VIOLATIONS OF FREE TRADE ASSUMPTIONS: EXTENSIONS. I. Comparison of Tariff, Quota, and Variable Levy (VL)

Transcription

1 AGEC 652 Lectures 26 and 27 VIOLATIONS OF FREE TRADE ASSUMPTIONS: EXTENSIONS I. Comparison of Tariff, Quota, and Variable Levy (VL) II. Differences in Market Effects of Tariff, Quota, and VL III. Tax/Tariff: Ad Valorem vs. Specific IV. Joint Products and Trade Policy V. Sector Linkages and Trade Policy VI. Rate of Effective Protection

2 I. Comparison of a Tariff, Quota, and Variable Levy (VL) 1. Main difference between tariff, quota and VL: 2. Tariff: The level of the tariff is the target: T m P m = P x + T m 3. Quota: The level of imports is the target: Q m The linkage between price is broken: P m P x 4. VL: The internal price is the target: P m The VL is NOT the target but rather the internal price. P m = P x + VL or VL = P m - P x 5. Their effects on markets and prices can be quite different given changes in internal and external conditions.

3 II. Effects of Quota, VL, and Tariff Under Changing Conditions Change in Internal Conditions (Sm ) Change in External Conditions (Sx ) ES US ES US Quota ED ROW ED ROW ES US ES US Variable Levy ED ROW ED ROW ES US ES US Tariff ED ROW ED ROW

4 III. Tariff-Rate Quota: Combination of a Tariff and a Quota A Normal Tariff or Import Quota D S ES Pm P Quota ED ED (Tm )

5 III. Tariff-Rate Quota: Combination of a Tariff and a Quota (cont d) With a tariff-rate quota, the target changes from the level of imports to the level of the tariff by setting two different tariff levels: (1) a lower tariff below the Quota level ( (Tm )) and (2) a higher tariff beyond the Quota ( (Tm 1 )). D S ED (Tm ) ED Quota ED (Tm 1 )

6 III. Tariff-Rate Quota: Combination of a Tariff and a Quota (cont d) The internal and external price levels (Pm and Px, respectively) depend on the level of the. D S ES Pm ED (Tm ) Px ED Quota ED (Tm 1 )

7 III. Tariff-Rate Quota: Combination of a Tariff and a Quota (cont d) As ES shifts right, Px declines but Pm and imports remain at the quota level For you to ponder: What would happen if the ES curve D S shifted left instead? ES Pm ED (Tm ) Px ED Quota ED (Tm 1 )

8 III. Tariff-Rate Quota: Combination of a Tariff and a Quota (cont d) but when the ES crosses the lower portion of the ED curve (ED (Tm 1 )), both prices drop with the difference equal to the outside tariff level (Tm 1 ) and imports increase beyond the quota level. D S Pm ES Quota ED (Tm 1 ) Px ED

9 IV. Ad Valorem Tax/Tariff vs. Specific Tax/Tariff P ES(t x ) ES (T x ) ES P x ED P m ED Q x Q x Q x Q

10 V. Joint Product Markets and International Trade in Soybeans and Soybean Products Example: Import Tariff on the Primary Product (Soybeans) DS SS ESS PS SOYBEAN SECTOR EDS S 2 S 1 XS 1 DM SM ESM SOYMEAL SECTOR PM EDM M 2 M 1 XM 1 ESO DO SO PO SOYOIL SECTOR EDO O 2 O 1 XO 1

11 V. Joint Product Markets and International Trade in Soybeans and Soybean Products Example: Import Tariff on the Joint Product (Soymeal) DS SS ESS PS SOYBEAN SECTOR EDS S 2 S 1 XS 1 DM SM ESM SOYMEAL SECTOR PM EDM M 2 M 1 XM 1 ESO DO SO PO SOYOIL SECTOR EDO O 2 O 1 XO 1

12 VI. Sector Linkages and International Trade A. Horizontal Linkage in Production Example: Corn and Soybeans VL on Corn DS SS ESS SOYBEAN SECTOR PS EDS S 2 S 1 XS 1 DC SC ESC CORN SECTOR PC EDC C 2 C 1 XC 1

13 B. Vertical Linkage in Production (Supply Chain) Example: U.S. Feeder Cattle Import Restrictions and the North America Cattle and Beef Supply Chain DFC SFC ESFC Mexico U.S. Feeder Cattle Market PFC F 1 F 2 MF 1 EDFC DSC SSC ESSC Canada U.S. Slaughter Cattle Market PSC EDSC S 2 S 1 XS 1 DB SB ESB Beef Market PB EDB Mexico B 2 B 1 XB 1

14 C. Horizontal Linkage in Consumption Example: Sugar and Artificial Sweeteners and U.S. Sugar Import Quota DS SS EOS PS U.S.: Sugar Market EDS S 1 S 2 MS 1 SA U.S.: Artificial Sweetener s Market DA

15 VII. Rate of Effective Protection The nominal import tariff rate does not indicate the actual level of protection provided to the processing industry of an import-competing commodity for 2 reasons: (1) imported inputs may also be charged a tariff and (2) the tariff charge as a % of the per unit profit of the processor (i.e., the per unit value added) is higher than it is a % of the per unit revenue (i.e. the price) The Rate of Effective Protection (g) measures the percentage increase in the per unit domestic value added (V) as a result of tariffs: (1) g = V V V If a i = ratio of the cost of the input i (c i ) to the price of the final product (p) in the absence of tariffs (i.e., c i /p) t m = the nominal ad valorem import tariff on the final product t i = the nominal ad valorem import tariff on input i Then the per unit value added is V = p-σc i. And since a I = c i /p, then: (2) V = p-pσa i = p(1-σa i ) With a tariff on imports of the final product and the inputs, the per unit value added is: (3) V = p(1 + t m ) pσa i (1 + t i ) and therefore. V V (4) g = = V Cancelling terms gives: p(1 + t m ) pσa i (1 + t I ) p(1 Σa i ) p(1 Σa i ) (5) g = t m Σa i t i 1 - Σa i A one input example: soybeans (input) and soymeal (final product). Given t m = 2% (soymeal) and t i = 1% (soybeans) and a i = 8%, then: g = (.2.8*.1)/(1-.8) =.12/.2 =.6 The EFFECTIVE tariff rate is while the NOMINAL tariff rate is only.