International Trade - Theory and Policy, 2010a

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Import Quota (Administered by Giving Away Quota Tickets) by a Small Country Domestic Price Domestic Consumer Welfare Domestic Producer Welfare Domestic Government Revenue Domestic National Welfare Foreign Price Foreign Consumer Welfare Foreign Producer Welfare Foreign National Welfare 7.15 The Choice between Import Tariffs and Quotas LEARNING OBJECTIVES 1. Understand the pros and cons of applying tariffs versus quotas. 2. Learn how tariffs differ from quotas in their protective effects in the face of market changes. There are two basic ways to provide protection to domestic import-competing industries: a tariff or a quota. The choice between one or the other is likely to depend on several concerns. One concern is the revenue effects. A tariff has an immediate advantage for governments in that it will automatically generate tariff revenue (assuming the tariff is not prohibitive). Quotas may or may not generate revenue depending on how the quota is administered. If a quota is administered by selling quota tickets (i.e., import rights), then a quota will generate government revenue; however, if the quota is administered on a first-come, first-served basis or if quota tickets are given away, then no revenue is collected. Saylor URL: http://www.saylor.org/books Saylor.org 363
Administrative costs of tariffs and quotas are also likely to differ. Tariff collection involves product identification, collection, and processing of fees. Quota administration will also involve product identification and some method of keeping track of, or counting, the product as it enters the country in multiple ports of entry. It may also involve some method of auctioning or disbursing quota tickets. It is not obvious which of these two procedures would be less costly, although a good guess would be tariff collection. Perhaps the most important distinction between the two policies, however, is the protective effect the policy has on the import-competing industries. In one sense, quotas are more protective of the domestic industry because they limit the extent of import competition to a fixed maximum quantity. The quota provides an upper bound to the foreign competition the domestic industries will face. In contrast, tariffs simply raise the price but do not limit the degree of competition or trade volume to any particular level. In the original General Agreement on Tariffs and Trade (GATT), a preference for the application of tariffs rather than quotas was introduced as a guiding principle. One reason was the sense that tariffs allowed for more market flexibility and thus could be expected to be less protective over time. Another reason concerned transparency. With a quota in place, it is very difficult to discern the degree to which a market is protected since it can be difficult to measure how far the quota is below the free trade import level. With a tariff in place, especially an ad valorem tariff, one can use the tariff percentage as a measure of the degree of protection. Also, it was considered somewhat easier to negotiate reductions in tariff rates than quota increases during GATT rounds of trade liberalization. Again, the issue of transparency arises. Trade liberalization agreements generally target a fixed percentage for tariff reductions. For example, countries might agree to reduce average tariffs by 30 percent from their current levels. This rule would be perceived as being equal reciprocation in that each country would be liberalizing to the same degree. Hence the agreement could be judged to be fair. However, with quotas in place, it would be difficult, if not impossible, to apply such a straightforward type of fairness principle. For this reason, current World Trade Organization (WTO) member countries agreed in the Uruguay Round to phase out the use of quotas, used primarily in agriculture industries. Instead, countries will apply tariffs that are equivalent in their market effects to the original quotas. This adjustment is referred Saylor URL: http://www.saylor.org/books Saylor.org 364
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This text was adapted by The Saylor
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Chapter 1 Introductory Trade Issues
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However, rapid growth in the value
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As of 2009, 153 countries were memb
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International trade is a field in e
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imported, the U.S. government colle
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Kenya 12.7 Ghana 13.1 Generally spe
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Average tariffs can be measured as
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When the bubble bursts, the demand
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missed deadlines are commonplace in
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a well-known “bicycle theory” a
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But at the same time that many deve
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Recent opposition to trade liberali
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ought back to the United States and
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conference attended by the main all
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One of the key principles of the GA
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arriers. [1] The trade remedy laws
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ound tariff rate the country reache
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instead, they are put into place ov
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5. The WTO principle to treat an im
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subsidies. Recall that export subsi
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As a result of Uruguay Round negoti
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Agreement, or TRIPS. The TRIPS inte
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1.7 The World Trade Organization LE
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1. Consultations. The DSB first dem
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countries from choosing more destru
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P, P+ CAFTA-DR FTA PE MA OM R SG U.
