Chapter 8 The Instruments of Trade Policy Amended slides originally prepared by Thomas Bishop, Pearson-Addison-Wesley.

Chapter 8Chapter 8

The Instruments of The Instruments of Trade PolicyTrade Policy

AmendedAmended slides originally prepared by Thomas slides originally prepared by Thomas Bishop, Bishop,

Pearson-Addison-WesleyPearson-Addison-Wesley

22

PreviewPreview

Partial equilibrium analysis of tariffs: Partial equilibrium analysis of tariffs: supply, demand, and trade in a single supply, demand, and trade in a single industryindustry

Costs and benefits of tariffsCosts and benefits of tariffs

Export subsidiesExport subsidies

Import quotasImport quotas

Voluntary export restraintsVoluntary export restraints

Local content requirementsLocal content requirements

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Types of TariffsTypes of Tariffs

A A specific tariffspecific tariff is levied as a fixed is levied as a fixed charge for each unit of imported goods.charge for each unit of imported goods.– For example, For example, $1$1 per kg of cheese per kg of cheese

An An ad valorem tariffad valorem tariff is levied as a is levied as a fraction of the value of imported goods.fraction of the value of imported goods.– For example, For example, 25%25% tariff on the value of tariff on the value of

imported cars.imported cars.

Let’s analyze how tariffs affect the Let’s analyze how tariffs affect the economy.economy.

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Supply, Demand, and Trade Supply, Demand, and Trade in a Single Industryin a Single Industry

Let’s construct a model measuring how Let’s construct a model measuring how a tariff affects a single (a tariff affects a single (competitivecompetitive) ) market, say that of wheat.market, say that of wheat.

Suppose that in the absence of trade Suppose that in the absence of trade the the price of wheat in the foreign price of wheat in the foreign country is lowercountry is lower than that in the than that in the domestic country.domestic country.

– With trade the foreign country will exportWith trade the foreign country will export

– and the domestic country will importand the domestic country will import

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Supply, Demand, and Trade Supply, Demand, and Trade in a Single Industry (cont.)in a Single Industry (cont.)

How would you construct an How would you construct an export supply (XS) curve and export supply (XS) curve and an import demand (MD) an import demand (MD) curve?curve?

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An An export supply curveexport supply curve is the difference is the difference between the quantity that foreign between the quantity that foreign producers supply minus the quantity that producers supply minus the quantity that foreign consumers demand, at each price.foreign consumers demand, at each price.

An An import demand curve import demand curve is the is the difference between the quantity that difference between the quantity that domestic consumers demand minus the domestic consumers demand minus the quantity that domestic producers supply, quantity that domestic producers supply, at each price.at each price.

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Fig. 8-1: Deriving Home’s Fig. 8-1: Deriving Home’s Import Demand CurveImport Demand Curve

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Fig. 8-2: Deriving Foreign’s Fig. 8-2: Deriving Foreign’s Export Supply CurveExport Supply Curve

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In In equilibriumequilibrium, the quantities of, the quantities of

import demand = export supplyimport demand = export supply

domestic demand – domestic supply domestic demand – domestic supply ==

foreign supply – foreign demandforeign supply – foreign demand

In equilibrium, the quantities ofIn equilibrium, the quantities of

world demand = world supplyworld demand = world supply

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Fig. 8-3: World Fig. 8-3: World EquilibriumEquilibrium

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Activity 1Activity 1

D = 200 – 40P, and S = 40 + 40PD = 200 – 40P, and S = 40 + 40P

D* = 160 – 40P, and S* = 80 + 40PD* = 160 – 40P, and S* = 80 + 40P

Draw Home’s Demand and Supply curveDraw Home’s Demand and Supply curve

Find the MD and XS curveFind the MD and XS curve

What are the price and output with no What are the price and output with no trade, and in case there is trade between trade, and in case there is trade between the two countries?the two countries?

