3. Trade and Development

Transcription

1 Trade and Development Table of Contents 3. Trade and Development the arguments a) Effects of an import tariff b) Effects of an export subsidy c) Arguments for trade policy 164

2 a) Effects of an import tariff Assumption: small country (tariff has no effect on terms of trade) Partial equilibrium analysis Consider the effect of a specific tariff/ ad valorem tariff on the domestic market for the imported good: increase in domestic price or 1 above world market price protected industry expands domestic production decrease in domestic consumption 165

3 a) Effects of an import tariff Figure 7: Partial equilibrium analysis of an import tariff 166

4 a) Effects of an import tariff Welfare analysis: Welfare= Consumer surplus+ producer surplus+ government balance Consumer surplus: (a+b+c+d) Producer surplus: +a Government: tariff revenues: +c Total Welfare effect: (b+d) deadweight loss (production and consumption bias) 167

5 a) Effects of an import tariff General equilibrium analysis An import tariff leads to output expansion in the import competing industry which needs a reallocation of resources (due to full employment condition) and, thus, affects the output of the export industry. A tariff leads to an increase in the domestic relative price: 1 168

6 a) Effects of an import tariff General equilibrium analysis Figure 8: General equilibrium analysis of an import tariff 169

7 a) Effects of an import tariff Effects of an import tariff in a small country expansion in import competing industry (y 1 ) at the expense of export oriented industry (y 2 ) decrease in consumption: substitution and income effect decreasing trade flows, less specialization decreasing welfare 170

8 a) Effects of an import tariff Differences between tariffs and quotas: c represents tariff revenues (in case of import tariff), and quota rents (in case of import quota), distribution of quota rents: Distribution of import licenses to domestic firms (quota rent as profits from importing), welfare loss as in the case of a tariff. Auctioning of import licenses (c represents government revenues from auction), welfare loss as in the case of a tariff. Rent seeking activities to obtain import licenses (MR equal MC of rentseeking), welfare loss is higher than in the case of a tariff. Voluntary export restrains: quota rents obtained by foreign firms/government, welfare loss higher than in the case of a tariff. dynamic perspective on tariffs and quotas: efficiency enhancing effects of a tariff vs. quality upgrading due to a quota A quota is selective and discriminatory. 171

9 b) Effects of an export subsidy Assumption: small country (subsidy has no effect on terms of trade) Partial equilibrium analysis Consider the effects of an export subsidy on the domestic market for the exported goods increase in domestic price: or 1 above world market price creates incentives to produce export goods (for the domestic market) export industry expands production decrease in domestic consumption 172

10 b) Effects of an export subsidy Figure 9: Partial equilibrium analysis of an export subsidy 173

11 b) Effects of an export subsidy Welfare analysis: Welfare= Consumer surplus + producer surplus + government balance Consumer surplus: (a+b) Producer surplus: +(a+b+c) Government: tariff revenues: (b+c+d) Total Welfare effect: (b+d) deadweight loss (production and consumption bias) 174

12 b) Effects of an export subsidy General equilibrium analysis An export subsidy leads to output expansion in the export industry (y 2 ) which needs a reallocation of resources (full employment condition) and, thus, affect output of the import industry (y 1 ). An export subsidy leads to a decrease in the domestic relative price:

13 b) Effects of an export subsidy General equilibrium analysis Figure 10: General equilibrium analysis of an export subsidy 176

14 b) Effects of an export subsidy Effects of an export subsidy in a small country further expansion of output in export oriented industry (y 2 ) at the expense of import industry (y 1 ) decrease in consumption: substitution and income effect increasing trade flows, inefficient specialization decreasing welfare 177

15 c) Arguments for trade policy 1. Infant industry argument (import substitution and industrialization) Protection of an industry would be desirable if firms in the industry will have a potential comparative advantage in the future. aim: industrialize and diversify export structure Achieving comparative advantage is not possible without protection because costs to produce the output are above world market price. Protection of the infant industry allows to gain learning curve effects, realize economies of scale (decreasing average costs), and spillover effects to other industries. 178

16 c) Arguments for trade policy 1. Infant industry argument (import substitution and industrialization) Figure 11: Infant industry protection p, AC AC 0 A P 1 B AC foreign AC domestic cumulated Output 179

17 c) Arguments for trade policy 1. Infant industry argument (import substitution and industrialization) Critical questions Do we know today how the industry will perform in the future? Will import protection make inefficient firms efficient? Or will inefficient firms enter the market due to import protection? Is there any incentive for the firms to lower average costs such that the protection becomes needless? (gaining rents from protection) Protection maynotbe ashort termissuebut become along term payment Alternative instruments to support industrialization? (subsidies, grants) 180

