Download Lecture I: Table of Contents Trade Policy

Course TOC:
International Trade - Trade Policy
Lecture I
Vilém Semerák
[email protected]
http://home.cerge-ei.cz/vsemerak
1. Introduction, trade policy instruments in general
equilibrium. Tariffs and quotas in cases of
growth and shocks, empirical estimates of
welfare effects of trade policy.
2. Optimum tariffs. IRS and imperfect competition,
strategic trade policy.
3. Applied GE modelling and its application.
Political economy of trade policy.
4. Liberalization, integration and preferential trade
areas
This presentation uses also some slides from Krugman-Obstfeld
course materials
Lecture I: Table of Contents
• Introduction
–
–
–
–
What is trade policy
Reasons for trade policy
Types of instruments
Trends in trade policy
• Partial equilibrium analysis – revision
• GE analysis
– Principles of GE modelling, assumptions, small vs.large
country
– Tariffs, export taxes, export subsidies
– Quotas
– Tariffs vs. quotas in case of growth
– Tariffs vs. quotas in case of shocks
International trade seems to be a subject where the
advice of economists is routinely disregarded.
Economists are nearly unanimous in their general
opposition to protectionism … [T]he increase in
U.S. protection in recent years … demonstrates
that economists lack political influence on trade
policy.
Robert E. Baldwin, 1989
Trade Policy - Introduction
• Trade policy – set of instruments that governments use
in order to deliberately influence impacts of trade on its
domestic economy
• Reasons for trade policy :
–
–
–
–
–
–
Protection of “strategic sectors“
The “infant industry” argument (F. List)
Market failures (inefficient allocation, unemployment)
Problems with balance of trade
Source of income (0.01% in the UK, 40.9% in Ghana)
Lobbying and private interests
• Gist: manipulation with terms of trade, transaction
costs and/or quantities traded that leads mainly to
redistribution (overall welfare effects will be explored
later)
Instruments of Trade Policy
• Tariffs – taxes on imports (exports)
• Non-tariff instruments (NTBs):
–
–
–
–
–
–
–
–
Quotas
“Voluntary” export restraints
Export subsidies (+ production subsidies)
Advance-deposit requirements
Formalities of custom clearance
Technical, safety, health and other regulations
State trading, foreign trade monopoly
Domestic content provision
1
Development of Trade Policy
Trends in trade policy since WWII:
• Gradual liberalization (GATT, WTO –
multilateral trade negotiations and liberalization,
regional economic integration)
• Decreasing autonomy and increasing
importance of treaties that set limits to
protection
• Increasing importance of non-tariff barriers and
decreasing importance of tariffs
Harmonized Commodity Description
and Coding System (HS)
• Multi-purpose goods nomenclature used as the basis for
customs tariffs and trade statistical nomenclatures all over
the world
• Over 98% of world trade classified in HS
• Sections, chapters (2 digits), headings (4 digits), one-dash or
two-dash subheadings (6 digits)
• The HS headings and sub-headings provide the building
blocks for more aggregated product classifications, e.g..
SITC
• CR – trade data available in 8 digit system
Tariffs and “Tariff-like” Instruments
• Influence trade via changes in prices of
exports and/or imports (i.e. terms of trade)
– “we change prices, market does the rest”
• Import tariffs, export taxes, export subsidies
• Types of tariffs:
– ad valorem (e.g. 20% of price)
– specific (e.g. 200 USD per item)
– compound (e.g. 20% of price, but not less than
200 USD per item)
Examples of Tariffs - CR
Item
General
Conv.
0204431000 Meat boneless of lamb
254.2
125.0
8802601000 Spacecrafts (incl.
satellites)
8906100000 Warships
13.0
13.0
16.0
3.8
3002901000 Human blood
7.0
0
European Union Harmonized Tariff Schedule:
e.g. on http://www.trade.gov/td/tic/tariff/eu_schedule/index.html
How Can We Measure Trade Policy?
