Preview

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Preview

• Export subsidies
• Import quotas
• Voluntary export restraints
• Local content requirements

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Export Subsidy

• Export subsidies are a payment to firms that
  export
• An export subsidy can also be specific or ad
  valorem
• A specific subsidy is a payment per unit
  exported.
• An ad valorem subsidy is a payment as a
  proportion of the value exported.

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Export Subsidy

• A subsidy like a tariff drives a wedge between
  the price the prevails in the domestic market and
  the price that prevails in the foreign market.
• For a specific subsidy instated by the domestic
  country, PsPss
• Why? When the domestic producer exports a good,
  it gets a subsidy s. In order to be willing to
  sell in the domestic market, it must get at least
  the price foreign consumers pay plus the subsidy.
• For an ad valorem subsidy, PsPs(1s)

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Export Subsidy

• In general, an export subsidy raises the price of
  a good in the exporting country,
• making its consumer surplus decrease (making its
  consumers worse off) and
• making its producer surplus increase (making its
  producers better off).
• Also, government revenue will decrease.

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Export Subsidy

• For a large country, an export subsidy raises the
  price of a good in the exporting country, while
  lowering it in foreign countries.
• In contrast to a tariff, an export subsidy
  worsens the terms of trade by lowering the price
  of domestic products in world markets.
• The quantities of Domestic Supply will increase
  and Domestic Demand will decrease, resulting in
  more goods being dumped on the international
  market and lowering the price.
• An export subsidy will make the domestic country
  unambiguously worse off.

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Export Subsidy
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Export Subsidy

• An export subsidy unambiguously produces a
  negative effect on national welfare.
• The triangles b and d represent the efficiency
  loss.
• The tariff distorts production and consumption
  decisions producers produce too much and
  consumers consume too little compared to the free
  market outcome.
• The area b c d e f g represents the cost
  of government subsidy.
• In addition, the terms of trade decreases,
  because the price of exports falls in foreign
  markets to Ps.

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Export Subsidy in Europe

• The European Unions Common Agricultural Policy
  sets high prices for agricultural products and
  subsidizes exports to dispose of excess
  production.
• The subsidized exports reduce world prices of
  agricultural products.
• The direct cost of this policy for European
  taxpayers is almost 50 billion.

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Export Subsidy in Europe

• But the EU has proposed that farmers receive
  direct payments independent of the amount of
  production to help lower EU prices and reduce
  production.
• In this case, the government would give domestic
  producers a certain amount of money, regardless
  of how much they produce or export.
• The benefits of this proposal are that it reduces
  incentives from dumping goods on world markets
  which should decrease the negative terms of trade
  effect

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Export Subsidy in Europe
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Import Tariffs and Distribution of Income

• When the domestic country imposes an import
  tariff, the terms of trade increases and the
  welfare of the country may increase.
• The magnitude of this effect depends on the size
  of the domestic country relative to the world
  economy.
• If there is a terms of trade effect, then this
  may cause a shift in the distribution of income
  (via the Stopler-Samuelson Theorem.

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Import Tariffs and Distribution of Income

• In general an import tariff, will lower the price
  of the import good on world markets and raise it
  in the domestic country (if the terms of trade
  effect is not too large).
• In this case, the countrys scarce factor will
  benefit from the protection (the real price of
  the scarce good should rise)

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Export Subsidies and Distribution of Income

• In general an export subsidy, will lower the
  price of the export good on world markets and
  raise it in the domestic country.
• This will tend to benefit the abundant factor in
  the subsidizing country. (if the country is
  subsidizing the industry in which it has a
  comparative advantage)

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Export Subsidies and Import Tariffs

• Export subsidies by foreign countries on goods
  that
• the US imports reduce the world price of US
  imports and increase the US terms of trade.
• the US also exports reduce the world price of US
  exports and decrease the US terms of trade.
• Import tariffs by foreign countries on goods that
• the US exports reduce the world price of US
  exports and decrease the US terms of trade.
• the US also imports reduce the world price of US
  imports and increase the US terms of trade.

