ECON 222 International Trade: Trade Policy A – Limiting imports

Flashcards generated from lecture notes on International Trade - Trade Policy A: Limiting Imports.

A tariff, also known as a customs duty or an __ ,is the most common instrument used to limit imports.

A tax paid on imported goods when they go through customs.

__ work largely the same way as tariffs in limiting imports but have slightly different welfare implications.

Largely the same way as tariffs in limiting imports, but have slightly different welfare implications.

Tariff-rate quotas __.

Set a low (e.g. zero) tariff on imports up to the quota and a higher tariff on imports above the quota.

Subsidising producers to help them compete against imports restricts imports because __.

They restrict imports by making it harder for them to compete.

In partial equilibrium models, __.

We analyse one sector at a time and can thus use actual (not relative) prices.

In a simple cost-benefit analysis for welfare effects, total welfare is __.

The sum of consumer surplus, producer surplus and government income/expenditure.

Consumer surplus (CS) is __.

The area below the inverse demand curve above the price.

The inverse demand curve __.

Measures an economy’s willingness to pay for each unit.

Producer surplus (PS) is __.

The area above the supply curve (MC) and below the price.

PS equals __.

Total revenue minus variable cost.

The received income from tariffs can be spent on public programmes, such as __.

Schools, road systems etc.

The autarky equilibrium is found where __.

Demand equals supply or, equivalently, where inverse demand equals inverse supply.

Home’s inverse supply: p = 1 + QS → QS = __

−2 + 2p

Home’s inverse demand: p = 6 − (3/4) QD → QD = __

8 − 4/3 p

ROW’s inverse supply: p* = 3 + (1/2) QS* → QS* = __

−6 + 2p*

ROW’s inverse demand: p* = 6 − (3/4) QD* → QD* = __

8 − 4/3 p*

Equilibrium requires that __.

Export supply of one country equals the other country’s import demand.

The main purpose of an import tariff is __.

To help the domestic industry compete against imports.

A prohibitive tariff is a tariff __.

That is so large that it leads to the elimination of imports.

The “small-country case” assumes that __.

The importers that use tariffs are sufficiently small so that a change in their own demand does not materially affect the world price.

Home's inverse supply is: p = 1 + QS ®Home’s quantity supplied / actual supply is QS = __

• 1 + p

Home's inverse demand is: p = 11 - QD ®Home’s quantity demanded / actual demand is QD = __

11 - p

Since they have to pay the tariff equal to $3, the price of their good goes up to __.

2 + $3 = $5 so that they can net $2

The tariff benefits the importing country because the producers __.

They can get a better price for their goods.

The tariff hurts the importing country because __.

The consumers have to pay a higher price.

Area b represents the production distortion, which means __.

Some output is produced at Home even if it would be more efficient to produce it elsewhere.

Area d represents the consumption distortion, which means __.

Some consumers that were willing to consume at world prices are forced out of the market.

Tariffs are most often used __.

To keep an industry and jobs alive in the face of increased competition from imports.

The main downside of a tariff is __.

An increase in price paid by all consumers.

The large-country case __.

Takes into account the effects of the tariff on the world price.

Home sets a per-unit tariff equal to $5, therefore __.

pW = pW* + 5

The difference between small country case and large country case is __.

The price in ROW is no longer fixed but adjusts to the change in demand from Home caused by the tariff.

A terms of trade gain arises because the tariff, by lowering world demand for the product, lowers __.

The price of the import good, which improves terms of trade of the importer.

Even a large importer will end up __.

Losing overall its trading partners’ tariffs hurt it more than it gains from its own tariff.

In the tariff war example, Home is better off using a tariff regardless of what ROW does – this is __.

A strictly dominant strategy.

The only equilibrium in this game is one where both countries use a tariff because __.

It is always individually rational to use a tariff.

The countries that are not directly affected by the tariff are still indirectly affected by the tariff if they trade on the world market __.

Because the world price changes due to the tariff.

Tariffs change the allocation of employment __.

