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Economics

Economics. Chapter 9 Trade barriers. Trade barriers. Trade barriers are imposed to avoid imports. Free trade brings mutual benefits to the trading countries. Why are there trade barriers to discourage international trade?. Trade barriers. Protectionism 保護主義

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Economics

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  1. Economics Chapter 9 Trade barriers

  2. Trade barriers • Trade barriers are imposed to avoid imports. • Free trade brings mutual benefits to the trading countries. • Why are there trade barriers to discourage international trade?

  3. Trade barriers Protectionism 保護主義 • The doctrine that urges for the protection of domestic industry from foreign competition by imposing trade barriers. Reasons of imposing trade barriers (Pros): • For the country • To protect the development of domestic industry • To protect agriculture and military • For the whole economy • To protect infant industries and help them to compete with imported goods • To protect local workers and avoid unemployment • To diversify industry and stabilize the economy • For environment • To avoid imports of products which bring environmental and health problem

  4. Trade barriers Reasons against of imposing trade barriers (Cons): • For consumer • Fewer choice for consumers • Lower the living standard • For the whole economy • Fewer job opportunities for import related industries, e.g. trading company, transportation services • Higher unemployment • For international relationship • Trade retaliation • International trade recession

  5. Types of trade barriers • Import tariffs 進口關稅 • Tax imposed on imported goods • Supply of imported goods  (∵higher price to import) • Import surcharge in addition tariffs • Import quotas 進口配額 • Fixed import quantity • Supply of imported goods  • Demand of local goods 

  6. Types of trade barriers • Subsidies on domestic goods • Subsidizing import-competing industries • Price of local goods   Demand of imported goods  • Subsidizing export • Price of exported goods  Demand of exported goods  • Dumping 傾銷: Exporting price < Production cost(Prohibited by WTO, because severe damage to local production) • Foreign exchange controls • Gov’t controls • Exchange rate • Devaluation  Price of imported goods   Demand of imported goods  • Supply of foreign currencies  Not enough foreign to pay

  7. Winners and losers of free trade Assumption • Small economy • Insignificant share of the global trade • No influence at all • Price taker • Comparative advantage by comparison of prices • Given Country A and Good X • If local price < international price all people buy Good X from Country A then, Country A has a comparative advantage in Good X • If local price > international price no one (both local and foreign residents) will buy Good X from Country A then, Country A has a comparative disadvantage in Good X

  8. Winners and losers of free trade Equilibrium before trade • At domestic price (PD), Q = 60 units Price ($) Domestic supply Consumersurplus E PD Producersurplus Domestic demand Clothes (units) 0 60

  9. Winners and losers of free trade Suppose International price (PW) > Domestic price (PD) • Domestic producers would like to export At Pw (where PD  to Pw) • Domestic quantity supplied  (from 60 units to 100 units) • Domestic quantity demanded (from 60 units to 20 units) • Exports volume= Domestic Qs – Domestic Qd= (100 units – 20 units)= 80 units Price ($) Domestic supply PW Domestic sales Exports sales Domestic and international demand PD Domestic demand Clothes (units) 0 20 100 60

  10. Winners and losers of free trade Price ($) Domestic supply Let’s look at the (domestic) consumer and producer surplus • Also look at the social surplus Price after trade (PW) Domestic and international demand D Price before trade (PD) B A Domestic demand Clothes (units) 0 20 100 60 C Net gain from trade

  11. Winners and losers of free trade Conclusion: If PW > PD , export of goods • Consumer surplus  (Area B) • Producer surplus  (Area B + D) • Total social surplus  (Area D) • Since increase in producer surplus (Area B + D) > decrease in consumer surplus (Area B) Then export trade is beneficial to the economy. • Export trade can improve a country’s economic welfare.

  12. Winners and losers of free trade Suppose International price (PW) < Domestic price (PD) • There will be import of goods. At Pw (where PD  to Pw) • Domestic quantity supplied(from 60 units to 20 units) • Domestic quantity demanded (from 60 units to 100 units) • Imports volume= Domestic Qd – Domestic Qs= (100 units – 20 units)= 80 units Price ($) Domestic supply PD Domestic and international supply PW Imports volume Domestic consumption Domestic demand Clothes (units) 0 20 100 60

  13. Winners and losers of free trade Price ($) Domestic supply Let’s look at the (domestic) consumer and producer surplus • Also look at the social surplus B D Price before trade (PD) A Domestic and international supply Price after trade (PW) Domestic demand Clothes (units) 0 20 100 60 C Net gain from trade

  14. Winners and losers of free trade Conclusion: If PW < PD , import of goods • Consumer surplus  (Area B + D) • Producer surplus  (Area B) • Total social surplus  (Area D) • Since increase in consumer surplus (Area B + D) > decrease in producer surplus (Area B) Then import trade is beneficial to the economy. • Import trade can improve a country’s economic welfare.

