Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani

1. Welcome to EC 382: International EconomicsBy:Dr. Jacqueline Khorassani Week Seven

2. Week Seven: Class One • Tuesday, October 16 • 14:10-15:00AC 202

3. Your exams are graded. I am so • I will bring them to class tomorrow • Is it ok if I post the results on my webpage based on your ID numbers? • If you have any objection to this method, please let me know before the end of this week. • If I don’t hear from you, I assume that you are ok it.

4. News • Still no news about a new room for us • Library had not ordered the book; the first time we placed the order • We placed another rush order

5. I received information • My book arrived the day before the exam. ………

6. A request • Dear coach Jacqueline, please don't give us a ICA this week !!! we studied so much for the exam last week so...we need a rest!!! thank you very much • Oooops!!! I have one planned for today.

7. In which case the domestic bike producer is more protected? • Scenario 1: • You impose a tariff of 50% on imported bikes • And 80% tariff on imported wheels • Scenario 2: • You impose a tariff of 50% on imported bikes • And 20% tariff on imported wheels

8. Effective Rate of Protection (ERP) • Measure the rate of protection of domestic bike producers from foreign completion ERP = (Tf – aTc)/(1-a) where, Tf = tariff rate on imported final product Tc = tariff rate on the imported components a= the ratio of the value of imported component to the value of final good

9. Assuming that the wheels represent 60 percent of the value of the bike, What is the ERP in each scenario? 1. ERP = ((0.5– (0.6 * 0.8))/(1-0.6) ERP = (0.5 -0.48)/0.4 ERP = 0.02/0.4 = 0.05 or 5% 2. ERP = ((0.5– (0.6 * 0.2))/(1-0.6) ERP = (0.5 -0.12)/0.4 ERP = 0.38/0.4 = 0.95 or 95%

10. Just In time ICA4 (in teams of 2 or 3) • Please, only one assignment per team • Q # 7, Page 153

11. International Economics • Week Seven- Class 2 • Wednesday, October 17 • 11:10-12:00 • Tyndall

12. Q # 7, Page 153 • Suppose that the free trade price of a domestic product is $10,000 and contains 25 percent imported components. Assume that the tariff on final product is 10 percent and a 5 percent tariff is imposed on the imported components. • A) What is the product’s price after the imposition of tariff? • B) What is the domestic value added before and after the imposition of tariff? • C) What is the effective rate of protection?

13. Answer? a. After the imposition of tariff, domestic price goes up by 10% to $11,000 b. Before the tariff, domestic value added is (10,000 – 2500 =$7,500) and after the tariff the domestic value added is [11,000-(2500 + (.05*2500)) =$8,375]. c. Tf = 10%, Tc = 5%, and a = 25%. ERP = (0.1 – 0.25 × 0.05) / (1 – 0.25) = 11.67%.

14. Arguments for Tariffs • Infant Government Argument • National Defense Argument • Infant Industry Argument • Senile Industry Protection • Job Protection Argument

15. Facts • Tariff creates losses in efficiency • Deadweight loss • Economies that have adapted the policy of protectionism have grown slower • Subsidy may be a better way to protect domestic producers

16. Price S’ S Subsidy = 2 10 a c Tariff = 2 b d 8 D 10 15 35 40 Quantity The effects of a subsidy equivalent to tariff in a small nation • no loss in CS • higher imports • no dead weight loss d • no revenue for government • cost of subsidy = €30 • b is still a loss in efficiency but it is covered by government

17. Nontariff Barriers to Trade(Chapter 7) • In the study guide, I asked you: • What are GATT and WTO and what is their role in international trade? • There is little on WTO in you book

18. GATT: General Agreement on Tariff and Trade • Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. • The GATT's main objective was the reduction of barriers to international trade. • This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements. • Originally, the GATT was supposed to become a full international organization called the International Trade Organization. • However, the agreement was not ratified, so the GATT remained simply an agreement. • The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s.

19. International Economics • Week Seven- Class 3 • Wednesday, October 17 • 15:10-16:00 • AC 201

20. In this week’s study guide, I asked: What are Non-tariff barriers to trade and how common are they? • The answer is in the book • Problems: • These types of protection are increasing as tariffs are decreasing. • They are less visible than tariff but in many cases they are more restrictive than tariffs.

21. What are Quotas? • A government policy that limits imports of a product to a certain number of units. • It is banned by the WTO but it still exists.

22. How common is quota? • In 1955 Ireland suspended its import quota on fertilizers. • China's Grain and sugar import quotas remain unchanged in 2008 • In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year • In 2005 the European Union decided to increase quotas for Chinese textiles • In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT.

23. Facts • Not all countries are members of the WTO • Members of WTO are allowed to maintain quotas for a specified period of time. • Transition period • How much power does WTO have? • Some countries implement quotas defying WTO rules.

24. What are Multifibre Arrangements? • Quota on textile • Uruguay Round negotiations of GATT have led to phasing out of the MFA.

25. What are Voluntary Export Restraint (VER)? • It is an agreement by a country to limit its exports to another country to a certain number of units. • It differs from a quota because the exporting country administers VER • Since it is “voluntary” it is legal under WTO regulations. • VER is difficult to negotiate

26. Examples of VERs • In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States. • In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear. • In 1991 a VER was established between the European Union (EU) and Japan that established “voluntary” quotas on Japanese cars until 1999.

27. Price of Cloth S 20 10 D 20 70 Quantity of Cloth Moving from no trade to free trade World Price = 10, Domestic Price = 20 Imports = 50, CS goes up E

28. Price of Cloth S S + Q 12 10 D Quota 20 30 60 70 Quantity of Cloth The Economic Effects of a Quota Quota = 30 Supply curve shifts right by 30 At P =10 there is a shortage of ______ Price goes up to ____ 12 20 What is d? CS goes down by? Who gets c? Who gets a? G a c b d What is b? 50

29. Who gets c? • In case of tariff c went to government. • In case of quota: • Domestic license holders, if they buy 30 units at p =10 and sell it at p = 12 • Domestic government, if it sells licenses at $2 per unit of imported good. • Foreign producer, if this is VER.

30. Price of Cloth S S + Q Tariff 10 D 20 30 60 70 Quantity of Cloth Suppose initially quota has the same effect as tariff The only difference may be in who gets c 12 c

31. Price of Cloth S S + Q Tariff 10 D’ D 20 30 60 70 Quantity of Cloth Now domestic demand grows to D’ Under quota, at p =12 there is a shortage P up to 13, CS? Under tariff, P is still 12, import grows to 40, CS↑ Quota is more restrictive 13 12 c b d a 35 65