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POLICY TRADE Readings from Y&Y: Chapter 6 - study (omit section 6.8, Appendixes A and B) Chapter 7 - study 7.1-7.5, skim 7.6-7.8, omit 7.9 Chapter 8 (omit cases) - main ideas and most important facts Chapter 9 sections 1-4 - main ideas and most important facts Rough correspondences: Trade Policy overheads I and II assigned sections of Chapters 6 and 7 Trade Policy overhead III assigned sections of Chapter 9 Trade Policy overhead IV assigned sections of Chapter 8 INTRODUCTION TO TRADE POLICY So far: free trade contrasted with autarky - reasons for trade - gainers and losers sectors different types of factors no analysis of government Now: between free trade and autarky - caused by government interventions gainers and losers - consumers, producers, taxpayers political economy - reflects political power of gainers and losers institutions of trade policy - affect political economy Outline interventions, barriers, distortions instruments of trade policy basic trade policy diagram applications of diagram - effect of tariffs, taxes, subsidies small country case large country case tariffs versus quotas US trade policy - institutions and history - interaction with world trade policies political economy of trade policies trade policy debates - dumping, subsidies, etc - arguments for and against trade restrictions Interventions, distortions, barriers trade interventions - policies causing deviations from free trade some interventions aim at improving general economic welfare - examples providing revenues for government budget protecting health, safety etc negating other country's interventions often interventions favor particular activities - e.g. protecting an industry from imports trade distortions effects on trade - interventions: reduce or increase trade - distortions: reduce or increase trade - barriers: reduce trade (protectionist policy) crucial policy issue: how does intervention change general economic welfare? The instruments of intervention basic distinction: - tariff versus non-tariff interventions (tax/subsidy intervention versus others) taxes, subsidies payment to or from government? to from export tax export subsidy tariff import subsidy exporting importing - tariffs (import taxes or duties) tax on good as it enters country types specific: $ amount on each unit ad valorem: percentage of the value focus of many early trade agreements countervailing tariffs or duties negate another country's subsidies - Instruments of intervention, continued: quotas - quantity limit on export or import e.g. "quantity of eggplants from Mexico, from April 1 to June 30 no more than 4,551,000 kg in 2001 and 4,687,000 in 2002" - most common non-tariff barrier - usually more selective than tariffs discriminates between countries voluntary export restraint (VER's) - hidden quotas import - implemented by foreign country under pressure e.g. Japanese cars in 1980's voluntary import expansions - trade expansion by government agreement Instruments of intervention, continued: Anti-dumping measures - what is dumping? exporting at "low" price - why could there be dumping? anti-competitive measure government intervention - "anti-dumping measures" punish dumping e.g. special punitive tariff often politically popular example: punitive tariffs on "certain paper clips from China, wholly of wire of base metal, whether or not galvanized, whether or not plated with nickel or other base metal (e.g., copper), with a wire diameter between 0.025 inches and 0.075 inches (0.64 to 1.91 millimeters), regardless of physical configuration, except as specifically excluded. The products subject to this order may have a rectangular or ring-like shape and include, but are not limited to, clips commercially referred to as No.1 clips, No. 3 clips, Jumbo or Giant clips, Gem clips, Frictioned clips, Perfect Gems, Marcel Gems, Universal clips, Nifty clips, Peerless clips, Ring clips, and Glide-On clips. Specifically excluded from the scope of this order are plastic and vinyl covered paper clips, butterfly clips, binder clips, or other paper fasteners that are not made wholly of wire of base metal " Instruments of intervention, continued: offshore assembly provisions - reduce tariffs, assessing only on value-added - example: maquiladoras, US-Mexico border US made computer components exported to Mexico assembled computer imported into US tariff assessed on value of computer minus value of components rules of origin - importing country specifies % of product that must be made in exporting country - especially important in free trade areas domestic content requirements - applies to domestically produced goods - limits % of components from imports Instruments of intervention, continued: Technical or regulatory standards - introduced for legitimate reasons even then can be a barrier to trade manipulated by producers and politicians government procurement rules - government often favors domestic producers Constructing the Basic Trade Policy Diagram Price (P) Dd Sd PA YA Quantity (Y) P Sd PA Dd YA Consumer surplus Y Producer surplus Introducing world supply and demand P Sd PA PW Dd YA Y Small country assumption: this country's actions do not affect world price. PW is world supply or world demand P Sd PA PW Dd YP YA YC Y Changes in Production and Consumption P Sd PW Imports YC Dd Y YP Levels of Imports P Changes in consumer and producer surplus d S PA PW Dd YP YA YC Y P Changes in economic well-being Sd PA PW Dd YP YA YC Y Gain because consumers replace more expensive home produced goods with cheaper imports Gain because consumers consume more of this good (and less of others) when price changes from autarky price to world price

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