topic 6.1
Commercial policy is actions taken by government to influence the volume and composition of trade flows:
- tariffs
- quotas
- subsidies
- nontariff barriers
Gains from trade:
- static gains
- dynamic gains
Static gains from trade:
- figure 6.1 depicts the static gains
- there are two parts to the gain - consumption and production
- consumption gains arise because even if production doesn't change imported goods are cheaper
- production gains arise from specialization
Dynamic gains from trade:
- importing capital
- technology diffusion
- competitive pressures
- economies of scale from expanded market
- immigration (not in text!)
TARIFFS
Revenue effect
Protective effect
Figure 6.4 depicts the gain from trade (on the import side) for a small country:
- consumer surplus increases by a+b+c
- producer surplus increases by a
- so total welfare gain is b+c
Figure 6.6 depicts the welfare loss due to a tariff (ie loss on import side):
- the tariff effectively raises the price of imports from pw to pw+t
- before the tariff the welfare gain from trade was (b+c+d+e) (e is not in the text)
- after the tariff consumers lose b+c+d
- government gains revenue c
- deadweight loss is b+d
- why isn't the whole area (b+c+d+e) lost? Becasue the world is not actually charging a higher price for the imported good. A tariff is a tax that causes losss only to the extent it distorts behavior (quantities consumed and produced).
Complications to tariffs:
- deadweight loss depends on elasticities
- a large country theoretically could benefit - "optimal tariff"
Estimating the protectiveness of tariffs is difficult - there are so many different rates.
Tariffs on inputs contribute to protection.
The ERP is an attempt to get at the effective rate of protection.
Countries negotiate;
- multilaterally
- bilaterally
Tariffs can be ad valorem, specific, or compound.
MFN: most favored nation status
GSP: generalised system of preferences
Trade agreements include NAFTA, the EU, free trade agreements
Multilateral is the most globally efficient but also the most politically difficult.
