Ch11_Pushing Exports

Ch11_Pushing Exports - PUSHING EXPORTS 1 Agenda •...

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Unformatted text preview: PUSHING EXPORTS 1 Agenda • “Dumping” and its consequences What should receiving countries do? • Export subsidies and their consequences What should importing countries do? • The special case of declining marginal costs 6 Pushing Exports • Dumping • Export subsidies • Countervailing duties 7 •1 Dumping Selling exports at a price lower than the “normal” or “fair market value” normal” value” price ”Normal Price” is one of the price charged to domestic consumers or average production cost including the profit margin 8 Dumping • Predatory dumping To drive competitors out of business • Cyclical dumping During recession to fully use the production capacity (AC > P > MC ) 9 Dumping • Seasonal dumping To sell off excess inventories • Persistent dumping When firms with market power discriminate between domestic and foreign market Price discrimination 10 •2 Price Discrimination and Dumping Domestic Market Price Price Foreign Market Foreign demand is more elastic PDomestic PExport MC=AC MR QDomestic MC=AC DDomestic Quantity DForeign MR QExport Quantity 11 Dumping and Retaliation • The WTO allows “retaliation” if the dumping “injures” domestic importcompeting producers Impose anti-dumping duties U.S. tends to find dumping when U.S. companies complain The benefit of being the accuser and the judge! A vote-garnering exercise? 13 Top Ten Initiators of Anti-Dumping Cases Anti- 14 •3 Export Subsidies • Examples are Subsidized loans given to exporters ExIm bank Support of R&D activities that help create the product Boeing, Airbus, and many others Production subsidies Agriculture 15 Export Subsidies • They expand exports and the home production of the subsidized product • They lower the price paid by foreigners They often involve the prohibition of importing similar items • They reduce the well-being of the exporting country They may be good for the RoW 16 Export Subsidies Example • Small country provides an export subsidy of $20 • World price = $100 • Producers now receive $120 from exporting • This raises the domestic price to $120! 17 •4 Equilibrium With Export Subsidies (Small Economy) Net Loss = f + h 18 Export Subsidies Example • When a large economy subsidizes exports, the difference is that the world price will fall (more supply) Country provides an export subsidy of $20 • The result is that its losses are higher, because it is subsidizing production below the initial (efficient) world price (PW becomes lower) 19 Equilibrium With Export Subsidies (Large Economy) Net Losses: f+i+j+k+l+m+h Net Losses: f+h+u i+j+k+l+m= n+r+t+u 20 •5 Export Subsidies Example • If the government spends enough, it can turn an importable into an exportable! Nothing like trading to your comparative disadvantage 21 Importing Country Choices • How should the importing country react to someone else’s export subsidies? The import’s price will generally be cheaper! Import-competing industry is harmed but consumers are better off • What is the effect of a countervailing duty, allowed by the WTO? 22 Countervailing Duties Example • Extreme case: All the export subsidy is passed forward to the importing country i.e., import prices fall the most most harm to import-competing producers Canada imports cold-rolled steel from Brazil Without subsidies or duties, the price in Canada is $300 23 •6 Countervailing Duties Example • Extreme case: All the export subsidy is passed forward to the importing country Brazil offers a $50/ton subsidy to its steel producers Price in Canada goes to $250 24 Countervailing Duty (Large Country) Canada gains: w + y + z The combined inefficiency of too little production in Canada and too much in Brazil: World loses: x 25 Countervailing Duties Example • Extreme case: All the export subsidy is passed forward to the importing country • Now Canada Imposes a $50 countervailing duty Price goes back up to $300 26 •7 Export Subsidies and Retaliation • If retaliation duties just offset the export subsidies, world inefficiency is eliminated x goes away! But it is not neutral for the two countries In this example, Canada Gains compared to free trade! Loses compared to accepting the Brazilian subsidy! 27 Export Subsidies and Retaliation • If retaliation duties just offset the export subsidies, world inefficiency is eliminated In effect Brazil ends up paying the export subsidy to Canada Canada collects the duties. Indirectly, the subsidies are transfers to the importing country 28 Export Subsidies and Retaliation • In markets dominated by few firms (i.e., Airbus and Boeing), the race to subsidize the exporting firm may lead to world losses Given the subsidies, firms may undertake investment, even if unprofitable 29 •8 Declining Marginal Cost (Natural Monopolies) (Natural • With declining marginal costs one cannot expect the usual “competitive” markets • One or a few firms will dominate the industry One firm can conceivably supply the demand History may play a role as to who dominates 30 Declining Marginal Cost (Boeing vs AirBus) (Boeing AirBus) • • • • New “superjumbo” airplane to be built Assume same costs Development costs: 8 If they both produce, P = AC, and profits = 0 for both They lose 8! • If only one produces, profits =100 The winner charges a monopoly price! 31 A Two-Firm Rivalry Game With No TwoGovernment Subsidies: Airbus versus Boeing Airbus 32 •9 Declining Marginal Cost (Boeing vs AirBus) (Boeing AirBus) • What happens when the E.U. subsidize AirBus by 10? AirBus will not lose if it goes ahead, regardless of what Boeing does • What happens when both the E.U. and the U.S. subsidize by 10? Both companies can produce without losses, regardless of what the other does 33 Boeing vs. AirBus W Government Subsidies: 10 subsidy to AB 10 subsidy to both 34 But Why Subsidize? (Boeing vs AirBus) (Boeing AirBus) • Both countries may aerospace industry? want a functioning Strategic issues Spillovers of technology (externalities) • Would the world benefit? Each company by itself operates at a lower MC than if both split sales BUT, price will be lower (and MC higher) if they compete! 35 •10 But Why Subsidize? (Boeing vs AirBus) (Boeing AirBus) • How do you feel about your government subsidizing a huge company like Boeing? • The case of the SST! 36 Some Interesting Facts on Trade • Product level U.S. trade: Most “potential” export trade flows are not present. These are called the “export zeroes” The incidence of zeroes is strongly correlated with Distance –the further away the less trade Importing country size –the bigger the country the less success in exporting to it Export unit values are positively related to distance and negative related to market size 37 New Facts on Trade & Industrial Policy • Product level U.S. trade data • Some products are “dead-end” in the sense that they don’t spawn kindred products and more development Mineral extraction Agriculture • For some products, their technology can be adapted to kindred products TV screens to monitors to … Military applications to civil aviation to … 38 •11 Summary • Dumping and its consequences Receiving countries Dumpling countries • Exports subsidies Subsidizers Importing country • Natural monopolies and subsidies 39 THE END 40 •12 ...
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