From the export sector to the import-competing sector.

Import tariffs in industrialised countries usually protect industries that employ __.

A disproportionate share of unskilled workers, women and ethnic minorities.

The employment argument states that we should protect some sectors from imports because __.

It hurts domestic employment in general and employment of the minority groups in particular.

While reducing trade barriers may lower employment in the import-competing sector, keeping trade barriers ends up __.

Reducing employment in the export sector

Tariffs for goods used as inputs in production raise the cost of production and put jobs in those industries in jeopardy. This is not such an issue in NZ because most of our tariffs __.

Are in final goods

The domestic market failure argument for trade policy suggests that __.

Tariffs can be used to correct for domestic market failures, such as unemployment as tariffs improve output and employment in the import-competing sector.

It might be better to correct a domestic market failure with a domestic subsidy as __.

Distorts the world price by less.

__ is called a domestic subsidy.

When a government subsidises output

The $5 subsidy __.

Offers domestic producers extra income for each unit they produce.

If you have the actual supply, __.

We will need to start by inverting it

The difference between a domestic subsidy and a tariff is that __.

A subsidy will simply increase the supply in the world market but will not create a differential between the internal price in the importing country and the world price

We can conclude that the subsidy increases domestic output by __.

More than the $5 tariff

The main difference between the domestic subsidy to a tariff is that domestic subsidy __.

Helps consumers

Import quotas are __.

Quantity restrictions on imports

Absolute quota means that once the quota is filled, __.

No more imports of that good are allowed to enter the country in that quota year

Tariff-rate quota means that once the quota is filled, __.

Subsequent imports will be subject to higher tariffs

Tariffs __.

Make importing more expensive

Quotas, on the other hand, __.

Reduce import quantity, which raises the price of imports

__ that typically set a low tariff on the quota amount, and a much larger (and often prohibitive) tariff on above quota amounts.

GATT/WTO members agreed in the Uruguay round to convert their quotas to tariff-rate quotas

The excess demand __.

Has an upward pressure on the price at Home.

If the quota is auctioned off, ROW producers will pay for it __.

For what they are worth

Quota has a definite negative effect on welfare when __.

The licences are given away

If the licences are given away, quota is worse than tariff for Home but better than tariff for ROW – __

This is because the so-called quota rent, or the value of the quota ($5 per unit) times the quota amount, goes to ROW and not Home in this case

Domestic subsidies are usually better than tariffs at protecting the import-competing sector because they end up __

Lowering the domestic price rather than increasing it.

__ and increase the amount of imports that is subject to this lower tariff rate

The goal of the WTO is to reduce the initial tariff rate and increase the amount of imports that is subject to this lower tariff rate

The most common instrument used to limit imports is a tariff, also known as a customs duty or an __.

Import duty

__ are being phased out and replaced by tariff-rate quotas.

Quotas

We only care about changes in government spending, so we assume that G = __ with free trade.

Zero

The __ is found where the total quantity supplied in the world equals the total quantity demand.

The free-trade equilibrium

The __ makes it easy to analyse trade because we don’t have to know anything more than the demand and supply functions of the importing country and the world price.

The small-country case

Substituting pW = 52.5 and pW * = 47.5 into the demand and supply functions gives us the quantities demanded and supplied when Home is using a tariff: p/

52.5

In the tariff war example, the same is true for ROW; it prefers a tariff over no tariff regardless of what Home does – __ , and it is better off when neither country uses a tariff compared to when both of them use a tariff.

A strictly dominant strategy

The net welfare effect of third party effects of tariffs – that are exporters – is negative __.

For an exporter

Removing tariffs is likely to lead job losses, and the new jobs created in the export sector __.

May require a different skill set for some displaced workers

A domestic subsidy can benefit a country if it is large enough to __ the world price.

Affect significantly

Because there is a quantity cap, quotas __ customs to keep track of how much of the quota is filled .

Requires

__ is to reduce the initial tariff rate and increase the amount of imports that is subject to this lower tariff rate.

The goal of the WTO