BAR11S.9IE - Dr Christine M Shaw[BAR11S.9IE International...

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Dr. Christine M. Shaw [BAR11S.9IE] International Economics Outline for Week 5 I. Week 4 “highlights” II. Welfare effects of a tariff A. Figure 3 (handout) B. Change (pre- and post-tariff) = - (D + F) 1. These two triangles are referred to as “deadweight losses” of a tariff a. D = The deadweight loss from over-production (because of the artificially high price) b. F = The deadweight loss from under-consumption III. Arguments for a tariff A. The most popular claim → the infant industry argument 1. This asserts that industries that might benefit from large-scale operations because of the existence of external economies (such as good transport facilities or a well-trained labour force) should be allowed to grow to optimum size under a protective umbrella 2. Once that size is attained – the baby grown up – the tariff can be removed → leaving behind a viable and competitive industry 3. Valid in theory, though there are problems a. Difficult for a government to have the perfect foresight to pick “winners” b. Once protection exists → tends to become entrenched c. Declining industries often come to rely on protection of this sort B. Tariffs may be used to increase employment or improve the balance of payments 1. Problem with such a strategy is that it entails large welfare losses 2. From a welfare perspective → far better off using monetary, fiscal or labour policies (such as reducing minimum wages) to generate employment → protection is an expensive way to create jobs 3. Similarly, would be better off using the exchange rate policies to improve the BOP C. There is actually only one rational argument for levying a tariff 1. That is to improve the terms of trade 2. However, this applies only to a country large enough to affect the TOT 3. Moreover, it only holds if there is no retaliation IV. Quotas 1
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A. A quota = a quantitative restriction on imports or exports → a type of NTB B. The welfare costs of a quota can be analysed in the same basic way as the costs of a tariff 1. Figure 4 (handout) 2. Our equilibrium point shifts from 1 (pre-trade) to 2 (free trade) to 3 (post- quota) 3. Change a. CS = - (C + D + E΄ + E΄΄ + F) b. PS = + C c. Quota-holder surplus = + (E΄ + E΄΄) d. TS = - (D + F) 4. Deadweight loss from a quota a. - (D + F) b. Notice that this is the same as in the case of a tariff (figure 3) 5. Moral of the story a. Both tariffs and quotas raise the domestic price of a good, reduce the welfare of domestic consumers, increase the welfare of domestic producers and cause deadweight losses b. The one difference i. A tariff raises revenue for the government (area E in figure 3) ii. A quota creates surplus for quota-holders (areas E΄ + E΄΄ in figure 4) V. Non-tariff barriers (NTBs) A. Encompasses a whole set of trade barriers – of varying degrees of legitimacy B. Domestic content requirements 1. This is a reaction to the out-sourcing of production by many companies 2. A government – usually pushed by some lobby, such as the ILGWU – will
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This note was uploaded on 04/17/2011 for the course ECON 3250 taught by Professor Shaw during the Spring '11 term at CUNY Baruch.

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BAR11S.9IE - Dr Christine M Shaw[BAR11S.9IE International...

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