CDAE 272 International Economic Development Spring 2008

Class 24 April 17 Last class: Result of Quiz 6 Group projects 5. Trade policies of importing nations Today: Group projects 5. Trade policies of importing nations 6. Trade policies of exporting nations Next class : 6. Trade policies of exporting nations A case study: China’s economic development

Class 24 April 17 Important dates: Detailed outline or draft of group presentation: Thurs., April 17 Class presentations: Thursday (4/24) and Tuesday (4/29) Final exam (take-home, 24 hours, April 6)

5. Trade policies of importing countries 5.1. Major types of import barriers 5.2. Reasons for import barriers 5.3. Effects of specific import policies 5.4. Related issues

5.4. Issues related to import policies (a) Major differences in the impacts of a tariff and a quota (b) Fixed domestic prices by importing countries: A variable import tax (levy) = P - Pw (c) Is it possible for a large importer to benefit from an import tariff? An intuitive analysis: A graphic analysis: A mathematic analysis ( see the example in Section 5.3(e) in Class 23 )

5.4. Issues related to import policies (d) Is it possible for a small importer to benefit from an import tax? An intuitive analysis: A graphical analysis: A mathematic analysis: (e) Is it possible for a large importer to benefit from an import quota? (f) Is it possible for a small importer to benefit from an import quota?

6. Trade policies of exporting countries 6.1. Major export policies 6.2. Reasons for export policies 6.3. Export subsidy 6.4. Export tax 6.5. Price discrimination 6.6. Related topics Special topic: dumping and antidumping

6.1. Major export policies (1) Export subsidy (2) Export tax (3) Price discrimination (4) Domestic price support (subsidy) (5) Technical assistance (6) Government promotion and negotiation …… 6.2. Major reasons for export policies

6.3. Export subsidy (1) A small exporter (a) An intuitive analysis (b) A graphical analysis (c) A mathematical analysis Qd = PQs = P ED: Pw = Export P* Qs Qd CS PS sub. CS+PS-sub No trade Free trade An export subsidy of $1/unit

6.3. Export subsidy (2) A large exporter (a) An intuitive analysis (b) A graphical analysis (c) A mathematical analysis Qd = PQs = P ED = P Export P* Qs Qd CS PS sub. CS+PS-sub No trade Free trade An export subsidy of $1/unit Please complete the table as a take-home exercise

6.4. Export tax (1) A small exporter (a) An intuitive analysis (b) A graphical analysis (c) A mathematical analysis Qd = PQs = P ED demand by the exporter: Pw = Export P* Qs Qd CS PS tax CS+PS+tax No trade Free trade An export tax of $1/unit A general question: Is it possible for a small exporter to benefit from export tax?

6.4. Export tax (2) A large exporter (a) An intuitive analysis (b) A graphical analysis (c) A mathematical analysis Qd = PQs = P ED = P Export P* Qs Qd CS PS tax CS+PS+tax No trade Free trade An export tax of $1/unit A general question: Is it possible for a large exporter to benefit from export tax?

6.5. Price discrimination (1) How does it work? (2) What are the reasons to do it? (3) Price discrimination in international trade ==> dumping and antidumping

6.6. Related topics (1) Price support -- A major policy of U.S. ag. ( ) -- Set a floor (minimum) price and the government purchases the surplus -- Impacts on trade (2) Deficiency payment system -- Developed from the price support policy -- Set a target producer price and the government pays producer the difference between target price and market price (3) Marketing boards ( e.g., Canadian wheat board )

Dumping and antidumping in international trade -- What is dumping? -- Why and how? -- What is reciprocal dumping? -- What is wrong with dumping? -- Antidumping practice in the U.S. -- Dumping and antidumping under WTO

What is dumping? Definition: a firm charges a lower price for its exported product than it charges for the same product in the domestic market In practice: a firm charges a price for its exported product that is lower than the product’s actual or estimated average production cost. Price discrimination: charge different prices for the same product. Two necessary conditions for dumping: (1) The industry is imperfectly competitive (2) The domestic and international markets must be segmented

Why does a firm “dump” to a foreign market? Foreign market is more competitive with low prices (lower than its production cost) but the company needs foreign exchange to import some materials or equipment Low price to enter the foreign market and hope to increase the price later Successful examples: Hyundai and Kia Failed examples: The loss in the foreign market due to low price is recovered from domestic market with higher price

Why does a firm “dump” to a foreign market? One hypothetical example: One firm sells 1,000 electric fans in the domestic market at $20 per unit and exports 100 units at $15 per unit. Suppose the firm will have to reduce the price by $0.01 in order to sell one more fan at home OR abroad, where will the firm cut the price and sell one more fan? Home market: x 1001 – 20 x = 9.99 Abroad: x 101 – 15 x 100 = If the average production cost is $16: Profit from the domestic market = (20 – 16) * 1000 = 4000 Profit from the foreign market = (14.99 – 16) = –