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0806.10.20 $1.13/m 3 (Feb. 15-Mar.
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Tariffs vary according to time of e
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1.9 Appendix B: Bound versus Applie
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EXERCISE 1. Jeopardy Questions. As
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2.1 The Reasons for Trade LEARNING
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For example, the Ricardian model of
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2. Learn the major historical figur
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could end up with more of both good
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The primary issue in the analysis o
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Real wages (and incomes) of individ
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he begins planting seeds in the sec
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In this way, we might raise the wel
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2.3 Ricardian Model Assumptions LEA
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Utility Maximization and Demand In
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United States L C + L W = L France
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2. Suppose that the unit labor requ
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KEY TAKEAWAYS The equation aLC QC
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comparative advantage in newspaper
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−aLCaLW⎡⎣⎢hrslbhrsgal=gallb
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KEY TAKEAWAYS Labor productivity i
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2.6 A Ricardian Numerical Example L
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With full employment of labor, prod
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At this point, we can already see a
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The answer to some of these questio
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wC=PCaLC. If production occurs in t
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Thus a good way to think about how
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Similarly, by rearranging the above
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production. But where will they fin
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The focus on real wages allows us t
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Real Wages in Autarky To calculate
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exchange. Thus the real wage of che
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2.11 The Welfare Effects of Free Tr
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Free trade will raise aggregate wel
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Chapter 3 The Pure Exchange Model o
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A Simple Example of Trade Suppose t
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3.2 Determinants of the Terms of Tr
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Persuasion The art of persuasion ca
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KEY TAKEAWAY The terms of trade is
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two individuals make a voluntary ex
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3.4 Three Traders and Redistributio
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is not motivated by profit but inst
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The changes described above assume
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3.6 The Nondiscrimination Argument
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clothing worker. The same applies i
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the page, scroll down to the “Bou
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4.1 Factor Mobility Overview LEARNI
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argument that free trade can only b
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them, but only if the prices are ve
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4.3 Time and Factor Mobility LEARNI
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factor to be moved and become produ
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KEY TAKEAWAY The immobile factor m
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wine workers and cheese workers. Th
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In autarky, the quantity demanded o
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4.7 Depicting a Free Trade Equilibr
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0 the variable does not change A th
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Thus cheese workers are most likely
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Real Wage of Wheat Workers in Terms
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wages. However, these extra profits
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French production and consumption i
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5.1 Chapter Overview LEARNING OBJEC
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less-developed countries have much
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would rise, while the wage rate wou
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Ricardian model, then factor prices
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4. This is by which industries diff
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where KC and KS are the quantities
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Let aLC[labor−hrsrack] represent
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The capital-labor ratio in an indus
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that would employ all the capital i
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The Relationship between Endowments
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Suppose the exogenous variables of
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Adding these two equations vertical
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3. Write the magnification effect f
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tariffs or other government regulat
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If the price of clothing had risen,
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Table 5.6 Numerical Values for Exog
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w∧>PC∧>PS∧>r∧. The effect i
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2. Suppose the price of cheese fall
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this requires a fair amount of adva
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workers per unit of capital in the
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of quantities CS″/CC″. Since CS
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In Figure 5.8 "Free Trade Equilibri
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5.11 National Welfare Effects of Fr
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calculating changes in real income
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who has deposits in a pension plan
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export industry in order to benefit
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Income is redistributed among indiv
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Thus it is always possible to find
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affects the capital-labor ratios in
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1. Describe the pattern of factor f
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assumed to be freely and costlessly
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expansion of output in the export s
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[1] See R. W. Jones, “A Three-Fac
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product line for a representative t
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The total amount of revenue earned
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The horizontal length of Figure 5.1
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Our prime concern, however, is the
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An alternative version of the magni
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8. The magnification effect for pri
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can be used to transport tomatoes o
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esponds to the excess supply of wor
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The effect on workers is, in genera
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Factor Rewards over Time Now let’
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Figure 5.20 Dynamic Import-Capital
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In summary, the models suggest that
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[1] See J. P. Neary, “Short-Run C
