Instruments of trade policy Flashcards
1
Q
Types of tariffs?
A
- Tariff is a tax levied when a good is imported
- Specific tariff levied as fixed charge for each unit
- Ad valorem tariff levied as fraction of the value
2
Q
Supply, demand and trade in a single industry
A
- Consider how a tariff affects a single market, say wheat
- Suppose in absence of trade, the price of wheat is higher in home than in foreign
- With trade, wheat will be shipped from foreign to home until price difference eliminated
3
Q
Deriving MD and XD?
A
- Import demand curve is the difference between the quantity that home consumers demand minus the quantity that home producers supply at each price (as long as net importer)
- MD = D – S
- Intercepts the price axis at Pa and is downward sloping – as price increases, quantity of imports demanded declines
- As price of good increases, home consumers demand less, whilst home producers supply more, meaning demand for imports falls
- An export supply curve is difference between the quantity that foreign producers supply minus the quantity that foreign consumers demand at each price
- XS* = S* - D*
- Intersects price axis at Pa* and is upwards sloping – as price increases, quantity of exports supplied rises
- MD = H – S as there is excess demand which will come from exporting country
- As price of good rises, foreign producers supply more while foreign consumers demand less, so that the supply available for export rises
4
Q
XS and MD equilibrium?
A
- MS = XD
- Home demand – home supply = foreign supply – foreign demand
- Home demand + foreign demand = home supply + foreign supply
- World demand = world supply
5
Q
Effects of a tariff?
A
- Tariff acts like a transportation cost, making sellers unwilling to ship goods unless the home price exceeds the foreign price by the amount of the tariff
- Pt – t = Pt* -> in equilibrium
- A tariff makes the price rise in home market and fall in the foreign
- Tariff raises price in home, lowering the price in foreign thus volume of trade declines
- Because price in foreign market changes from Pw under free trade to Pt with tariff – home producers supply more and home consumers demand less
- So quantity of imports falls from Qw under free trade to Qt with the tariff
- Bc price in home market changes from Pw under free trade to Pt* with the tariff,
- Foreign producers supply less and foreign consumers demand more so
- Quantity of exports falls from Qw to Qt
- Quantity of home imports demanded equals the quantity of foreign exports supplied when
- Pt – Pt* = t
- Increase in the price in home can be less than the amount of the tariff
- Part of the tariff causes the foreign export price to decline – but effect sometimes very small
6
Q
Effects of tariff in a small country
A
- Will have no effect on world price because its demand is an insignificant part of world demand for the good
- Foreign price doesn’t fall, remaining at Pw
- Price in home market rise by full amount of the tariff to Pt = Pw + t
- Burden of tariff goes to home consumers
- Price relationship different
7
Q
Measuring the amount of protection?
A
- Effective rate of protection measures how much protection a trade policy provides
- Represents the change in value that firms in an industry add to the production process when trade policy changes, which depend on the change in prices the trade policy causes
- Effective rates of protection often differ from tariff rates because tariffs affect sectors other than the protected, causing indirect effects on the prices and value added for the protected sector
- For example – say automobiles sell in world markets for $8,000, made from FOP worth $6,000 – value added is $2000
- Suppose a country puts 25% tariff on imported autos so that home auto assembly firms can now charge up to $10,000
- Effective rate of protection for home auto assembly firms is the change in value added – ($4000 - $2000)/$2000 = 100%
- In this case, effective rate of protection greater than tariff
8
Q
Costs and benefits of tariffs?
A
- Tariff raises price of a good in the importing country, so hurts consumers and benefits producers there
- in addition, gov gains tariff revenue
- need to look at consumer surplus and producer surplus
9
Q
Consumer Surplus?
A
- consumer surplus measures the amount consumers gain from purchases by computing the difference in the price actually paid from the maximum price they would be willing to pay for each unit consumed
- when price increases, quantity demanded alongside consumer surplus falls
- consumer surplus equal to area under demand curve and above price
10
Q
Producer surplus?
