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Trade Policies Tariffs and Quotas. Tariffs Tariff: A tax on import Specific tariff: a per unit tax on imports Ad valolrem tariff: a value based tax on.

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Presentation on theme: "Trade Policies Tariffs and Quotas. Tariffs Tariff: A tax on import Specific tariff: a per unit tax on imports Ad valolrem tariff: a value based tax on."— Presentation transcript:

1 Trade Policies Tariffs and Quotas

2 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

3 Tariffs and Economic Welfare The small country case The large country case Effective rate of protection

4 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

5 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

6 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

7 Tariffs and Offer Curves Case of a small country TT A A` Good X Good Y X2 X1 Y2 Y1

8 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

9 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

10 The Effective Rate of Protection The protective effect of tariff based on the value added t f - a.t i ETR = a a = value of import as % of the value of final good

11 f h g i DwDw D w -t Q 0 q2q1 q4q3 P Export Tax P1P1 P0P0

12 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

13 Quota po p1 Y a b c d Sd Dd

14 Tariffs vs Quotas Greater loss of welfare for the importing country with quotas Quotas are less flexible

15 oo QQ q1 q3qoq2 q1 q2 q3 q4 D D D D Sd Sd +t Sd P P

16 Export Policies Export taxes: »Small counties »Large countries Export subsidies Voluntary export restraints Countervailing Duties (Against subsidies)

17 Dw-S2 Dw Dw +S1 Dd Sd P Qx oq3 q1 qo q1 po Po-s Po+s a b c d e f

18 Dumping Sporadic dumping Persistent dumping Predatory dumping

19 Dumping Dh MR De MR MC Ph Pe Q Q $$ o o

20 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.

21 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

22 Non-Tariff Barriers Technical standards Regulatory standards Administrative standards Domestic-content requirements Rules of origin Government-procurement policies

23 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

24 Tariffs vs. Subsidies QQ Sw Sd Ss Sw + t Qo Q1 Q2 ce f Sd P P o o D D s

25 The Optimal Tariff Dd Q Sd+w Sd+w +t Sd 0 P0P2P0P2 P2P2 s

26 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.

27 Monopolies and Tariffs MC D Q 0 MR Sw Q1 Q2 Q3 Sw +t

28 A monopoly and a Quota MC D DqMRq Q1 Q2 Q3 Q4 0

29 Trade and Externalities EB 0 Q q1 q2

30 Positive Externalities S D Sw Sw +t Q Q o o CE EB

31 Negative Consumption Externalities S D Sw Sw +t Q Q o o CE


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