Transcript Document

Trade Policy Analysis
CHAPTER 6
Reinert/Windows on the World Economy, 2005
Introduction
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Reasons to expect landowners in Japan might
oppose the import of rice from another country
Opposition to imports exists despite overall gains to
Japan from these imports
Trade policy analysts and international affairs
professionals are often called upon to assess
impacts of government interventions in international
trade
Purpose of chapter is to understand how the
assessments are made
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Figure 6.1 Absolute Advantage
and Trade in the Rice Market
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Absolute Advantage Revisited
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In moving from autarky to trade in Figure 6.1,
there is a reduction in domestic quantity
supplied in Japan
 Japanese rice-producing firms would lobby
Japanese government to oppose decrease in
domestic quantity supplied
• Demand protection from Vietnam exports
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Protective policies are widespread in world
economy
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Trade Policy Measures
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A country can grant import protection to a
sector of its economy in form of either
 Tariffs
• Tax on imports
Specific tariff is a fixed tax per physical unit of the import
 Ad valorem tariff is a percentage tax applied to value of
import
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 Non-tariff measures
 Governments employ both types of tariffs
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Non-Tariff Measures
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An inclusive category of many kinds of trade policy measures including
 Prohibitions and quantitative restrictions (import quotas) on imports
 Tariff rate quotas
• Lower (higher) tariff for levels of imports within (above) the quota
 Trigger-price mechanisms
• Market floor prices that “trigger” government interventions to curtain imports
 Technical barriers to trade
• Support health and safety concerns—may be legitimate but can be a disguised
form of import protection
 Anti-dumping duties—charges imposed on imports deemed by imposing
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government to have been sold at “less than fair value” by exporter
Countervailing duties—tariff-like charges imposed on imports deemed by
imposing government to have been “unfairly” subsidized by exporting
country government
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A Tariff
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For our graphical analysis in this chapter, it is much
simpler to consider a specific tariff
Basic results also apply to an ad valorem tariff
A tariff increases domestic price of imported
product above world price
 In the case of Japanese rice, domestic price is many
times larger than world price
• Causes an increase in Japan’s production of rice which is desired
effect from Japanese rice farmers
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Domestic consumption of rice falls
Imports fall
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Figure 6.2: A Tariff on
Japan’s Imports of Rice
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Tariff Effects
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Welfare and revenue effects also occur from the
tariff
Consumer surplus of Japanese households fell
 Japanese rice consumers are paying more and
consuming less
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Producer surplus of Japanese firms has increased
 Japanese rice producers are receiving more for their
product and producing more
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Japanese government is receiving revenue from
import tax
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Net Welfare Effect
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Summarizes welfare impact of policy for the
country as a whole
 From an economic standpoint, tariff hurts
Japanese society as a whole
 Although it benefits producers and government,
losses imposed on consumers outweigh benefits
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Terms of Trade Effects
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When Japan imposes a tariff on its imports
from Vietnam, amount of these imports
decreases
 As Japan’s imports of rice decrease, there will be
excess supply in the world market for rice
• Will cause the world price to fall
• Since Japan is importing rice, this is a good thing for
this country
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Figure 6.3 The Terms-of-Trade
Effect of Japan’s Tariff
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A Quota
Import quota—a quantitative restriction on
imports
 Type of non-tariff measure
 A quota results in a shortage of a good
relative to initial situation without quota,
causing price of good to rise
 Known as quota premium
 Consumer surplus falls and producer surplus
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increases
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Figure 6.4 A Quota on Japan’s
Rice Imports
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A Quota
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Policy usually administered via a system of import
licenses
Quota has restricted supply of import licenses
Extra value of the right to import an amount of a
good
 Known as quota rents
• Who receives rents depends on how quota licenses are allocated
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Import licenses are allocated to domestic importers
 Quota rents accrue to importers, so they remain within the
country
 A gain to Japan
Import licenses are allocated to foreign exporters
 Quota rents accrue to exporters, so they leave the country
 A loss to Japan
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A Quota
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Net welfare effect of the quota is just like a specific
tariff
In the case of import licenses allocated to foreign
exporters this represents a transfer from domestic
consumers to these foreign exporters
 Does not result in a net loss of zero, because loss to
consumers is not offset by a gain to domestic importers
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Net welfare effect is gain to firms less loss to
consumers
 In this case quota is worse than a tariff
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Quota Decision
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Suppose you were a government official
administering quota policy
 Which alternative would you choose?
• A quota allocated to domestic importers or quota allocated to
foreign exporters?
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Probably quota allocated to domestic importers
 Has smaller welfare loss
However governments often choose a foreign
allocated quota. Why?
 They are uninformed about economic implications of their
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choices
Political considerations cause such a choice
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Summary of Trade Policies
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Tariff
 Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and government revenue
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Tariff with terms of trade effects
 Ambiguous net welfare effect due to terms of trade gain (fall in world
price) potentially outweighing efficiency loss
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Domestic-allocated quota
 Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and quota rents
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Foreign-allocated quota
 Unambiguous net welfare loss that exceeds that of domesticallocated quota case
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Comparative Advantage Models
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In many instances effects of trade policies go
beyond a single sector
Protecting a large sector such as automobiles can
draw resources from other sectors into the
protected automobile sector
 Perhaps workers in metal furniture sector will move into
automobile sector as it expands under protection
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In these cases, trade policy analysts turn to models
of comparative advantage
 Analyzes more than one sector simultaneously
• Much more complicated than absolute advantage models
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