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INTRODUCTION In the previous lectures we dealt with the determinants and the effects of international trade • Models of inter-industry trade (Ricardo, Specific Factors, Heckscher-Ohlin) INTERNATIONAL ECONOMICS ECON 30074 • Models of intra-industry trade (economies of scale and imperfect competition) LECTURE 8 And, we have established the existence of gains from trade TRADE POLICY: The policy implication: countries should pursue policies of free trade? PARTIAL EQUILIBRIUM ANALYSIS However, in the real world we observe a variety of trade policies Warning!! These lecture notes are to help students during the lectures. Reading these notes without attending lectures can be misleading. © Estela Montado, University of Bristol 1 2 Main trade policy instruments The relevant questions are : Tariffs: tax levied when a good is imported (specific versus ad valorem) 1-What are the effects of protectionist trade policies? 2-Why do we observe such policies? 3-What should trade policy be? Subsidies: payment to a firm that ships a good abroad (specific versus ad valorem) In this lecture Non-tariff barriers Partial equilibrium analysis : examine direct effects of a trade policy in market z on the prices and quantities in market z Import quotas: limits on the quantity of imports Voluntary Exports Restraints (VER): limits on the quantity of exports (generally imposed by the exporting country at the importing country’s request) Do not consider indirect effects or secondary effects in other markets Next lecture General equilibrium analysis: examine the full general equilibrium effects of the introduction of a tariff 3 4 Supply, demand and trade in an industry b) Foreign: Export Supply Curve (Fig. 2) p - Single commodity (rice), no transportation costs. Perfectly competitive markets p D* XS S* P2 - Two large countries (home and foreign) p1 p*A p In the absence of trade, price of rice is higher in home than in foreign D*2 When trade takes place, determine world market price and quantity using concepts of import demand curve and export supply curve D*1 S *1 S *2 Q S *1 – D*1 S *2 – D*2 Q c) World Equilibrium (Fig. 3) p a) Home: Import Demand Curve (Fig. 1) p XS p S pp pW pA p2 p1 MD MD D S 1 S 2 D2 D1 Q D2 - S 2 D1 - S 1 QW Q Q 5 6 Small versus Large Country (Fig. 4) Welfare Analysis (Fig. 6) p S p XS large pT a pW b pW XS small c d e p*T D QW Q d) Effects of a Tariff: a) Large Country (Fig. 5) HOME p p WORLD p S1 D1 Q FOREIGN Producer Surplus: XS A pT D2 QT S* S S2 + (a) Government Revenue: + (c + e) E pW t p*T MD D Q - (a + b + c + d) Net Welfare Effect: + e - (b + d) D* B QT Consumer Surplus: MDT QW Q Q 7 8 Effects of a Tariff: b) Small Country (7) HOME Welfare Analysis WORLD p Producer Surplus: p S + (a) Government Revenue: + (c) pT t pW XS MD D MDT Q QT Consumer Surplus: - (a + b + c + d) Net Welfare effect: - (b + d) Q 3) Effects of Import Quota: Large country (Fig. 8) HOME p S HOME WORLD p pT pW p D a c b d S XS A pq pW E p*q D S1 S2 QT D2 D1 B Qq Q 9 QUOTA Q Qq MD Q 10 Conclusions: an import quota will raise domestic prices by the same amount as a tariff that limits imports to the level specified in the quota (under perfect competition) p S pq a pW p* q b c d Key issue: to whom should the right to sell in the domestic market be assigned? e D Voluntary Export Restraints (VER): A quota on trade volumes imposed from the exporting country’s side instead of the importer’s side Q Welfare Analysis: (quota licences sold by government) Producer Surplus: + (a) With a VER, the right so sell in the domestic market is assigned to foreign producers Government Revenue: + (c + e) Consumer Surplus: - (a + b + c + d) Net Welfare Effect: + e - (b + d) The otherwise government revenue becomes rents received by foreign firms Welfare effect: + (a) - (a + b + c + d) Net: - (b + c + d) 11 12 4) Effect of Export Subsidy: Large country (Fig. 9) HOME p D Welfare analysis WORLD p S A XS pS pW Producer Surplus: + (a + b + c) Consumer Surplus: - (a + b) Government Revenue: - (b + c + d + e + f + g) E * pS B MDS Net welfare effect: - (b + d + e + f + g) MD QS Q 5) Domestic Monopoly: a) Tariff (Fig. 10) The threat of import competition forces the monopolist to charge the competitive price Q p HOME p pS pW MC pM a b c d f pT p* S e pW g MR Q SF ST 13 D DT DF Q 14 Domestic Monopoly: b) Quota (Fig. 11) Domestic Monopolist - Welfare effect A quota leads to lower domestic output and a higher price than a tariff that yields the same level of imports p MC pq QUOTA pW MRq Dq D Q Sq Domestic Monopoly: c) Tariff vs. Quota (Fig. 12) p MC pq pW + t QUOTA pW MRq Sq ST Dq D Q 15 16