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1、Chapter 8 The Instruments of Trade Policy1IntroductionBasic Tariff AnalysisCosts and Benefits of a TariffOther Instruments of Trade PolicyThe Effects of Trade Policy:A SummarySummaryChapter Organization2Appendix I:Tariff Analysis in General EquilibriumAppendix II:Tariffs and Import Quotas in the Pre
2、sence of Monopoly3IntroductionThis chapter is focused on the following questions:What are the effects of various trade policy instruments?Who will benefit,and who will lose?What are the costs and benefits of protection?Will the benefits outweigh the costs?What should a nations trade policy be?4Class
3、ification of Commercial Policy Instruments Commercial Policy InstrumentsTrade Contraction Trade Expansion Tariff Export taxImport quotaVoluntary Export Restraint(VER)Import subsidyExport subsidyVoluntary Import Expansion(VIE)Price Quantity Price Quantity 5Basic Tariff AnalysisTariffs can be classifi
4、ed as:Specific tariffsTaxes that are levied as a fixed charge for each unit of goods importedExample:A specific tariff of$10 on each imported bicycle with an international price of$100 means that customs officials collect the fixed sum of$10.Ad valorem tariffsTaxes that are levied as a fraction of t
5、he value of the imported goodsExample:A 20%ad valorem tariff on bicycles generates a$20 payment on each$100 imported bicycle.6A compound duty(tariff)is a combination of an ad valorem and a specific tariff.Modern governments usually prefer to protect domestic industries through a variety of nontariff
6、 barriers,such as:Import quotasLimit the quantity of importsExport restraintsLimit the quantity of exportsBasic Tariff Analysis7Supply,Demand,and Trade in a Single IndustrySuppose that there are two countries(Home and Foreign).Both countries consume and produce wheat,which can be costless transporte
7、d between the countries.In each country,wheat is a competitive industry.Suppose that in the absence of trade the price of wheat at Home exceeds the corresponding price at Foreign.This implies that shippers begin to move wheat from Foreign to Home.The export of wheat raises its price in Foreign and l
8、owers its price in Home until the initial difference in prices has been eliminated.Basic Tariff Analysis8To determine the world price(Pw)and the quantity trade(Qw),two curves are defined:Home import demand curveShows the maximum quantity of imports the Home country would like to consume at each pric
9、e of the imported good.That is,the excess of what Home consumers demand over what Home producers supply:MD=D(P)S(P)Foreign export supply curveShows the maximum quantity of exports Foreign would like to provide the rest of the world at each price.That is,the excess of what Foreign producers supply ov
10、er what foreign consumers demand:XS=S*(P*)D*(P*)Basic Tariff Analysis9Quantity,QPrice,PPrice,PQuantity,QMDDSAPAP2P1S2D2D2 S22S1D1D1 S11Figure 8-1:Deriving Homes Import Demand CurveBasic Tariff Analysis10Properties of the import demand curve:It intersects the vertical axis at the closed economy price
11、 of the importing country.It is downward sloping.It is flatter than the domestic demand curve in the importing country.Basic Tariff Analysis11P2P*AD*S*P1XSPrice,PPrice,PQuantity,QQuantity,QS*2 D*2S*2D*2Figure 8-2:Deriving Foreigns Export Supply CurveBasic Tariff AnalysisD*1S*1S*1 D*112Properties of
12、the export supply curve:It intersects the vertical axis at the closed economy price of the exporting country.It is upward sloping.It is flatter that the domestic supply curve in the exporting country.Basic Tariff Analysis13Figure 8-3:World EquilibriumXSPrice,PQuantity,QMDPWQW1Basic Tariff Analysis14
13、Useful definitions:The terms of trade is the relative price of the exportable good expressed in units of the importable good.A small country is a country that cannot affect its terms of trade no matter how much it trades with the rest of the world.The analytical framework will be based on either of
14、the following:Two large countries trading with each otherA small country trading with the rest of the worldBasic Tariff Analysis15Effects of a TariffAssume that two large countries trade with each other.Suppose Home imposes a tax of$2 on every bushel of wheat imported.Then shippers will be unwilling
15、 to move the wheat unless the price difference between the two markets is at least$2.Figure 8-4 illustrates the effects of a specific tariff of$t per unit of wheat.Basic Tariff Analysis16XSPTMDD*S*DSPW2QT1QWBasic Tariff AnalysisFigure 8-4:Effects of a TariffP*T3tPrice,PQuantity,QPrice,PQuantity,QPri
16、ce,PQuantity,QHome marketWorld marketForeign marketHome marketWorld marketForeign market17In the absence of tariff,the world price of wheat(Pw)would be equalized in both countries.With the tariff in place,the price of wheat rises to PT at Home and falls to P*T(=PT t)at Foreign until the price differ
