05.07.2023 Instruments of Trade Policy#

Summary of all options:

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Tariffs#

Types:

  • specific tariff: per unit

  • ad valorem: as % of value

Situation in one-good and tariff:

Import Demand Curve#

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  • where foreign price less than home

  • \(MD = D-S\)

  • downward sloping (higher world price = less imports)

Export Supply Curve#

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  • from perspective of foreign country

  • \(XS^* = S^*-D^*\)

  • upward sloping

Equilibrium: Import Demand = Export Supply

Effects of Tariff#

= Transportation Cost

  • unwilling to trade unless foreign price compensates tariff

  • \(P_t - t > P_t^*\)

  • higher price home, leser foreign

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=> less traded, higher prices

  • tariff increase not completely on home price

  • of country small = no effect on world price = complete markup tariff

Amount of Protection#

effective rate of Protection: Change in value added for producers after trade policy change, depends on price change of good

Example:

  • before: 8000€ Cars with inputs 6000€ = 2000€ value added

  • After: 25% tariff increase

    • price now: 10000€ (8000*1,25) for car

    • factor prices same = 10000-6000 = 4000€ value added

  • rate of protection: \(\frac{ 4000-2000 }{2000}=100\%\)

Here: rate of protection > tariff rate

Cost and Benefits#

  • consumers = higher prices

  • producers = more profit

  • government = tariff money

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  • d+e = efficiency loss

  • e = terms of trade gain (lower foreign prices)

    • only possible for large countries

Problem: Retaliation and Wasteful activities

Export Subsidy#

Types: specific or ad valorem

  • less government revenue

  • lowers price in importing country: \(P^* = P_s-S\)

  • higher price for home consumers

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Import Quota#

Restriction of Quantity that may be imported

  • no government revenue

  • quota rents to license holders

  • rents to producers, cost to consumers

US Sugar Prices vs. Worldimg

Voluntary Export Restraint#

Voluntary Export Restraint (VER): quota imposed by exporting country on its exporting industry

  • due to pressure by Importing Country

  • Example: Japanese Cars in US Market

    • Price rose of japanese fuel efficient cars

    • rent to japanese firms

Local Content Requirement#

Local Content Requirement: regulation, that fraction of end product domestically produced

  • either value terms of unit terms

  • no revenues

  • home producers of inputs like import quota

  • home producers of outputs not as strict

  • price diff average between no quota and import quota

Exercise#

Free Trade Situation#

Country A $\( \begin{aligned} D &= 100-20P \\ S &= 20+20P \\ MD &= D - S = 80-40P \end{aligned} \)\( Country B \)\( D = 80-20P \\ S = 40+20P \\ XS = S-D = -40+40P \)\( Equilibrium \)\( 80-40P = -40+40P \\ \to P = 1.5 \ , Q_{trade} = 20 \)$

Tariff#

Tariff inhome country: \(t=0.5\) $\( MD = 80-40 (P+t) \\ XS = -40 + 40P \)$ Equilbirum:

  • Import Demand to the Left

  • less Imports / Exports from other country

  • higher price

\[\begin{split} 80-40 (P+0.5) = -40+40P \\ 120 = 40P+40P+20 \\ 100 = 80P \to P = 1,25 \end{split}\]

world market price: 1.25 + tax = 1.75 home price

=> tariffs leads to sinking world prices, cancels out some of the tariff

Tariff with big country#

\[\begin{split} MD = 80-40(P+t) \\ XS = -400+400P \\ \end{split}\]

Equilibrium without Tariff $\( 80-40P = -400+400P \\ 480 = 440P \\ \to P=1.0909, Q= 36,36 \)\( with Tariff \)\( 80-40(P+t) = -400+400P \\ 480 = 400P+40P+20 \\ 460 = 440P \\ \to P_{world}=1.045, Q=18,2 \)\( Price with tariff: \)P_{tariff} = 1.545$

=> small country shoulders most of the price increase!

Effective Tariff = nicht klausurrelevant

Surplus#

with original Situation

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with small country

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  • \(P_t-P_w=1.545-1.09=0,455\)

  • Zwischending = 9,1

  • Triangle: \(0.455*9.1 = 4,1405\)

Surpluses:

  • Government: \(0.5*(69.1-50.9)\)

  • Producer: \(41,8*0,455+4,1405\)

  • Consumer: \(69,1*0,455\)

Export Subsidy#

new Sitatuion $\( MD = 80-40P \\ XS = -40+40(1+0,5)P \)\( Equilibrium \)\( 80-40P = -40+60P \\ P_{import} = 1.2, Q=32\\ P_{export} = 1.8 \)$ img