Overview Basic analysis Strategic trade policy Further topics. Overview

Transcription

1 Robert Stehrer Version: June 19, 2013

2 Overview Tariffs Specific tariffs Ad valorem tariffs Non-tariff barriers Import quotas (Voluntary) Export restraints Local content requirements Subsidies Other Export credit subsidies National procurement Red-tape barriers

3 Frameworks adopted General equilibrium models Partial equilibrium models Variety of models Focusing on particular trade policy measures Using different modeling strategies see e.g. Rivera-Batiz and Oliva, 2003

4 of tariffs 2 countries Production of homogenous in competitive markets Costless trade Prices quoted in same currency (no exchange rate effects)

5 Import demand and export supply curves S XS S* D MD D* Q W Home World Foreign World price lies between autarky prices Home imports good and Foreign exports good The following relationships hold: D S = S D D + D = S + S

6 Demand and supply curves Q D = 50 P Q S = 30 + P Q D = 50 P Q S = 10 + P Equilibrium in autarky P = 40; Q = 10 P = 30; Q = 20 As price in Home is larger, Home will import and Foreign will export Home import demand curve: Q D Q S = 80 2P Foreign export supply curve: Q S Q D = P World equilibrium P = 35 Home demands Q D = 15 and supplies Q S = 5, therefore imports 10 Foreign demands Q D = 15 and supplies Q S = 25, therefore exports 10

7 Costs and benefits of tariffs (partial equilibrium) Net gains from trade S S S Gains from trade World price World price World price D D D Gain in consumer surplus Loss in producer surplus Net welfare gain Home country: gain in consumer rent is larger than loss in producer rent: gains from trade of 10 5/2 = 25 Foreign country: gain in producer rent is larger than loss in consumer rent: gains from trade of 10 5/2 = 25 Note: numbers depend on specific example chosen!

8 Example

9 Effects of a tariff S XS S* t D MD D* Q T Q W Home World Foreign Foreign moves goods to Home only if Home price is at least as large as p + t After tariff price in Home rises and in Foreign falls until price differences is t Trade volume falls Note that increase in Home price is less than the tariff Decline in Foreign export price Tariff increase not entirely passed on to Home consumers

10 A tariff is imposed by the home country of t = 2: 80 2(P + 2) = P 80 2P 4 = P 136 = 4P World equilibrium price without tariff is P = 34; Home price includes tariffs, therefore P + t = 36 Home demands Q D = 14 and supplies Q S = 6, therefore imports 8 Foreign demands Q D = 16 and supplies Q S = 24, therefore exports 8

11 Special case: Effects of a tariff in a small country S World price + t World price D Small country Tariff in small country has no effect on foreign export price Import price rises by full amount of t to p w + t

12 Effects of a tariff in a small country S S Production distortion loss S Consumption distortion loss World price World price World price D D Tariff revenues D Loss in consumer surplus Gain in producer surplus Net welfare loss A tariff reduces welfare (measured as CR and PR) in home country; tariff revenues are not large enough to compensate In this case, no effect on foreign country Based on concept of consumer and producer surplus

13 Effects of a tariff: Strong effect on export price S S S World price World price World price D D D Loss in consumer surplus Gain in producer surplus Net welfare gain If export prices falls, this could lead to welfare gains

14 Example

15 Optimal tariff Large country is able to affect prices of foreign exporters Tariff lowers price of imports and generates terms of trade effects Terms of trade benefits might be larger than costs of tariffs For exporting sector: terms of trade argument would suggest export tax (e.g. oil exporting countries) Little practical importance Small countries cannot influence exporter price Seen as argument for national monopoly power in negotiations Not used as justification for trade policy

16 Optimal tariff rate National welfare Free trade Optimum tariff Prohibitive tariff Tariff rate Welfare maximized at optimal tariff Depends on decline in foreign export price

17 Export subsidies Payment to a firm shipping goods abroad Specific subsidy Ad valorem subsidy

18 Effects of an export subsidy with no effect on export price S S S World price World price World price D D D Loss in consumer surplus Gain in producer surplus Subsidy An export subsidy generates a welfare loss

19 Effects of a subsidy with additional terms-of-trade effect S S S World price World price World price D D D Loss in consumer surplus Gain in producer surplus Subsidy An export subsidy raises prices in the exporting and lower them in the importing country

20 Example

21 Import quotas Restriction on quantity of good imported Enforced by issuing licenses to individuals or firms (or governments) Effects of quotas Import quotas raise domestic price of imported good An import quota will raise domestic prices by same amount as tariff that limits imports to same level (under perfect competition) Government receives no revenues Revenue (quota rents) is collected by license holders License holders buy imports at world prices and resell them at domestic price

22 Effects of an import quota S S S World price World price World price Quota D Quota D Quota D Loss in consumer surplus Gain in producer surplus Net welfare loss Welfare loss is higher than for a tariff that limits imports to same amount

23 Empirical example Annual cost of US Import Protection (in billion $, years around 1985) US deadweight Foreign deadweith loss Quota rents loss Automobiles Dairy Steel Sugar Textiles and apparel Average tariffs Total Source: Feenstra, 2003, p. 258, Table 8.1.

