Other Instruments of Trade policy

1
Other Instruments of Trade policy

• Eco 3024F
• Readings
• Text
• Krugman Obstfeld, Ch 8 including Appendix
• Reader
• Punch-up over handouts Economist, March 26
• Clothing textile jobs revisited (Morris
  Edwards)

2
Outline

• Costs and benefits of
• Export subsidies
• Import quotas
• Case study Common Agricultural Policy
• Case study Quotas on clothing in SA

8-2
3
Export subsidies

• State financial boost for capital projects
  (Business Day, 17 March 08)
• The trade and industry departments industrial
  support plans were boosted on Friday with the
  launch of the amended Capital Projects
  Feasibility Programme, under which the department
  would fund up to 55 of the feasibility studies
  into capital goods projects that would lead to an
  increase of exports.

4
US farm subsidies
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Export Subsidy for small country

• 1) Domestic price distortions in small country
• The subsidy for the exported good raises the
  domestic price of exportables for producers
• PDX PWX(1S)
• The price ratio of the imported to the exported
  good decreases
• (PM/PX)D (PM/PX(1S))W lt (PM/PX)W
• Implications
• production of Exports increase
• If country is large Pxw may fall

(Pm/Px)D
E2
X
E1
(Pm/Px)W
M
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Export subsidies Cost-benefit analysis
Price
S
D
PW
Quantity
Q1
Q2
Net welfare loss BDEFGNote The more Pw
falls the greater the loss
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Export Subsidy, conclusion

• Implications
• production of Exports increase
• Outcome
• Worsens terms of trade (Pxw falls)
• Consumption patterns distorted
• Welfare loss as exported good is exported at
  price less than cost (sacrifice of domestically
  produced imported good)

8
Export subsidies Case study Common Agricultural
Policy

• Read Punch-up over handouts Economist, March 26
• Agricultural subsidies and protection a major
  stumbling block to the Doha trade round
• Common Agricultural policy (CAP)
• Initially a form of minimum price support to
  guarantee high prices to European farmers
• Support prices turned out to be so high that EU
  became a surplus producer
• 1.2 mill tons butter, 780 000 tons beef, 12 mill
  tons wheat (in 1985)
• Exports then subsidised to dispose surplus

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Export Subsidy in Europe (cont.)
If the world price prevailed, EU will be an
importer of agricultural produce (wheat) Support
price is so high, EU becomes a surplus
producer Surplus is then exported at cost
represented by shaded area Given size of surplus
exported, World price falls
8-9
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How large are the distortions?

• Cost (How Europe cheats Africa, The Observer 19
  June 2005)
• Swallows more than 40 per cent of Europe's
  budget for the benefit of just 5 per cent of its
  population (How Europe cheats Africa, The
  Observer 19 June 2005)
• Each European cow costs taxpayers 2.20 a day,
  while half the world's population lives on less
  than 2 a day
• The 224 largest cereal producers get 47m a year
  between them - more than the UK spends on aid to
  Ethiopia.
• Price effect
• Removal of distortions raise world prices by
  10-20
• Cotton price 26 lower because of 4 bill America
  lavishes on cotton producers
• European Union (EU) account for 38 , Japanese
  plus Korean for 12 and US for 16 of global
  price distortions.
• Agricultural support in OECD account for 30 of
  farm income received
• Switzerland 70, NZ 2, USA approx 20
• SA fell from 18 in 1994 to 5 in 2004

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Is CAP bad for African countries?
12

• Agricultural subsidies are undesirable, but the
  claim that removing them will help the poorest
  countries is dangerous nonsense and a
  pernicious fallacy
• (Jagdish Bhagwati).

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Do poorest gain from removal of support in OECD
countries?

• (a) Poorest countries are net-importers of food
• 33/49 poorest countries import more farm goods
  than export
• 45/49 poorest countries import more food than
  they export
• Big Latin American countries (Brazil and
  Argentina) gain, but rest of Latin America lose,
  Sub-saharan Africa loses, Middle-east and most of
  S Asia lose.

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Do poorest gain from removal of support in OECD
countries?

• (b) Least developed African, Caribbean and
  Pacific countries have preferential access to
  Developed markets
• They receive the high distorted price for exports
• Sugar is 3 times world price (Swaziland has free
  access up to quota limit)
• Mauritius 30 of export earnings due to
  preferential access
• Least developed get preferential access under
  Everything but Arms agreement.

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Do poorest gain from removal of support in OECD
countries?

• (c) alternative views (William Cline)
• Poor economies have a comparative advantage in
  agriculture
• They are net importers of food because of large
  aid flows they receive (they are net importers of
  everything)
• Rising agricultural prices good for rural
  producers, bad for urban poor who are net
  consumers

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Other trade barriers

• Import quota Specifies physical amount of
  permitted imports.
• Being phased out under WTO negotiations, but
  often replaced by less transparent barriers (as
  below)
• Voluntary export restraint Supplier agrees
  voluntarily agrees to refrain from exporting
  beyond a fixed amount.
• Government procurement provisions.
• SAs recent arms purchase agreement.
• BEE requirements
• Domestic content requirement.
• US requirement of 51 domestic content in the
  purchasing of buses.
• Service trade restrictions.
• Foreign ships barred from carrying cargo between
  purely domestic ports in the US. Foreign planes
  not permitted to transport passengers between
  domestic cities (SA).
• Antidumping action
• Other Health, environmental and safety
  standards.
• Export of fish from lake Victoria to Europe.
  Foot-and-mouth disease.

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Case study 2 Quotas on clothing imports from
China

• Read Clothing textile jobs revisited (reader)
• January 2007 SA imposed quotas on imports of
  clothing and textiles from China
• Quotas to be applied for 2 years to allow
  industry to recover
• How severe are quota restrictions?

Table Quota restrictions as share of projected
CHINESE import volumes prior to imposition of
quota
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Effect of Quota

• Quota restriction of Q2Q3 raises prices gt has
  similar impact to tariff
• BUT Quota rent (C) goes to holder of quota gt
  Important political economy differences
• Dead weight loss BE

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What are problems with clothing Quota?

• Argument 1. Quota will help ailing industry
• Substitution towards other sources of supply gt
  quota ineffective.
• Where substitution is not possible, quota
  preserves market power (see later in lecture)
• Increased tariff would be better
• Proposed quota allocation system benefits large
  importers relative to new-comers and low
  importers
• Will encourage quality upgrade -gt enhanced
  competition in higher value added sectors (the
  sectors that the DTI wishes to develop)

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What are problems with clothing Quota?

• 2. Protection will target problem
• Problem is lack of competitiveness, but
  historical evidence shows that protection breeds
  inefficiencies
• High input costs on textiles (due to barriers)
  lowers profitability of clothing producers
• Policy lasts 3 years period insufficient to
  encourage new investment
• Industry merely captures the rent

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What are problems with clothing Quota?

• 3. Protection will preserve jobs
• 60 000 jobs lost since 2003 statistical error
• Liberalisation has led to a re-structuring of
  industry and employment Decline in employment in
  production, but rise in retail
• Retail employment not captured in above data
• Informal household production or outsourced
  employment not captured
• Producers have shifted from production to import
  composition, but not necessary level of
  employment affected.
• Protection is a tax on poor consumers who spend a
  relatively high proportion of income on food and
  clothing