Trade Policies.ppt

TheEconomicsofProtectionism Traditional ModernTradePolicies Introduction WelfareanalysisoftradeTariffsTermsoftradeeffect optimumtariffsOthertradepolicyinstrumentsTradepolicyindevelopingcountriesModerntradepoliciesTariffstoextractforeignmonopolyprofitStrategictradepolicy Welfareanalysisoftrade Freetradewillgenerallybethebestsolutionformaximisingsocialwelfare However therewillalwaysbesomewinners somelosers Thus tradepolicymaysometimesbejustifiedondistributionalgrounds particularlyinrelationtocertainsocialorinterestgroups Tradepolicymayalsobeusedtotrytostabilisethetradecycle TermsofTradeEffects TermsofTradeEffects OptimumTariffs Nationalwelfare Tariffrate t topt Prohibitiverate OtherTradePolicyInstruments Quotas Voluntaryexportrestraint VER Exportsubsidies Discriminatingpublicprocurement TechnicalCounter tradetransactions VoluntaryExportRestraints1 smallcountrycase Price P1 P0 h c b d QuantityofImports Quota VER QFT ForeignSupply DM VoluntaryExportRestraints1 smallcountrycase Price P1 P0 h b d QuantityofImports Quota VER QFT ForeignSupply DM c VoluntaryExportRestraints1 smallcountrycase Price P1 P0 h QuantityofImports Quota VER QFT ForeignSupply DM c b d VoluntaryExportRestraints1 smallcountrycase Price P1 P0 h QuantityofImports Quota VER QFT ForeignSupply DM c b d VoluntaryExportRestraints2 largecountrycase Price P1 P0 h c b d QuantityofImports Quota VER QFT ForeignSupply DM e f g P2 VoluntaryExportRestraints2 largecountrycase Price P1 P0 h b d QuantityofImports Quota VER QFT ForeignSupply DM e g P2 c f VoluntaryExportRestraints2 largecountrycase Price P1 P0 h QuantityofImports Quota VER QFT ForeignSupply DM e g P2 c f b d VoluntaryExportRestraints2 largecountrycase Price P1 P0 h QuantityofImports Quota VER QFT ForeignSupply DM e g P2 c f b d TradePolicyinDevelopingCountries 4alternativeapproaches Accept exploitcomparativeadvantageinland naturalresourcesAttempttoenhancegainsfromexportingprimaryproductsImport substitutingindustrialisationDevelopnewexport ledindustries ExportPrimaryProducts TraditionalexportsofdevelopingcountriesProblemoffallingprimaryproductpricesEngelslaw asincomesrisedemandshiftstowardsluxuriesSyntheticsubstitutesButGrowingscarcityofnaturalresourcesRelativelyslowproductivitygrowthinprimarysectorLongtermtrendisfallingprices RaiseWorldPricesofPrimaryProducts ImplementanexporttaxOnlypossibleifcountry sexportsarealarge ofworldoutputJoinaninternationalcartele g OPECforoilRestrictoutput actasamonopolist RaiseWorldPricesofPrimaryProducts ProblemswithcartelpowerSaggingdemandNewcompetingsupplyDecliningmarketshareCheatingOPEChashadsomesuccess butwoulditworkforotherprimaryproducts Import SubstitutingIndustrialisation ISI Tax restrictimportstoprotectnewindustriesservingthedomesticmarketSubsidiseproductionofnewindustriesservingthedomesticmarketIfinfantindustriesarenurturedsuccessfully theycaneventuallycompeteatworldprices ISI Infantindustryargument Import SubstitutingIndustrialisation ISI ISI otherarguments Governmentcoulduserevenuesfromtaxesonimports exportsforeconomicdevelopmentprojectsReplacingimportsbringsbettertermsoftradeeffectsthanexpansionofexportindustriesCheap convenientmarketinformationonwhichindustriestotarget ISI Evaluation OldadvancedindustrialisedcountrieswereprotectionistinearlyyearsEstimatesofstaticeffectsoneconomicwelfarearenotgoodWhencountrieschangefromISItochampioningexports theydobetterGrowthratesarehigherforcountriesthatemphasiseexports ExportManufacturestoIndustrialCountries ExportManufacturestoIndustrialCountries Less skilled labour intensivemanufacturedgoodsStandardisedmanufacturinglinesLow costassemblyofhigh techproductsNewcomerscanoftengainmarketaccessfortheirproducts ModernTradePolicies TariffstoextractmonopolyprofitsStrategictradepolicy ATarifftoExtractForeignMonopolyProfit OriginatedbyBrander Spencer1981Foreignsupplierisonlyproducer Withfreetrade firmsetsMC MR gainsmonopolyprofit Impositionoftariff t raisesMC sooutputisreduced price profitisreduced ATarifftoExtractForeignMonopolyProfit q1 q2 c1 p1 0 MR D MC AC R F Quantity Price cost ATarifftoExtractForeignMonopolyProfit q1 q2 c1 c2 p1 p2 0 MR D MC AC MC t AC t S R G F H Quantity Price cost ATarifftoExtractForeignMonopolyProfit Homeconsumersloseconsumersurplus Governmentgaintariffrevenue Aslongasthegainintariffrevenue thelossinconsumersurplus thehomecountryhasenhancedwelfareattheexpenseoftheforeignproducer Butworldwelfarefalls Foreignproducerlosesmorethanhomecountrygains N B Possibleretaliation ATarifftoExtractForeignMonopolyProfit q1 q2 c1 c2 p1 p2 0 MR D MC AC MC t AC t S R F H Quantity Price cost G StrategicTradePolicy IntroducedbyBrander Spencerinearly1980smainlyforoligopoly especiallyhigh techproducts Countrymayintroduceexportsubsidiesortariffstopersuadefirmsofothercountriestoreducetheirproduction Example 2companieshaveexpertisetoproducenewaircraft butmarketwillonlyallow1toproduceataprofit ExantePay offmatrix Pay offMatrixafterAirbusSubsidy Pay offMatrixwithSubsidytobothfirms CritiqueofStrategicTradePolicy Strategicpolicywasdevelopedforoligopolistic high techmarketsHigh techindustriesgenerateimportantbenefitsforaneconomy Dangeroustoleavetheirfatetomarketforces especiallywhenothergovernmentsintervene Theaimistoshiftmarketsharestotransferprofitsfromforeignfirmstodomesticones CritiqueofStrategicTradePolicy BUTItsimportanceislimitedtomarketswithfewproducersInformationrequirementsareimmensePotentialgainsmayleakabroadMayupsetgeneralequilibriumAlwayswinners losers soproblemsoflobbyingbyinterestgroupsDange