01. Exam - Trade Instruments

Question 1

What are the two types of tariff?

Answer 1

• Transparent - clearly defined as a barrier

- Non-transparent - hidden trade barriers

Question 2

What are two types of non-transparent tariffs?

Answer 2

• red tape

- bureaucratic rules

Question 3

What are two types of transparent barriers?

Answer 3

• tariffs - indirect limit on imports (tax)

- quotas - direct limit on imports (regulated quantity)

Question 4

What do tariffs and quotas encourage?

Answer 4

• Consumers to switch to relatively cheaper domestic goods / drop out of the market
• Domestic producers to increase their output as demand switches from foreign to domestic goods

Question 5

What is partial equilibrium analysis?

Answer 5

The effect of tariffs and quotas on the industry on which they are imposed, rather than their economy wide effect.

Question 6

What is a consumer surplus?

Answer 6

The difference between the value of a good to consumers and the price they have to pay.

Question 7

What is a producer surplus?

Answer 7

The difference between the minimum price a producer would accept to produce a given quantity and the price it actually receives.

Question 8

Explain what happens when the world price is lower than the price that domestic producers would produce at?

Answer 8

Domestic producers will produce the amount they can at Pw, however this will not meet demand, and at the lower price demand will be higher, and as such foreign producers that can produce at this price will meet the difference in supply.

Question 9

What is the impact of the government imposing a tariff on a good that has a world price which is less than what it could be produced at domestically?

Answer 9

Importers would still purchase at the same price, but would have to sell with the tax, this means the price is effectively higher up the supply curve so domestic producers will produce more, The demand at this price is also less than at Pw so this effectively moves up the demand curve resulting isn a smaller difference in supply for foreign producers to provide.

Question 10

With a tariff on a good what happens to domestic consumption? domestic production? and imports?

Answer 10

domestic consumption falls
domestic production increases
imports fall

Question 11

What is another impact of a tariff on the economy?

Answer 11

• Additional resources (capital, labour and land) are diverted away from prior uses and towards the protected industry.
• Producer and consumer surpluses also change.

Question 12

With the implementation of a tariff what is the impact to the consumer surplus?

Answer 12

Some is transferred to the producer (portion between Pw and Ptax) on left of supply curve. Between the supply and demand curve the additional paid is transferred to the government as revenue, but there is also net national loss.

Question 13

Is the nation better off as a whole as a result of a tariff?

Answer 13

No, it is generally not better off. The area either side of the consumer surplus now going to the government are a net national loss as both involve a misallocation of resources.

Question 14

What are the two types of net national loss?

Answer 14

(b) is a deadweight efficiency loss on the production side, the domestic producer spends more to make the extra output at a cost to the nation.
(d) is a supply side loss which sees some consumers squeezed out of the market because at this price they will not pay.

Question 15

What is a deadweight loss?

Answer 15

A deadweight loss is the destruction of value that is not compensated by a gain somewhere else.

Question 16

What is the Doha round attempting to achieve with regard to tariffs?

Answer 16

Removal / reduction of tariffs in developed nations as these block access for developing countries particularly in the areas that these countries produce in, ie labour intensive products such as agriculture, textiles and clothing.

Question 17

What is the conundrum for low income countries?

Answer 17

The also have higher tariffs which prevent trade amongst each other and limits their ability to sell into each others markets and to follow their comparative advantage.

Question 18

Why do low income countries have tariffs?

Answer 18

As it is a reliable source of operating revenue for governments as they do not have or cannot establish comprehensive income tax arrangements

Question 19

What are the other less predictable and harder to quantify costs of tariffs?

Answer 19

• Retaliation - by other countries where they stop buying other exports - can escalate quickly
• Innovation - is reduced as competitive pressure for domestic firms is reduced
• Rent seeking - of resources in order to capture more income without actually providing a good (lobbyists employed to maintain the tariff protection)

Question 20

Explain the ‘large country case’ regarding tariffs?

Answer 20

If a country imports a large amount of a particular product, they can potentially impose a tariff, with the result that the exporting country reduces their price in order to maintain their share of the large market. So in theory the large country can improve their national welfare by imposing a tariff as long as their trading partners do not retaliate.

Question 21

What is the nominal rate of protection?

Answer 21

The tariff rate levied on a given product.

Question 22

What is the Effective rate of protection?

Answer 22

the nominal rate + tariffs on intermediate inputs.

Question 23

What is ‘value added’?

Answer 23

The price of a good minus the costs of intermediate goods used to produce it (the contribution of labour and capital at a given stage of production) therefore the effective rate of production is (VA* - VA)/VA. where VA is the amount of domestic value added under free trade and VA* is the domestic value added after taking into account all tariffs on final and intermediate goods.

Question 24

The Uruguay round had what impact on Tariffs and subsidies?

Answer 24

• Most industrial product tariffs were cut by 40%
• Some agricultural quotas were converted to tariffs
• Subsidies were defined
• Classification of subsidies as prohibited and actionable.

Question 25

What was the impact the Uruguay round had on new agreements?

Answer 25

• Agreement on textiles and clothing (ATC)
• Trade-Related Aspects of Intellectual Property Rights (TRIPS)
• Trade-Related Investment Measures (TRIMS)
• General agreements on trade in services (GATS)

Question 26

What was the impact the Uruguay round had on institutions?

Answer 26

• Creation of the WTO
• Refined the dispute settlement process
• Implemented periodic trade policy reviews.

Question 27

What is a quota?

Answer 27

A quantitate restriction that specifies a limit on the quantity of imports

Question 28

What is the main similarities between quotas and tariffs?

Answer 28

Similar - both lead to a reduction in imports, a fall in total domestic consumption and an increase in domestic production.

Question 29

What are the three types of quota?

Answer 29

1) Outright limit
2) Import licensing requirement (restricts # based on licence)
3) Voluntary export restraint (VER)

Question 30

Why are VERs popular?

Answer 30

1) they do not require domestic legislation to implement; and
2) they allow politicians to provide protection for domestic industry and to appear to be proponents of free trade.

Question 31

Why did VERs increase in popularity after the Uruguay Round?

Answer 31

As a result in the decline in tariffs, however recent international negotiation has restricted their use.

Question 32

What is the main difference between tariffs and quotas?

Answer 32

There is no government revenue in place for quotas.

Question 33

What are quota rents?

Answer 33

Increased profits accruing to the foreign producers from the use of quotas, ie they can price higher as supply is limited.

Question 34

What circumstances limit quota rents?

Answer 34

• large # of foreign producers, so competition limits their ability to increase prices
• government can extract the extra profits from foreign producers through an auction for import licences.

Question 35

Another difference between tariffs and quotas is that over time as demand increases and the quota remain fixed, what happens?

Answer 35

The price paid by consumers will increase and there will be an increase in producer surplus garnered by domestic firms. In contrast an increase in demand for an item with an import tariff will increase the quantity of imports and leave the price in tact.

Question 36

Who gets the ‘c’ part of the surplus with a tariff and who gets it with a quota?

Answer 36

Tariff - government

Quota - foreign producers

Question 37

What are hidden forms of protection?

Answer 37

Any trade barrier that reduces imports without imposing a tax.

Question 38

What are non-tariff barriers (NTBs) (5) ?

Answer 38

• excessively complicated custom procedures
• environmental and consumer health and safety precautions
• technical standards
• government procurement rules
• limits imposed by state trading companies

Question 39

Intellectual property rights are usually divided into what six categories?

Answer 39

• copyrights
• industrial property rights for trademarks
• patents
• industrial designs
• geographical indicators
• layout of integrated circuits