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Trade Policies Tariffs and Quotas
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Tariffs Tariff: A tax on import Specific tariff: a per unit tax on imports Ad valolrem tariff: a value based tax on imports Why impose tariff? To discourage consumption To raise revenue To discourage imports To protect domestic industries
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Tariffs and Economic Welfare The small country case The large country case Effective rate of protection
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Measuring Tariff Rates Tariff rates vary across goods and and services as well over time An unweighted average tariff rate A Weighted average tariff rate: the sum of weighted tariff rates; for each good the rate weighted based on the percentage value of the import of that good relative to the total value of all imports
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The Small Country Case D S Q P Pw Pw+ T Pa o Q1 Q3 Qo Q4 Q2 b c d e fg h i k Tariff
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The Large Country Case D S d +w S d+w +t Sd Q P o q1 q3 q2 qo mr s P1P1 P0P0 P2P2
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Tariffs and Offer Curves Case of a small country TT A A` Good X Good Y X2 X1 Y2 Y1
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Tariffs and Offer Curves B A A` TT TT` X Y 0 A tariff is imposed by Country A Note the change in the terms pf trade:TT
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Optimal Tariff For a small country: A zero tariff rate For a large country that can affect the terms of trade: Maximize the difference between the gain (s) and the losses (m+r) from a tariff The effect of tariffs on input prices
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The Effective Rate of Protection The protective effect of tariff based on the value added t f - a.t i ETR = ------------ 1 - a a = value of import as % of the value of final good
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f h g i DwDw D w -t Q 0 q2q1 q4q3 P Export Tax P1P1 P0P0
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Non-tariff Barriers to Trade Quotas Quantitative restrictions on imports Voluntary export restrictions Export subsidies Dumping Regulatory and technical standards Government purchasing policies How to measure non-tariff barriers
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Quota po p1 Y a b c d Sd Dd
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Tariffs vs Quotas Greater loss of welfare for the importing country with quotas Quotas are less flexible
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oo QQ q1 q3qoq2 q1 q2 q3 q4 D D D D Sd Sd +t Sd P P
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Export Policies Export taxes: »Small counties »Large countries Export subsidies Voluntary export restraints Countervailing Duties (Against subsidies)
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Dw-S2 Dw Dw +S1 Dd Sd P Qx oq3 q1 qo q1 po Po-s Po+s a b c d e f
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Dumping Sporadic dumping Persistent dumping Predatory dumping
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Dumping Dh MR De MR MC Ph Pe Q Q $$ o o
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Export Subsidies An export subsidy lowers the cost of production for the produces in the exporting country. The cost of a subsidy is borne by the taxpayers in the exporting country. An export subsidy lowers the price to the importing country, resulting in an increase in the exports for exporting county; that is an increase in imports for the importing country.
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An Export Subsidy from the Perspective of the Importing Country: A Small Country D Sd Pw Pw -s 0 s = Pw-s+c Q f e g h P1P1 P2P2
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Non-Tariff Barriers Technical standards Regulatory standards Administrative standards Domestic-content requirements Rules of origin Government-procurement policies
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Arguments for Protection Infant Industry Argument Imperfect Competition »The Optimal Tariff »The Case of a Monopoly Strategic Trade Policy »The Learning Curve »Profit Shifting (The Game Theory) Externalities
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Tariffs vs. Subsidies QQ Sw Sd Ss Sw + t Qo Q1 Q2 ce f Sd P P o o D D s
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The Optimal Tariff Dd Q Sd+w Sd+w +t Sd 0 P0P2P0P2 P2P2 s
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International Trade and a Monopoly Under autarky a monopoly under-produces Free trade forces a monopoly to behave like a competitive firm. A tariff protection for a monopoly is less restrictive than a quota protection.
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Monopolies and Tariffs MC D Q 0 MR Sw Q1 Q2 Q3 Sw +t
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A monopoly and a Quota MC D DqMRq Q1 Q2 Q3 Q4 0
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Trade and Externalities EB 0 Q q1 q2
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Positive Externalities S D Sw Sw +t Q Q o o CE EB
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Negative Consumption Externalities S D Sw Sw +t Q Q o o CE
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