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Economia Internazionale
Trade Policy
Luca De Benedicts
Università di Macerata
[email protected]
The effects of barriers to international trade
(partial equilibrium)
Which barriers?
• tariffs
• non-tariff barriers
• new instruments for protection
Derivation of the import demand curve in A
S
Price, P
Price, P
A
PA
2
P2
1
P1
MD
D
S1 S2
D2 D1 Quantity, Q
D2 – S2
D1 – S1
Quantity, Q
Derivation of the export supply curve in B
S*
Price, P
Price, P
XS
P2
P1
P*A
D*
D*2 D*1
S*1 S*2
Quantity, Q
S*1 – D*1 S*2 – D*2 Quantity, Q
World Equilibrium
Price, P
XS
1
PW
MD
QW
Quantity, Q
Useful definitions:
• The terms of trade is the relative price of the export
good expressed in terms of the price of the import good
• A small country is a country which is not able to
modify its terms of trade, independently from how
much it trades with the rest of the world
• The effect of a tariff is different depending on the case
we are considering:
– a small country trading with the rest of the world
– two large countries
Consumer’s surplus
• It measures the benefit for the consumer from buying a
good. It is the measure of the difference between the price
that it is actually paid and the price she would accpt to
pay for it.
• Graphically, it is given by the area under the demand
curve above the price
• Example: assume that an individual is willing to pay 20€
for each unit of a given good, but that the good’s price is
only 5€. The consumer’s surplus (that derives from
buiyng the good) is given by 15€.
Geometry of consumer’s surplus
Price, P
a
P1
P2
b
D
Q1 Q2
Quantity Q
Producer’s surplus
• It measures the benefit for the producers. It is given by the
difference between the actual selling price and the price the
producer would accept to sell her product.
• Graphically, it is equal to the area above the supply curve and
below the selling price.
• Example: assume that the produce is willing to sell her good at
the price of 2€. If she receives 5€, the producer’s surplus is equal
to 3€.
Geometry of producer’s surplus
Price, P
S
P2
d
P1
c
Q1
Q2
Quantity, Q
Effects of a tariff: large country
– Assume that the country is large
– Assume that A imposes a tariff of 2€/Kg on imported wheat
– For exporters in B it will be not convenient to export in A
unless the difference between the price in the two markets is
not larger than 2$.
Effects of a tariff: large country
Price, P
Price, P
Price, P
XS
S
PT
PW
Market in B
World market
Market in A
2
t
P*T
S*
1
3
MD
D*
D
Quantity, Q QT QW
Quantity, Q
Quantity, Q
Effects of a tariff: large country
– Without tariffs, the world price of wheat (Pw) is equalized across
countries.
– With the tariff, the price of wheat increase to PT in A and decreases
to P*T (PT – t ) in B, i.e. until the difference is equal to t.
• In A: as a consequence of the change in the price, producers offer more
and the consumers demand less. Thus, import demand decreases
• In B: as a consequence of reduction in the price , producers offer less and
consumers demand more. Thus, the export supply decreases.
– After the introduction of a tariff, the volume of international trade
in wheat decreases.
– The increase in the domestic price in A is smaller than the tariff
because the tariff also implies a reduction in the export price from B
Effects of a tariff: large country
• A tariff increases the price of a good in the importing country and
decreases it in the exporting country.
• Following these changes in the prices:
– Consumers’ welfare decreases in the importing country and
increases in the exporting country
– Producers’ welfare increases in the importing country and
decreases in the exporting country
– The government of the importing country receives the tariff
revenues
• We now measure this costs and benefits
Costs and benefits for the importer country
Price, P
S
= consumer loss (a + b + c + d)
= producer benefit (a)
= government revenues (c + e)
PT
PW
a
c
b
d
e
P*T
D
S1
S2
D2 D1
QT
Quantity, Q
Cost and benefits of a tariff
•The areas of triangulars b and d mesuare the aggregate country
loss (efficiency loss) while the rectangular measure benefits due
to the change in the terms of trade
•The efficiency loss emerges because the tariff affect both
consumption and production incentives.
- Producers and consumers behave as if imports were more
expensive than they actually are
- The triangular b represents the distortion inproduction and
triangular d represents distortion in consumption
•The benefit due to change in the terms of trade is due to the fact
that the tariff reduces the price of (foreign) export.
Net effect of a tariff
If the benefit due to the change in the terms of trade is larger than the
efficiency loss, the tariff increases the welfare in the import country.
