Exam 2 Ch. 2,6,7

Examples of public goods

- national defense, basic research, fighting poverty - open markets as prompted by GATT/WTO - capital flows to less-developed countries help growth (world bank) - international money for paying international debts (IMF) - last resort lending to avoid financial crisis (IMF)

What are the benefits of the trade war:

$70.90 tariff revenue GDP $51.44 Protecting intellectual property

Development funds and banks

- Asian Development Bank - Islamic Development Bank

Categories of International institutions

- Commodity-or industry-specific organizations; these range from trade associations, to international standards setting bodies, to powerful cartels - Commissions and agencies for managing shared resources - Development funds and banks - International trade agreements involving a few nations (regional trade alliances or trade blocs) - Global organizations for trade, development, and macroeconomic stability

Commissions and agencies for managing shared resources

- International Boundary and Water Commission (IBWC) - Mekong River Commission

Global organizations for trade, development, and macroeconomic stability

- International Monetary Fund (IMF) - World Bank - World Trade Organization (WTO)

International trade agreements involving a few nations (regional trade alliances or trade blocs)

- North American Free Trade Agreement (NAFTA) - European Union

How a quota can be expressed

- Number of units - Total value

Commodity-or industry-specific organizations; these range from trade associations, to international standards setting bodies, to powerful cartels

- Oil Producing and Exporting Countries (OPEC) - International Telecommunications Union (ITU)

What are some of the criticisms of international organizations?

- Sovereignty - transparency - ideology

How a tariff can be expressed

- Specific tariff (per unit) - Ad valorem tariff (percent) - Compound tariff (both)

What are the basic principles of the WTO?

- Trade without discrimination - Freer trade - Predictability - Promoting fair competition - Encouraging development and economic reform

How does the WTO promote trade?

- by administering trade agreements - acting as a forum for trade negotiations - settling trade disputes - reviewing national trade policies - assisting developing countries in trade policy issues (through technical assistance and training programs) - cooperating with other international organizations.

IMF (International Monetary Fund)

- fights financial crisis around the world - it keeps tabs on the global economy - puts economic policies in place in member countries

Freer trade

- gradually - through negotiation

Public Goods

- non-excludable (once provided, anyone can enjoy benefits) - non-rival (sharable) Examples: clean air and clean water, that everyone must share.

What point is producer surplus under free trade.

A

How does domestic production compare between import tariff and quota?

If a quota remains fixed, an increase in consumer demand also increases the price paid by consumers and the quantity of producer surplus garnered by domestic firms. In contrast, an increase in consumer demand for an item that has an import tariff increases the quantity of imports and leaves the price intact. This assumes that the country is relatively small and the increase in its demand does not alter the world (pre-tariff) price. Given this difference, it is not surprising that domestic firms prefer quotas over tariffs as a form of protection for their industry.

Why is it important to protect geographical indications?

If not protected it may result in false advertisement. For example, if you buy Darjeeling tea it indicates that it is from a certain part of India, if this wasn't protected someone could sell you tea from America and call it Darjeeling tea.

Top imports from China:

Electrical machinery ($147B) Machinery ($110B) Furniture and bedding ($32B) Toys and sports equipment ($26B) Plastics ($16B)

reasons for trade dispute with China

Intellectual property Balance of payments / Trade deficit Currency manipulation Chinese subsidies

Know that tariffs cost the U.S. and give some estimates of cost per job saved

Estimated to cost of jobs from all tariffs 179,800 lost.

What producers lose when comparing no trade to trade with a tariff.

F

In going from no trade to trade with a tariff, a country gains. This letter represents the portion of the gain that goes to consumers.

G

What point is consumer surplus before trade.

H

Asian Infrastructure Investment Bank (AIIB)

started operating in 2016, promised that it would respond to developing countries more quickly, with fewer conditions, and with fewer layers of oversight and review than the World Bank or the IMF

Deadweight loss

the destruction of value that is not compensated by a gain somewhere else

Non-excludability

the inability to keep non payers (free riders) from obtaining benefits from a certain good; a characteristic of a public good

Effective Rate of Protection

the percentage change inn value added following a tariff, it can be higher than, less than, or equal to the numerical size of tariff. How the value added for the industry is affected.