• When doing a model, we need some simple
measure of the trade policy that influences a
sector or a country
• Average tariffs
– By sectors or by countries
– Simple! or weighted, or divide total tariff
revenues by the value of total imports
– OECD mean tariff (1990-93): 7.2%
• What about non-tariff barriers? Index of
protectionism?
Economic Analysis of Tariffs
• Issues:
– Impact on volume and terms of trade
– Changes in structure of production
– Welfare effects
• Partial equilibrium analysis – we examine only the
market directly affected by a tariff
• General equilibrium (GE) – we ought to pay
attention to all markets in the economy
• Small country vs. large country assumption
– is a country able to influence “world prices”?
2
Tariffs – Partial Equilibrium Analysis
• Comparison of changes in consumer and producer
surplus, and increase in state revenues
• Necessary assumptions:
partial equilibrium = 1 market, ceteris paribus
P
Welfare Analysis in PE
P
– Knowledge of supply and demand curve (elasticities)
– Ability to compute consumer surplus and to compare it with
changes in profits and revenues
ES LROW
PE
PW
PW
QS
QD
ESsROW
Consumer Surplus
Welfare Analysis – Tariff, Small Economy
P
– Domestic price increases
– Consumption decreases
– Production increases
– Revenue for state
– Welfare effects:
pW+t
B
C
D
• Producers and state gain, consumers lose
• Stolper-Samuelson-like effects (not analyzed here)
• Overall welfare effect negative
D
Q0S
Q1S
Q1D
Tariffs and Small Country
• Assumption: any changes in its foreign trade
cannot influence world prices
• Effects:
S
A
– Other markets not taken into account
– Other effects neglected (such as costs of administration or
long-term effects on competitiveness)
Q
Q
Producer Surplus
PW
• Problems:
Q0D
Q
3
Large Country Case:
Tariffs and Quotas
Tariffs and Large Country
• Assumption: Monopolistic/monopsonistic
position, i.e. ability to influence terms of trade
• Effects:
– Domestic price increases
– Consumption decreases
– Production increases
– Revenue for state
– Welfare effects:
• Producers and state gain, consumers lose
• Stolper-Samuelson redistribution effects
• Overall welfare effects unclear (positive TOT effect)
Welfare Analysis – Quota, Small Economy
P
S
• Modeled practically in the same way both in PE as well
as in GE.
• In a static situation and under traditional assumptions
they have the same effects (with possible exception of
the problem of distribution of quota rent).
• For every quota we can find an adequate tariff with the
same effect (tariffication) and vice versa.
• Still – there can be important differences if we take into
account possible changes in domestic/foreign economy
(growth, shocks) or if we change assumptions
(imperfect competition).
Krugman: U.S. Import Quotas on Sugar
S+quota
pD
PW
A
B
C
D
Quota
Q0S
Q1S
D
Q1D
Q0D
Q
4
Distribution of Quota Rights
• Very important – it determines allocation of quota
rent ⇒ it also influences welfare effects!!
• Several methods:
– Grant import permits to current importers according to
their market shares
– “First come, first served”
– Auction of the quota rights (recommended by
economists, but rarely used in practice)
– Lobbying/corruption
– Specific case: “V”ERs
Simple Quantitative Example
• Let us assume that we somehow know demand and
supply curves in a given market:
QD = 100000 − 100 ⋅ P
QS = 100 ⋅ P
• What is the autarky equilibrium?
• What happens after opening of the market if the world
price is 200 (500, 600)? For simplicity assume it is a
small economy
• What happens if a specific tariff 200 (300) is
introduced?
• What happens if we introduce quota (20000 or 40000)
instead?
