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 imports Why impose tariff? To discourage consumption To raise revenue To discourage imports To protect domestic industries

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

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

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

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

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

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

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

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

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

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

Quota po p1 Y a b c d Sd Dd

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

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

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

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

Dumping Sporadic dumping Persistent dumping Predatory dumping

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

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.

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

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

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

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

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

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.

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

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

Trade and Externalities EB 0 Q q1 q2

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

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