Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta....

Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta. IndonesiaIn

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Samuel G. AsfahaITC-ILO

Trade Policy and Its Trade Policy and Its InstrumentsInstruments

Assessing and Addressing the Effects of Trade on Employment : A knowledge

Sharing Workshop

Le Meridian HotelJakarta. Indonesia12 – 16, July 2010.

Trade Policy and Its InstrumentsIn

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. ObjectiveObjectiveTo understand trade policy and its

instruments; andTo understand the welfare effects of

various trade policy instruments on consumers’, producers’ and governments’ welfare in both the applying county (the home country) and its trading partners (foreign countries).


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OutlineOutlineTrade policyTrade policy instruments

– Tariffs– Subsidies– Import quotas– Voluntary export restraints– Others …


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. Trade PolicyTrade Policy

What is trade policy?– A set of rules and regulations applied to trade.

Objectives of trade policy?


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. Common InstrumentsCommon Instruments1. Tariff – a levy on imports and exports.

– Specific tariff– Ad valorem tariff

2. Subsidies– Import subsidies– Export subsidies


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TariffsTariffsSpecific tariffs

– Fixed charge for each unit of goods imported (often based on weight, number, length, volume or other unit of measurement).

– often levied on foodstuffs and raw materials E.g. $1 per kill of apple etc …

Ad valorem tariff – levy as percentage of value (instead of quantity, weight etc.)


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Why tariff?Why tariff? A tariff could be levied for one or all of the

following purposes:– To protect domestic producers from foreign competition

(i.e. protective tariff). In extreme cases a tariff could be so high that it effectively prohibits imports (i.e. prohibitive tariff).

– To raise Revenue for government (i.e. revenue tariffs).

– For environmental and health purposes, i.e. to discourage the consumption of goods that are harmful for environment (i.e. green tariff; a.k.a. eco-tariff) and/or health (e.g. tariffs on cigarettes and liquors).


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Effects of tariffsEffects of tariffs

Tariffs lead to:

•Higher cost of importing goods

•Higher price of imported goods

•Lower demand for imported goods

Case 1: Effects in the tariff imposing countryCase 1: Effects in the tariff imposing country


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Effects of tariffEffects of tariff

• Lower demand for the good in the tariff imposing country

• Negligible effect on global prices for the good

• Negligible effect on aggregate demand for the exporting country

Case 2: For the country whose exported goods face the Case 2: For the country whose exported goods face the tariff and that the tariff imposing country accounts for a tariff and that the tariff imposing country accounts for a negligible share of total demand for the good:negligible share of total demand for the good:

• Negligible effect on production and supply of the good

• Negligible effect on global trade of the good


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Effects of tariffEffects of tariff

•Lower demand for the good in the tariff imposing country

•Lower export (international) prices for the good

• Lower aggregate demand for the good

Case 3: For the country whose exported goods face the Case 3: For the country whose exported goods face the tariff and that the tariff imposing country accounts for a tariff and that the tariff imposing country accounts for a significant share of total demand for the good:significant share of total demand for the good:

•Excess supply of the good

•Lower production of the good•Lower global trade of the good


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How much protection does a tariff How much protection does a tariff offer?offer?

The actual protection that a tariff provides is measured by a concept called effective rate of protection.

An analysis of effective rate of protection provided to an industry takes into account the effects of tariffs on inputs as well as on outputs.

How do we calculate the effective rate of protection? Let’s see this example:


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Example:Example:

Consider:– International price of car: $10,000– Cost of parts for assembly: $8,000– Assemblers value added is $2000 (i.e. 10,000 – 8,000)

Assume a country wants to promote an auto industry, it imposes a tariff of 20% on auto. Hence:– Domestic price of auto would now be $12,000.– Cost of parts for assembly remains the same. – Assemblers value added now is $4,000 (12,000 – 8,000).

Note:– The nominal protection was 20%. – The effective protection however is captured by the

percentage difference in value added that the tariff created: ([(4,000 – 2,000)/2,000)]*100%) = 100%.


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Who is more effectively protected?Who is more effectively protected?Firm A: Bicycle Assembler

– Cost of imports of bicycle parts to make a bicycle = 200

– Bicycle price = 300Firm B: Auto Assembler

– Total cost of imports of auto spares to make a car = 5,000

– Auto price = 6,000. Whose is more protected (Firm A or Firm B)

if we levy 30% tariff on bicycles and 20 % on autos?


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Costs and benefits of tariffsCosts and benefits of tariffs Tariffs are the simplest trade policies Tariffs increase the price of imported goods, as a

result:– consumers pay higher (negative effect on their welfare)– producers gain from higher prices. – Government earns tariff revenue

By artificially inflating prices of imported goods, tariffs encourage the substitution of lower price (efficient) imports by higher price (less efficient) domestic products. Hence, there is a loss of efficiency.

But of course, to get the full picture one needs to look at the dynamic effect of tariffs (encouraging domestic industries etc (the so called infant industry argument).


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2. Subsidy2. SubsidyExport subsidy:

– A payment for a firm or individual that exports goods abroad.

– It can be fixed (fixed payment per unit) or ad valorem (proportional to value of export).

– Exports subsidies encourage exporters to export more. From the individual exporter’s point of view, subsidies increase his/her export revenue.

Well known examples: U.S. subsidy on cottonThe European Common Agriculture Policy (CAP)


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. Benefits and costs of subsidyBenefits and costs of subsidySubsidized exporters benefit Foreign consumers benefit from low prices Foreign producers suffer from low prices Creates production distortionCreates consumption distortionCreates “terms of trade” loss for the

subsidizing country


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. Other instruments of trade policy:Other instruments of trade policy:

Import Quotas– Restriction on quantity of imports– Often enforced through import license – Have the same effect as tariffs on domestic

prices (hence production and consumption distortions)


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Other instruments … Cont’d.Other instruments … Cont’d.Voluntary export restraints

– Is a quota imposed on the side of the exporting (instead of importing) country.

– Often imposed by the request of the importing country - it thus is not truly voluntary.

– Exporting countries agree to it so as to not risk other worse forms of trade barriers such as import quotas or higher tariffs.

– It is discriminatory in its effect


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Other instruments … Cont’dOther instruments … Cont’d

Local Content Requirements– Requirement that some specific fraction of a

good must be produced domestically– Provides protection to local parts producers

such as automobile parts etc.– Was widely used as part of industrial policy


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Other instruments … Cont’dOther instruments … Cont’dExport credit schemes

– Could take several forms. Two main forms are:

Export loan - government institutions extend export credits directly, often in association with private financing.

Export loan subsidy - Subsidized loan given to the foreign buyer by the exporting countries’ government operating indirectly to extend preferential refinancing and interest subsidies to private lenders.


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. Other instruments … Cont’dOther instruments … Cont’d

Export credit schemes? – What are their impact?


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National procurement– May also be called government procurement,

public tendering, public procurement etc …– Purchases by government or regulated firms

directed towards domestically produced goods and services.


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Bureaucratic barriers – Creating bureaucratic delays in customs

clearance and other forms of administration barrier in order to discourage imports;

– Twisting laws, regulations and requirements in order to affect the internal sale, purchase, transportation and distribution of foreign goods.



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. ReflectionsReflections

What are the key policy instruments of trade policy in Indonesia?

Could trade policy affect a country’s trade structure? Economic development? Employment and wages? How?


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Assessing and addressing the employment effects of trade : A knowledge sharing workshop. Jakarta....

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