17、ence is$t.In Home:producers supply more and consumers demand less due to the higher price,so that fewer imports are demanded.In Foreign:producers supply less and consumers demand more due to the lower price,so that fewer exports are supplied.Thus,the volume of wheat traded declines due to the imposi
18、tion of the tariff.Basic Tariff Analysis18The increase in the domestic Home price is less than the tariff,because part of the tariff is reflected in a decline in Foreign s export price.If Home is a small country and imposes a tariff,the foreign export prices are unaffected and the domestic price at
19、Home(the importing country)rises by the full amount of the tariff.Basic Tariff Analysis19Figure 8-5:A Tariff in a Small CountrySPrice,PQuantity,QDPW+tPWImports after tariffS1D1Imports before tariffD2S2Basic Tariff Analysis20Measuring the Amount of ProtectionIn analyzing trade policy in practice,it i
20、s important to know how much protection a trade policy actually provides.One can express the amount of protection as a percentage of the price that would prevail under free trade.Two problems arise from this method of measurement:In the large country case,the tariff will lower the foreign export pri
21、ce.Tariffs may have different effects on different stages of production of a good.Basic Tariff Analysis21Effective rate of protection One must consider both the effects of tariffs on the final price of a good,and the effects of tariffs on the costs of inputs used in production.The actual protection
22、provided by a tariff will not equal the tariff rate if imported intermediate goods are used in the production of the protected good.Example:A European airplane that sells for$50 million has cost$60 million to produce.Half of the purchase price of the aircraft represents the cost of components purcha
23、sed from other countries.A subsidy of$10 million from the European government cuts the cost of the value added to purchasers of the airplane from$30 to$20 million.Thus,the effective rate of protection is(30-20)/20=50%.Basic Tariff Analysis22Costs and Benefits of a TariffA tariff raises the price of
24、a good in the importing country and lowers it in the exporting country.As a result of these price changes:Consumers lose in the importing country and gain in the exporting countryProducers gain in the importing country and lose in the exporting countryGovernment imposing the tariff gains revenueTo m
25、easure and compare these costs and benefits,we need to define consumer and producer surplus.23Consumer and Producer SurplusConsumer surplusIt measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay.It c
26、an be derived from the market demand curve.Graphically,it is equal to the area under the demand curve and above the price.Example:Suppose a person is willing to pay$20 per packet of pills,but the price is only$5.Then,the consumer surplus gained by the purchase of a packet of pills is$15.Costs and Be
27、nefits of a Tariff24Figure 8-6:Deriving Consumer Surplus from the Demand CurveCosts and Benefits of a Tariff8$129$1010$911DPrice,PQuantity,Q25Figure 8-7:Geometry of Consumer SurplusCosts and Benefits of a TariffabP1P2DPrice,PQuantity,QQ2Q126Producer surplusIt measures the amount a producer gains fro
28、m a sale by the difference between the price he actually receives and the price at which he would have been willing to sell.It can be derived from the market supply curve.Graphically,it is equal to the area above the supply curve and below the price.Example:A producer willing to sell a good for$2 bu
29、t receiving a price of$5 gains a producer surplus of$3.Costs and Benefits of a Tariff27Figure 8-8:Geometry of Producer SurplusCosts and Benefits of a TariffdcP2P1SPrice,PQuantity,QQ2Q128Costs and Benefits of a TariffMeasuring the Cost and BenefitsIs it possible to add consumer and producer surplus?W
30、e can(algebraically)add consumer and producer surplus because any change in price affects each individual in two ways:As a consumerAs a workerWe assume that at the margin a dollars worth of gain or loss to each group is of the same social worth.29Figure 8-9:Costs and Benefits of a Tariff for the Imp
31、orting CountryCosts and Benefits of a TariffPTPWP*TbcdeDa=consumer loss(a+b+c+d)=producer gain(a)=government revenue gain(c+e)QTD2S2SS1D1Price,PQuantity,Q30The areas of the two triangles b and d measure the loss to the nation as a whole(efficiency loss)and the area of the rectangle e measures an off
32、setting gain(terms of trade gain).The efficiency loss arises because a tariff distorts incentives to consume and produce.Producers and consumers act as if imports were more expensive than they actually are.Triangle b is the production distortion loss and triangle d is the consumption distortion loss
33、.The terms of trade gain arises because a tariff lowers foreign export prices.Costs and Benefits of a Tariff31If the terms of trade gain is greater than the efficiency loss,the tariff increases welfare for the importing country.In the case of a small country,the tariff reduces welfare for the import