18 c) Arguments for trade policy 2. Strategic trade policy (export promotion and rent shifting argument) (Literature on strategic trade policy emerged in 1980s (i.e. Brander and Spencer 1982)) The rent shifting argument Oligopolistic rents can be shifted from the foreign firm to the home firm. An export subsidy will lead to higher output and higher profits of the home firm and higher national welfare because the profit effect outbalances the costs of the subsidy (by assumption). optimal level of subsidy maximizes national welfare 181

19 c) Arguments for trade policy 2. Strategic trade policy (export promotion and rent shifting argument) Assumptions of the models in general imperfect competition (oligopoly: two countries each having a single firm) firms produce homogenous good for a third market, no domestic sales Cournot competition: quantities not prices no consumers, welfare effect due to increase in firm profits 182

20 c) Arguments for trade policy 2. Strategic trade policy (export promotion and rent shifting argument) Critical questions: retaliation measures (foreign country pays subsidy as well) Prisoners Dilemma: subsidy is the dominant strategy, but free trade better than subsidies Bertrand competition on prices reverses the result: subsidy lead to decreasing prices and, thus, profits and welfare loss. A tax would be optimal. knowledge about the market? cost of lobbying reduce welfare 183

21 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) Assumption: large country (tariff has an effect on world demand and world prices) Partial equilibrium analysis Consider the effect of an import tariff on the domestic market in a large country: increase in domestic price: or 1 above world market price protected industry expands domestic production decrease in domestic consumption Decrease in domestic demand for import goods lead to lower world market price for imports. 184

22 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) Figure 12: Partial equilibrium analysis of an import tariff (ToT effect) 185

23 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) Welfare analysis: Welfare= Consumer surplus+ producer surplus+ government balance + ToT Consumer surplus: (a+b+c+d) Producer surplus: +a Government: tariff revenues: +c Terms of trade: +e Total Welfare effect: (b+d) + e total effect depends on terms of trade effect relative to deadweight loss positive if terms of trade effect outbalances deadweight loss 186

24 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) General equilibrium analysis An import tariff leads to output expansion in the import competing industry (y 1 ) which needs a reallocation of resources (full employment condition) and, thus, affects output of the export industry (y 2 ). An import tariff leads to an increase in the domestic relative price

25 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) General equilibrium analysis On the world market: Decreasing domestic demand for imports and decreasing domestic supply of exports lead to an improvement in the terms of trade: With respect to the following figure: 188

26 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) General equilibrium analysis Figure 13: General equilibrium analysis of an import tariff (ToT effect) 189

27 c) Arguments for trade policy 3. Optimal tariff (improvements of the terms of trade argument) Effects of an import tariff in a large country expansion in import competing industry (y 1 ) at the expense of export oriented industry (y 2 ) World market prices for imports decrease while world market prices for export goods increase (terms of trade effect) If terms of trade effect outbalances the production and consumption bias, the country gains from an import tariff Export promotion instead of import substitution: What does the terms of trade argument imply for an export subsidy? 190

28 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country Partial equilibrium analysis Consider the effects of an export subsidy in a large country on the domestic market: increase in domestic price: or 1 above world market price export industry expands domestic production decrease in domestic consumption increase in domestic supply on world markets lead to lower world market price for exports 191

29 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country Figure 14: Partial equilibrium analysis of an export subsidy (ToT effect) 192

30 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country Welfare analysis: Welfare= Consumer surplus+ producer surplus+ government balance + ToT Consumer surplus: (a+b) Producer surplus: +(a+b+c) Government: tariff revenues: (b+c+d) Terms of trade: (e+f+g) Total Welfare effect: (b+d) (e+f+g) Total effect depends on terms of trade effect relative to deadweight loss. positive if terms of trade effect outbalances deadweight loss 193

31 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country General equilibrium analysis An export subsidy leads to output expansion in the export industry (y 2 ) which needs a reallocation of resources (full employment condition) and, thus, negatively affects output of import industry (y 1 ). An export subsidy leads to a decrease in the domestic relative price

32 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country General equilibrium analysis On the world market: Increasing domestic supply of export goods and increasing domestic demand for import goods lead to a negative terms of trade effect: with respect to the following figure 195

33 c) Arguments for trade policy 3. Optimal tariff Export subsidy in the case of a large country General equilibrium analysis Figure 15: General equilibrium analysis of an export subsidy (ToT effect) 196