Download Chapter 33 International trade and commercial policy

Chapter 33
International trade
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
8th Edition, McGraw-Hill, 2005
PowerPoint presentation by Alex Tackie and Damian Ward
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Exports as % of GDP
3
Ja
pa
n
SA
U
ly
Ita
nc
e
Fr
a
K
U
'la
nd
s
1967
2004
N
B
el
gi
um
90
80
70
60
50
%
40
30
20
10
0
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Source: GATT, Directions of Trade
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Destination of world exports,
2003
LDCs
43%
Rich
countries
57%
Source: GATT, Directions of Trade
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The composition of world
exports
100%
80%
60%
40%
20%
0%
2002
1955
Food, ag
Fuels
Other primary
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Manufactures
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The composition of Turkey’s
exports
100%
80%
60%
40%
20%
0%
1950
1980
1985
AGRICULTURE
1990
MINING
1995
2000
2006
INDUSTRY
Source:SPO
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Some important issues
• Raw materials prices
– Less-developed countries (LDCs) have claimed exploitation by
industrial countries
• e.g. by buying raw materials cheaply & selling manufactures dear
• Manufactured exports from LDCs
– some LDCs have had success in exporting manufactures
– leading to complaints that jobs are under threat in the industrial
countries
• Trade disputes between industrial countries
– In some countries, established producers of certain goods are
being undercut by efficient modern producers
– especially from Japan & East Asia
– should such exports be restricted?
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Comparative advantage
• Trade offers benefits when there are
international differences in the opportunity
cost of goods.
• Opportunity cost of a good
– the quantity of other goods sacrificed to make one
more unit of that good
• The law of comparative advantage
– states that countries should specialise in
producing and exporting the goods that they
produce at a lower relative cost than other
countries.
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The source of comparative advantage
• An important difference between countries is in factor
endowments
• which will be reflected in different relative factor
prices
– e.g. if the UK has relatively abundant capital but relatively
scarce labour as compared with India,
– then the UK would tend to specialise in capital-intensive
goods,
– and India would tend to specialise in labour-intensive
products
• Comparative advantage may also reflect a relative
advantage in technology
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Figure 33.1: Comparative advantage and export
composition (125 countries and regional averages)
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Gainers and losers
• Countries may gain from specialisation
and trade
– but not all countries may gain equally
• Commercial policy
– is government policy that influences
international trade through taxes or
subsidies
• e.g. tariffs
– or through direct restrictions on imports
and exports.
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The economic effects of a tariff
DD and SS show the domestic
demand and supply for a good.
SS
If the world price is Pw,
and there is free trade,
domestic firms supply Qs
domestic demand is Qd
Pw + T
Pw
and the difference is imported.
DD
Qs Q s '
Qd' Qd Quantity
A tariff can stimulate domestic
supply and restrict imports.
At a domestic price Pw + T,
where T is the size of the tariff.
Domestic demand falls to Qd', domestic supply rises to Qs'
and imports fall.
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The welfare costs of a tariff
The tariff leads both to
transfers and net social
losses.
SS
The government raises
revenue – i.e. there is a
transfer to the government
Pw + T
Pw
DD
Qs Qs '
and there is a transfer in
the form of extra profits to
producers.
Qd' Qd Quantity
There is a social cost from production inefficiency, given that the
good could be imported at Pw, and a loss of consumer surplus.
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Tariffs
• The deadweight burden of a tariff suggests
that society suffers from this method of
restricting trade.
• This is the case for free trade.
• Tariffs have fallen substantially under the
GATT
– General Agreement on Tariffs and Trade
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The case for tariffs – good arguments
• Optimal tariff
– a first-best argument
– only valid where the importing country is large
enough to affect the world price.
• This policy fulfils the principle of targeting
– which says that the most efficient way to attain a
given objective is to use a policy that influences
that activity directly.
– Policies that attain the objective, but also influence
other activities are second-best, because they
distort those other activities.
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The case for tariffs – second-best arguments
• Way of life
– an attempt to preserve ‘traditional’ ways
– a production subsidy would be better
• Suppressing luxuries
– an attempt to curb consumption patterns of the rich in a poor
society
– better achieved by a consumption tax
• Infant industries
– an attempt to nurture new activities via learning by doing
– a temporary production subsidy probably better
• Revenue
– tariffs raise government revenue
– but there are better ways
• Cheap foreign labour
– a non-argument – denies benefits of comparative advantage
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Other commercial policies
• Although tariff rates have fallen under
GATT, there has been a proliferation of
other trade restrictions
– quotas
– non-tariff barriers
• administrative regulations that discriminate
against foreign goods
– export subsidies
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An export subsidy
Under free trade, with the
world price at Pw,
S
Pw+ s
production is Qs
B
G
E
Subsidy
World
price
Price
Pw
A
consumers demand Qd
exports are GE.
With a subsidy, producers
produce Qs’ and supply Qd' to
the domestic market.
Exports now rise to AB.
DD
Qd' Qd
Qs Q`s'
Quantity
Social costs arise from
production inefficiency
and the loss of consumer surplus.
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