Rest Of Trade Policy

Question 1

From whose perspective do we analyse an export subsidy from?

Answer 1

Exporting country

Question 2

Are an export subsidy’s effect symmetric to tariff??

Answer 2

NO

Question 3

2 types of export subsidies

Answer 3

1. specific/per unit = payment per unit exported.

2. ad valorem = payment as % of value of exported.

Question 4

impact of export subsidy on price in exporting country and why?

Answer 4

RAISES the price of the good since domestic firms more willing to export –> excess demand domestically = price rises.

Question 5

impact of export subsidy on price in foreign countries and why?

Answer 5

LOWERS the world price of the good since domestic firms more willing to export –> excess supply in global market = price falls.

Question 6

Under what condition does a subsidy affect world price?

Answer 6

LARGE country = able to influence world supply and demand and therefore price.

Question 7

impact of export subsidy on TOT

Answer 7

WORSE TOT for exporting country since world Px falls.

Question 8

Subsidy equilibrium and why?

Answer 8

Ps - Ps* = s
No arbitrage condition: domestic producers compensated to still sell at home. Indifferent between exporting and selling domestically.

Question 9

How do Ps, Ps* and Pw compare?

Answer 9

Ps > Pw

Ps* < Pw

Question 10

Impact of export subsidy on domestic consumers

Answer 10

Internal Ps rises = demand falls and loss of CS

Question 11

Impact of export subsidy on domestic producers

Answer 11

Internal Ps rises = domestic supply rises and increase in of PS

Question 12

Impact of subsidy on government

Answer 12

Cost of subsidy = s * quantity of exports.

Remember s = Ps - Ps*

Question 13

Impact of subsidy on trade

Answer 13

Domestic producers have greater incentive to export + domestic demand falls = XS rises.

Question 14

Effect of subsidy on welfare

Answer 14

UNAMBIGUOUSLY -VE: efficiency losses + TOT loss.

Question 15

Impact of subsidy on TOT

Answer 15

Ps* = world price of exports FALLS = TOT LOSS.

Question 16

CAP was created when and by how many countries?

Answer 16

1962 by EU’s 6 founding countries

Question 17

2 things CAP does

Answer 17

1. fixes high domestic prices for agricultural products.

2. Subsidises exports to dispose of excess production.

Question 18

Direct cost of CAP to EU

Answer 18

$50BN = 42% of budget

Question 19

% of GDP agriculture is in EU

Answer 19

2%

Question 20

How do support, autarky and free trade prices compare under CAP?

Answer 20

Support price > autarky price > world price.

Question 21

Under free trade, would EU be exporter or importer of agriculture?

Answer 21

Importer: D > S at world free trade price.

Question 22

How does fair trade affect prices? How does this differ to subsidy?

Answer 22

Pushes up prices above free trade price.

But not just to government payment - voluntarily paid by consumers in developed countries.

Question 23

GE effect of fair trade

Answer 23

Fair trade producers increase supply = lowers world price . Oversupply means non fair trade producers lose out.

Question 24

2 -VE of fair-trade in LR

Answer 24

1. doesn’t help developing countries diversify

2. Supermarkets try to skim off consumer’s WTP higher prices through feel good factor.

Question 25

Import quota =

Answer 25

a restriction on the QUANTITY of a good that may be imported.

Question 26

How is a quota enforced?

Answer 26

LICENSES: given to domestic firms or foreign governments as permits to import/export.

Question 27

What is a BINDING import quota?

Answer 27

One that affects the prevailing demand and supply.

Question 28

How does a quota affect domestic price and why?

Answer 28

Restrict imports means domestic demand > domestic supply + imports = excess demand pushes up price of imports.

Question 29

What are quota rents? who do they go to?

Answer 29

Revenue from being able to sell imports at a higher price = goes to license holders (domestic firms / foreign governments).

Question 30

Impact of quota on domestic consumers

Answer 30

Higher internal price of imports = lower demand and CS

Question 31

Impact of quota on domestic producers

Answer 31

Higher internal price of imports = higher supply and PS

Question 32

Net effect of quota

Answer 32

Ambiguous - depends on where quota rents go.

Question 33

Voluntary export restraint =

Answer 33

like an import quota, but imposing voluntarily by the exporting country.

Question 34

Why is a VER in realistic not voluntary?

Answer 34

They're requested by importing country & threaten harsher punishments otherwise.

Question 35

2 gains of VER to exporting country

Answer 35

1. get to sell restricted quantity at higher price. | 2. get to give out licenses = quota rents

Question 36

example of multilateral VER

Answer 36

MFA 22 countries until 2005.

Question 37

Local content requirement =

Answer 37

a REGULATION requiring a specific fraction of the final good to be produced domestically.

Question 38

How may a local content requirement be expressed?

Answer 38

In % of value terms or physical units.

Question 39

How does LCR affect domestic producers of INPUTS

Answer 39

+VE effect: protects them in the same way as a quota.

Question 40

How does LCR affect domestic producers that must buy inputs

Answer 40

Increases costs of production from monitoring/changing production and not being able to source cheapest.

Question 41

Does a LCR mean firms have to reduce imports of inputs?

Answer 41

NO - they can keep them to same/increase as long as also use more domestic inputs.

Question 42

Do LCR have government revenue / rents>

Answer 42

NO

Question 43

Who pays for LCR restrictions?

Answer 43

The difference between the price of domestic inputs and imports is average into the price of the final good & passed onto consumers.

Question 44

Whats a related issue to LCR?

Answer 44

Rules of origin

Question 45

state 3 other trade policies

Answer 45

1. export credit subsidies 2. government procurement 3. bureaucratic regulations

Question 46

What are export credits subsidies?

Answer 46

A subsidised loan to foreign buyers of domestic exports and subsidised insurance in case foreign buyers don't pay.

Question 47

What's government procurement?

Answer 47

Govs required to buy from domestic suppliers even if foreign ones are lower price and/or better quality.

Question 48

What's bureaucratic regulations?

Answer 48

Safety, health, quality, red tape etc - forms of trade restrictions.

Question 49

Skiing example of bureaucratic regs.

Answer 49

Skis exported from Europe into Japan were subject to additional tests because the Japanese claim their snow was different. Technical barrier to trade.

Question 50

Overall welfare effect of VER o country requesting it

Answer 50

-VE. Gain PS, loss CS, rents abroad.

Question 51

How do welfare effects of VER cf quota and tariff?

Answer 51

- Typically more costly than quota | - Always more costly than tariff