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Answers Activity 1Answers Activity 1

MD = 160 – 80P MD = 160 – 80P

XS = -80 + 80PXS = -80 + 80P

No trade P = 2, Q = 120No trade P = 2, Q = 120

No trade P* = 1, Q* = 120No trade P* = 1, Q* = 120

With trade MD = XSWith trade MD = XS

160 – 80P = -80 + 80P 160 – 80P = -80 + 80P 240 = 160P 240 = 160P

P = 240/160 P = 240/160 PPww = 1.50 = 1.50

QQww = -80 + (80 x 1.50) = -80 + (80 x 1.50) = 40= 40

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The Effects of a TariffThe Effects of a Tariff

What impact does an Import What impact does an Import Tariff have on a large or small Tariff have on a large or small economy?economy?

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The Effects of a TariffThe Effects of a Tariff A tariff can be viewed as an added cost of A tariff can be viewed as an added cost of

transportation, making sellers unwilling to transportation, making sellers unwilling to ship goods unless the price difference ship goods unless the price difference between the domestic and foreign markets between the domestic and foreign markets exceeds the tariff.exceeds the tariff.

If sellers are unwilling to ship wheat, there is If sellers are unwilling to ship wheat, there is excess demandexcess demand for wheat in the domestic for wheat in the domestic market and market and excess supplyexcess supply in the foreign in the foreign market.market.– The The price price of wheat will tend toof wheat will tend to rise rise in the domestic in the domestic

market.market.

– The The priceprice of wheat will tend to of wheat will tend to fall fall in the foreign in the foreign market.market.

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The Effects of a Tariff (cont.)The Effects of a Tariff (cont.)

Thus, a tariff will make the price of a good Thus, a tariff will make the price of a good rise in the domestic market and will make rise in the domestic market and will make it fall in the foreign market, it fall in the foreign market, until the price until the price difference equals the tariffdifference equals the tariff..

PPTT – P – P**TT = t = t

PPTT = P = P**TT + t + t

The price of the good in foreign (world) The price of the good in foreign (world) markets should fall if there is a significant drop markets should fall if there is a significant drop in the quantity demanded of the good caused in the quantity demanded of the good caused by the domestic tariff (by the domestic tariff (large countrylarge country).).

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Fig. 8-4: Effects of a Tariff Fig. 8-4: Effects of a Tariff ((LargeLarge))

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Because the price in Because the price in domestic markets domestic markets rises rises ((PPWW to to PPTT), domestic producers should supply ), domestic producers should supply more and domestic consumers should more and domestic consumers should demand less.demand less.

– The quantity of imports falls fromThe quantity of imports falls from QQWW to to QQTT (1 (12)2)

Because the price inBecause the price in foreign markets foreign markets falls (falls (PPW W

to to PP**TT), foreign producers should supply less ), foreign producers should supply less

and foreign consumers should demand more.and foreign consumers should demand more.

– The quantity of exports falls from The quantity of exports falls from QQWW to to QQTT (1 (13)3)

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The quantity of domestic import demand The quantity of domestic import demand equals the quantity of foreign export equals the quantity of foreign export

supply when supply when PPTT – P – P**TT = t = t

In this case, the In this case, the increase in the price of increase in the price of the good in the domestic countrythe good in the domestic country is is less less than the amount of the tariffthan the amount of the tariff..– Part of the effect of the tariff causes the Part of the effect of the tariff causes the foreign foreign

country’s export price to declinecountry’s export price to decline, and thus is , and thus is not passed on to domestic consumers.not passed on to domestic consumers.

– But this effect is sometimes not very significant:But this effect is sometimes not very significant:

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The Effects of a Tariff in The Effects of a Tariff in SmallSmall CountryCountry

A A “small” country“small” country has has NO effect NO effect on the on the foreign (world) price foreign (world) price of a good, because its of a good, because its demand of the good is an insignificant part demand of the good is an insignificant part of world demand.of world demand.

– Therefore, the Therefore, the foreign price will not fallforeign price will not fall, but will , but will remain at remain at PPww

– The The priceprice in the domestic market, however, will in the domestic market, however, will rise rise to to PPT T = P= Pww + t + t

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Fig. 8-5: A Tariff in a Fig. 8-5: A Tariff in a SmallSmall CountryCountry

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Activity 2Activity 2

Determine the effects of a specific tariff of Determine the effects of a specific tariff of 0.50 on imports, i.e. 0.50 on imports, i.e.

