Rest Of Trade Policy Flashcards
From whose perspective do we analyse an export subsidy from?
Exporting country
Are an export subsidy’s effect symmetric to tariff??
NO
2 types of export subsidies
- specific/per unit = payment per unit exported.
2. ad valorem = payment as % of value of exported.
impact of export subsidy on price in exporting country and why?
RAISES the price of the good since domestic firms more willing to export –> excess demand domestically = price rises.
impact of export subsidy on price in foreign countries and why?
LOWERS the world price of the good since domestic firms more willing to export –> excess supply in global market = price falls.
Under what condition does a subsidy affect world price?
LARGE country = able to influence world supply and demand and therefore price.
impact of export subsidy on TOT
WORSE TOT for exporting country since world Px falls.
Subsidy equilibrium and why?
Ps - Ps* = s
No arbitrage condition: domestic producers compensated to still sell at home. Indifferent between exporting and selling domestically.
How do Ps, Ps* and Pw compare?
Ps > Pw
Ps* < Pw
Impact of export subsidy on domestic consumers
Internal Ps rises = demand falls and loss of CS
Impact of export subsidy on domestic producers
Internal Ps rises = domestic supply rises and increase in of PS
Impact of subsidy on government
Cost of subsidy = s * quantity of exports.
Remember s = Ps - Ps*
Impact of subsidy on trade
Domestic producers have greater incentive to export + domestic demand falls = XS rises.
Effect of subsidy on welfare
UNAMBIGUOUSLY -VE: efficiency losses + TOT loss.
Impact of subsidy on TOT
Ps* = world price of exports FALLS = TOT LOSS.
CAP was created when and by how many countries?
1962 by EU’s 6 founding countries
2 things CAP does
- fixes high domestic prices for agricultural products.
2. Subsidises exports to dispose of excess production.
Direct cost of CAP to EU
$50BN = 42% of budget
% of GDP agriculture is in EU
2%
How do support, autarky and free trade prices compare under CAP?
Support price > autarky price > world price.
Under free trade, would EU be exporter or importer of agriculture?
Importer: D > S at world free trade price.
How does fair trade affect prices? How does this differ to subsidy?
Pushes up prices above free trade price.
But not just to government payment - voluntarily paid by consumers in developed countries.
GE effect of fair trade
Fair trade producers increase supply = lowers world price . Oversupply means non fair trade producers lose out.
2 -VE of fair-trade in LR
- doesn’t help developing countries diversify
2. Supermarkets try to skim off consumer’s WTP higher prices through feel good factor.
Import quota =
a restriction on the QUANTITY of a good that may be imported.
How is a quota enforced?
LICENSES: given to domestic firms or foreign governments as permits to import/export.
What is a BINDING import quota?
One that affects the prevailing demand and supply.
How does a quota affect domestic price and why?
Restrict imports means domestic demand > domestic supply + imports = excess demand pushes up price of imports.
What are quota rents? who do they go to?
Revenue from being able to sell imports at a higher price = goes to license holders (domestic firms / foreign governments).
Impact of quota on domestic consumers
Higher internal price of imports = lower demand and CS
Impact of quota on domestic producers
Higher internal price of imports = higher supply and PS
Net effect of quota
Ambiguous - depends on where quota rents go.
Voluntary export restraint =
like an import quota, but imposing voluntarily by the exporting country.
Why is a VER in realistic not voluntary?
They’re requested by importing country & threaten harsher punishments otherwise.
2 gains of VER to exporting country
- get to sell restricted quantity at higher price.
2. get to give out licenses = quota rents
example of multilateral VER
MFA 22 countries until 2005.
Local content requirement =
a REGULATION requiring a specific fraction of the final good to be produced domestically.
How may a local content requirement be expressed?
In % of value terms or physical units.
How does LCR affect domestic producers of INPUTS
+VE effect: protects them in the same way as a quota.
How does LCR affect domestic producers that must buy inputs
Increases costs of production from monitoring/changing production and not being able to source cheapest.
Does a LCR mean firms have to reduce imports of inputs?
NO - they can keep them to same/increase as long as also use more domestic inputs.
Do LCR have government revenue / rents>
NO
Who pays for LCR restrictions?
The difference between the price of domestic inputs and imports is average into the price of the final good & passed onto consumers.
Whats a related issue to LCR?
Rules of origin
state 3 other trade policies
- export credit subsidies
- government procurement
- bureaucratic regulations
What are export credits subsidies?
A subsidised loan to foreign buyers of domestic exports and subsidised insurance in case foreign buyers don’t pay.
What’s government procurement?
Govs required to buy from domestic suppliers even if foreign ones are lower price and/or better quality.
What’s bureaucratic regulations?
Safety, health, quality, red tape etc - forms of trade restrictions.
Skiing example of bureaucratic regs.
Skis exported from Europe into Japan were subject to additional tests because the Japanese claim their snow was different. Technical barrier to trade.
Overall welfare effect of VER o country requesting it
-VE. Gain PS, loss CS, rents abroad.
How do welfare effects of VER cf quota and tariff?
- Typically more costly than quota
- Always more costly than tariff