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6.1 Chapter Overview LEARNING OBJEC
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6.2 Economies of Scale and Returns
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produced and if the costs of this e
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6.3 Gains from Trade with Economies
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United States aLC = 1 L = 100 Franc
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thirty racks of clothing, then each
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model best describes markets in whi
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2. Each firm produces a product tha
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2. The demand assumption in which e
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Keep in mind that this is the equil
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KEY TAKEAWAYS A market equilibrium
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1. If the product is such that an i
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varieties may increase aggregate we
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7.1 Basic Assumptions of the Partia
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2. The term used to describe a coun
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where XSUS(.) is the export supply
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This implies also that world supply
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1. The price that equalizes one cou
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The price that ultimately prevails
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Surplus", some firm would be willin
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Changes in Producer Surplus Suppose
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2. The term used to describe a meas
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Page 340 and 341: We examine the effects of optimal t
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Page 352 and 353: KEY TAKEAWAYS To administer a quot
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Page 370 and 371: In situations where market changes
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Page 384 and 385: Consumer Surplus − (G + H + I + J
Page 386 and 387: KEY TAKEAWAYS An antisubsidy law,
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An import tariff applied on an impo
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KEY TAKEAWAYS Domestic production
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a Domestic Production Subsidy", whi
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Domestic policies can affect trade
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+ the variable increases − the va
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Domestic consumption taxes are ofte
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Figure 8.3 Inducing Exports with a
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8.7 Consumption Tax Effects in a Sm
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Since the cost to consumers exceeds
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When a specific consumption tax “
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time of the founding of the nation,
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Chapter 9 Trade Policies with Marke
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Market imperfections or market dist
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firm’s welfare) by restricting su
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are neatly kept and homes are well
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Policy-Imposed Distortions Another
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In this section, we will provide an
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Welfare-Improving Policies in a Sec
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Summary of the Theory of the Second
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9.4 Unemployment and Trade Policy L
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Suppose that international market c
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9.2 "Welfare Effects of an Import T
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Begin with the same surge of import
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eliminate the same unemployment imp
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A the variable change is ambiguous
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their own production efficiency imp
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Suppose that the infant industry ar
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This means that in the second perio
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The Economic Argument against Infan
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world efficiency standards, protect
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9.6 The Case of a Foreign Monopoly
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Assuming the monopolist maximizes p
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Import tariff effects on the import
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This shows that although a tariff c
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2. Recognize that a trade policy ca
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consider a large importing country
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the subsidy is set too high, the lo
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9.8 Public Goods and National Secur
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nonexcludable because once it is th
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efficiency loss. Nevertheless, the
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5. The term describing a ìgoodî l
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the environment. On the other hand,
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Pollution Effect National Welfare
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Govt. Revenue Pollution Effect + e
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A Source of Controversy For many en
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This statement points out that many
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noneconomists, providing permits th
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[4] World Trade Organization, “Tr
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product categories. This type of tr
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The key question of interest concer
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Figure 9.10 "Harmful Trade Diversio
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Free trade area effects on Country
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We assume that A has a specific tar
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The simple way to do that is to ima
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Chapter 10 Political Economy and In
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do indeed seek to maximize national
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a representative democracy, governm
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3. This type of lobbying does not i
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much larger than the number of firm
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We can now ask whether a household
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Large groups are much less effectiv
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Because the per-producer benefit of
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clearly he or she would vote for th
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10.7 The Lobbying Problem in a Demo
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Chapter 11 Evaluating the Controver
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the results from any one model. Ins
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increase in national welfare. This
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4. The enhancement of this is what
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of the real world. The real world c
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Another way to deflect the concern
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For example, an optimal tariff or o
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Stuart Mill in hisPrinciples of Pol
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11.5 The Economic Case against Sele
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to eliminate some of the inefficien
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effects, it would then need to meas
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to avoid the use of any such policy
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Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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