The Economics of Trade Barriers

Question 1

Two views on cost advantages

Answer 1

• Adam Smith: “Wealth of Nations” (1776)
  => Doctrine of absolute cost advantages
• David Ricardo:
  => Doctrine of comparative cost advantages (all costs are relative, or all costs are opportunity costs)

Question 2

Tariffs vs. quotas

Answer 2

• both have a negative impact on welfare

- quota is inferior to tariff (except when quota licenses are sold in auction)

Question 3

Terms of Trade

Answer 3

• small countries never enjoy Terms-of-Trade gains

- large countries often enjoy T-o-T gains

Question 4

Import demand curve / Export supply curve

Answer 4

Border price effects and trade volume effects take place

Question 5

Most-favourite-nations tariffs

Answer 5

• introduction of tariff has no effect on MD;
• introduction of tariff shifts MS curve up by T: exporters would need a domestic price that is T higher to offer the same exports since they earn the domestic price minus T

-> Moreover, the higher domestic price stimulates production and discourages consumption.

Question 6

Types of protection

Answer 6

• DCR (domestically captured rents) like tariffs, import licenses
• FCR (foreign captured rents) like price undertakings, export taxes
• frictional (no rents since barriers involve real costs of importing and exporting) like regulations and red-tape

Question 7

Inter- vs. Intra-industry trade

Answer 7

• inter-industry trade: a country either exports the good or imports the good
• intra-industry trade: back-and-forth trade of (not identical) products