Predictability

through biding and transparency

World Bank

was to give financial stability to countries mainly in Europe so they could rebuild after the war. Now focuses its efforts on development and poverty and provides resources to the poorest countries.

What consumers lose in consumer surplus because they are forced to buy from higher priced producers with the tariff as compared to free trade.

C

What consumers lose in consumer surplus because the tariff reduces how much they can buy as compared to free trade.

E

Rules of Origin

A system of allocating certificates whereby a defined amount of a product or service must be certified as being created within that region - in order to qualify for free tariff between member countries, certain percentage of the good must be produced within the free trade zone. This prevents a country like china shipping things to Mexico at a low tariff rate and then sending it duty-free to the U.S.

How do you show that free trade is better than autarky?

After you write down the sections that are in the Quantity produced (Qp) and Quantity consumed (QC) combine all the sections together in the welfare bracket, which eve has the most section has more gain.

Top exports to China:

Aircraft ($16B) Machinery ($13B) Miscellaneous grain, seeds, fruit ($13B) Soy beans ($12B) Vehicles ($13B) Electrical machinery ($12B)

trade deficit

An excess of imports over exports

What point is the gain in producer surplus due to tariff.

B

What are the basics of the trade statistics with China

China is our 3rd largest goods export market inn 2017, amounting for 8.4% of overall U.S. exports. We have a deficit in goods, but a surplus in services, overall a large deficit.

What point is revenues from the import tariff.

D

Why is it important to protect intellectual property across international borders?

It is important because countries need to respect the companies from other countries that come up with good ideas because that helps boost trade, economic stability, and helps with development

What is meant by most favored nation status?

It requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. Although its name implies favoritism toward another nation, it denotes the equal treatment of all countries.

What are the costs of the trade war:

Loss of 159,400 jobs Wages down -0.13% Long run GDP -0.21% U.S. companies taking a hit

Cost of intellectual property theft:

Low-end $225B High-end $600B

Infant industry (why countries protect industries)

Mainly associated with the tariff policies of developing nations that protect their _________ against the competition of more mature firms in industrial countries. Two main beliefs: (1) market forces will not support the development of a particular industry because foreign completion is to established and/or the industry is to risky, and (2) the industry inn question has some spillover benefits or positive externalities that make the industry more valuable to the national economy than simply the wages and profits it might generate.

Effect of trade war on American companies:

More than 25,000 companies had asked the Trump administration to exclude about 31,000 products, which at the time Chinese imports had a 25% tariff and expected to go to 30%.

National security (why countries protect industries)

Most countries refuse to trade military technologies or weapons with potential adversaries, and some nations also include strategic minerals that have specialized uses in the military hardware such as jet aircraft.

Trade without Discrimination

Most-Favored-Nation (MFN): treating other people equally like giving all members the same tariff schedule National treatment: treating foreigners and locals equally by not discriminating between domestic and foreign produced goods.

Allocative Efficiency

No monopoly, externalities, public goods, government subsidy or other interference in market (no market failure). Key: demand represents the value to society and supply represents the cost to society; no costs or benefits are ignored.

Trade Diversion

Price of good in country X: $10 Price of good in country Y: $13 Price of good in country Z: $11 Tariff in Y on X and Z goods: 20% Regional agreements could allow the tariff to be removed from country Z but not X—cause inefficiency once country Y now buys from higher cost producer (Z instead of X), they are now not buying from lowest cost producer

Trade Creation

Price of good in country X: $10 Price of good in country Y: $13 Tariff in Y on X's goods: 50%, making good X go up to $15 A regional agreement would Remove tariff which allows for trade—efficiency since low cost firm produces (more production from Y to X)

What are the pros and cons of regional trade agreements?

