International Trade - Theory and Policy, 2010a

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Figure 9.10 "Harmful Trade Diversion" depicts the case in which trade diversion is harmful to a country that joins an FTA. The graph shows the supply and demand curves for Country A. PB and PC represent the free trade supply prices of the good from Countries B and C, respectively. Note that Country C is assumed to be capable of supplying the product at a lower price than Country B. (Note that in order for this to be possible, Country B must have tariffs or other trade restrictions on imports from Country C, or else all of B’s market would be supplied by C.) Figure 9.10 Harmful Trade Diversion We assume that A has a specific tariff tB = tC = t∗ set on imports from both Countries B and C. The tariff raises the domestic supply prices to PTB and PTC, respectively. The size of the tariff is denoted by the green dotted lines in Figure 9.10 "Harmful Trade Diversion", which show that t∗ = PTB − PB = PTC − PC. Since, with the tariff, the product is cheaper from Country C, Country A will import the product from Country C and will not trade initially with Country B. Imports are given by the red line, or by the distance D 1 − S 1 . Initial tariff revenue is given by the area (c + e), the tariff rate multiplied by the quantity imported. Next, assume Countries A and B form an FTA and A eliminates the tariff on imports from Country B. Now, tB = 0, but tC remains at t∗. The domestic prices on goods from Countries B and C are now PB and PTC, respectively. Since PB < PTC, Country A would import all the product from Country B after the FTA and would import nothing from Country C. At the lower domestic price, PB, imports would Saylor URL: http://www.saylor.org/books Saylor.org 515
ise to D 2 − S 2 , denoted by the blue line. Also, since the nondistorted (i.e., free trade) price in Country C is less than the price in Country B, trade is said to be diverted from a more-efficient supplier to a lessefficient supplier. The welfare effects are summarized in Table 9.16 "Welfare Effects of Free Trade Area Formation: Trade Diversion Cases". Table 9.16 Welfare Effects of Free Trade Area Formation: Trade Diversion Cases Country A Consumer Surplus + (a + b + c + d) Producer Surplus − a Govt. Revenue − (c + e) National Welfare + (b + d) − e Free trade area effects on Country A’s consumers. Consumers of the product in the importing country benefit from the free trade area. The reduction in the domestic price of both the imported goods and the domestic substitutes raises consumer surplus in the market. Refer to Table 9.16 "Welfare Effects of Free Trade Area Formation: Trade Diversion Cases" and Figure 9.10 "Harmful Trade Diversion" to see how the magnitude of the change in consumer surplus is represented. Free trade area effects on Country A’s producers. Producers in the importing country suffer losses as a result of the free trade area. The decrease in the price of their product on the domestic market reduces producer surplus in the industry. The price decrease also induces a decrease in the output of existing firms (and perhaps some firms will shut down), a decrease in employment, and a decrease in profit, payments, or both to fixed costs. Refer to Table 9.16 "Welfare Effects of Free Trade Area Formation: Trade Diversion Cases" and Figure 9.10 "Harmful Trade Diversion" to see how the magnitude of the change in producer surplus is represented. Free trade area effects on Country A’s government. The government loses all the tariff revenue that had been collected on imports of the product. This reduces government revenue, which may in turn reduce government spending or transfers or raise government debt. Who loses depends on how the adjustment is made. Refer to Table 9.16 "Welfare Effects of Free Trade Area Formation: Trade Diversion Cases" and Figure 9.10 "Harmful Trade Diversion" to see how the magnitude of the tariff revenue is represented. Saylor URL: http://www.saylor.org/books Saylor.org 516
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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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6.2 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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7.8 Import Tariffs: Small Country W
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3. The tariff causes a redistributi
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1. Where on the graph is the level
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We examine the effects of optimal t
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3. Given player one’s optimal pol
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The goal of a cooperative equilibri
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1. Use the information provided in
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7.10 Import Quotas: Large Country P
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An import quota will reduce the qua
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KEY TAKEAWAYS To administer a quot
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demand is equal to the quota level.
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market decreases producer surplus i
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Foreign National Welfare 2. Suppose
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This implies that, in the case of a
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Quota Rents National Welfare + C
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Import Quota (Administered by Givin
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to as tariffication. In this way, f
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Next, consider the effects in this
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In situations where market changes
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where S is the specific export subs
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7.17 Export Subsidies: Large Countr
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the subsidy payments are made, then
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An export subsidy of any size will
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2. Identify the effects of a counte
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Table 7.12 "Welfare Effects of the
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Consumer Surplus − (G + H + I + J
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KEY TAKEAWAYS An antisubsidy law,
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9. What is the change in government
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Notice that a unique set of prices
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in the import country and in the ca
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Figure 7.36 Welfare Effects of a VE
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the quota rents will benefit, but p
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A the variable change is ambiguous
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Mexico, and all wheat sold in Mexic
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7.23 Export Taxes: Large Country We
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Because there are both positive and
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− the variable decreases 0 the va
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If a domestic consumption tax is im
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Equivalency between Domestic and Tr
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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
Page 466 and 467: their own production efficiency imp
Page 468 and 469: Suppose that the infant industry ar
Page 470 and 471: This means that in the second perio
Page 472 and 473: The Economic Argument against Infan
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Page 476 and 477: 9.6 The Case of a Foreign Monopoly
Page 478 and 479: Assuming the monopolist maximizes p
Page 480 and 481: Import tariff effects on the import
Page 482 and 483: This shows that although a tariff c
Page 484 and 485: 2. Recognize that a trade policy ca
Page 486 and 487: consider a large importing country
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Page 490 and 491: 9.8 Public Goods and National Secur
Page 492 and 493: nonexcludable because once it is th
Page 494 and 495: efficiency loss. Nevertheless, the
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Page 498 and 499: the environment. On the other hand,
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Page 506 and 507: This statement points out that many
Page 508 and 509: noneconomists, providing permits th
Page 510 and 511: [4] World Trade Organization, “Tr
Page 512 and 513: product categories. This type of tr
Page 514 and 515: The key question of interest concer
Page 518 and 519: Free trade area effects on Country
Page 520 and 521: We assume that A has a specific tar
Page 522 and 523: The simple way to do that is to ima
Page 524 and 525: Chapter 10 Political Economy and In
Page 526 and 527: do indeed seek to maximize national
Page 528 and 529: a representative democracy, governm
Page 530 and 531: 3. This type of lobbying does not i
Page 532 and 533: much larger than the number of firm
Page 534 and 535: We can now ask whether a household
Page 536 and 537: Large groups are much less effectiv
Page 538 and 539: Because the per-producer benefit of
Page 540 and 541: clearly he or she would vote for th
Page 542 and 543: 10.7 The Lobbying Problem in a Demo
Page 544 and 545: Chapter 11 Evaluating the Controver
Page 546 and 547: the results from any one model. Ins
Page 548 and 549: increase in national welfare. This
Page 550 and 551: 4. The enhancement of this is what
Page 552 and 553: of the real world. The real world c
Page 554 and 555: Another way to deflect the concern
Page 556 and 557: For example, an optimal tariff or o
Page 558 and 559: Stuart Mill in hisPrinciples of Pol
Page 560 and 561: 11.5 The Economic Case against Sele
Page 562 and 563: to eliminate some of the inefficien
Page 564 and 565: 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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