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International Trade > Trade policies > Flashcards

Trade policies Flashcards

1
Q
  1. What can the government do with the different policies?
A

These actions include taxes on some international transactions, subsidies for other transactions, legal limits on the value or volume of particular imports, and many other measures

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2
Q
  1. What is a tariff?
A

A tax levied when a good is imported. It raises the cost of shipping goods to a country.

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3
Q
  1. What is a specific tariff?
A

A fixed charge for each unit of goods imported ex. 3€ per barrel of oil

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4
Q
  1. What is a valorem tariff?
A

A tax that is levied as a fraction of the value of the imported goods ex. 25% on imported trucks

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5
Q
  1. What is the purpose of a tariff?
A
  • To provide revenue

* To protect particular domestic sectors

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6
Q
  1. How many sectors do we examine at a time?
A

Trade policy can be examined in a partial equilibrium framework, so only one sector needs to be examined at a time.

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7
Q
  1. What is the main assumption in a single industry?
A

Exchange rate is not affected by the trade policy. We therefore quote prices in both markets in terms of home country.

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8
Q
  1. Which curves do we need to determine the world price and quantity traded?
A

The Home import demand curve and the foreign export supply curve:
•Home import demand = The excess of what home consumers demand over what home producers supply
•Foreign export supply= The excess of what foreign producers supply over what foreign consumers demand

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9
Q
  1. How does the IM demand curve look in the case of no tariff?
A

(Figure 9.1)
• The import demand curve (MD) is downward sloping, because if prices increase, the quantity of import demanded decreases.
• Home supply = Home demand IF there is no trade! (PA on the graph, where IM=0)

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10
Q
  1. How is the foreign export supply curve derived?
A

Look at fig. 9.2.
• If prices rises -> Foreign producers raise the quantity supplied -> Foreign consumers lower the amount they demand -> Quantity of supply available to export rises
• Supply curve is Upward sloping
• Export supply = 0, where there is no trade at P*A

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11
Q
  1. What happens in the IM demand curve and the EX-supply curve if prices rise?
A

Look at fig. 9.1 + 9.2.

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12
Q
  1. How to find the world equilibrium?
A

Fig. 9.3
World equilibrium: Happens when home IM demand = Foreign EX supply
• Pw = World supply = World demand (Point 1)

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13
Q
  1. What are the effects of a specific tariff?
A

(Fig 9.4) Tariffs is like a cost of transportation.
• No tariff -> Price would be PW in both home and foreign
• With tariff -> Shippers will not move wheat from Foreign to home unless the home price is bigger than the foreign price+tariff
o If there is no shipment: There will be an excess demand in home and an excess supply in foreign. -> Prices in home will rise and in foreign they will fall.
Home: More supply at higher price -> Consumers demand less (Price increase is less than the amount of the tariff).
Foreign: Less supply -> Increased demand -> Smaller EX supply.
World: Volume traded declines

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14
Q
  1. What is the effect of a tariff in a small country?
A

Fig. 9.5.
• If a small country imposes a tariff, they do normally not import a lot, so if they reduce their IM, it does not affect the world price
• A tariff raises the price of the IM good  Supply increases  Demand falls  IM falls

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15
Q
  1. What is the tariff´s principal objective?
A

To protect domestic producers from the low prices that would result from import competition.

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16
Q

How much protection is a tariff or other trade policy providing?

A

A percentage of the price that would prevail under free trade. Ex. Import quota on sugar can raise the price received by US sugar producers by 35%

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17
Q
  1. How to measure the protection of a tariff?
A
  • If the tariff is an “ad valorem tax” proportional to the value of the imports, the tariff rate itself should measure the protection.
  • If the tariff is specific, you get it by dividing the tariff by the price net of the tariff, so it also gives the “ad valorem”
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18
Q
  1. What are the problems connected with calculating the rate of protection?
A
  • If the small-country assumption is not a good approximation, part of the effect of a tariff will be to lower foreign export prices increased of raising the domestic prices
  • Tariffs may have very different effects on different stages of production of a good. (See example on p. 32)
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19
Q
  1. Does trade policies aimed at promoting economic development often lead to a higher of lower rate of effective protection compared to the tariff rate?
A

It often leads to rates of effective protection much higher than the tariff rates themselves.

