University:
California State University, Northridge
Course:
ECON 405 | International Trade
Academic year:

2024
Views:

84

Pages:

16
Author:

hakulap1d

Topic 3 The Standard Trade Model Part 3 Import Tariffs and Export Subsidies • Import tariffs are taxes levied on imports. • Export subsidies are payments given to domestic producers that export. • Both policies influence tot and therefore national welfare. Import Tariffs and Export Subsidies (cont.) • Import tariffs and export subsidies drive a wedge between prices in world markets (or external prices) and prices in domestic markets (or internal prices). ♦ Since exports and imports are traded in world markets, tot measures relative external prices. Import Tariffs • If home imposes a tariff on food imports → ↓PC/PF internally. ♦ Home producers: face a lower PC/PF, so they will produce more food and less cloth: RS of cloth shifts in. ♦ Home consumers: face a lower PC/PF, so they will consume more cloth and less food: RD of cloth shifts out. Fig. 10: Effects of a Tariff on the Terms of Trade Note: this graph reflects the world market and world prices. Tot refer to external prices. Import Tariffs (cont.) • When home imposes an import tariff, ↑tot and home’s welfare may increase. • The magnitude of this effect depends on the size of the home country relative to the world economy. ♦ If the country is small, its tariff (or subsidy) policies will not have much effect on world RS and RD, and thus on tot. ♦ But for large countries, a tariff rate that maximizes national welfare at the expense of foreign countries may exist. Export Subsidies • If home imposes a subsidy on cloth exports, ↑PC/PF internally. ♦ Domestic producers: face a higher PC/PF when they export, so they produce more cloth and less food: RS of cloth shifts out. ♦ Domestic consumers: face a higher PC/PF, so they consume more food and less cloth: RD of cloth shifts in. Fig. 11: Effects of an Export Subsidy on the Terms of Trade This graph refers to world markets and world prices. Tot will fall if the country is large enough to impact world markets. Income Distribution • Two dimensions: 1. Distribution of income between countries (i.e., international distribution of income) 2. Distribution of income within countries Import Tariffs and International Distribution of Income • Home imposes a tariff → ↑tot and ↓tot* but impact on home’s welfare is not so clear cut. ♦ ↑tot benefits home, but ↑PM → distorts production decisions: encourages home’s producers to use scarce resources to produce a good that home does not have a comparative advantage in. ♦ ↑PM distorts consumer decisions and hurts consumers through a reduction in their purchasing power. Import Tariffs and International Distribution of Income (cont.) • Welfare rises with ↑tot as long as the tariff is not too large and does not substantially distort production and consumption decisions. • Later, we will study an optimum tariff for large countries. • For a small country, optimum tariff is zero: cannot impact its tot and only distorts producer and consumer decisions. Export Subsidies and International Distribution of Income • Home imposes an export subsidy → ↓tot and ↑tot*. Policy also distorts production and consumption decisions. So home’s ↓welfare. • Difficult to justify any export subsidy under any circumstances. International Distribution of Income with Multiple Countries and Goods • Are foreign export subsidies good for U.S.? • Yes –in a simple 2 country and 2 good model. • But in reality, subsidies to exports of goods the U.S. exports is harmful. ♦ E.g., EU subsidies of agricultural exports hurt U.S. farmers by reducing prices they receive on world markets (i.e., ↓tot). ♦ Alternatively, subsidies to exports of goods the U.S. imports is beneficial! International Distribution of Income with Multiple Countries and Goods (cont.) • Are foreign import tariffs bad for U.S.? • Yes –in a simple 2 country and 2 good model. • But in reality, foreign tariffs on goods U.S. imports are beneficial. ♦ Why? Foreign tariff lowers world demand for goods we import which raises our tot. • Thus, in reality: subsidies to exports of goods U.S. imports is beneficial, while tariffs against U.S. exports is harmful. Distribution of Income Within Countries • View that subsidies of foreign exports of goods that the U.S. imports is beneficial, is not held by G officials. ♦ E.g., When a Commerce Dept. study found EU was subsidizing steel exports to U.S., our G ordered EU to raise its P of steel. ♦ Why? Subsidies of EU exports of steel to the U.S. have an impact on our income distribution. • U.S. consumers gain from cheaper steel; as do U.S. exporters who use steel as a factor of production (e.g., Caterpillar and Ford). But, U.S. steel workers and company owners lose! Distribution of Income Within Countries (cont.) • Foreign tariffs and subsidies ∆relative goods prices → ∆factor rewards because of factor immobility and differences in the factor intensity of different industries. • In general, a tariff helps the import-competing sector at home while hurting the export sector. 1. Pulls resources out of the export sector. 2. ↑P of resources (like steel) that the export sector uses as an input. This ↑costs and ↑PX making our producers less competitive on world markets. ♦ An export subsidy helps the export sector and harms the import-competing sector.