Topic 3 Instruments of Trade Policies

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Topic 3Instruments of Trade Policies

• Textbook Chapter 8

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Learning Objectives

• Learn about the basic tariff analysis
• Examine costs and benefits of a tariff
• Develop an analysis of the effects of an export
  subsidy
• Develop an analysis of the effects of an import
  quota

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Import Demand Curve

• The import demand curve of a country (say, Home)
  reflects the excess of what Home consumers demand
  over what Home producers supply.

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Figure 8-1 Deriving Homes Import Demand Curve
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Export Supply Curve

• The export supply curve of a country (say,
  Foreign) is the excess of what Foreign producers
  supply over what Foreign consumers demand.

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Figure 8-2 Deriving Foreigns Export Supply Curve
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World Equilibrium

• World equilibrium occurs when Home import demand
  equals Foreign export supply.

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Figure 8-3 World Equilibrium
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Effects of a Tariff

• Introducing a tariff (t) drives a wedge between
  the prices in two markets.
• The tariff raises the price in Home by less than
  the amount of the tariff (0ltPT-PWltt).
• Part of the tariff is reflected in a decline in
  the world (Foreigns export) price instead of
  being passed on to Home consumers.
• A tariff in a small countrycannot lower the
  world price the price in Home rises by the full
  amount of the tariff (PT-PWt).

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Figure 8-4 Effects of a Tariff
continued...
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Figure 8-5 A Tariff in a Small Country
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Costs and Benefits of a Tariff

• Domestic producers gain from a tariff
• They receive a higher price and thus a larger
  producer surplus.
• Domestic consumers are hurt by a tariff
• They pay a higher price and thus receive a
  smaller consumer surplus.
• The government gains by collecting tariff

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Figure 8-7 Geometry of Consumer Surplus
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Figure 8-8 Geometry of Producer Surplus
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Figure 8-9 Costs and Benefits of a Tariff for
the Importing Country
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Net Welfare Effects of a Tariff

• Net welfare effects of a tariff
• Consumer loss - producer gain -government
  revenue
• (abcd)- a- (ce)
• (bd)-e
• (production distortion lossconsumption
  distortion loss)-(terms of trade gain)

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Figure 8-10 Net Welfare Effects of a Tariff
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Export Subsidies

• An export subsidy is a government payment to a
  firm that ships a good abroad.
• Producers receive the world price plus the
  subsidy for each unit of a product shipped
  abroad, therefore shifting sales from domestic to
  foreign markets.

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Effects of an Export Subsidies

• Export subsidy causes
• the price in the exporting country to rise,
• the quantity demanded to fall,
• the quantity of the good supplied for exports to
  rise, and
• the price in the importing country to fall.

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Figure 8-11 Effects of an Export Subsidy
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Net Loss of an Export Subsidy

• Net welfare loss of an export subsidy
• Consumer loss cost of government subsidy -
  producer gain
• (ab)(bcdefg)-(abc)
• (bd)(efg)
• Efficiency loss terms of trade loss

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Import Quotas

• An import quota is a direct restriction on the
  quantity of some good that may be imported.
• An import quota causes the price to be bid up
  until the market clears (i.e., until the
  permissible import just equals the excess demand
  in the importing country)

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Effects of Import Quotas

• An import quota is like a shadow tariff because
  it will raise domestic prices by the same amount
  as a tariff that limits imports to the same
  level.
• An import quota differs from a tariff because the
  government receives no revenue directly from the
  quota.

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Effects of Import Quotas

• The quasi-tariff revenue is collected by
  whomever receives the import licenses.
• License holders are able to buy imports and
  resell them at a higher price in the domestic
  market, therefore earning quota rents.
• The costs of a quota is much higher than the
  equivalent tariff when the governments of
  exporting countries get the licenses and thus the
  rents.

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Figure 8-13 Effects of the U.S. Import Quota on
Sugar
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Summary

• A tariff drives a wedge between foreign and
  domestic prices so that producers and the
  government gain and consumers loss from the
  tariff.
• An export subsidy causes a net loss because of
  production and consumption distortion and
  deteriorated terms of trade.
• Under import quotas, it is license holders who
  get the quota rents.