Price, P
S
= efficiency loss (b + d)
= terms of trade benefit (e)
PT
PW
P*T
d
b
e
D
Import
Quantity, Q
Effects of a tariff: small country
– Assume that the country is small
– Assume that A imposes a tariff of 2€/Kg on imported wheat
– For exporters in B it will be not convenient to export in A
unless the difference between the price in the two markets is
not larger than 2$.
Tariff: small country
S
Price, P
Price, P
2
P2
xs
1
P1
MD
D
S1 S2
D2 D1 Quantity, Q
D2 – S2
D1 – S1
Quantity, Q
Net welfare effect of a tariff
The tariff necessarily reduces welfare in the importer country
Price, P
S
= efficiency loss (b + d)
= terms of trade benefit (e)
PT
PW
b
d
D
Import
Quantity, Q
Average tariff level on manufacturing (1995)
(percentage)
Importer region
Exporter region
Industrialized countries
LDCs countries
Industrialized countries
0.8
10.9
LDCs countries
3.4
12.8
World
1.5
11.5
1. LDCs are on average more protectionist than industrialized countries
2. Industrialized countries are highly protectionist in the textile and
agricultural sectors (in which LDCs have comparative advantage)
3. Increase in the use and importance of non-tariff barriers
• Resume of previous lessons
•
•
•
International trade as production
Efficiency
Effects of tariff protection
• Free trade and protectionsm
•
•
•
Terms of trade, otpimal tariff and political economy
Who wins and who loose
Why do we need international institutions?
•
Games theory
Arguments in favor of free trade
•
•
•
•
Efficiency/Consumption
Economies of scale
Competition
Political consideration
Efficiency of free international exchange
S
Price
Pt
Inefficiency: production
Inefficiency: consumption
Pw
D
Sf St
Dt Df
Quantity
1 - Why do countries protect themselves?
- terms of trade
- optimal tariff
- political economy
2 - Who wins and who looses
Terms of trade and optimal tariff
Aggregate welfare
1
Optimal
tariff, to
Prohibitive
tariff, tp
Tariff
Optimal tariff
– The tariff that maximizes aggregate welfare
– It is always positive, but it is smaller than the prohibitive
tariff, i.e. the tariff level for which there is no import
– It is zero in the case of a small country, i.e. a country that
cannot modify the terms of trade
Terms of trade and export
– Which policy implication for the exporting sectors derives
from arguments based on the terms of trade?
– An export subsidy implies a deterioration of the terms of
trade Thus, it surely decreases aggregate welfare.
– The optimal policy for the exporting sectors is a negative
subsidy, i.e. an export tax
– As for the optimal tariff, also the export tax it is always
positive but smaller than the prohibitive tax, i.e. the level of
the tax that would eliminate any export.
Political economy and aggregate welfare
• Do policy makers maximize aggregate welfare?
• Very often, trade policies are dictated by distributions concerns:
Stolper-Samuelson theorem
• Government decision may capture individual preferences to a
very different extend depending on the issues
• It would be useful to consider models in which governments
maximize their own political success:
– median voter
– collective action
– lobby activity
• Electoral competition: political scientists say that policies are the
result of competition between parties that try to capture the
majority of votes
Political economy and income distribution
Median voter
– Assumptions of the model:
• there are two political parties that compete
• the objective of each is to elect its own representative
• each party has to decide the level of the tariff to impose
(this is assumed to be the only policy that it is possible to
implement)
• voters do have preferences concerning trade policies and
these preferences are differentiated across individuals
– Which policies will the two parties promise to
implement?
• the two parties will promise the same policy. This is the
one that impose the tariff level that it is preferred by the
median voter, i.e. the voter that lies at the median of a
distribution of individual voter preferences
Political economy and income distribution
Median voter
Preferred tariff
Political support
tA
tB
tM
Median voter
Voters
Political economy and income distribution
Collective action
– Political activity is a public good (i.e. non-excludable,
– For instance, consider a tariff that protects all firms
belonging to a specific sector from foreign competition.
The cost of the lobby activity has been paid by a subgroup of firms but the benefit goes to all of them.
Predictions
– Trade policies causing large losses that are distributed
between a large number of consumers or firms are
nonetheless implemented
– Well organized sectors (or sectors characterized by a small
number of firms) obtain protection.
