Trade Policies and Their Effects

Effects of Alternative Trade Policies

Export Tariff

• Impact on Producer:

  • Increases revenue: Domestic producers benefit from higher prices due to reduced competition from imports.

• Impact on Consumer:

  • Decreases surplus: Higher prices lead to diminished consumer welfare.

• Impact on Government:

  • Increases revenue: Government collects tariff revenue.

• Impact on National Welfare:

  • Decreases in a small country due to higher prices and reduced consumption.
  • Could increase in a large country if it can affect world prices.

Import Quota

• Impact on Producer:

  • Increases surplus: Domestic producers benefit from limited foreign competition.

• Impact on Consumer:

  • Decreases surplus: Consumers face higher prices and fewer choices.

• Impact on Government:

  • Mixed effects: Depends on whether quota rents are captured by the importing country (through sale of licenses) or by foreign exporters.

• Impact on National Welfare:

  • Decreases in a small country due to inefficiencies.
  • Could increase in a large country by manipulating quotas.

Subsidy

• Impact on Producer:

  • Increases surplus: Producers receive direct financial assistance.

• Impact on Consumer:

  • Decreases: Potential for consumer harm due to higher taxes or prices.

• Impact on Government:

  • Increases spending: Government must fund subsidies; could lead to higher taxes.

• Impact on National Welfare:

  • Decreases overall due to market distortions.

Voluntary Export Restraint (VER)

• Impact on Producer:

  • Increases prices: Limiting exports can raise domestic prices.

• Impact on Consumer:

  • Decreases surplus: Higher prices limit consumer welfare.

• Impact on Government:

  • No direct revenue; benefits mostly accrue to domestic producers.

• Impact on National Welfare:

  • Decreases in small countries; possible welfare increase in large countries if they can negotiate beneficial terms with exporters.