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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

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
Qm

Q
Imports after
tariff

Welfare eects
Reduction in consumer surplus

P

D

P

S

PA

PA

PW+t
PW

S*
Dm
Qm

Q
Imports after
tariff

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
Qm

Q
Imports after
tariff
Taris reduce welfare in small countries
production and consumption eciency losses

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
S*

PW

Q

Imposing tari
P

D

S

PA
S*T
PT
PT

S*

W

Q

Welfare eects
P

D

S

PA
S*T
PT

S*

P TW

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

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

Import quota
Allow imports up to some limit

P

PW

D

S

S*

Q

Import quota
P

D

S

SQ

PQ
PW

S*

Q

Quota

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

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

Other non-tari barriers

national procurement
safety standards
labour standards
administrative regulations

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

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

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
...
222-248
Chapter 10, pp
...
279-322
Chapter 9, pp
...


Origin of international trade agreements

In 1930, the United States passed the Smoot-Hawley Act
...


In 1947 23 countries agreed General Agreement on Taris and Trade
(GATT)
covered taris on merchandise

GATT

World Trade Organisation
Formed in 1995 after Uruguay Round
Charged with implementing multilateral trade negotiations (and
policing them)
WTO negotiations address trade restrictions by:
1

Reducing tari rates through multilateral negotiations

2

Most-favoured-nation (MFN) principle

3

National treatment - treating foreign and local goods equally

4

Binding tari rates: a tari is  bound by having the imposing country
agree not to raise it in the future

5

Eliminating nontari barriers

quotas and export subsidies are changed to taris because the costs of
tari protection are more transparent and easier to negotiate
Various exceptions allowed, including:
Subsidies for agricultural exports
 market disruptions caused by a surge in imports

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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