Political economy and income distribution
Lobbying
• Interest group and lobbies
• Who is protected in OECD countries?
Two sectors are mostly protected in US and EU
• Agriculture
– Farmers are few and very well organized. In US,
the structure of the government strengthen their
political influence
• Textile and apparel
– Both sectors are highly protected. These sectors
are characterized by low skilled workers and a
large presence of labor unions
Protectionism may end up in a commercial war
Loosers
• consumers
• not well-organized lobby groups
• small countries
• mono-specialized producers
How to manage the ‘latent’ conflict?
- Insights from Game Theory
Game Theory
Game theory is the mathematical apparatus used to study
conflict and cooperative situations with rational and strategic
agents.
•Rational: each agent maximizes her expected utility
•Strategic: each agents knows that she has to interact with
other rational and strategic agents
Characteristic feature of game theory is strategic interaction
Non-cooperative game
It is not possible to make an ex-ante agreement because it
does not exist a mechanism that can enforce that contract.
Game in strategic form
Player A
Player B
b1
b2
a1
11 , 7
8 , 10
a2
10 , 12
6 , 12
Game in strategic form
Player A
Player B
b1
b2
a1
11 , 7
8 , 10
a2
10 , 12
6 , 13
a1 is dominant
b2 is dominant
The dilemma
The Prisoner’s dilemma is the most famous noncooperative non-zero sum game
It represent the opposite of the Walrasian scheme
The game is characterized by:
– a Nash-equilibrium which is Pareto sub-optimal
– the realization of the lowest possible aggregate
collective benefit
The prisoner’s dilemma
Player A
Player B
b1
b2
a1
-1, -1
-6, 0
a2
0, -6
-5, -5
(a1; b1) = Free trade (a2; b2) = protectionism
Dominant strategy
How is the Prisoner’s dilemma solved?
1. Tit for tat
2. Time
3. A third actor: it becomes a cooperative game
Tariffs in U.S.
Why did tariffs decline?
The large trade liberalization after WWII has been
obtained trough international negotiations
Governments reciprocally agreed on reducing tariffs
Advantages of negotiations
Copaire libro
E’ più facile ridurre i dazi nell’ambito di un accordo reciproco
piuttosto che su iniziativa unilaterale perchè:
– ciò consente di mobilitare gli esportatori come sostenitori del
libero scambio
– ciò vincola i governi nelle scelte di politica commerciale e
riduce la probabilità di guerre commerciali
Trade, distribution and growth
Distribution
• efficiency = equality ?
• sectors and factors which loose
• redistribution, welfare and short run
Growth
• weak empirical evidence
• the role of institutions
The governance of world trade: the WTO
International trade agreements: historical notes
- The coordinated reduction in tariffs
dates back to the second half pf the
30s’ (after the Smoot-Hawley Act ).
- The multilateral reduction in
tariffs after WWII has taken places
under the General Agreement on
Trade and Tariffs (GATT) signed
in 1947 in Ginevra.
- The GATT has evolved into the World Trade Organization (WTO)
- The WTO is a formal institution which includes a set of rules of
behavior concerning trade policies
GATT
Since GATT’s creation in 1947–48 there have been eight rounds of trade
negotiations. The Doha round is the ninth.
At first these focused on lowering tariffs on imported goods.
But by the 1980s, the negotiations had expanded to cover non-tariff barriers
on goods, and to the new areas such as services and intellectual property.
GATT: trade rounds
– Dal 1947 ad oggi, hanno avuto luogo otto round negoziali
– i primi cinque hanno assunto la forma di negoziati bilaterali
“paralleli” (per esempio, Germania con Francia e Italia).
– il sesto accordo commerciale multilaterale, noto come Kennedy
Round, venne completato nel 1967:
• comportava una riduzione generalizzata del 50% di tutti i dazi
vigenti da parte dei paesi industrializzati, eccezion fatta per
alcuni specifici settori industriali in cui i dazi rimasero immutati
• complessivamente, il Kennedy Round comportò una riduzione
media dei dazi del 35% circa.
GATT: trade rounds
– IlTokyo round (conclusosi nel 1979) comportò:
• la riduzione ulteriore dei dazi
• nuovi codici per controllare la proliferazione di barriere non
tariffarie, quali ad esempio le VER.
– L’ ottavo round di negoziati, l’ Uruguay Round, si è concluso nel
1994.
– L’impatto economico dell’Uruguay Round è difficile da stimare
(CGE).
