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Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta. Indonesia International Training Centre of ILO, Turin,

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Presentation on theme: "Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta. Indonesia International Training Centre of ILO, Turin,"— Presentation transcript:

1 Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta. Indonesia International Training Centre of ILO, Turin, Italy. Samuel G. Asfaha ITC-ILO Trade Policy and Its Instruments Assessing and Addressing the Effects of Trade on Employment : A knowledge Sharing Workshop Le Meridian Hotel Jakarta. Indonesia 12 – 16, July 2010.

2 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Objective To understand trade policy and its instruments; and To understand the welfare effects of various trade policy instruments on consumers, producers and governments welfare in both the applying county (the home country) and its trading partners (foreign countries).

3 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Outline Trade policy Trade policy instruments –Tariffs –Subsidies –Import quotas –Voluntary export restraints –Others …

4 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Trade Policy What is trade policy? –A set of rules and regulations applied to trade. Objectives of trade policy?

5 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Common Instruments 1. Tariff – a levy on imports and exports. –Specific tariff –Ad valorem tariff 2. Subsidies –Import subsidies –Export subsidies

6 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Tariffs Specific tariffs –Fixed charge for each unit of goods imported (often based on weight, number, length, volume or other unit of measurement). –often levied on foodstuffs and raw materials E.g. $1 per kill of apple etc … Ad valorem tariff – levy as percentage of value (instead of quantity, weight etc.)

7 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Why tariff? A tariff could be levied for one or all of the following purposes: –To protect domestic producers from foreign competition (i.e. protective tariff). In extreme cases a tariff could be so high that it effectively prohibits imports (i.e. prohibitive tariff). –To raise Revenue for government (i.e. revenue tariffs). –For environmental and health purposes, i.e. to discourage the consumption of goods that are harmful for environment (i.e. green tariff; a.k.a. eco-tariff) and/or health (e.g. tariffs on cigarettes and liquors).

8 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Effects of tariffs Tariffs lead to: Higher cost of importing goods Higher price of imported goods Lower demand for imported goods Case 1: Effects in the tariff imposing country

9 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Effects of tariff Lower demand for the good in the tariff imposing country Negligible effect on global prices for the good Negligible effect on aggregate demand for the exporting country Case 2: For the country whose exported goods face the tariff and that the tariff imposing country accounts for a negligible share of total demand for the good: Negligible effect on production and supply of the good Negligible effect on global trade of the good

10 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Effects of tariff Lower demand for the good in the tariff imposing country Lower export (international) prices for the good Lower aggregate demand for the good Case 3: For the country whose exported goods face the tariff and that the tariff imposing country accounts for a significant share of total demand for the good: Excess supply of the good Lower production of the good Lower global trade of the good

11 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. How much protection does a tariff offer? The actual protection that a tariff provides is measured by a concept called effective rate of protection. An analysis of effective rate of protection provided to an industry takes into account the effects of tariffs on inputs as well as on outputs. How do we calculate the effective rate of protection? Lets see this example:

12 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy.Example: Consider: –International price of car: $10,000 –Cost of parts for assembly: $8,000 –Assemblers value added is $2000 (i.e. 10,000 – 8,000) Assume a country wants to promote an auto industry, it imposes a tariff of 20% on auto. Hence: –Domestic price of auto would now be $12,000. –Cost of parts for assembly remains the same. –Assemblers value added now is $4,000 (12,000 – 8,000). Note: –The nominal protection was 20%. –The effective protection however is captured by the percentage difference in value added that the tariff created: ([(4,000 – 2,000)/2,000)]*100%) = 100%.

13 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Who is more effectively protected? Firm A: Bicycle Assembler –Cost of imports of bicycle parts to make a bicycle = 200 –Bicycle price = 300 Firm B: Auto Assembler –Total cost of imports of auto spares to make a car = 5,000 –Auto price = 6,000. Whose is more protected (Firm A or Firm B) if we levy 30% tariff on bicycles and 20 % on autos?

14 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Costs and benefits of tariffs Tariffs are the simplest trade policies Tariffs increase the price of imported goods, as a result: –consumers pay higher (negative effect on their welfare) – producers gain from higher prices. –Government earns tariff revenue By artificially inflating prices of imported goods, tariffs encourage the substitution of lower price (efficient) imports by higher price (less efficient) domestic products. Hence, there is a loss of efficiency. But of course, to get the full picture one needs to look at the dynamic effect of tariffs (encouraging domestic industries etc (the so called infant industry argument).

15 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. 2. Subsidy Export subsidy: –A payment for a firm or individual that exports goods abroad. –It can be fixed (fixed payment per unit) or ad valorem (proportional to value of export). –Exports subsidies encourage exporters to export more. From the individual exporters point of view, subsidies increase his/her export revenue. Well known examples: U.S. subsidy on cotton The European Common Agriculture Policy (CAP)

16 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Benefits and costs of subsidy Subsidized exporters benefit Foreign consumers benefit from low prices Foreign producers suffer from low prices Creates production distortion Creates consumption distortion Creates terms of trade loss for the subsidizing country

17 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments of trade policy: Import Quotas –Restriction on quantity of imports –Often enforced through import license –Have the same effect as tariffs on domestic prices (hence production and consumption distortions)

18 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments … Contd. Voluntary export restraints –Is a quota imposed on the side of the exporting (instead of importing) country. –Often imposed by the request of the importing country - it thus is not truly voluntary. –Exporting countries agree to it so as to not risk other worse forms of trade barriers such as import quotas or higher tariffs. –It is discriminatory in its effect

19 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments … Contd Local Content Requirements –Requirement that some specific fraction of a good must be produced domestically –Provides protection to local parts producers such as automobile parts etc. –Was widely used as part of industrial policy

20 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments … Contd Export credit schemes –Could take several forms. Two main forms are: Export loan - government institutions extend export credits directly, often in association with private financing. Export loan subsidy - Subsidized loan given to the foreign buyer by the exporting countries government operating indirectly to extend preferential refinancing and interest subsidies to private lenders.

21 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments … Contd Export credit schemes? –What are their impact?

22 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Other instruments … Contd National procurement –May also be called government procurement, public tendering, public procurement etc … –Purchases by government or regulated firms directed towards domestically produced goods and services.

23 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Bureaucratic barriers –Creating bureaucratic delays in customs clearance and other forms of administration barrier in order to discourage imports; –Twisting laws, regulations and requirements in order to affect the internal sale, purchase, transportation and distribution of foreign goods. Other instruments … Contd

24 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy. Reflections What are the key policy instruments of trade policy in Indonesia? Could trade policy affect a countrys trade structure? Economic development? Employment and wages? How?

25 Trade Policy and Its Instruments International Training Centre of ILO, Turin, Italy //


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