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Chapter 14

Chapter 14. Preferential Arrangements and Regional Issues in Trade Policy. PP’ is the partner-country supply curve. Tariff removal cuts domestic price from OT to OP, expands imports to M’N’, and raises welfare by areas 2+4.

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Chapter 14

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  1. Chapter 14 Preferential Arrangements and Regional Issues in Trade Policy

  2. PP’ is the partner-country supply curve. Tariff removal cuts domestic price from OT to OP, expands imports to M’N’, and raises welfare by areas 2+4. Here supply curve is perfectly elastic supply so that unlimited quantity is available at price OP. British consumers enjoy a gain in surplus 1+2+3+4. But area A is formerly the production gain. Area 3 is the tariff revenue. Net benefit=2+4=production benefit + consumption benefit Welfare Effects of Trade Creation

  3. Figure 14.1 Welfare Effects of Trade Creation

  4. Britain and France form the CU, but US has a lowest cost. Pb indicates pretariff supply price in partner country—France Pc is the pretariff supply price in the U.S. Tariff preference lowers internal price from Tc to Pb. Lowering a tariff (even preferentially) allows a gain to British consumers (areas 3+4) But areas 3+5 measure the total tariff revenue. Therefore, welfare loss occurs if area 5 exceeds area 4. Welfare Effects of Trade Diversion

  5. Figure 14.2 Welfare Effects of Trade Diversion

  6. For trade creation predominates trade diversion, UK and FR should be actually competitive. Trade creation gains are greater when protected production is reduced more. This happens when protective tariffs have made the output pattern of the two economics look similar. To avoid trade diversion, each member of the PTA must also be the most efficient producer of goods protected. E.G., if Pc>Pb in the previous figure: US is more costly than France to produce the goods Net Gains or Losses?

  7. The reduced dispersion of tariff itself is a source of welfare gain. Usually the CU set an average tariff to decide on a common external tariff. It is because the relative price of commodities inside the tariff wall are then less distorted than those in the world. Net Gains or Losses?

  8. Table 14.1 Changes in Distribution of Trade, Countries in Transition, 1995-2002 (percentages)

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