Free Trade – GoodRestriction – Bad
This presentation is the property of its rightful owner.
Sponsored Links
1 / 14

Free Trade – GoodRestriction – Bad PowerPoint PPT Presentation


  • 43 Views
  • Uploaded on
  • Presentation posted in: General

Free Trade – GoodRestriction – Bad. g. G. e. f. S d+w+t. a. b. c. d. Free Trade : Price = World Price = $8,000 Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g ; Producer Surplus = h. S d. Price ($). E. F. S d+w. h. D d.

Download Presentation

Free Trade – GoodRestriction – Bad

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Free trade good restriction bad

Free Trade – GoodRestriction – Bad

g

G

e

f

Sd+w+t

a

b

c

d

Free Trade: Price = World Price = $8,000

Domestic Production=20; Domestic Consumption=80; Imports=60

Consumer Surplus: a+b+c+d+e+f+g; Producer Surplus = h

Sd

Price ($)

E

F

Sd+w

h

Dd


Free trade good restriction bad

Free Trade – GoodRestriction – Bad

g

G

e

f

Sd+w+t

a

b

c

d

Tariff: Price = World Price + Tariff = $8,000 + $1,000 = $9,000

Domestic Production=40; Domestic Consumption=60; Imports=20

Reduced Consumer Surplus: a+b+c+d

Increased Tax Revenue = c

Sd

Deadweight Loss:

Inefficient Production = b

Price ($)

Deadweight Loss:

Reduced Consumption = d

E

F

Sd+w

h

Dd

Increased Producer Surplus = a (Redistributive Effect)


Costs of import restrictions

Costs of import restrictions

Domestic consumers face increased costs

  • Low income consumers are especially hurt by tariffs on low-cost imports

    Overall net loss for the economy (deadweight loss)

  • Production effect: output that cost more than it has to (b)

  • Consumption effect: surplus lost from reduced consumption (d)

  • Export industries face higher costs for inputs

  • Cost of living increases

  • Other nations may retaliate


  • So why restrict trade

    So why restrict trade?

    • Benefits of free trade in final goods are spread widely

      • Tariffs on intermediate inputs tend to be low

    • Costs of free trade are felt rapidly by domestic producers  Lobbying by business and labor

      “… those persons who demand cheaper coats would be ashamed of themselves if they could realize that their demands cut the wages of the women who made those coats.”

      Benjamin Harrison, Election Campaign of 1888

    • Strategic trade policy

      • Reduce demand for foreign stuff

         lower its price a lot  Big gain on what you still buy

    • Ways to restrict trade

      • Tariffs

      • Non-Tariff Barriers


    Flavors of tariffs

    Flavors of tariffs

    Tariff: a tax (duty) on internationally traded products

    • Import tariffs

    • Export tariffs… unconstitutional in US

      • Raise revenue

      • Favor domestic users of exported commodities

  • Protective tariff … insulate domestic producers

  • Revenue tariff- raise funds for government

  • Specific tariff - Fixed $/Unit

  • Ad valorem tariff - % of product’s value

    • “Free-on-board” (FOB) as it leaves port

    • Levied “cost-insurance-freight” (CIF) as it arrives in port

  • Compound tariff - Combination of fixed and ad valorem tariffs

  • Levied on finished goods whose imported inputs are subject to tariff

    • Fixed portion offsets tariffs on imports paid by domestic producers

    • % portion protects domestic producers against finished good imports


  • Effective rate of protection

    Effective rate of protection

    • For a finished good,

    • Effective tariff rate =

    • {Nominal tariff – (% value Imports)x(Tariff on Imports)}

    • (% Domestic Value Added)

    • The impact of a tariff is often different from its stated amount

    • Tariff Escalation: If domestic value added (domestic content) is low and tariffs on imports are also low

      Effective tariff >> Nominal tariff.


    Nominal and effective tariff rates us and japan early 1980s

    Nominal and Effective Tariff Rates(US and Japan, early 1980s)

    USJapan

    NominalEffectiveNominalEffective

    Agriculture, fish, forest. 1.8% 1.9% 18.4% 21.4%

    Food, beverages,tobacco 4.7 10.6 25.4 50.3

    Footwear 8.8 15.4 15.7 50.0

    Furniture 4.1 5.5 5.1 10.3

    Leather products 4.2 5.0 3.0 -14.8

    Paper and paper products 0.2 -0.9 2.1 1.8

    Textiles 9.2 18.0 3.3 2.4

    Wearing apparel 22.7 43.3 13.4 42.2

    Wood products 1.6 1.7 0.3 -30.6


    Avoiding and postponing tariffs

    Avoiding and postponing tariffs

    • Production sharing special treatment for foreign assembly using domestic inputs

      • OAP: Offshore Assembly Provision

        • Maquiladoras

    • Bonded warehouses

      • Assemble imported components and reexport duty free

      • If sell domestically, tariff is levied only on imported value

    • Foreign trade zones (FTZ)


    Arguments for trade restrictions

    Arguments for trade restrictions

    • Job protection

      … but losses elsewhere

    • Protect against “cheap” foreign labor

      … but is foreign labor “cheap”?  Worker productivity

    • Fairness in trade - level playing field


    Principles of fair trade

    Principles of Fair Trade

    • Democratic organization

      • Producer cooperatives

    • Recognize unions

    • No child labor

    • Decent working conditions

    • Environmental sustainability

    • Prices that cover production costs

      • Price guarantees irrespective of world prices

    • Social premiums

      • Pay premiums to organizations public goods

    • Long-term relationships

      • Reduce uncertainties


    Arguments for trade restrictions1

    Arguments for trade restrictions

    • Job protection

      … but losses elsewhere

    • Protect against “cheap” foreign labor

      … but is foreign labor “cheap”?  Worker productivity

    • Fairness in trade - level playing field

      … but sacrifice gains from trade

    • Equalization of production costs

      … but whose costs? [Their low cost producer = Our high cost?]

    • Infant-industry protection  Achieve efficient scale

      … but protect senile industries too?

    • Political and social reasons

      • Protect against cultural imperialism

      • National defense/Self–sufficiency…reduce interdependence

        ... but could build strategic reserves instead


    Import quotas

    Non – Tariff Barriers (NTBs)

    Import quotas

    • Quota: how much can be imported in a year

      • Global quotas

      • Selective quotas

  • Government loses tariff revenue

  • Quota is insensitive to demand shifts

    • Tariff-rate quota: a two-tiered tariff

      • More can be imported if demand increases … but only at a higher tariff rate


  • Free trade good restriction bad

    Other NTBs

    • Voluntary export restraints (VERs)

      • export quota by foreign country … or else

      • Japanese auto exports  unintended consequences

    • Domestic content requirements

    • Subsidies

      • Domestic subsidy … e.g. R & D

      • Export subsidy

    • Government procurement policies

    • Social regulations (health, environmental and safety rules … MGOs)

    • Sea transport and freight restrictions


    Costs of import restrictions redux

    Costs of import restrictions redux

    Domestic consumers face increased costs

    Overall net loss for the economy (deadweight loss)

    • Production effect: output that cost more than it has to (b)

    • Consumption effect: surplus lost from reduced consumption (d)

  • Export industries face higher costs for inputs

  • Cost of living increases

  • Retaliation


  • Login