4. Instruments of Trade Policy Flashcards
What are examples for “Classical” Trade Policies?
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- tariffs: tax on imports or exports
- quotas: Qty restriction on imports or exports
- Exports Subsidies: a payment to producers that export
What are other types of Trade policy that effectively hinder foreign products from entering the market?
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- voluntary export restraints by the foreign country
- local content requirements, eg rules requiring a certain share of a product being produced domestically
- red tape barriers, e.g. complex product specifications or tedious border controls
- export/ import controls to completely exclude trade of certain goods with certain countries (eg to sanction)
How a tariff on importa affects a country depends on….
What are the two types of tariffs?
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…. the economic size of the country
- specific tax: fixed charge for each unit of imported goods, e.g. 3$ per barrel of oil
- ad valorem tariff: fraction of the value of the imported goods, e.g. 25% on the value of imported trucks
What are the two cases in a single market where trade affects trade?
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- tariff levied by a country that is large enough to affect the world market price
-> tariff acts like additional transportation cost that the exporter from Foreign has to pay to enter Home (PT* + t = PT)
-> this leads to lower exports - tariff levied by country that is too small to affect world market price
In case of a large country | The affect of the tariff on prices in Home and Foreign depends a lot on…
… the size of Home relative to the world
-> the price in Home rises from P W to Pt, Home producers supply more and Home consumers demand less, so imports fall from Qw to Qt
Tariff affect on price
1. If the price in Home rises from Pw to Pt, Home producers….. and Home consumers….
- If the price in Foreign falls from Pw to Pt, Foreign producers….. and Foreign consumers…..
-> The tariff increases the price in Home by …. than the amount of the tariff because part of the difference is made up of a drop of Foreign
This only goes for large countries -> the smaller the country, the smaller the part made up by a price drop in Foreign
- … supply more
… demand less
so imports fall - supply less
demand more
so exports fall
-> less
The introduction of a Tariff by Home affects different groups in Home differently
What are some examples?
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- a tariff raises the price of a good in the importing country
- the consequences are: consumers being hurt; producers benefitting; government earning revenues
What are costs and benefits of a tariff for a large country?
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4. What happens to the p in foreign?
5. Does national welfare increase or decrease?
6. What reaction does foreign most likely have?
7. What happens to global welfare?
- consumers lose
- producers win
- governemnt collects
- tariff lowers the Foreign price, allowing Home to buy its imports cheaper
- if the terms of trade gain exceeds the efficiency loss, then national welfare may increase under a tariff, at the expense of foreign countries (and the losses in Foreign are larger than the gains at Home)
- foreign is likely to react with tariffs itself, hurting Home
- in total, global welfare decreases due to the tariff for sure (even if the foreign country would not react)
What are the costs and benefits of a tariff for a small country?
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- tariff will be completely absorbed by a higher price in Home
- this implies that there are no terms of trade gains for home AND there will be a net welfare loss of b+d for sure
And export subsidy….
What are the two types?
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…. is a payment to an individual or firm that exports a good
- specific subsidy: a payment per unit exported
- ad valorem subsidy: payment as a proportion of the value exported
How does the export subsidy affect prices in Home and Foreign when Home is a large country?
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- price of the good in Home must increase above the world market price
this is because the firms in Home would otherwise not sell domestically, but just export everything - but here (large country), the price increase will be less than the amount of the subsidy bc increasing exports will put pressure on the world market price to drop and a part of the effect of the subsidy will be ABSORBED by the price of the good FALLING below the world market price in foreign
An export subsidy….. national welfare for sure
decreases
Differences and similarities of import quotas and tariffs?
How do Quotas work?
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- import quotas are similar to tariffs, but government may not earn any revenues
- = restriction on the quantity of a good that may be imported, this restriction is usually enforced by issuing licenses of quota righta (to foreigners) and provides exact certainty for the givernment about the amount of imports (unlike tariffs)
- when a Quota is used to restrict imports, the government receives to tariff revenue and instead the revenue from selling imports at high prices goes to Quota License Holders (Quota rents) -> government could hand these out for money and earn some revenue from it
Whats a binding import Quota, i.e. what does it do?
- pushes up price of the import bc the Quantity demanded will exceed the Quantity supplied by Home producers and from imports
Definition Voluntary Export Restraints
works like import quota, except for that quota is imposed by exporting country rather than the importing country (often after the importing country has asked for it)
e.g. US asks Japan to import less cars
Definition Local Content Requirements
- regulation that requires a specified fraction of a final good to be produced domestically
- from the viewpoint of domestic producers of inputs, a local content requirement provides protection in the same way that an import quota would
Definition Red Tape Barriers
bureaucratic regulations, e.g. regarding safety, health or quality acting as a form of protection and trade restriction
Definition Export/ Import Controls
To completely exclude trade of certain goods with certain countries (e.g. sanctions)
Protectionist Trade Policies (Tariffs, Import Quotas, Export Subsidies) in general (raise/ shrink) prices in the adopting country. This leads to…
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raise
- home producers supplying more and gain
- home consumers demanding less and lose
- world price for the good falling when the adopting country is large enough to affect the world price
Trade Policies and their effect on the government
- Tariffs
- Export Subsidies
- Import Quotas
-> All these trade policies create…. which hurts…
- generate government revenue
- Drain government revenue
- Dont affect it, unless licenses are sold
-> production&consumption distortions (inefficiencies) hurting national welfare
National Welfare of the importing Country and the following:
- Export Subsidy
- In which case rises for tariff?
- In which case rises for import quota?
- National Welfare definitely falls here
- increase if country is large and the terms of trade gains (imports now cheaper) are large enough
- increases if country is large and the revenues from selling licenses to foreigners are sufficiently large
What is not an in principal valid political economy reasoning to explain why we see tariffs in a country?:
- The collective action problem suggests that special trade interests may prevail.
- Politicians may want to target voters who are losers from free trade.
- The median voter may have the impression that globalization does her more harm than good.
- None of the three other answering options provided is correct
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