International Trade - Theory and Policy, 2010a

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Consumer Surplus − (G + H + I + J + K) + (a + b) Producer Surplus + (G + H) − (a + b + c + d + e) Govt. Revenue + (C + D + E + J) + (b + c + e + f + h + l) National Welfare + (C + D + E) − (I + K) + (b + f + h + l) − (d) World Welfare + (b + f + h + l) − (I + K) = b + f + I + K Note that the effects on consumers and producers in both countries are equal and opposite to the effects of the export subsidy. Thus producers in the import-competing industry gain in surplus from the CVD exactly what they had lost as a result of the foreign export subsidy. Consumers in the import industry lose from the CVD, producers in the exporting country lose, and consumers in the exporting country gain. The importing government now collects tariff revenue from the CVD, which benefits someone in the importing country. The exporting government, however, experiences a reduction in its subsidy expenditures. This occurs because the CVD reduces trade and thus reduces the number of units exported. As a result, the government (i.e., the taxpayers) in the exporting country benefits from the CVD. The national welfare effects in both countries are ambiguous in general. In the importing country, a terms of trade gain may outweigh two deadweight losses and cause national welfare to rise even further. Interestingly, the export subsidy and the CVD may each raise welfare for the importing country. In the export country, the net national welfare effect may be positive or negative. The world welfare effects are found by summing the national welfare effects on both countries. The expression is simplified first by noting that area (C + D + E) = area (d) and second by noting that area (h) = twice area I, or (2I), and area (l) = area (2K). The final expression shows that world welfare will rise as a result of the CVD. Welfare Effects of the Combined Policies (Export Subsidy plus CVD) Next, let’s consider the welfare effects of the export subsidy and the CVD combined. In this case, we compare the welfare status of each country after both policies are in place relative to when neither policy is imposed. The effects can be calculated either by summing the individual welfare effects of each of the two stages depicted above or by noting that prices have not changed from the initial presubsidy state to the final post-CVD state but that the governments do have expenditures and receipts, respectively. The welfare effects are summarized in Table 7.14 "Welfare Effects of an Export Subsidy plus a CVD". Table 7.14 Welfare Effects of an Export Subsidy plus a CVD Saylor URL: http://www.saylor.org/books Saylor.org 383
Importing Country Exporting Country Consumer Surplus 0 0 Producer Surplus 0 0 Govt. Revenue + (C + D + E + J) − (d + i + j + k) National Welfare + (C + D + E + J) − (d + i + j + k) World Welfare 0 Since the prices in each country after the CVD are the same as prices before the export subsidy, there is ultimately no change in producer or consumer surplus in either country. Everyone participating in the market is left as well off as they were at the start. However, since the exporting country maintains the export subsidy and the import country maintains the CVD, there are government revenue effects. In the exporting country, the government continues to make expenditures for the export subsidy. This represents a cost to the country’s taxpayers that does not even generate the intended benefit for the export industry. In the importing country, the government collects tariff revenue as a result of the CVD. This generates benefits to the recipients of the resulting additional government spending. The net national welfare effect in each country is the same as the government effects. This means that the importing country benefits from the export subsidy plus CVD, while the exporting country loses from the combined policies. The world welfare effect of the combined policies is neutral. This means that the exporting country loses exactly the same amount as the importing country gains. The ultimate effect of the export subsidy plus the CVD is that the exporting country’s government transfers money to the importing country’s government with consumers and producers left unaffected. In practice, exporting country producers receive an export subsidy payment from their government when their product leaves the port bound for the importing country. When the product arrives, the importing country’s government collects a tariff (or a CVD) exactly equal to the subsidy payment. Thus the export firms turn over the extra monies they had just received from their own government to the government of the importing country. These effects described here hold only for markets that are perfectly competitive. If the markets are oligopolistic, or contain market imperfections or other distortions, then the effects of the export subsidy and CVD may differ. Saylor URL: http://www.saylor.org/books Saylor.org 384
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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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the same price for their product re
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to purchase the Mexican wheat at $1
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The effect on the foreign price is
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The quantity of imports and exports
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the sum of the gains exceeds the su
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indicate the effect of each policy
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7.6 The Optimal Tariff LEARNING OBJ
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zero. Somewhere between a zero tari
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3. The tariff rate that corresponds
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KEY TAKEAWAYS An import tariff wil
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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 362 and 363: Quota Rents National Welfare + C
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Page 370 and 371: In situations where market changes
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Page 386 and 387: KEY TAKEAWAYS An antisubsidy law,
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Page 410 and 411: If a domestic consumption tax is im
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Page 416 and 417: KEY TAKEAWAYS Domestic production
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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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