– what is the new world price,what is the new world price,

– the price at home including the tariff,the price at home including the tariff,

– and the new import demand?and the new import demand?

Use MD old = 160 – 80P Use MD old = 160 – 80P

XS = -80 + 80PXS = -80 + 80P

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Answers Activity 2Answers Activity 2

MDMDoldold = 160 – 80P and XS = -80 + 80P = 160 – 80P and XS = -80 + 80P

MDMDstst = 160 – 80(P + t) = 160 – 80(P + t) [ not MD avt = 160 – 80 (1 + t)P ][ not MD avt = 160 – 80 (1 + t)P ]

MDMDstst = 160 – 80(P + 0.50) = 120 – 80P = 160 – 80(P + 0.50) = 120 – 80P

MDMDstst = XS = XS 120 – 80P = -80 + 80P 120 – 80P = -80 + 80P

200 = 160P 200 = 160P P = 200/160 P = 200/160 PPT*T* = 1.25 = 1.25

PPTT = 1.75 = 1.75 [ as P[ as PTT – P – PT*T* = 0.50 ] = 0.50 ] [ P[ Pww prior to the tariff was 1.50, while Q prior to the tariff was 1.50, while Qww was 40 ] was 40 ]

QQT T (MD(MDstst)=160 – 80(1.75) or (XS)=120 – 80(1.25) )=160 – 80(1.75) or (XS)=120 – 80(1.25) = = 2020

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Effective Rate of ProtectionEffective Rate of Protection The The effective rate of protection (ERP)effective rate of protection (ERP)

measures how much protection a tariff or other measures how much protection a tariff or other trade policy provides domestic producers.trade policy provides domestic producers.– It represents the change in value that firms in an It represents the change in value that firms in an

industry add to the production process when trade industry add to the production process when trade policy changes, policy changes,

– which depends on the change in prices when trade which depends on the change in prices when trade policies change.policies change.

– ERPs often differ from tariff rates ERPs often differ from tariff rates because tariffs affect because tariffs affect sectors other than the protected sector, causing indirect sectors other than the protected sector, causing indirect effects on the prices and value added for the protected effects on the prices and value added for the protected sector.sector.

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Effective Rate of Protection Effective Rate of Protection (cont.)(cont.)

For example, suppose that automobiles For example, suppose that automobiles sell in world markets for $8,000, and sell in world markets for $8,000, and they are made from factors of production they are made from factors of production worth $6,000.worth $6,000.– The The value addedvalue added of the production process is of the production process is

$8,000-$6,000 = $8,000-$6,000 = $2,000$2,000 Suppose that a country puts a Suppose that a country puts a 25% tariff 25% tariff

on imported autos so that domestic auto on imported autos so that domestic auto assembly firms can now charge up to assembly firms can now charge up to $10,000 instead of $8,000.$10,000 instead of $8,000.– Auto assembly will occur in the domestic Auto assembly will occur in the domestic

country if the country if the value added value added is up to $10,000-is up to $10,000-$6,000 = $6,000 = $4,000$4,000..

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Effective Rate of Protection Effective Rate of Protection (cont.)(cont.)

The The effective rate of protection effective rate of protection (ERP)(ERP) for domestic auto assembly firms is for domestic auto assembly firms is the change in value added: the change in value added: VVTT – V – Vww / V / Vww

($4,000 - $2,000)/$2,000 = ($4,000 - $2,000)/$2,000 = 100%100% In this case, the effective rate of In this case, the effective rate of

protection is greater than the tariff rate.protection is greater than the tariff rate.

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ERP ProblemERP Problem

World price of cowbells is $230 and World price of cowbells is $230 and that of components is $120that of components is $120

Vanuatu (island near Australia)Vanuatu (island near Australia) Government imposes a 25% tariff Government imposes a 25% tariff on cowbellson cowbells

What is the ERP?What is the ERP?

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Answer ERP ProblemAnswer ERP Problem

ERPERP: : VVTT – V – Vww / V / Vww

VVww = 230 – 120 = 110 = 230 – 120 = 110

PPww was 230 was 230 P PT went up toT went up to 287.50 287.50

VVT T = 287.50 – 120 = 167.50= 287.50 – 120 = 167.50

ERP ERP = 167.50 – 110 / 110 = = 167.50 – 110 / 110 = 52.3%52.3%

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Cost-Benefit AnalysisCost-Benefit Analysis

Who is affected when an Who is affected when an import tariff is introduced?import tariff is introduced?

