22 Instruments of Trade Policy, Part 2

22 Instruments of Trade Policy, Part 2 - Instruments of...

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1 1 Instruments of Trade Policy, Part 2 • Non-Tariff Barriers to Trade: – Export Subsidies – Import Quotas – Voluntary Export Restraints – Local Content Requirements – Other Trade Policy Instruments 2 Export Subsidies •An export subsidy is a payment to a firm that ships a good abroad. – It can be either specific or ad valorem . 3 Export Subsidies Need to distinguish between 2 cases: 1. “Small” country export subsidy. 2. “Large” country export subsidy. In both cases, the domestic and foreign markets must be segmented. 4 “Small” Country Export Subsidies Q P S D P W
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2 5 “Small” Country Export Subsidies Effects of the export subsidy: 1. Domestic price rises to P W + S. 2. Domestic demand falls from D 0 to D 1 . 3. Domestic supply rises from S 0 to S 1 . 4. Exports rise from X 0 to X 1 . 6 “Small” Country Export Subsidies Q P S D P W P W + S S 1 S 0 D 0 D 1 7 “Small” Country Export Subsidies Costs and benefits of an export subsidy: Fall in consumer surplus = - ( a + b ) Rise in producer surplus = + a + b + c Fall in government revenue = - ( b + c + d ) Net effect on Home welfare = - ( b + d ) 8 “Small” Country Export Subsidies •Th e net cost of an export subsidy is: - ( b + d ) ¾ b represents the consumption distortion, and ¾ d represents the production distortion.
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3 9 “Small” Country Export Subsidies • An export subsidy unambiguously leads to a net loss of economic welfare for a “small” country. 10 “Large” Country Export Subsidies Q P S D P W D 0 S 0 11 “Large” Country Export Subsidies Effects of the export subsidy: 1. World price declines from P W to P W1 . 2. Domestic price rises to P W1 + S. 3. Domestic demand falls from D 0 to D 1 . 4. Domestic supply rises from S 0 to S 1 . 5. Exports rise from X 0 to X 1 . 12 “Large” Country Export Subsidies Q P S D P W P W1 + S S 1 S 0 D 0 D 1 P W1
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4 13 “Large” Country Export Subsidies Costs and benefits of an export subsidy: Fall in consumer surplus = - ( a + b ) Rise in producer surplus = + a + b + c Fall in government revenue = - ( b + c + d + e +
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.

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22 Instruments of Trade Policy, Part 2 - Instruments of...

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