive globalization?

technological change in transport, information, and communications; liberalization of trade and investment; development of international financial markets

risks of levying tariffs to protect American manufacturing jobs at particular firms

the few jobs that are saved come at a high cost to domestic consumers

Why do large countries have lower measures of openness

they are less reliant on international trade, companies can attain optimal production size without having to export due to the population and economic size

would a tariff wall really protect US jobs

trade protectionism was a political priority in 2016 presidential election. tariffs on imported steel tend to have a positive, direct effect on jobs for American steel workers, bur can have less visible, indirect effects on others. tariff-related gains for Americans is a complex issue

factor-price equalization

trade redirects demand away from relatively expensive, scarce resource toward relatively cheap, abundant resource in each nation. (cheap resource becomes relatively more expensive, expensive resource becomes relatively cheaper, and eventually factor price equalization as globalization evens things out but no full factor price equalization exists in the real world

risks of restricting imports from particular countries in an attempt to decrease bilateral trade deficits

trading partners may retaliate. reductions in bilateral trade deficits are not a good indicator of economic development

redistributive effect

transfer of consumer surplus to domestic producers

intra-industry trade

two way trade in a similar commodity, emphasized by advanced industrial nations, existence of intra-industry trade incompatibly with models of comparative advantage

bonded warehouse

under US tariff law, dutiable imports can be brought into US and temporarily left in a bonded warehouse, duty free up to 5 years, owners of warehouses must be bonded to ensure they will satisfy all customs duty obligations, and bonding company guarantees payment of custom duties if importing company unable to do so, when goods removed from warehouse firm must pay duty on value at time of removal

foreign market value cost based definition

used when price based definition cannot be applied, commerce department constructs a foreign market value

risks of violating rules of the World Trade Organization to protect American interests

weakens the rules-based trading system that many countries rely on to settle trade disputes and maintain open markets

What is a small nation?

when a nation is so small it can not influence the price of the product it buys, and when they import a very small portion of world market supply and are unable to impact market price.

when can tariffs increase national welfare

when imposed by importing nation large enough that changes in its quantity of imports influence world price

managerial economies of scale

when you have larger corporations it becomes harder to manage them and you need more people

government regulations

workplace safety, product safety, clean environment all improve well being of the public but result in higher costs for domestic firms

the economy is ___ with the introduction of tariffs

worse off

First wave of globalization

1870-1914. technological advances in steam engine, telegraph, electricity internal combustion engine led by Great Britain. Initially free trade but rising protectionism. Free capital movements and free migration

Second wave of globalization

1944-1980. Technological advancements in container shipping, jet planes, communication satellites, and television led by US. Gradually decreasing tariffs, regulated capital movements, and regulated migration

Third wave of globalization

1980-present. Advances in personal computers, internet, and mobile phones led by multipolar (US, EU, China). Freer trade spreading followed by rising protectionism, free capital movements, and regulated migration

protectionism

Economic policy of shielding an economy from imports.

who benefits in free trade biased sector

Exporting producers, their workers, and their suppliers

Risks of US participating in trade war with continuous rounds of escalating tariffs

Harms American exports and both countries suffer when volume of trade falls. Trade wars create uncertainty for businesses, which causes investment spending to fall, lessening the economy's ability to grow

What is the threat of imports to unskilled workers in developed countries

Hurts these workers in import-competing industries, wages increase for skilled workers, workers are more production, but imports do not decrease the total jobs in nation

theory of overlapping demands

Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods; wealthy nations will likely trade with other wealthy nations, and poor nations will likely trade with other poor nations

capital movements

Purchase and sales of foreign and domestic bonds and stocks

external economies of scale

The cost benefits that all firms in the industry can enjoy when the industry expands. expansion of the industry, benefits most/all firms, agglomeration economies are important, helps to explain rapid growth of many cities

ricardian theory

a country exports that commodity in which it has a comparative labor productivity advantage. assumes relative labor productivity, labor costs, product prices differ in countries before trade.

