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Managing trade
Trade Policy

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Tari in small country
Partial equlibrium approach (ceteris paribus)
Small country (no eect on world price)
perfectly competitive markets

P

D

P

S

PA

PA

PW

S*
Dm
Imports before
tariff

Q

Imports before
tariff

Qm

Imposing tari

P

D

P

S

PA

PA

PW+t
PW

S*
Dm
Q
Imports after
tariff

Qm

Welfare eects
Reduction in consumer surplus

P

D

P

S

PA

PA

PW+t
PW

S*
Dm
Q
Imports after
tariff

Qm

Welfare eects
increase in producer surplus
transfer from consumers to producers (redistributive eect)

P

D

P

S

PA

PA

PW+t
PW

S*
Dm
Q
Imports after
tariff

Qm

Welfare eects
Government revenue

P

D

P

S

PA

PA

PW+t
PW

S*
Dm
Q
Imports after
tariff

Taris reduce welfare in small countries
production and consumption eciency losses

Qm

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Large country
Country large enough to aect world price
world supply curve no longer perfectly elastic
home must pay more to foreign suppliers to induce them to supply more

P

D

S

PA

PW

S*

Q

Imposing tari
P

D

S

PA
S*T
PT
PT

S*

W

Q

Welfare eects
P

D

S

PA
S*T
PT
PT

S*

W

Q
If tari small enough large country gains
terms of trade eect outweighs eciency eect

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Export subsidies
Opposite eect to import taris

P

D

S

PW +s
PW

S*

Q
Imports after
Subsidy

Export subsidies
Consumer surplus reduced

P

D

S

PW +s
PW

S*

Q

Export subsidies
Producer surplus increased

P

D

S

PW +s
PW

S*

Q

Export subsidies
Subsidy costs government money

P

D

S

PW +s
PW

S*

Q
deadweight losses in consumption and production
large countries worsen terms of trade
increases government subsidy

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Import quota
Allow imports up to some limit

P

PW

D

S

S*

Q

Import quota
P

D

S

SQ

PQ
PW

S*

Quota

Q

Import quota
P

D

S

SQ

PQ
PW

S*

Q
Rents rather than government revenue from taris
may accrue to government
may be appropriated by importers

At best same welfare as tari

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Voluntary Export Restraints

As for import quotas, but voluntary
rents accrue to importers
not likely to attract retaliation

More ecient to allow trade and transfer rents
recaptures eciency losses

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Other non-tari barriers

national procurement
safety standards
labour standards
administrative regulations

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Theoretical arguments

Gains from specialisation
Comparative advantage
labour productivity

factor endowments and intensities
Gains from variety

Economies of scale
Protected markets prevent concentration of industries

Too many rms to enter the protected industry
The scale of production of each rm becomes inecient

Tarrifs (generally) welfare reducing

Trade barriers usually
welfare reducing
taris distort
resource allocation

consumers pay
higher prices
and consume
too little
rms produce
too much
...
2% of GDP
(Lai and Treer 2004)
Developing countries stand to gain more

Gains low because taris currently low

Outline
1

Taris
Small country
Large country

2

Non-tari barriers
Export subsidies
Import Quotas
Voluntary Export Restriants
Other non-tari barriers

3

Why impose barriers to trade?
Arguments for free trade
Arguments for active trade policy

Optimal tarrif for large countries
1
...
Trade policies cause welfare redistribution
consumers to producers/government
political economy/lobbying

3
...
4

United States

1
...
2

India

14
...
2

Russia

25
...
3

Source: World Bank data

Redistributive eects
2
...
Taris generate government revenues
more important for developing/resource abundant countries
Trade tax revenues
2008
Poland

as % of revenue
0
...
1

Switzerland

6
...
8

Ghana

21
...
2

Ivory Coast

35
...
domestic market failures may exist that cause free trade to be a
suboptimal policy
consumer and producer surplus don't accurately measure welfare
do not fully capture Marginal Social Benets of production

Types of market failures:
Factor market imperfections - prices don't adjust

e
...
Persistently high sectoral unemployment
e
...
Underutilization of structures, equipment, or other capital
Externalities

e
...
Knowledge generation/spillovers - protect/subsidise high-tech
industries?
e
...
environmental costs not fully paid for by producers/consumers

Correcting domestic market failure
4
...
g
...
g
...
g
...
g
...
g
...


Government policies to address market failures are likely to be
manipulated by politically powerful groups

Infant industry argument
Countries may have a

potential

comparative advantage in an industry

Initially this industry cannot compete with well-established industries
in other countries
To allow these industries to establish themselves, governments should
temporarily support/protect them until they have grown strong
enough to compete internationally
...

Might be justied because:
poorly developed capital markets reduce ability of rms to invest to
reduce costs
Trade barriers generate high prots which might be reinvested

-protected industries can grow large enough for economies of scale
more competitive when restrictions lifted

protection buys time to learn to be ecient

Infant industry argument

Weaknesses with argument:
What if pick wrong industry?
If industry so protable in future why not private sector backing it?

Infant industries may never  grow up or become competitive
domestic markets not large enough to generate sucient economies of
scale/learning-by-doing
protection reduces competition

may reduce eciency rather than improving

Reading

Krugman et al (2011)
Chapter 9, pp
...
249-264

Miki¢ (1998)
Chapters 8-9, pp
...
323-358
...

Lead to retaliation
Tari rates rose sharply and global trade fell
...

2

General Agreement on Taris and Services (GATS)

covers trade in services (not insurance, consulting, legal services,
banking)
3

Agreement on Trade-Related Aspects of Intellectual Property (TRIPS)

covers international property rights (not patents and copyrights)
AND dispute settlement procedure
disputes heard and decided by panel
if decision not respected punished by other countries imposing trade
restrictions

Doha negotiations collapsed 2008

World Trade Organisation
The World Trade Organization is based on a number of agreements:
1

General Agreement on Taris and Trade (GATT)

covers trade in goods
...

2

General Agreement on Taris and Services (GATS)

covers trade in services (not insurance, consulting, legal services,
banking)
3

Agreement on Trade-Related Aspects of Intellectual Property (TRIPS)

covers international property rights (not patents and copyrights)
AND dispute settlement procedure
disputes heard and decided by panel
if decision not respected punished by other countries imposing trade
restrictions

Doha negotiations collapsed 2008

World Trade Organisation
The World Trade Organization is based on a number of agreements:
1

General Agreement on Taris and Trade (GATT)

covers trade in goods
...

2

General Agreement on Taris and Services (GATS)

covers trade in services (not insurance, consulting, legal services,
banking)
3

Agreement on Trade-Related Aspects of Intellectual Property (TRIPS)

covers international property rights (not patents and copyrights)
AND dispute settlement procedure
disputes heard and decided by panel
if decision not respected punished by other countries imposing trade
restrictions

Doha negotiations collapsed 2008

World Trade Organisation
The World Trade Organization is based on a number of agreements:
1

General Agreement on Taris and Trade (GATT)

covers trade in goods

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