Effects of an Export Subsidy
Subsidy and Retaliation
Importing country
p
D
A
PFT
G
B C
H
I
p
S
D
J
Exporting country
D
E F
L
K
S
a
c
b
d
e
g
h i
j
k l
f
Q
Standard Trade Model
• Ricardian model –differences in technologies
• Heckscher-Ohlin – differences in endowment
• Despite the differences both types of models use the
same modeling techniques
• Therefore we can easily create a “general” model, that
includes Ricardo and HO (and possibly some other
approaches) as special cases
• Generality brings some costs too – when staying on
general level we often cannot get so detailed analysis as
in more specific models
• Basic assumptions: perfect competition, CRS
(decreasing MP of each factor individually), rational
optimizing agents, mobility of goods, mobility of
factors within country but not internationally
Q
Autarky and Free Trade Equilibria
• How do we define equilibrium?
• Equilibrium = prices and allocations such that:
– Consumers maximize utility given their budget
constraint (endowment)
– Producers maximize profit
– Markets clear
• Conditions that must be met:
– MRS = p
Note: Corner solutions possible!
– MRT = p
– Free Trade: Walras law/BP condition holds (i.e. value
of import equals value of export at international prices
– Autarky: For each commodity domestic consumption
≤ domestic production
5
General Equilibrium Analysis of
Tariffs, Quotas, Subsidies, etc.
• Based on standard GE model of trade
• Assumptions – standard neoclassical general
equilibrium
• Imposition of tariffs (taxes, subsidies) modeled
as a change in relative prices according to
which consumers and producers optimize
• Basically – it is similar to the free trade case,
but with some distortion
Autarky Equilibrium and Autarky Prices
in the General Case
Relative price determined by the properties of
the PPF and of the indifference map
Y
CY = QY
E
IC
PPF
C X = QX
Slope
the TT line:
SklonofTT:
TT
dY
P
= − X
dX
PY
X
Free Trade Equilibrium
Y
IC0
E
QY V
ýxp
vo
CY or
zt
IC1
P 
− X
 PY  W
A
PPF
QX
P 
− X
 PY 
A
Dovoz
Import
CX
X
Effects of Import Tariff
Tariffs – Small Country Case
Y
Imposition of tariffs on good X:
pxH = (1 + t ) p*x ∧ pyH = p*y
MRS = MRT = p = p* (1 + t ) > p*
(
) (
)
p* X c − X p + Yc − Yp = 0
Export tax – the same reasoning and effects!
MRS = MRT = p =
p*
> p*
1− t
p=
p X (1 + t )
pY
X
6
“Trade Triangle”
Effects of Tariffs - Explanation
• Imposition of tariff on an imported product changes
relative prices, that’s why:
– Producers will produce more of the protected good (and less of
the other good – limited resources)
– Consumers will buy relatively less of the protected product and
more of the unprotected
Exported
units
of Y
p* =
Imported units of X
pd =
p *X
pY*
p *X ⋅ (1 + t )
pY*
• Consequences:
–
–
–
–
Both imports and exports decline!
Decrease in welfare – country moves back to autarky!
Structural changes
Redistribution according to Stolper-Samuelson
Export Subsidies
Tariffs in Excess Demand Diagram
Export subsidy increases domestic price
of subsidized commodity
p*
MRS = MRT = p =
< p*
1+ s
p
pa
p’a
T
pD=p*.(1+t)
• Effects:
F
p*
p*
EX
E’X
0
XC-Xp
MTAR MFT
Effects of Export Subsidy on Y
– Change in relative price of exportables and importables
– Change in structure of production towards exportables
– Change in structure of consumption towards
importables
– Higher export and import, lower welfare (in extreme
case even lower than in autarky!)
Large Country Case
Y
UFT
UT
PPF
p*
• Large country may be capable of influencing its
term of trade (as in PE)
• It may behave as a monopolist in its export
markets or as a monopsonist in its import market
• TOT effects – if country decreases its imports
(exports) by imposition of a tariff, its import
prices decrease and export prices increase
• Positive effect of higher purchasing power of
imports – large country may even profit from
imposition of tariffs
X
7
Large Country – Excess Demand Diagram
Large Country: Welfare-improving Tariff?