Pros: Trade creation Cons: Trade Diversion

WTO (World Trade Organization)

Regulates trade agreements involving goods, services, or intellectual property between countries by setting rules for trade, which have lowered barriers over time

Cultural protection (why countries protect industries)

Some nations worry that if they allow completely free trade in the cultural industries, then the most commercially viable firms will dominate, and the cultural values of the home country will be obscured and forgotten.

Retaliation List

The products that the U.S raises import duties on. It is carefully selected to minimize the adverse impact on U.S. consumers, firms, and workers.

what happens to the price of a good when free trade is opened?

The world price becomes the domestic price.

Why trade war started:

Trump administration imposed retaliatory tariffs because a section 301 investigation found that China was making U.S. companies share their technologies with them if they wanted to work together, basically stealing intellectual property.

Average Tariff rates before trade war:

U.S. 1.6% China 3.5% Majority of countries 0 to 3.9%

Foreign Exchange Reserves

are dollars, yen, pounds, euros, or another currency that is accepted internationally

How to compare an import tariff to a quota (with and without the quota being auctioned)

There is no government revenue from quotas. In the tariff case, the government earned revenue from imports. In the quota case, no revenue is earned unless the government auctions the quota.

Antidumping

WTO agreement allows governments to act against dumping where there is genuine ("material") injury to the competing domestic industry.

Countervailing duties

WTO agreement on Subsidies and Countervailing Measures disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO's dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty on subsidized imports that are found to be hurting domestic producers. A tariff that is granted to an industry that has been hurt by foreign country subsidies of its national firms.

Escape clause (section 201 in the U.S.)

WTO member may restrict imports of a product temporarily (take "safeguard" actions) if its domestic industry is injured or threatened with injury caused by a surge in imports. Here, the injury has to be serious, measures were always available under GATT. Empowers the president to raise tariff rates temporarily when the U.S. International Trade Commission (ITC) determines that a suede import surge has caused or threatened serious injury to a U.S. industry.

IMF Conditionality

When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. This system is designed to promote national ownership of strong and effective policies.

IMF Criticism

When a country borrows money from the ____ they agree to make policy adjustments in order to prevent having to borrow again, some say the _____ creates ones that address the problem or keeps lending money to countries even though they make no effort to fix it.

Retaliation for unfair trade practices (why countries protect industries)

When a country decides that another country's trade practices unfairly discriminate against it, a common response is to impose a trade barrier. They can provide an incentive for negotiation, but they can also lead to escalating trade wars.

Externality (market inefficiency)

When come costs and benefits are ignored. How can a market balance the costs and benefits if all the costs and benefits are not included?

Quota

a limited quantity of a particular product which under official controls can be produced, exported, or imported

Tariff

a tax or duty to be paid on a particular class of imports or exports

Retaliation (costs/effects from tariffs)

a tax that a government charges on imports to punish another country for charging tax on its own exports: China responded by saying it would impose ___________ tariffs on a broad range of US products.

Regional Trade Agreements

agreements among nations in a particular region to reduce tariffs and develop similar technical and economic standards

Partial Trade Agreement

an agreement that covers only some goods and/or services and is less than a free-trade agreement

Rent Seeking (costs/effects from tariffs)

any activity that uses resources to try to capture more income without actually producing a good or service. If it is easier to lobby a government for protection than it is to become more competitive, then firms will use _____________ tactics.

Market Efficiency

balances the costs of producing a good or service and the benefits of consuming a good or service.

Trade-Related Aspects of Intellectual Property Rights (TRIPS)

copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs, undisclosed information such as trade secrets

Producer Surplus:

difference between the minimum pice a producer would accept to produce a given quantity and the price it actually receives (supply is the minimum a producer would accept)

Consumer Surplus:

difference between the value of a good to consumers and the price they have to pay (demand is value of a good to consumers)

Innovation (costs/effects from tariffs)

effect of tariffs is that they isolate domestic firms from foreign competition and reduce the incentive to introduce new products or upgrade the quality and features of existing ones. Imports are often a major point of access to new technologies and new products.