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Export Subsidies and Import Tariffs

• Should the US be concerned about the EUs
  increasing its subsidies on unskilled intensive
  goods? Why or why not.
• Speak to the terms of trade effect as well as the
  effect on the distribution of income.

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Import Quota

• An import quota is a restriction on the quantity
  of a good that may be imported.
• This restriction is usually enforced by issuing
  licenses to domestic firms that import, or in
  some cases to foreign governments of exporting
  countries.
• Who gets the licenses has a big effect on the
  welfare effects.

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Import Quota

• Binding import quota means that in the absence of
  the quota more would have been produced. (ie the
  quota actually makes a difference)
• A binding import quota will push up the price of
  the import because the quantity demanded will
  exceed the quantity supplied by domestic
  producers and from imports at the free trade
  price.

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US Import Quota on Sugar(small country assumed)
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Import Quota-Tariff versus Quota?

• When a quota instead of a tariff is used to
  restrict imports, the government receives no
  revenue.
• Instead, the revenue from selling imports at high
  prices goes to quota license holders either
  domestic firms or foreign governments.
• These extra revenues are called quota rents.
• Economic rentsamount sell a good for-amount
  willing to sell the good for.
• In the previous example, in the sugar industry,
  foreign sellers would have been willing to sell
  for 159.60 but were allowed to charge 417.40.

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Import Quota-Tariff versus Quota?

• Quota
• Internal price increase causing a distortion of
  both domestic supply and demand.
• For a small country, the quota makes the country
  unambiguously worse off.
• For a large country, the there will be a positive
  terms of trade effect as domestic demand
  decreases and domestic supply increases, more
  goods are available on world markets pushing down
  the price.
• For a large country, the welfare effect will
  depend on who holds the licenses and gets the
  quota rents (domestic or foreign) and also on the
  relative sizes of the quota rents versus the
  efficiency distortions.

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Voluntary Export Restraint

• A voluntary export restraint works like an import
  quota, except that the quota is imposed by the
  exporting country rather than the importing
  country.
• However, these restraints are usually requested
  by the importing country.
• The profits or rents from this policy are earned
  by foreign governments or foreign producers.
• Foreigners sell a restricted quantity at an
  increased price.
• VERs will make the country who has its imports
  restricted unambiguously worse off.

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Local Content Requirement

• Local content requirement provides neither
  government revenue (as a tariff would) nor quota
  rents.
• Instead the difference between the prices of
  domestic goods and imports is averaged into the
  price of the final good and is passed on to
  consumers.

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Local Content Requirement

• A local content requirement is a regulation that
  requires a specified fraction of a final good to
  be produced domestically.
• It may be specified in value terms, by requiring
  that some minimum share of the value of a good
  represent domestic valued added, or in physical
  units.

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Local Content Requirement

• From the viewpoint of domestic producers of
  inputs, a local content requirement provides
  protection in the same way that an import quota
  would.
• From the viewpoint of firms that must buy
  domestic inputs, however, the requirement does
  not place a strict limit on imports, but allows
  firms to import more if they also use more
  domestic parts.

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Other Trade Policies

• Export credit subsidies
• A subsidized loan to exporters
• US Export-Import Bank subsidizes loans to US
  exporters.
• Government procurement
• Government agencies are obligated to purchase
  from domestic suppliers, even when they charge
  higher prices (or have inferior quality)
  compared to foreign suppliers.
• Bureaucratic regulations
• Safety, health, quality or customs regulations
  can act as a form of protection and trade
  restriction.

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Summary
No change rents to license holders
No change rents to foreigners
Increases
Decreases
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Summary

• A tariff decreases the world price of the
  imported good when a country is large,
  increases the domestic price of the imported good
  and reduces the quantity traded.
• A quota does the same.
• An export subsidy decreases the world price of
  the exported good when a country is large,
  increases the domestic price of the exported
  good and increases the quantity produced.

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Summary

• The welfare effect of a tariff, quota and export
  subsidy can be measured by
• Efficiency loss from consumers and producers
• Terms of trade gain or loss
• With import quotas, voluntary export restraints
  and local content requirements, the government of
  the importing country receives no revenue.
• With voluntary export restraints and occasionally
  import quotas, quota rents go to foreigners.