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Cost-Benefit AnalysisCost-Benefit Analysis

Price of the imported good increases Price of the imported good increases affecting consumers;affecting consumers;

The tariff benefits domestic producersThe tariff benefits domestic producers

Government generates tariff revenue.Government generates tariff revenue.

To measure these costs and benefits, we To measure these costs and benefits, we use use consumer surplus consumer surplus andand producer producer surplus.surplus.

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Consumer SurplusConsumer Surplus

Consumer surplusConsumer surplus measures the amount measures the amount that consumers gain from purchases by the that consumers gain from purchases by the difference in the price that each pays from difference in the price that each pays from the maximum price each would be willing to the maximum price each would be willing to pay.pay.

– The maximum price each would be The maximum price each would be willing to paywilling to pay is determined by a demand (willingness to buy) is determined by a demand (willingness to buy) function.function.

– When the price increases, the quantity When the price increases, the quantity demanded decreases as well as the consumer demanded decreases as well as the consumer surplus.surplus.

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Fig. 8-7: Geometry Consumer Fig. 8-7: Geometry Consumer SurplusSurplus

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Producer SurplusProducer Surplus

Producer surplusProducer surplus measures the amount measures the amount that producers gain from a sale by the that producers gain from a sale by the difference in the price each receives from difference in the price each receives from the minimum price each would be willing the minimum price each would be willing to sell at.to sell at.

– The minimum price each would be The minimum price each would be willing to willing to sellsell at is determined by a supply (willingness to at is determined by a supply (willingness to sell) function.sell) function.

– When price increases, the quantity supplied When price increases, the quantity supplied increases as well as the producer surplus.increases as well as the producer surplus.

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Fig. 8-8: Geometry of Producer Fig. 8-8: Geometry of Producer SurplusSurplus

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Costs and Benefits of TariffsCosts and Benefits of Tariffs

A tariff raises the price of a good in the A tariff raises the price of a good in the importing country, making its consumer importing country, making its consumer surplus decrease (making its surplus decrease (making its consumers consumers worse offworse off))

and making its producer surplus increase and making its producer surplus increase (making its (making its producers better offproducers better off).).

Also, Also, government revenue will increasegovernment revenue will increase..

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Fig. 8-9: Costs and Benefits of a Fig. 8-9: Costs and Benefits of a Tariff for a Tariff for a LargeLarge Importing Importing

CountryCountry

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Costs and Benefits of Tariffs Costs and Benefits of Tariffs (cont.)(cont.)

For a For a “large” country“large” country, whose imports and , whose imports and exports can affect foreign (world) prices, the exports can affect foreign (world) prices, the net net welfare effect welfare effect of a tariff is ambiguous.of a tariff is ambiguous.

The The triangles triangles bb andand dd represent the represent the efficiency efficiency lossloss..– The tariff The tariff distorts production (distorts production (bb) and consumption () and consumption (dd) )

decisionsdecisions: producers produce too much and consumers : producers produce too much and consumers consume too little compared to the market outcome.consume too little compared to the market outcome.

The The rectangle rectangle ee represents therepresents the terms of trade terms of trade gaingain. . – The terms of trade increases because the The terms of trade increases because the tariff lowers tariff lowers

foreign export (domestic import) pricesforeign export (domestic import) prices..

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Government revenue from the tariff equals Government revenue from the tariff equals the tariff rate times the quantity of imports.the tariff rate times the quantity of imports.– t = Pt = PTT – P – P**

TT – QQTT = D = D22 – S – S22

– Government revenue = Government revenue = t x Qt x QTT = c + e = c + e Part of government revenue (Part of government revenue (rectangle rectangle ee) )

represents the represents the terms of trade gainterms of trade gain, and , and part (part (rectangle rectangle cc) represents part of the ) represents part of the value of value of lost consumer surpluslost consumer surplus..– TheThe government gains government gains at the expense of at the expense of

consumers consumers andand foreigners. foreigners.

