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Intl Micro

by: Madie Schinner

Intl Micro ECN 160A

Madie Schinner
GPA 3.57


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This 7 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 160A at University of California - Davis taught by Staff in Fall. Since its upload, it has received 40 views. For similar materials see /class/191898/ecn-160a-university-of-california-davis in Economcs at University of California - Davis.


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Date Created: 09/08/15
Lecture 9 The Instruments of Trade Policy II Quotas Export Subsidy and Regional Trade Agreements NonTariff Barriers Governments usually prefer to protect domestic industries through a variety of NTB s such as Import quotas Limit the quantity of imports Export restraints Limit the quantity of exports Import Quotas Theory Import quotas are a restriction on the amount of a particular good that one country can purchase from another country Example The United States has a quota on imports of foreign cheese I The restriction is usually enforced by issuing licenses to some group of individuals or firms Example The only frrms allowed to import cheese are certain trading companies I In some cases eg sugar and apparel the right to sell in the United States is given directly to the governments of exporting countries I Reasons for guotas As insurance against further increases in import competition protectionist insurance and import spending Balance of Payment insurance with tariffs results depend on elasticities of Import Demand and Export Supply give government officials greater administrative exibility and power to deal with domestic rms I An import quota always raises the domestic price of the imported good Import Quota in a Small Country 5 PM u X I d bed a I r K r r t M Sr 52 D D Qummry r M ltnpurts aHorueuurlter b Lurpenrnarket Figure 81 antz fur a Small Cnllntry md rtr tr d p and rmports M2 lt Ml leads to tlre vemcal export supply curve x wth tlre equlllbnum atpornt c Pwto P2 pnee and quanmles lflnstead of tlre quota atarlff oft 4 PW had been used Effect on Home We are Fall m e rpl Rlse rn produeer surplus abcd a Quota rents earned atHome 2 Net effect an Humewelfare 7 IIMD Ways to anneate impart licenses government leed favonusm tlre most ar rtrary Way esourceruslng applreauon proe tlre east effluentway Any pr edure l oeedure tlrat for rms or rndrvrduals to demonstrate tlre ment of Lhelr elarm to rmp ses wlll eause tlrem to use me andmoney lobbylng wth government om era s Lreense holders are able to buy rmports andresell tlrem at ahlgher pnee rn tlre domestre market es rt lreen The pro ts reeerved by tlre holders oflmpon lreenses are known as qunta rents Rent Seeking rnetrrerent aetrmues done to obtarn quotalreenses a Change in the Value of Exports 10 0 10 20 30 40 50 China India Cambodia Bangladesh Indonesia Pakistan Vietnam Sri Lanka Honduras Philippines I Thailand Italy Canada Mexico Guatemala Dominican Republic Turkey Hong Kong Taiwan S Korea Changes in Clothing and Textiles Exports to the United States after the MFA 2004 2005 Voluntary Export Restraint A voluntary export restraint V ER is an export quota administered by the exporting country also known as a voluntary restraint agreement VRA VERs are imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions A VER is exactly like an import quota Where the licenses are assigned to foreign governments and is therefore very costly to the importing country A VER is always more costly to the importing country than a tariff that limits imports by the same amount A VER produces a loss for the importing country The tariff equivalent revenue becomes rents earned by foreigners under the VER Example About 23 of the cost to consumers of the three major US voluntary restraints in textiles and apparel steel and automobiles is accounted for by the rents earned by foreigners Example In the 19805 the US used this type of arrangement to restrict Japanese automobile imports Japan s Ministry of International Trade and Industry MITI told each Japanese auto manufacturer how much it could export to the US 1n tlus ease tlne quota rents are eamed byfarexgnpraducers so tlne loss m Home welfare equals Fal l r eonsumer surplus 7abcd Rlse m produeer surplus a Net effect an Hemewelrare 41mm So tlne VER glves a luglner net loss for tlne rmporter of At M tlnan does a uotarents are earned by forelgn exporters lt2 lt6 5 E E b s are used at a117 o The reeewrng countxy ls less llkely to retalrate o r e tlne transfer of quotarents to tlne exponerbecomes away to avold a tanff or quota w r Home deadwergnt