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20
Q
  1. What does a tariff do?
A

It raises the price of a good in the importing country and lowers it in the exporting country!

  • Consumers loose in the IM country and gain in the EX-country
  • Producers gain in the IM country and loose in the EX-country
  • Government imposing the tariff gains.
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21
Q
  1. How do you measure the costs and benefits of a tariff?
A

Based on the consumer and producer surplus

22
Q
  1. What is the consumer surplus? Explain and graph.
A
  • Consumer surplus measures the amount of consumer gains from a purchase by computing the difference between the price actually paid and the price willing to pay.
  • The graph looks like stairs, with P on the y-axis and Q on the x-axis. (Fig. 9.6)
  • Can also be graphed as fig. 9.7, where it is a downward sloping line, and the consumer surplus is the area under the demand curve, but above the price.
23
Q
  1. How do you calculate the rate of protection for a sector?
A

(V_T-V_W)/V_W
V_W=Value added in the sector
V_T=Value added in the presence of trade policies

24
Q
  1. What is producer surplus? Explain and graph.
A
  • It is the surplus the producers gain.
  • The graph is fig. 9.8, where there is an upward sloping supply curve, and the surplus is above the suppl curve and below the price.
25
Q
  1. What are some of the difficulties related to the concepts of consumer and producer surplus?
A
  • Technical issues of calculating
  • The question of whether the direct gains to producers and consumers in a given market accurately measure the social gains
  • Also, it does not capture the benefits and costs that are not associated with consumer and producer surplus
26
Q
  1. What is the consumer loss, the producer gain and the government revenue gain of a tariff? Graph it.
A
  • Look at fig. 9.9.
  • Here we can see that consumers loose a+b+c+d, producers gain a and governent gain c+e.
  • It is drawn in an price*quantity axis, where the supply curve is upward and the demand curve downward. The letters starts with a outside the triangle. E is the area below the other ones.
27
Q
  1. Is the benefit of a tariff equal to the costs?
A

No, costs and benefits are not equal, the overall evaluation of a tariff depends on how much we value a dollar´s worth of benefit to each group.

28
Q
  1. What are the net costs of a tariff?
A

Consumer loss-Producer gain-Government revenue
Or
(a+b+c+d)-a-(c+e)=b+d-e

29
Q
  1. What are the net welfare effects of a tariff? Graph it.
A

• Negative effects:
o B+d
B=Production distortion loss -> Arise because the tariff leads domestic producers to produce too much of this good.
D=Consumption distortion loss -> Arise because the tariff leads consumers to consume too little of the good
o E=Terms of trade -> Arise from a decline in the foreign export price caused by a tariff (In the case of a small country, this effect does not count. It means that the costs of a tariff exceed the benefits.

See figure 9.10. Here D and S are in the picture. The triangles represent the efficiency losses, and the square represents the gains of TOT.

30
Q
  1. What is an export subsidy?
A

An export subsidy is a payment to a firm or individual that ships a good abroad.
• Like a tariff, an export subsidy can be either specific (a fixed sum per unit) or ad valorem (a proportion of the value exported).
• When the government offers an export subsidy, shippers will export the good up to the point at which the domestic price exceeds the foreign price by the amount of the subsidy.

31
Q
  1. What are the effects of an export subsidy? Graph it.
A

• The opposite of a tariff (Fig 9.11)
o Price in EX country rises  Price in IM country fall  The price increase is less than the subsidy
–> EX country: Consumers are hurt (Lose a+b), producers gain (Gain a+b+c), and the government loses, because it must spend money on the subsidy
• The government subsidy (Export*Subsidy) = a+c+d+e+f+g.
–> The net welfare loss is therefore: b+d+e+f+g
• B+d is the consumption and production distortion losses

32
Q
  1. Does the export subsidy improve or worsen the terms of trade?
A
  • Worsen, because it lowers the price of the export in the foreign market. So, loss of e+f+g.
  • Costs exceed the benefits.
33
Q
  1. What is the case of Europe´s common agricultural policy?
A
  • Agricultural prices are fixed, not only above world market levels, but also above the price that would clear the EU market. They use an export subsidy to dispose the resulting surplus.
  • It is to provide aid to farmers.
34
Q
  1. What is an import quota?
A

An import quota is a direct restriction on the quantity of some good that may be imported.
• The restriction is usually enforced by issuing licenses to some group of individuals or firms.