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If the If the terms of trade (terms of trade (PPEE/P/PMM) gain exceeds ) gain exceeds the efficiency loss, then national welfare the efficiency loss, then national welfare will increase will increase (recall Chapter 5) under a (recall Chapter 5) under a tariff, at the expense of foreign countries.tariff, at the expense of foreign countries.

– However, this analysis However, this analysis assumes assumes that the terms that the terms of trade does of trade does nonot change due to tariff changes t change due to tariff changes by foreign countries (that is, due to by foreign countries (that is, due to retaliationretaliation).).

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What is the Net Welfare Loss of What is the Net Welfare Loss of an Import Tariff? Give all details.an Import Tariff? Give all details.

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+a +c +e+a +c +e

-a –b –c –d -a –b –c –d

Net: +E versus -b -dNet: +E versus -b -d

Large country +E larger than -b -dLarge country +E larger than -b -d

Small country no e, only -b -dSmall country no e, only -b -d

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Fig. 8-10: Net Welfare Effects of Fig. 8-10: Net Welfare Effects of TariffTariff

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The Effects of a Tariff in The Effects of a Tariff in SmallSmall CountryCountry

A A “small” country“small” country has NO effect on the has NO effect on the foreign (world) price of a good.foreign (world) price of a good.

Costs of a tariff will exceed the Costs of a tariff will exceed the benefits (only distortions benefits (only distortions bb and and dd exist, no exist, no ee))– Therefore, the Therefore, the foreign price will not fallforeign price will not fall, but will , but will

remain at remain at PPww

– The The priceprice in the domestic market, however, will in the domestic market, however, will rise rise to to PPT T = P= Pww + t + t

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Fig. 8-5: A Tariff in a Fig. 8-5: A Tariff in a SmallSmall CountryCountry

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Export SubsidyExport Subsidy An export subsidy can also be An export subsidy can also be specificspecific or or ad ad

valoremvalorem– A A specific subsidyspecific subsidy is a payment per unit is a payment per unit

exported.exported.

– An An ad valorem subsidyad valorem subsidy is a payment as a is a payment as a proportion of the value exported.proportion of the value exported.

An export subsidy raises the price of a good An export subsidy raises the price of a good in the exporting country, decreasing its in the exporting country, decreasing its consumer surplus (making its consumer surplus (making its consumers consumers worse offworse off) and increasing its producer ) and increasing its producer surplus (making its surplus (making its producers better offproducers better off).).

Also, Also, government revenue will decreasegovernment revenue will decrease..

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Export Subsidy (cont.)Export Subsidy (cont.)

An export subsidy raises the price of a An export subsidy raises the price of a good in the exporting country, while good in the exporting country, while lowering it in foreign countries.lowering it in foreign countries.

An An export subsidy worsens the terms of export subsidy worsens the terms of tradetrade by lowering the price of domestic by lowering the price of domestic products in world markets (i.e. products in world markets (i.e. PPE E

decreasesdecreases).).

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Fig. 8-11: Effects of an Export Fig. 8-11: Effects of an Export SubsidySubsidy

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Export Subsidy (cont.)Export Subsidy (cont.) An export subsidy unambiguously produces a An export subsidy unambiguously produces a

negativenegative effect on national welfare. effect on national welfare.

The The triangles triangles bb and and dd represent the represent the efficiency efficiency lossloss..– The subsidy distorts production and consumption The subsidy distorts production and consumption

decisions: producers produce too much and consumers decisions: producers produce too much and consumers consume too little compared to the market outcome.consume too little compared to the market outcome.

The area The area b + c + d + e + f + gb + c + d + e + f + g represents the represents the cost of government subsidycost of government subsidy. . – In addition, the In addition, the terms of trade terms of trade decreasesdecreases, because the , because the

price of exports falls in foreign markets to price of exports falls in foreign markets to PP**ss..

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What is the Net Welfare Loss of What is the Net Welfare Loss of an Export Subsidy? Give all an Export Subsidy? Give all details. details.