Y
T
F
E Xh
E’Xh
E Xf
0
MTAR MFT
XC-Xp
X
How Quotas Work - GE
Quota Protection
• Imposition of quota on product X causes lack of the
good at the existing prices
• Relative price of X to Y will be growing
• Producers will change their structure of production –
they will start producing more X and less Y (the
country is on its PPF)
• Consumers will change their structure of
consumption – relatively more Y and less X
• Quota ⇒ lower import, but lower export as well
• Ceiling on quantities of imports of particular
goods
• Increasingly popular after WWII
• When modeling tariffs we were given the
difference between domestic prices and world
prices, whereas here we have to find out the
domestic price at which the difference between
domestic demand and supply equal the quota
Effects of Import Quota
Modeling Impacts of Quotas
• Equilibrium conditions “almost” the same
as in case of tariffs:
Y
MRS = p
MRT = p
(
) (
)
p* X c − X p + Yc − Yp = 0
• But in this case:
• Exogenous Quota = X c − X p
• Endogenous p
X
8
Quotas in Excess Demand Diagram
Quota Rent in GE
p
pa
Exported
units
of Y
QR
p* =
*
X
*
Y
p
p
Imported units of X
= quota
T
pD
F
p*
p*
EX
pd
pd = X*
pY
0
Large Country – Excess Demand Diagram
MQ
MFT
XC-Xp
Other Non-Tariff Restrictions
• Special types of quotas: country specific quota,
“V”ER, embargo, sanctions
• Measures that increase transaction costs (e.g. different
standards, advanced deposit requirements)
• Discriminatory tax laws
• Exchange controls
• Domestic contents requirements
• Problems: modeling and estimation of costs
Q
F
E Xh
E Xf
0
Q
MFT
XC-Xp
Tariffs and Quotas
• Modeled practically in the same way both in PE as well
as in GE.
• In static situation and under traditional assumption they
have the same effects (with possible exception of the
problem of distribution of quota rent).
• For every quota we can find an adequate tariff with the
same effect (tariffication) and vice versa.
• Still – there can be important differences if we take into
account possible changes in domestic/foreign economy
(growth, shocks) or if we change assumptions
(imperfect competition).
Quotas, Tariffs, and Growth
• Impacts depend on sources of the growth
• Scarce factor oriented growth:
– Quota – becomes less binding
– Tariff – price fixed by world price and tariff,
adjustment in quantities (decreasing volume of
imports)
• Abundant factor oriented growth:
– Quotas become increasingly binding and push up
prices
– Tariffs – imports grow at unchanged domestic
prices
9
Quotas, Tariffs and Price Fluctuations
• Similar issues as in case of growth, but we analyze
impacts on price fluctuations only
• In general – all changes will transform itself into
changes in prices in case of quotas and into
change in quantities (and sometimes prices) in
case of tariff
• Price fluctuations – two different situations:
– Cause of fluctuations is at home
– Fluctuations are caused by changes “abroad”
• Assumption: small open economy
“Domestic” Shocks
• Assumptions: Causes of the shocks are at
home and the country cannot influence world
price
– Example: Unbalanced changes in factor
endowments
• Quotas: Volume of imports is fixed (up to a
point), shocks in domestic supply and demand
will demonstrate itself in price fluctuation
• Tariffs: Domestic price is fixed at pW(1+t),
changes will influence only quantities
Prices and “Shocks” Originating Abroad
• Assumption: Foreign excess demand curve shifts
randomly
• Tariff: t is fixed, domestic prices will therefore
fluctuate in proportion to foreign shocks
• Quota: Country is insulated from the shocks (as long
as the quota is binding constraint)
– Alternative explanation: It is possible to calculate an
adequate tariff to each quota, but this tariff would have to
fluctuate inversely with the price fluctuations
t=
p
−1 ∧
p*
p = (1 + t ) p *
10