disadvantages of globalization

americans have lost jobs because of imports or shifts in production abroad and most find new jobs that pay less, americans that operate in import-competing industries fear getting laid off, workers face demands of wage concessions from their employers who often threaten to export jobs abroad if wage concessions are not accepted, besides blue collar jobs, service jobs and white collar jobs are increasingly vulnerable to operations being sent overseas, american employees can lose their competitiveness when companies build state of the art factories in low wage countries, making them as productive as those in the US

margin of dumping

amount by which foreign market value exceeds US price

compound tariff

applied to manufactured products composed of raw materials that are subject to tariffs specific portion of the duty neutralizes the cost disadvantage of domestic manufactures that results from tariff protection granted to domestic suppliers of raw material, and ad valorem portion of the duty grants protection to the finished goods industry

foreign trade zone (FTZ)

area in US where businesses operate without paying duties on imported products or materials as long as they remain in area and do not enter US marketplace, in an FTZ, can do just about anything to merchandise (repair, repackage, assembly), FTZ program treats a product manufactured in FTZ as if it were imported, not made in US, customs duties are due when goods are transferred from FTZ for US consumption

tariff effects

as taxes on imports, tariffs make items more expensive for consumers, reducing demand, buyers pay more for US made goods than they would for imported goods under free trade, job loss in retail and transportation sectors that import foreign-made goods, job loss in any domestic industry that suffers retaliatory tariffs, and additional costs of inputs passed on to consumers through goods and services that use such inputs in production process

agglomeration economies

benefits an enterprise/business enjoys because they are close to other businesses

Principle of comparative advantage in trade

both partners can benefit from trade

revenue effect

government's collections of duty

export quotas

governments enter as form of voluntary export restraint agreements. moderate intensity of international competition; tend to be more costly than tariffs. identical effect to equivalent import quotas; except implement by exporting nation. in 1980s, 67% of costs to US consumers of these restraints captured by foreign exporters as profit

effects of export subsidy

higher output and prices for exporters so higher exports and lower domestic consumption, domestic producers gain at expense of domestic consumers and taxpayers, leading to decrease in CS, increase in PS, and taxpayers bear cost of export subsidy

effects of import tariffs on exporters

higher production costs from imported inputs and reduction in CS, can result in higher prices and depending on elasticity of demand, reduce overseas sales, raise cost of living, international repercussions lead to reductions in domestic exports

High degree of economic interdependence reflects

historical evolution of economic and political orders and increasing integration into activities of foreign countries

license of demand allocation on tariff-rate quotas

if demand for licenses is less than quota, system operates on first come, first serve basis. if demand exceeds quota, import volume requested is reduced proportionally among all applicants. allocation may also be based on historical market share or auctions

free-trade argument

if each nation produces what it does best and permits trade in long term, there will be lower prices and higher levels of output, income, and consumption, tariffs and other trade barriers are viewed as tools that prevent the economy from undergoing adjustment, resulting in economic stagnation

Heckscher-ohlin theory/factor endowment theory

immediate basis for trade is difference between pre-trade relative product prices of trading nations. Explains why labor abundant countries export labor-intensive products such as textiles and why capital abundant countries would export aircraft and machinery. Doesn't explain why 2-way trade widely exists and why wealthy countries that have similar endowments trade more intensively with those with dissimilar endowments

who benefits in protection biased sector

import competing producers, labor unions in protected industry, suppliers of producers in protected industry, established firms in aging industry that could lose comparative advantage

selective quota

import quota allocated to specific countries, may lead to domestic monopoly of production and higher prices

effective tariff rate

include nominal tariff on finished good and any tariff implied to imported units if tariff on finished product is less than tariff on imported input, effective rate of protection is less than nominal tariff (may even be negative), tariff protects domestic suppliers of raw materials more than domestic manufactuters if tariff on finished product exceeds tariff on imported input, effective tariff exceeds nominal tariff

supply of protectionism

increases depending on political importance of import-competing industry, whether domestic firms and workers face large costs of adjusting to rising import competition, public sympathy for a group of domestic businesses or workers

openness in the US economy after WW2

increasing openness, negotiated reductions in trade barriers

demand for protectionism rises with

intensification of domestic industry's comparative disadvantage, higher levels of import penetration, concentration of domestic production, degree of export dependence

dumping

international price discrimination. occurs when foreign buyers are charged lower prices than domestic buyers for identical product, selling in foreign markets at a price below cost of production

does trade make the poor even poorer

international trade and technological change increase demand for skilled workers, immigration decreases supply of skilled workers relative to unskilled workers, education and training opportunities reduce wage inequality between skilled and unskilled workers, union weakness increases the wage inequality between unskilled and skilled workers

opportunity of imports

international trade increases total productivity, wages paid by exporters higher than non-exporters, exporting industries require more educated workforce