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+a +b +c +a +b +c

-a –b-a –b

-b –c –d –e –f -g-b –c –d –e –f -g

Net: -b -d -e -f –gNet: -b -d -e -f –g

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Export Subsidy in EuropeExport Subsidy in Europe The The European Union’s Common European Union’s Common

Agricultural PolicyAgricultural Policy sets high prices for sets high prices for agricultural products and agricultural products and subsidizes subsidizes exportsexports to dispose of excess production. to dispose of excess production.– The subsidized exports reduce world prices of The subsidized exports reduce world prices of

agricultural products. agricultural products. (Who are also affected?)(Who are also affected?)

The direct cost of this policy for European The direct cost of this policy for European taxpayers is almost $50 billion.taxpayers is almost $50 billion.– But the EU has proposed that farmers receive But the EU has proposed that farmers receive

direct payments independent of the amount of direct payments independent of the amount of production to help lower EU prices and reduce production to help lower EU prices and reduce production.production.

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Fig. 8-12: Europe’s Common Fig. 8-12: Europe’s Common Agricultural ProgramAgricultural Program

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Import QuotaImport Quota An An import quotaimport quota is a is a restriction on the restriction on the

quantityquantity of a good that may be imported. of a good that may be imported. This restriction is usually enforced by This restriction is usually enforced by

issuing issuing licenseslicenses to domestic firms that to domestic firms that import, or in some cases to foreign import, or in some cases to foreign governments of exporting countries.governments of exporting countries.

A binding import quota will A binding import quota will push up the push up the price price of the import because the quantity of the import because the quantity demanded will exceed the quantity demanded will exceed the quantity supplied by domestic producers and from supplied by domestic producers and from imports.imports.

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Import Quota (cont.)Import Quota (cont.)

When a quota instead of a tariff is used to When a quota instead of a tariff is used to restrict imports, the government receives restrict imports, the government receives no revenue.no revenue.

– Instead, the revenue from selling imports at Instead, the revenue from selling imports at high prices goes to high prices goes to quota quota license holderslicense holders: : either either domestic firms domestic firms oror foreign foreign governmentsgovernments..

– These extra revenues are called These extra revenues are called quota quota rentsrents..

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What is the Net Welfare Loss of What is the Net Welfare Loss of an Import Quota? Give all details.an Import Quota? Give all details.

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+a +a

––a –b –c –da –b –c –d

-c-c

Net: -b –C -dNet: -b –C -d

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Fig. 8-13: Effects of the U.S. Fig. 8-13: Effects of the U.S. Import Quota on Sugar Import Quota on Sugar

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Voluntary Export RestraintVoluntary Export Restraint A A Voluntary Export Restraint (VER)Voluntary Export Restraint (VER)

works like an import quota, except that the works like an import quota, except that the quota is imposed by the exporting countryquota is imposed by the exporting country rather than the importing country.rather than the importing country.

However, these restraints are usually However, these restraints are usually requested by the importing country.requested by the importing country.

TheThe profits or rents profits or rents from this policy arefrom this policy are earned earned by by foreign governments foreign governments oror foreign foreign producers.producers.

– Foreigners sell a restricted quantity at an Foreigners sell a restricted quantity at an increased price.increased price.

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Local Content RequirementLocal Content Requirement

AA local content requirementlocal content requirement is a is a regulation that requires a specified regulation that requires a specified fraction of a final good to be produced fraction of a final good to be produced domestically.domestically.

It may be specified in value terms, by It may be specified in value terms, by requiring that some minimum share of the requiring that some minimum share of the value of a good represent domestic valued value of a good represent domestic valued added, or in physical units.added, or in physical units.

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Local Content Requirement Local Content Requirement (cont.)(cont.)

From the viewpoint of From the viewpoint of domestic producers domestic producers of inputsof inputs, a local content requirement , a local content requirement provides provides protectionprotection in the same way that in the same way that an import quota would.an import quota would.

From the viewpoint of firms that must buy From the viewpoint of firms that must buy domestic inputs, however, the domestic inputs, however, the requirement does not place a strict limit requirement does not place a strict limit on imports, but on imports, but allows firms to import allows firms to import more if they also use more domestic partsmore if they also use more domestic parts..

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Local Content Requirement Local Content Requirement (cont.)(cont.)