  15. The effects of tariffs Import tariff: • An import tariff is a tax imposed on imported goods. • When PD < PW , no import. • When tariff (t) is imposed, PD < PW + t ,no import. • When PD> PW + t , import from foreign countries. • New equilibrium at P2 , Quantity transacted = 80 units Qs by domestic supplier = 40 units

  16. The effects of tariffs Price ($) Domestic supply Domestic and international supply Price (P2) after tariff Tariff = $t Price (PW) before tariff Import volume after tariff International price Domestic demand Import volume before tariff Clothes (units) 0 40 80 20 100 60

  17. The effects of tariffs Price ($) Domestic supply Let’s look at the (domestic) consumer and producer surplus • Also look at the social surplus A Domestic and international supply Price after tariff D B Tariff = $t E C Price before tariff International price F Domestic demand Clothes (units) 0 75 20 45 100 Deadweight loss

  18. The effects of tariffs Conclusion • Tariffs  Domestic price • Domestic consumer will lose [ Consumer surplus  ] • Domestic producers will gain [ Producer surplus  ] • Government will gain [ Tariff (tax) revenue  ] • Deadweight loss: • Area C: Over-production, where marginal cost is higher than the international price (Pw) • Area E: Under-production, where marginal benefit is higher than the international price (Pw)

  19. The effects of quotas Import quota: • Maximum import volumes of goods (e.g. 40 units) • When PD< PW , no import. • When PD > PW, exercise the quota and import 40 more units at PW. • Supply increases after using up the quotas, therefore supply curve shifts rightward. • New equilibrium at P2 , Quantity transacted = 80 Qs by domestic supplier = 40

  20. The effects of quotas Price ($) Domestic supply Quota Domestic and international supply Price (P2) after quota International price Price (PW) before quota Import volume before quota Domestic demand Clothes (units) 0 80 20 40 100 60 • Import volume • after • quota

  21. The effects of quotas Price ($) Domestic supply Domestic and international supply Let’s look at the (domestic) consumer and producer surplus • Also look at the social surplus A Price after quota D B E C Price before quota International price F Domestic demand Clothes (units) 0 80 20 40 100 Deadweight loss

  22. The effects of quotas Conclusion • Quotas  Domestic price • Domestic consumer will lose [ Consumer surplus  ] • Domestic producers will gain [ Producer surplus  ] • Quota holders’ gain [ Selling of quota ] • Deadweight loss: • Area C: Over-production, where marginal cost is higher than the international price (Pw) • Area E: Under-production, where marginal benefit is higher than the international price (Pw)

  23. Summary Tariffs Quotas

  24. Hong Kong’s attempts to overcome trade barriers • To examine how Hong Kong overcomes trade barriers • To understand the functions of institutions promoting Hong Kong’s trade development • To examine the reasons for Hong Kong’s participation in international economic institutions • To analyze the effects of CEPA on Hong Kong

  25. Abbreviation: WTO (url: http://www.wto.org/index.htm) • Founded in 1995 • Aims at promoting free international trade • Formerly known as General Agreement on Tariffs and Trade (GATT) 關稅及貿易總協定 • 153 member countries • Accounting for over 90% of world trade • Highest policy-making body: The Ministerial Conference 世貿部長級會議

  26. Major functions: • Hosts multilateral trade negotiations. • Ensures the execution of international trade agreements. • Resolves trade disputes among member countries. • Authorizes the implementation of trade sanctions. • Helps developing and underdeveloped economies. The WTO agreements cover areas ranging from trade in goods and services to intellectual property rights.

  27. Structure

  28. Hong Kong’s attempts to overcome trade barriers • Practising free trade policy • Hong Kong Economic and Trade Offices are set up in many cities worldwide. • Participating in international economic institutions • WTO: Active participation in the multilateral trade system. • APEC: Hong Kong joined Asia-Pacific Economic Cooperation in 1991.

  29. Hong Kong’s attempts to overcome trade barriers • Promoting trade • The Hong Kong Trade Development Council (HKTDC)香港貿發局 helps the industrial and commercial sectors to promote and develop markets for trade in goods and services. • Others • Trade and Industry Department 工業貿易署 • Hong Kong Export Credit Insurance Corporation 香港出口信用保險局 • Hong Kong Productivity Council香港生產力促進局 • Hong Kong Science and Technology Parks 香港科技園

  30. Hong Kong’s attempts to overcome trade barriers • CEPA: Closer Economic Partnership Arrangement (2003) • The 1st free trade agreement between HK and the mainland • Goods (list of goods) • Zero tariff treatment on certain goods • E.g. Fiber, digital clock • Services • Preferential treatment when setting up business • e.g. Medical • Mutual recognition of professional qualifications • e.g. Accountants • Trade and investment facilities • Electronic business, simplification of customs clearance facilitation

  31. Hong Kong’s attempts to overcome trade barriers

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