A
- producer surplus measures amount producers gain from sales by computing the difference in the price received from the minimum price at which they would be willing to sell
- when price increases, quantity supplied alongside producer surplus increases
- producer surplus is equal to area above supply curve and below the price
11
Q
Measuring costs and benefits of tariffs?
A
- tariff raises price in importing country
- consumer surplus falls
- producer surplus rises
- gov collects tariff revenue equal to tariff rate times quantity of imports with the tariff
- Deadweight loss - tariff distorting production/consumption decisions, producing too much, consuming too little
- if terms of trade gain exceed deadweight loss, national welfare will increase at expense of foreign countries – however foreign may retaliate by imposing tariffs on other products
- tariff can be hard to remove
- tariffs can be hard to remove and large tariffs may induce producers to engage in wasteful activities to avoid paying tariffs – Ford and Subaru install (and later remove) seats in vans and pickup trucks to avoid US tariff on imports of light commercial trucks
12
Q
Trump trade war?
A
- Looking at the timeline of average tariffs imposed by the Trump administration 2018–2019:
- Some tariffs on specific goods (solar panels, washing machines, steel, and aluminium) were imposed on a large set of exporting countries.
- Some tariffs were targeted at specific countries(mostly China but also the European Union later on)and covered many different goods.
- By 2019, over 66% of Chinese exports to the United States were hit by the tariffs
13
Q
Winners and losers of the Trump trade war?
A
- Any terms-of-trade gains were negligible—foreign exporters did not lower their prices to absorb hardly any of the tariffs.
- Almost the entire brunt of the tariffs has been borne by U.S. consumers and firms buying intermediate goods
- The higher import prices due to the tariffs represented a substantial annual cost increase of $300-900 for U.S. households
- Relatively to loss though, poorer individuals were worse off
- The new tariffs imposed by the United States inevitably led to retaliation by its trading partners. Looking at the progression of those retaliatory tariffs (averaged over the set of targeted goods) over time:
- China responded with higher tariffs on par with the higher tariffs imposed by the United States.
- Major steel and aluminium exporters to the United States responded with tariffs on various U.S. imports
- All those retaliatory tariffs overwhelmingly targeted agricultural products. The Chinese tariffs covered virtually all U.S. agricultural exports
14
Q
Export subsidy?
A
- Can be specific or ad valorem
- Specific subsidy is a payment per unit exported
- Ad valorem subsidy is a payment as a proportion of the value exported
- Raises the price in the exporting country, decreasing consumer surplus and increasing producer surplus
- Gov revenue falls due to paying S Xs* for export subsidy
- Lowers price paid in importing countries Ps* = Ps – S
- Ps = Ps* + S – Ps price in exporting country, Ps* price in exporting s subsidy – Ps = Ps* + S – charges this else would just export all products
- Worsens terms of trade by lowering price of exports in world markets
- Export subsidy raises prices in exporting country, lowering them in importing country
- Damages national welfare
15
Q
The unfriendly skies - settling the longest running trade dispute?
A
- The WTO labels production subsidies to exporters that are shown to harm foreign producers as “actionable” and allows the impacted countries to impose countervailing duties (tariffs) against the subsidizing country.
- In 2004, the United States filed a case with the WTO complaining that European-owned Airbus had received favourable loan agreements for the development of their new A380 and A350 jumbo jets.
- The European Union immediately filed a counter claim that Boeing received tax rebates and favourable contracting terms from the U.S. government
- Both governments claimed that assistance received by airplane manufacturers were actionable export subsidies. The WTO eventually ruled in favour of both cases.
- In 2019, the United States imposed tariffs on European wines and specialty food items. The European Union retaliated with tariffs on U.S. whiskey, nuts, and tobacco.
- In 2021, the United States and the European Union finally agreed to end their 17-year trade dispute regarding the production subsidies received by Boeing and Airbus (the world’s two largest passenger airplane manufacturers).