losses along wrtln tlne quotarents formajorU s quotas m tlne year around 1985 In all eases exeept dalry tlne rents were earned by Forelgn expo ters Annual Cnsl ems Inpan Pmmcnml 39 ml dullmirjemimnund 1939 Sugar Texliles and Apparel lluport Tari s Tutal anal Content Requirements Oplinnal A lncal enntentrequlrement ls aregulatron tlnatrequrres tlnat aproduet assembled or produeed m tlne countxy must have a speclfled fractlon of good produeed domestreally Thls fractlon ean be speclfledln physlcal unrts onn value terms Thls lrmrt tlne rmport ofmatenals and eomponents rr manufaetunng base from assembly back rnto lnter medlate Loeal eontent la o no p ertlnergoyernment rey 1nsteadtlne dlfference between tlne pnees oflm ayer edln tlne nal pnee andls passe t ds oduee ue or quota rents ports and domesue goods gets eonsumers tln sse ly rms are requrredto use 50 domestre eost oflmponed parts ls 6000 and tlne eost ofthe same parts domesueally ls 10000 Tnen tlne ayerage eost of parts ls 8000 0 5 x 6000 0 5 x 10000 e ofuslng parts domesueally I A mixing requirement Stipulates that an importer must buy a certain percentage of the product locally Import Quota with Home Monopoly I The threat of import competition forces the monopolist to behave like a perfectly competitive rm The tariff allows the monopolist to raise its price but the price is still limited by threat of imports Now suppose that instead of the tariff a quota is applied We choose the quota so that it equals the imports under the tariff wluch are M2 Since imports are xed at that level then the effective demand curve facing the Home monopolist is the demand curve D minus the amount M2 We label this effective demand curve as D 7 M2in Figure below Unlike the situation under the tariff the monopolist now retains the ability to in uence its price Price P3 PW t PW Equilibrium with quota D Quantity Fvbw J Imports with tariff or quota are the same Imports free trade M1 Quota with Domestic Monopoly Under free trade the Home monopolist produces at point A and charges the world price of Pw With a tariff oft the monopolist produces instead at point B and charges the price of Pwt Imports under the tariff are M2 7 2 Under a quota of M2 the demand curve is shi ed to the le by that amount resulting in the demand D7M2 The marginal revenue curve is MR and the Home monopolist produces at point C where MR equals MC The price charged at point C is P3 gt PWt so the quota leads to a higher Home price than the tariff Export Subsidies Intro duction Larg cale protests at WTO meetings es 0 Why Expo The protests came especially from South Korean farmers worried that their country would be forced to lower import tariffs on rice thereby threatening their livelihood Farmers in South Korea along with those in Japan Europe and the United States bene t from an intricate svstem of tariffs and subsidies that keeps prices for their crops high but in some cases lowers prices in the rest of the world The lower world price hurts farmers in landrich developing countries like Brazil India China and some African nations such as South Africa by making it harder for them to export their own agricultural products On the other hand the lower world prices due to existing tariff and subsidy regimes are a benefit to landpoor developing countries that import agricultural products As such they will be hurt if prices end up rising due to agricultural reforms in the WTO Many strong interests in many different countries must be balanced when discussing each nation s agricultural trade policies countries Subsidize some industries The primary reason that countries subsidize agricultural exports is political such subsidies benefit a group in society farmers that the government wants to support Some hightechnology industries also receive generous subsidies For example Airbus in Europe and Boeing in the US have received various types of government assistance For hightech industries it is sometimes thought that the use of export subsidies can give a domestic industry a strategic advantage in international competition That is rather than being just politically motivated legislators often believe that subsidies to hightech industries might raise their profits and benefit the exporting country rt Subsidy Export subsidy is a payment by the government to a firm or individual that ships a good abroad When the government offers an export subsidy shippers will export the good up to the point where the domestic price exceeds the foreign price by the amount of the subsidy An export subsidy unambiguously leads to costs that exceed its bene ts


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