35
Q
  1. Does an import quota raise or decrease the domestic price of the IM good?
A

The truth is that an import quota always raises the domestic price of the imported good. In the end, an import quota will raise the domestic price by the same amount as a tariff that limits imports to the same level. (NOT in the case of monopoly, where the quota raises prices more than this).

36
Q
  1. What is the difference between a tariff and a quota?
A

• The government receives no revenue. The sum of money that would have been to the government goes to the ones who receives the import licenses.
o License holders are able to buy IM and resell them at higher price in the domestic market.
o Quota rents = The profit received by the holders of import licenses

37
Q
  1. How to assess the cost and benefits in an import quota?
A
  • First, determine who gets the rents
  • The rights to sell in the domestic market are often assigned to the governments of EX country.
  • The transfer of rents abroad makes the costs of a quota higher than the tariff.
38
Q
  1. What is a voluntary export restraint (VER)?
A

A quota on trade imposed from the exporting country’s side instead of the importers.
• Ex. The limitation on auto exports to the United States enforced by Japan after 1981.
• It is done as a request from the importer and agreed by the exporter
In some cases, it is the preferred instrument of trade policy.

39
Q
  1. Is a VER always more costly than a tariff for the importing country?
A

YES! A VER is always more costly to the importing country than a tariff that limits imports by the same amount.

40
Q
  1. What is the difference between a tariff and a VER?
A

What would have been revenue under a tariff becomes rents earned by foreigners under the VER, so that the VER clearly produces a loss for the importing country.

41
Q
  1. What is the welfare effect on the world economy of VERY based on a study?
A
  • A government’s preference for VERs offers a short-term expansion effect on the exporting country
  • Can only bring positive results in the case of perfect competition for the goods market or when the exporting country is larger than the importing country
  • Conclusion: VER damages the domestic economy in the long-run AND has a negative effect on the overall welfare in the world economy.
42
Q
  1. Are voluntary export restraints allowed under WTO rules?
A

No, governments cannot do it.

43
Q
  1. What is a local content requirement?
A

A regulation that requires some specified fraction of a final good to be produced domestically. It provides protection in the same way that an import quota does.

44
Q
  1. What is a local content requirement seen from the view of a firm that must buy local?
A

It allows the firm to import more. The effective price of inputs to the firm is an average of the price of imported and domestically produced input.

45
Q
  1. What is a local content requirement seen from the view of the domestic producer of parts?
A

It provides protection in the same way that an import quota does.

46
Q
  1. Does a local requirement produce government revenue or quota rent?
A

A local content requirement does not produce either government revenue or quota rents. The difference between the prices of imports and domestic goods in effect changes the final price to the customers.

47
Q
  1. What is an export credit subsidies
A

It is like an EX subsidy, but it takes the form of a subsidized loan to the buyer.

48
Q
  1. What is a National procurement
A

Purchases by the government or strongly regulated firms can be directed toward domestically produced goods even when these goods are more expensive than imports. Ex. telecommunication

49
Q
  1. What is a Red-tape barriers
A

Sometimes a government wants to restrict imports without doing so formally. Fortunately or unfortunately, it is easy to twist normal health, safety, and customs procedures in order to place substantial obstacles in the way of trade. Ex. All radios have to be checked manually before entering France and there is only 2 men to do it.

50
Q
  1. Draw a table with the effects of the four biggest trade policies: Tariff, export subsidy, import quota, voluntary export restraint. State if they have PS, CS, GR and welfare improvements.
A

See table 9.1.

International Trade (10 decks)

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