Transcript Lecture Slides – 9 October 1 - 3: The Instruments of Trade Policy

THE INSTRUMENTS OF TRADE POLICY
9-1
TARIFFS



A tax levied when a good is imported.
Can be specific – a charge for each unit of
imported goods.
Can be ad valorem - a fraction of the value of
imported goods.
9-2
HOME’S IMPORT DEMAND CURVE
9-3
FOREIGN’S EXPORT SUPPLY CURVE
9-4
IN EQUILIBRIUM,
IMPORT DEMAND
= EXPORT SUPPLY
9-5
THE EFFECTS OF A TARIFF




Acts like a transportation cost.
Makes the price rise in the Home market and fall
in the Foreign market.
The price in the Home market rises from PW
under free trade to PT with the tariff

Home producers supply more and Home consumers
demand less

the quantity of imports falls
If the Home country is large, the price in the
Foreign market falls because of the new tariff

Their quantity of exports thus falls
9-6
A TARIFF IN A SMALL COUNTRY

If we assume that the country is “small,” it has no
effect on the foreign (world) price
9-7
EFFECTIVE RATE OF PROTECTION



The change in value that firms in an industry
add to the production process when trade policy
changes
a 25% tariff on imported cars allows car
manufacturers at home to charge $10,000 instead
of $8,000
I production factors cost $6,000, the value added
increased from $2,000 to $4,000 – a 100%
increase.
9-8
COSTS AND BENEFITS OF TARIFFS AT HOME

Hurts consumers –decreases consumer surplus

Benefits producers – increases producer surplus

Benefits the government – increases tax revenues
9-9
CHANGE IN WELFARE DUE TO THE TARIFF IS
E – (B + D)


The rectangle e
represents the
terms of trade
gain.
The welfare
effect of a tariff
can only be
ambiguous for a
large country.
9-10
EXPORT SUBSIDY




Can also be specific or ad valorem.
Raises the price in the exporting country;
decreases consumer surplus; increases producer
surplus.
Government incurs higher expenditure
If a large country: lowers the price paid in
importing countries
9-11
EFFECTS OF AN EXPORT SUBSIDY


Net loss: areas
b+d+e+f+g
Again, e + f + g
is miniscule if
the country is
small
9-12
IMPORT QUOTA




A restriction on the quantity of a good that may
be imported.
Usually enforced by issuing licenses or quota
rights.
The government only receives revenues if it can
collect quota rents
Raises the price of the import as the quantity
demanded exceeds the quantity supplied.
9-13
EFFECTS OF THE U.S. IMPORT QUOTA ON
SUGAR
9-14
VOLUNTARY EXPORT RESTRAINT



Works like an import quota
Officially imposed by the exporting country but
usually requested by the importing country.
The profits or rents from this policy are earned
by foreign governments or foreign producers.

Foreigners sell a restricted quantity at an increased
price.
9-15
LOCAL CONTENT REQUIREMENT






A regulation that requires a specified fraction of a
final good to be produced domestically.
In the World Trade Organization language, this is
called “rules of origin”
For domestic producers of inputs, it is a protection,
just like an import quota.
From firms that must buy home inputs, it raises the
price of their inputs.
This price rise is largely passed on to consumers.
The policy provides neither government revenue nor
quota rents.
9-16
OTHER TRADE POLICIES

Export credit subsidies



Government procurement


A subsidized loan to exporters
U.S. Export-Import Bank subsidizes loans to U.S.
exporters.
Government agencies are obligated to purchase from home
suppliers.
Bureaucratic regulations

Safety, health, quality, or customs regulations.
9-17
FOR EACH TRADE BARRIER, THE PRICE RISES IN
THE HOME COUNTRY ADOPTING THE POLICY


Home producers supply more and gain.
Home consumers demand less and lose.
The world price falls when Home is a “large”
country that affects world prices.
 Tariffs generate government revenue; export
subsidies drain it; import quotas may have no
effect.
 All trade barriers create production and
consumption distortions.

9-18