• Le stime del GATT e dell’OCSE indicano un beneficio per
l’economia mondiale quantificato in 200 miliardi di dollari
all’anno, una volta che l’accordo sarà pienamente in vigore.
• Gli economisti tendono a ritenere troppo basse queste stime.
• I PVS sostengono di non aver tratto nessun beneficio.
– Con l’Uruguay round nasce il WTO
WTO: what is it?
The WTO describes itself as
• an organization for liberalizing trade.
• a forum for governments to negotiate trade agreements
• a place for them to settle trade disputes
Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 149 countries (on 11 December 2005)
Budget: 175 million Swiss francs for 2006
Secretariat staff: 635
Head: Pascal Lamy (Director-General)
Functions:
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations
WTO: structure
• Ministerial conferences
• General Council
• Dispute Settlement Body
• Trade Policy Review Body
• Councils
– Council for Trade in Goods
– Council for Trade in Services
– Council for TRIPs
WTO: structure
From GATT to WTO
– The last and largest GATT round, was the Uruguay Round
which lasted from 1986 to 1994 and led to the WTO’s creation.
– GATT was an agreement (and an un-official de facto
organization), while WTO is an international organization
– Whereas GATT had mainly dealt with trade in goods, the
WTO and its agreements now cover trade in services, and in
traded inventions, creations and designs (intellectual
property).
– Being a member of the WTO implies a set of “Rights and
obligations” and it provides a place to settle disputes.
WTO’s basic principles (1)
Non-discrimination (sectoral and geographic)
Most-favoured-nation (MFN): treating other people equally
Under the WTO agreements, countries cannot normally discriminate
between their trading partners. Grant someone a special favour (such
as a lower customs duty rate for one of their products) and you have
to do the same for all other WTO members.
Some exceptions are allowed.
• Countries can set up a free trade agreement that applies only to
goods traded within the group
• Countries can give developing countries special access to their
markets
• A country can raise barriers against products that are considered
to be traded unfairly from specific countries.
But the agreements only permit these exceptions under strict
conditions.
WTO’s basic principles (2)
Non-discrimination (sectoral and geographic)
National treatment: Treating foreigners and locals equally
Imported and locally produced goods should be treated equally — at
least after the foreign goods have entered the market.
The same should apply to foreign and domestic services, and to
foreign and local trademarks, copyrights and patents.
WTO and Regionalism
Preferential trade agreements
• Countries sign preferential trade agreements in which they
negotiate the reciprocal reduction of tariffs , but not with respect
to the rest of the world (ROW)
• The GATT-WTO “most favorite nation” (MFN) principle prohibits
this type of agreements
• Preferential trade agreements are allowed only if it creates a free
trade situation between member countries (art. XXIV, GATT).
Preferential trade agreements
Two or more WTO member countries may negotiate
different forms of free trade:
– Free trade area: it allows the free trade between member
countries, but each member can have its own trade policy
with respect to the ROW
• Example: il North American Free Trade Agreement (NAFTA)
– Custom union: it allows free trade between member
countries and requires the adoption of a common trade
policy with respect to the ROW
• Example: the European Union (EU)
– Common market : it is a custom union in which there is
free movement of factors of production between the
member countries.
Preferential trade agreements
Are preferential trade agreement beneficial?
It depends on which of the following two effect prevails:
Creation of trade flows
– It takes place when the creation of a trade agreement
induce the substitution of high cost domestic
production with low cost import from other member
countries
Diversion of trade flows
– It takes place when the creation of a trade agreement
produce the substitution of import from low cost third
countries with higher cost member countries
WTO and LDCs
Trattamento speciale e differenziato
Enabling Clause
E’ prevista maggiore flessibilità per i paesi a reddito più basso
nell’uso di stumenti di protezione della produzione nazionale
Sono previste fasi di transizione più lunghe
WTO come vincolo
• The benefits from large scale negotiations may be reduced by the
costs associated with the increasingly complicated decisional process
• If it is true that the steps forward have been slow, the negotial
rounds have nonetheless avoided steps back
• L’accordo dell’Uruguay Round sull’agricoltura ha obbligato gli
USA a posiz ag. trade reforms from the ‘86 and ‘90 farm bills, and
the EU 1992 CAP reforms.
Problems and perspectives
• The “bigness” of the WTO
• Promises and results of the WTO: commitment
• Unilateral trade policies
• Capacità decisionale e consensus