Welcome to Econ 414 International Economics

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Welcome to Econ 414 International Economics

• Study Guide
• Week Ten
• Ending Friday November 2

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Assignment 4 (10 points)Key

• The statement American car producers will prefer
  a new tariff on imported cars to an equivalent
  amount of quota if the U.S economy is predicted
  to be in recession in the near future. is true.
• See the next two slides

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Suppose initially quota has the same effect as
tariff

• Tariff 2 per unit
• Quota 30
• Gain in producer surplus a

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a
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Now domestic demand grows to D
Under quota, at p 12 there is a surplus ? P? to
11, domestic production goes down to 25 and
producer surplus goes down to c
Under tariff, P is still 12, imports go down to
to 10 and the gain in producer surplus remains
the same ( a b c)
Quota is more restrictive
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b
11
c
40
55
25
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Here is a couple of questions the answers to
which is not in your book

• What is Fair Trade?
• Is it a distortion to free trade?

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• Fair trade is an organized social movement that
  promotes the payment of a fair price as well as
  social and environmental standards in areas
  related to the production of a variety of goods.
• The movement focuses on exports from developing
  countries to developed countries, most notably
  handicrafts, coffee, cocoa, tea, bananas, honey,
  cotton, wine, fresh fruit etc.

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• Fair trade's strategic intent is to deliberately
  work with marginalized producers and workers in
  order to help them move from a position of
  vulnerability to security and economic
  self-sufficiency.
• It also aims at empowering them to become
  stakeholders in their own organizations and
  actively play a wider role in the global arena to
  achieve greater equity in international trade.
• Fair trade proponents include international
  religious, development aid, social and
  environmental organizations such as Oxfam,
  Amnesty International, and Caritas International.
• The next slide shows a photo of a Oxfam store in
  Galway

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(No Transcript)
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Controversy

• Some economists see fair trade as a type of
  subsidy that distorts free trade.
• Segments of the left criticize fair trade for not
  doing enough.

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Chapter 8

• Suppose there is a proposal to impose a new
  tariff on imported widgets
• There are 10,000 consumers of widgets in the US
• Demand for widgets is perfectly inelastic
• Each American buys a widget no matter what the
  price
• If the tariff becomes effective, the price of
  widgets goes up by 1
• That is each consumer loses 1
• All consumers together lose 10,000
• If the tariff becomes effective each of the 3
  domestic producers of widget gain 1000.

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Case 1 Direct democracy

• Everyone has one vote
• All consumers vote against tariff
• The 3 producers vote for tariff
• Majority wins
• Tariff does not go into effect

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Case 2 Representative Democracy

• In order to make your representative aware of
  your wish you need to hire a lobbyist who charges
  500
• Who is more likely to hire the lobbyist?
• None of the consumers
• since they each will only lose 1 if the proposed
  tariff become law.
• and it takes time and effort to get organized.
• But each of the producers has an incentive to
  hire the lobbyist since he will gain 1000 if the
  tariff goes into effect.
•  

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So under Representative Democracy

• Tariff is likely to be imposed
• This is called rent seeking behavior
• Occurs when government approves a program that
  benefits only a small group within society, but
  the society as a whole pays the cost.

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Average Tariff Rate(Source World Bank)
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Total trade barriers (tariff and non tariff) in
comparison Source World Bank
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The Political Economy of Protectionism

• Facts
• Imports and exports have conflicting effects.
• Free trade benefits consumers but firms and
  workers in importing industry can be harmed.
• Regulation can favor one segment of society.
• Domestic industries and firms have a demand for
  government regulation.
• 5. Special interest groups lobby for changes that
  benefit them.

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What is the public choice theory?

• It is the economic analysis of the political
  process and government decision-making.
• Assumptions
• Politicians attempt to maximize utility
• Utility comes in the form of votes
• Question
• Since trade benefits the country as a whole and
  there are more consumers (voters) than firms,
  shouldnt we expect politicians to favor free
  trade?

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Answer

• Not necessarily
• The loss in one consumers surplus due to trade
  restriction may not even be noticeable to him.
• Consumers cannot easily form groups, get
  organized and let politicians hear them but firms
  can.
• Given group support, votes to politician may
  increase.
• Politicians favor programs having immediate and
  clear-cut benefits with vague or deferred costs.
• Detailed tariff schedule allows politician to
  pick up votes for protecting specific good
  without protests from average consumer.
• Tariffs on very similar goods may be very
  different.

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Who does what?

• Firms with comparative advantage
• lobby foreign governments for free
• trade of exports.
• Firms that compete with imports
• would lobby for protection from
• imports.

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Who gets more protection and why?

• 1. Industries that are more important to a
  country
• are more likely to receive protection.
• 2. More concentrated an industry, more likely to
• have protection.
• Easier for firms to organize and lobby
• 3. Intermediate products easier to gain
  protection
• Voters unlikely to notice
• 4. Industries with a larger number of employees
  are
• more likely to get protection.
• 5. Regionally concentrated or unionized industry
  are
• more likely protected.
• 6. Industries with comparative disadvantage are
  more
• likely protected.

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What is dumping?

• Two definitions
• Cost-based dumping
• A firm sells a product at a price below its
• cost of production in a foreign market.
• Price-based
• A firm sells a product in a foreign market at
• a price lower than the price charged in its home
  market.

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Types of Dumping

• Sporadic dumping
• occasional dumping
• Persistent dumping
• Because there is more competition in
• the foreign market than at home.
• Predatory dumping
• Temporary
• To drive competing firms out of business.

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Antidumping law

• A law that does not allow an international
• firm to sell its product in an export market
• for less than it is sold for in its home
  market.
• Most countries have it

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Countervailing Duty

• A tariff imposed by a country that is
• designed to increase the price of the
• imported good by an amount equal to
• any export subsidies.
• Most nations have this too

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Attention my dear students
You must know everything in this Chapter on GATT
and WTO
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The General Agreement on Tariffs and Trade (GATT)
Table 8.3 GATT and WTO Multilateral Trade
Negotiations
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Asst 5(20 points)Due Friday, November 2 before
10 PM

• 1. Visit the WTOs web page at wto.org to answer
  the following questions
• Is Iran a member of WTO? How about Iraq?
• Which country is the newest member of WTO?
• Is the following statement true or false?
  Explain. WTO is for free trade at any cost.
• Is the following statement true or false?
  Explain. The voting power of a nation that is a
  member of WTO depends on its GDP.
• What was the size of the WTOs budget last year?

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Asst 5

• 2. Search the web (or elsewhere) for at least
  two examples of countervailing and/or antidumping
  duties imposed by the U.S. in the recent years.
  Name the products and their exporting countries
  and the nature of the imposed duties. Clearly
  list your sources.