Section 232

empowers the President to adjust tariffs on imports that threaten to impair U.S. national security (national security).

World Bank Criticism

has been criticized for ignoring the environmental and social impacts of some of its projects

Bretton Woods conference

held in 1944 and is what led to the creation of the IMF and World Bank

Non-tariff measure

include a wide variety of regulations and policies that effectively reduce the volume of international trade. They often act as hidden forms of protection and are commonly embedded deeply in a country's rules and institutions. Together with quotas, they make up non-tariff barriers to trade.

Free Trade Area

includes all goods and services but to the rules of origin - no tariff or restrictions between the two countries but those countries have tariffs with others - A zone in which there are no tariffs or other restrictions on the movement of goods and services across borders

Customs Union

includes all goods and services, as well as common tariffs - all tariffs are the same amongst countries connected, for example the European Union - A group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy.

Common Market

includes all goods and services, common tariffs, and capital and labor - allows workers to work in other countries, The European Union is Ann example of this - a group of countries that acts as a single market, without trade barriers between member countries

Economic Union

includes all goods and services, common tariffs, capital and labor, and economic policies which may include currency - has common economic policies, the European Union is an example of this - A group of countries committed to (1) removing all barriers to the free flow of goods, services, and factors of production between each other, (2) the adoption of a common currency, (3) the harmonization of tax rates, and (4) the pursuit of a common external trade policy.

Revenue (why countries protect industries)

income taxes and sales taxed are difficult if not impossible to impose, but tariffs can be relatively easily collected. Tariff _________ were the single greatest source of income for the U.S. government until well into the twentieth century.

Antidumping Duty (ADD)

is a tariff levied on an import that is selling at a price below the product's fair value.

Nominal Rate of Protection

is the percentage tariff imposed on a product as it enters the country (is the tariff rate). For example, if a tariff of 20 percent of value is collected on clothing as it enters the country, then the ____________ is that same

what is China accused of doing?

killing 100,000 Americans a year with imported fentanyl and stealing hundred of billions in intellectual property.

Free Riding

means that there is no incentive to pay for public goods because people cannot be excluded from consumption

Economic Equity

means what is "fair." Economic actions and policies have to be evaluated in terms of what people think is right or wrong. Some people judge equity based on providing equal opportunity. Others judge equity based on equality of outcomes.

Labor protection (why countries protect industries)

nations must protect their markets against imports from countries where wages are much lower because otherwise the advantage of lower wages will either wreck the domestic industry or force it to match the lower wages.

Section 301

provides the U.S. with the authority to enforce trade agreements, resolve trade disputes, and open foreign markets to U.S. goods and services (unfair trade practices). It is the principal statutory authority under which the U.S. may impose trade sanctions one foreign countries that either violate trade agreements or engage I other unfair trade practices. When negotiations to remove the offending trade practice fail, the U.S. may take action to raise import duties on the foreign country's products as a means to rebalance lost concessions.

Economic Efficiency

refers to how well scarce productive resources are allocated to (1) produce the goods and services people want (allocative efficiency) and (2) how well inputs are used in the production process to keep production costs as low as possible (productive efficiency).

Economic Growth

refers to increasing the production of goods and services over time. It is measured by changes in level of real gross domestic product (GDP).

Economic Stability

refers to maintaining stable prices and full employment and keeping economic growth reasonably Smooth and steady. It means avoiding inflation or deflation. Full employment occurs when an economy's scarce resources, especially labor, are fully utilized.

Economic security

refers to protecting consumers, producers, and resource owners from risks that exist in society. Each society must decide from which uncertainties individuals can and should be protected, and whether individuals, employers, or the government should provide or pay for this protection.

Economic Freedom

refers to such things as the freedom for consumers to decide how to spend or save their incomes, the freedom of workers to change jobs and join unions, and the freedom of individuals to establish new businesses or close old ones.

Sovereignty

refers to the rights of nations to be free from unwanted foreign interference in their affairs