24 Voluntary export restraints (VER) Voluntary restraint agreement (VRA) Quote imposed from exporting country s side Example: Limitation of auto exports to US enforced by Japan after 1981 Multi-Fiber Agreement (multilateral) Imposed at request of importer; agreed by exporter to forestall other trade restrictions Same effects as quote (with licenses assigned to foreign economy)

25 Local content requirements Specified fraction of final good must be produced domestically No government revenues or quota rents Price differences passed on to consumers

26 Other Export credit subsidies National procurement Red-tape barriers

27 Summary Tariff Export subsidy Import quota VER Producer surplus Consumer surplus Government revenue 0 (Rents to license holders) 0 (Rents to foreigners) Overall national welfare??... for small countries Source: Krugman and Obstfeld, 2003

28 Brander and Spencer, 1985 Two firms competing in third market Choosing volumes of production of homogenous good that is entirely exported to third market Cournot competition Governments consider export subsidies

29 Third market inverse demand function p(q) = a bq = a b(q + q ) with a, b > 0 p... price in third market Q = q + q... output (=exports) of home and domestic firm Home firm s profit function π = pq cq = [a b(q + q )]q cq Export subsidy π = pq cq = [a b(q + q )]q cq + sq c... constant marginal costs s... subsidy

30 Foreign profit function (assuming no subsidies) Assume that firms compete in quantities Cournot oligopoly π = pq cq = [a b(q + q )]q c q Cournot-Nash noncooperative equilibrium Find each firm s best output response given the rival s decision Home firm takes (per unit) subsidy as given First order conditions π q = a 2bq bq c + s = 0 π q = a 2bq bq c = 0 Note that 2 π/ q 2 = 2 π / q 2 = 2b < 0

31 Reaction functions express each firms optimal output as a function of other firm s output given subsidy q R = a bq c + s 2b q R a bq c = 2b

32 Cournot-Nash equilibrium and effects of export subsidy q* q* Cournot-Nash equilibrium RR R*R* q s=0 s>0 RR R*R* RR q

33 Solving for q and q q = a + c 2c + 2s 3b q = a + c 2c s 3b After subsidy profits π = (a + c 2c + 2s) 2 9b π = (a + c 2c s) 2 9b A higher home subsidy Raises home firm s output and profits Decrease foreign firm s output and profits

34 Welfare effects of a subsidy Profit-shifting effect versus subsidy costs Assumption that subsidies financed by non-distorting lump-sum taxes; redistribution policy is welfare neutral Local consumers pay taxes sq Given to domestic firms as export subsidies Welfare defined as W = π sq = (a + c 2c + 2s)(a + c 2c s) 9b For s = 0 we get W s=0 = (a + c 2c) 2 9b

35 Government sets subsidies to maximize domestic welfare; first order conditions dw ds = 2(a + c 2c s) (a + c 2c + 2s) 9b = a + c 2c 4s 9b = 0 Solving for optimal unilateral subsidy gives s U = a + c 2c 4 > 0 as positive output condition implies that a + c 2c > 0 Subsidy increases with rival s marginal costs Subsidy decreases with domestic marginal costs Implies that more cost-competitive firms should receive larger subsidies

36 Bilateral export subsidies π = [a b(q + q )]q cq + sq π = [a b(q + q )]q c q + s q Solving for output levels as above yields reaction functions Equilibrium output and profits q = a+( 2c+c )+(2s s ) 3b q R = a bq c + s 2b q R = a bq c + s 2b q = a+( 2c +c)+(2s s) 3b π = [a+( 2c+c )+(2s s )] 2 π 9b = [a+( 2c +c)+(2s s)] 2 9b Aggregate output Q = 2a (c + c ) + (s + s ) 3b

37 Effects of bilateral subsidies q* R*R* R*R* RR RR q Shifts both reaction functions out

38 Welfare W = π sq = (a + c 2c + 2s s )(a + c 2c (s + s )) 9b W = π s q = (a + c 2c + 2s s)(a + c 2c (s + s)) 9b Both governments choose non-cooperatively specific welfare maximizing subsidy s B = a 3c + 2c 5 s B = a 3c + 2c 5 Inserting back, the equilibrium welfare levels become W B = 2(a 3c + 2c ) 2 25b W B = 2(a 3c + 2c) 2 25b

39 Consider symmetric case (c = c ) Subsidy levels 0 < s B = s B = a c 5 < s U = a c 4 Firms profits are always larger than under free trade π = π = (a c + s)2 9b > (a c)2 9b = π s=s =0 Welfare levels are lower than under free trade W B = W B = 2 (a c) 2 < W s=s =0 = 1 (a c) 2 25 b 9 b

40 Output levels Note that q B = q B = 2 a c 5 b q U = 1 a c > q B = 2 a c > q s=s =0 = 1 a c 2 b 5 b 3 b

41 Bilateral intervention q* q* RR R*R* R*R* q s=0 s=0 RR RR R*R* R*R* RR q Optimal bilateral subsidy is lower than optimal unilateral subsidy Both firms produce more than under free trade

42 Summary Bilateral subsidy is smaller than unilateral subsidy Welfare is smaller than under free trade Prisoner s dilemma Welfare losses compared to free trade Bilateral output lower than unilateral output, but higher than production level under free trade Aggregate output is higher than under free trade and unilateral output Welfare gains in third market

43 Extensions Asymmetries Tax distortions Competitive export market plus political pressures exercised by exporters (Bagwell and Staiger, 2001) Alternative frameworks Multiple instruments (Dixit, 1984) Free entry and increasing costs (Horstman and Markusen, 1986) Research and Development (Brander and Spencer, 1983; Leahy and Neary, 1997) General equilibrium (Dixit and Grossman, 1986) Other environments (e.g. Bertrand competition) Note: Brander and Spencer (1985) results not robust to these alternative frameworks

44 Measuring trade barriers Effective tariffs Nontariff barriers Trade restrictiveness indicators International cooperation (WTO) Political economy of trade (Reciprocal) Dumping

45 Trade policy in developing countries Import-substituting industrialization Infant industry argument Promoting manufacturing Dual economies Export oriented industrialization (e.g. East Asia)