Local content requirement provides Local content requirement provides neither government revenue (as a tariff neither government revenue (as a tariff would) nor quota rents.would) nor quota rents.

Instead the difference between the prices Instead the difference between the prices of domestic goods and imports is of domestic goods and imports is averaged into the price of the final good averaged into the price of the final good and is and is passed on to consumerspassed on to consumers..

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Other Trade PoliciesOther Trade Policies Export credit subsidiesExport credit subsidies

– A subsidized loan to exportersA subsidized loan to exporters– U.S. Export-Import Bank subsidizes loans to U.S. U.S. Export-Import Bank subsidizes loans to U.S.

exporters.exporters.

Government procurementGovernment procurement– Government agencies are obligated to purchase from Government agencies are obligated to purchase from

domestic suppliers, even when they charge higher domestic suppliers, even when they charge higher prices prices (or have inferior quality) compared to foreign suppliers.(or have inferior quality) compared to foreign suppliers.

Bureaucratic regulationsBureaucratic regulations– Safety, health, quality, or customs regulations can act as Safety, health, quality, or customs regulations can act as

a form of protection and trade restriction.a form of protection and trade restriction.

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SummarySummary

TariffTariff Export Export subsidysubsidy

Import Import quotaquota

Voluntary Voluntary export export

restraintrestraint

Producer Producer surplussurplus

Consumer Consumer surplussurplus

GovernmeGovernment net nt net revenuerevenue

National National welfarewelfare

Increases IncreasesIncreases Increases

No change:rents to license holders

Increases Decreases

DecreasesDecreases Decreases Decreases

No change:rents to foreigners

Ambiguous,falls for smallcountry

Ambiguous,falls for smallcountry

DecreasesDecreases

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Summary (cont.)Summary (cont.)

1.1. A tariff decreases the world price of the A tariff decreases the world price of the imported good, increases the domestic imported good, increases the domestic price of the imported good and reduces price of the imported good and reduces the quantity traded when a country is the quantity traded when a country is “large”.“large”.

2.2. A quota does the same.A quota does the same.

3.3. An export subsidy decreases the world An export subsidy decreases the world price of the exported good increases the price of the exported good increases the domestic price of the exported good and domestic price of the exported good and increases the quantity produced when a increases the quantity produced when a country is “large”.country is “large”.

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Summary (cont.)Summary (cont.)

4.4. The welfare effect of a tariff, quota and The welfare effect of a tariff, quota and export subsidy can be measured by: export subsidy can be measured by: – Efficiency loss from consumption and Efficiency loss from consumption and

productionproduction– Terms of trade gain or lossTerms of trade gain or loss

5.5. With import quotas, voluntary export With import quotas, voluntary export restraints and local content requirements; restraints and local content requirements; the government of the importing country the government of the importing country receives no revenue.receives no revenue.

6.6. With voluntary export restraints and With voluntary export restraints and occasionally import quotas, quota rents go occasionally import quotas, quota rents go to foreigners.to foreigners.

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Fig. 8A1-1: Free Trade Fig. 8A1-1: Free Trade Equilibrium for a Small CountryEquilibrium for a Small Country

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Fig. 8A1-2: A Tariff in a Small Fig. 8A1-2: A Tariff in a Small CountryCountry

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Fig. 8A1-3: Effect of a Tariff on Fig. 8A1-3: Effect of a Tariff on the Terms of Tradethe Terms of Trade

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Fig. 8A2-1: A Monopolist Under Fig. 8A2-1: A Monopolist Under Free TradeFree Trade

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Fig. 8A2-2: A Monopolist Fig. 8A2-2: A Monopolist Protected by a TariffProtected by a Tariff

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Fig. 8A2-3: A Monopolist Fig. 8A2-3: A Monopolist Protected by an Import QuotaProtected by an Import Quota

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Fig. 8A2-4: Comparing a Tariff Fig. 8A2-4: Comparing a Tariff and a Quotaand a Quota

Chapter 8 The Instruments of Trade Policy Amended slides originally prepared by Thomas Bishop, Pearson-Addison-Wesley.

Documents

foreign supply foreign

demand curve slide

import demand curve

import tariff

world supply slide

export supply xs curve

domestic producers supply

import demand md curve