Download custom duty

Globalization and
International Trade
Lecture 8 – academic year 2014/15
Introduction to Economics
Fabio Landini
What do we do today?
• Lect. 8: the welfare effects of
globalization
• Lect. 8: is it convenient to impose a tax
on Chinese shoes imported in Europe?
If so, convenient for whom?
2
Question of the day
Who made our shoes?
3
Globalization
What’s “globalization”?
Process of growing economic and financial,
e.g. exchange of goods and financial
activities (assets).
We ask:
• Which are the effects of globalization on
welfare?
• Who gain and who looses from the free
trade among nations?
4
World exports of goods
(Billions US $ x 1000)
European Union (15)
08
20
05
20
03
20
00
20
90
19
80
19
70
19
60
19
19
48
18
16
14
12
10
8
6
4
2
0
World
5
Updating… the crisis
Export of goods and service (source: OECD)
1800
1600
US Billion Dollar
1400
1200
1000
800
600
400
200
0
Germany
Italy
United States
Equilibrium in the absence of
international exchanges
Economy without international exchanges
(“closed”): the price adjusts so as to equalize
internal demand and supply.
7
Equilibrium in the absence of
exchanges
Price of steel
Consumer surplus
Internal supply
Equilibrium price
Internal demand
Producer surplus
0
Equilibrium
quantity
Quantity of steel
8
Equilibrium in the absence of
exchanges
EXAMPLE – Market for steel
Hypotheses:
•A country that is not in contact with the rest
of the world and produces steel.
•The market for steel consists of producers and
consumers of that country.
9
Opening to international
trade: questions
If a country opens to international trade, what
happens to exporters and importers of steel?
Who gains and who looses from the opening
of the market (= globalization)?
Are the gains of some compensated by the
losses of the others?
10
Opening to international trade
Baseline hypothesis: the country is SMALL in the
world market.
Hence: it behaves like consumers and
producers under perfect competition.
Take the world price as a given.
The country decides whether to sell or buy
steel to/from the world market.
11
World price and comparative
advantage
If a country has a “comparative advantage”
in the production of a good,
then: internal price < global price
– why? Price= opportunity cost
In this case: the country becomes an exporter
of that good
12
World price and comparative
advantage
If a country does not have a “comparative
advantage”,
then internal price > global price.
In this case: the country becomes exporter of
that good
13
International trade in an
importing country
If global p < internal p,
“once the borders are opened”, the country
becomes an importer of steel.
Key question: who do the consumers want to
buy from (given that they are free to choose)
?
14
International trade in an
importing country
Price of steel
Internal supply
Price in a closed
economy
World price
Internal demand
0
Quantity of steel
15
International trade in an
importing country
Internal consumers want to buy steel at a
lower price.
– For small quantities, the most efficient among
the internal producers can satisfy demand
– For larger quantities, the internal producers
are too inefficient compared to foreign
competitors and imports
16
International trade in an
importing country
Price of steel
Internal supply
Price in a closed
economy
World price
Internal demand
Import
0
Internal
quantity
supplied
Internal
quantity
demanded
Quantity of steel
17
International trade in an
importing country
Import=
Internal quantity demanded – internal quantity
supplied, at the world price.
Internal price until internal p = global p
Internal consumption and internal production
i.e., the country becomes an importer of steel.
18
International trade in an
importing country
Price of steel
Consumer surplus in a
closed economy
Internal supply
A
Price in a closed
economy
World price
Import
Internal demand
0
Quantity of steel
19
International trade in an
importing country
Price of steel
Consumer surplus in a
closed economy
Internal supply
A
Price in a closed
economy
B
World price
C
Import
Produce surplus in a
closed economy
0
Internal demand
Quantity of steel
20
International trade in an
importing country
Price of steel
Consumer surplus in a
open economy
Internal supply
A
Price in a closed
economy
B
D
World price
Import
Internal demand
0
Quantity of steel
21
International trade in an
importing country
Price of steel
Consumer surplus in a
open economy
Internal supply
A
Price in a closed
economy
B
C
D
Import
Produce surplus in a
open economy
0
World price
Internal demand
Quantity of steel
22
International trade in an
importing country
Price of steel
Consumer surplus in a
open economy
A
Price in a closed
economy
Additional surplus in an
open economy
B
C
D
World price
Import
Produce surplus in a
open economy
0
Internal supply
Internal demand
Quantity of steel
23
Gains and losses from free trade
When a country opens its frontiers to free trade
becoming an importer, its consumers gain.
They pay a lower price and can buy more.
The national producers, instead, are damaged.
They receive a lower price and sell less units.
24
Gains and losses from free trade
Overall, international trade increases the total
welfare of the country.
The net variation of total welfare (surplus) is
positive
The gains of consumers are greater than the
losses of producers.
25
The effects of a custom duty
A custom duty is a tax on a good produced
abroad and imported.
A custom duty increases the global price
proportionally.
26
The effects of a custom duty
National producers take advantage of the
duty, while consumers experience a loss.
27
The effects of a custom duty
Price of steel
Internal supply
World price
Price without duty
Internal demand
0
QS1
QD1
Import without
duty
Quantity of steel
28
The effects of a custom duty
Consumer surplus
without duty
Price of steel
Internal supply
World price
Price without duty
Producer surplus
Without duty
0
QS1
Internal demand
QD1
Import without
duty
Quantity of steel
29
The effects of a custom duty
Price of steel
Internal supply
World price
Price without duty
Internal demand
0
QS1
QD1
Import without
duty
Quantity of steel
30
The effects of a custom duty
Price of steel
Internal supply
Price with duty
Duty
World price
Price without duty
Internal demand
0
QS1
QS2
Import without
duty
QD2 QD1
Quantity of steel
31
The effects of a custom duty
Price of steel
Internal supply
Price with duty
Duty
World price
Price without duty
0
Import with
duty
Q
QS2
Internal demand
QD2 QD1
Quantity of steel
32
The effects of a custom duty
Consumer surplus
without duty
Price of steel
Internal supply
Price with duty
Duty
World price
Price without duty
Internal demand
Producer surplus
with duty
0
Q
QS2
QD2 QD1
Quantity of steel
33
The effects of a custom duty
Consumer surplus
without duty
Price of steel
Internal supply
Public revenue
Price with duty
Duty
World price
Price without duty
Internal demand
Producer surplus
with duty
0
Q
QS2
QD2 QD1
Quantity of steel
34
The effects of a custom duty
Consumer surplus
without duty
Price of steel
Internal supply
Public revenue
Net loss due to the duty
Price with duty
Duty
World price
Price without duty
Internal demand
Producer surplus
with duty
0
Q
QS2
QD2 QD1
Quantity of steel
35
The effects of a custom duty
As any other tax, a duty creates a distortion in
incentives and affects the optimal allocation
of resources
36
The argument in favour of
restrictions to free trade
• Employment
• National security
• Infant industry protection
• Dumping
• Protectionism as bargaining tool
37
Hence
Through the comparison between internal
price and world price one can identify which
countries are exporters and which are
importers of a particular good.
38
Globalization means:
In exporting countries, producers gains, while
consumers loose.
In importing countries, consumers gain, while
producers loose.
In both cases gains are greater than losses.
39
Conclusion
The custom duty. . .
• Increases the national price of a good.
• Reduces the welfare of internal consumers
• Increases the welfare of internal producers
• Creates a net loss in terms of welfare
40