34、ing country.Costs and Benefits of a Tariff32Figure 8-10:Net Welfare Effects of a TariffPTPWP*TbdeD=efficiency loss(b+d)=terms of trade gain(e)ImportsSPrice,PQuantity,QCosts and Benefits of a Tariff33Export Subsidies:TheoryExport subsidyA payment by the government to a firm or individual that ships a
35、 good abroadWhen the government offers an export subsidy,shippers will export the good up to the point where the domestic price exceeds the foreign price by the amount of the subsidy.It can be either specific or ad valorem.Other Instruments of Trade Policy34baFigure 8-11:Effects of an Export Subsidy
36、Other Instruments of Trade PolicyPSPWP*SPrice,PQuantity,QExportsgfeSubsidydc=producer gain (a+b+c)=consumer loss(a+b)=cost of government subsidy (b+c+d+e+f+g)DS35An export subsidy raises prices in the exporting country while lowering them in the importing country.In addition,and in contrast to a tar
37、iff,the export subsidy worsens the terms of trade.An export subsidy unambiguously leads to costs that exceed its benefits.Other Instruments of Trade Policy36Figure 8-12:Europes Common Agricultural ProgramOther Instruments of Trade PolicyPrice,PQuantity,QSDEU price without importsWorld price=cost of
38、government subsidySupport priceExports37Import Quotas:TheoryAn import quota is a direct restriction on the quantity of a good that is imported.Example:The United States has a quota on imports of foreign cheese.The restriction is usually enforced by issuing licenses to some group of individuals or fi
39、rms.Example:The only firms allowed to import cheese are certain trading companies.In some cases(e.g.sugar and apparel),the right to sell in the United States is given directly to the governments of exporting countries.Other Instruments of Trade Policy38An import quota always raises the domestic pric
40、e of the imported good.License holders are able to buy imports and resell them at a higher price in the domestic market.The profits received by the holders of import licenses are known as quota rents.Other Instruments of Trade Policy39Welfare analysis of import quotas versus of that of tariffs The d
41、ifference between a quota and a tariff is that with a quota the government receives no revenue.In assessing the costs and benefits of an import quota,it is crucial to determine who gets the rents.When the rights to sell in the domestic market are assigned to governments of exporting countries,the tr
42、ansfer of rents abroad makes the costs of a quota substantially higher than the equivalent tariff.Other Instruments of Trade Policy40Price in U.S.Market 466World Price 280bcdDemanda8.456.32Supply5.149.26Price,$/tonQuantity of sugar,million tonsFigure 8-13:Effects of the U.S.Import Quota on SugarOthe
43、r Instruments of Trade PolicyImport quota:2.13 million tons=consumer loss (a+b+c+d)=producer gain(a)=quota rents(c)41Voluntary Export RestraintsA voluntary export restraint(VER)is an export quota administered by the exporting country.It is also known as a voluntary restraint agreement(VRA).VERs are
44、imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions.Other Instruments of Trade Policy42A VER is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country.A VER i
45、s always more costly to the importing country than a tariff that limits imports by the same amount.The tariff equivalent revenue becomes rents earned by foreigners under the VER.Example:About 2/3 of the cost to consumers of the three major U.S.voluntary restraints in textiles and apparel,steel,and a
46、utomobiles is accounted for by the rents earned by foreigners.A VER produces a loss for the importing country.Other Instruments of Trade Policy43Local Content RequirementsA local content requirement is a regulation that requires that some specified fraction of a final good be produced domestically.T
47、his fraction can be specified in physical units or in value terms.Local content laws have been widely used by developing countries trying to shift their manufacturing base from assembly back into intermediate goods.Other Instruments of Trade Policy44Local content laws do not produce either governmen
48、t revenue or quota rents.Instead,the difference between the prices of imports and domestic goods gets averaged in the final price and is passed on to consumers.Example:Suppose that auto assembly firms are required to use 50%domestic parts.The cost of imported parts is$6000 and the cost of the same p
49、arts domestically is$10,000.Then the average cost of parts is$8000(0.5 x$6000+0.5 x$10,000).Firms are allowed to satisfy their local content requirement by exporting instead of using parts domestically.Other Instruments of Trade Policy45Other Trade Policy Instruments Export credit subsidiesA form of
50、 a subsidized loan to the buyer of exports.They have the same effect as regular export subsidies.National procurementPurchases by the government(or public firms)can be directed towards domestic goods,even if they are more expensive than imports.Red-tape barriersSometimes governments place substantia