DYING FOR TRADE: Why Globalization Can Be Bad for Our Health
Free Trade – GoodRestriction – Bad
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6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500 12,000 0 10 20 30 40 50 60 70 80 90 100 110 Q uantity ofautos Free Trade – Good Restriction – Bad Price ($) S d F S d+w E f G S d+w+t a b c d e g D d h Free Trade : Price = World Price = $8,000 Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g; Producer Surplus = h
description
Free Trade – GoodRestriction – Bad. g. G. e. f. S d+w+t. a. b. c. d. Free Trade : Price = World Price = $8,000 Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g ; Producer Surplus = h. S d. Price ($). E. F. S d+w. h. D d. - PowerPoint PPT Presentation
Transcript of Free Trade – GoodRestriction – Bad
6,0006,5007,0007,5008,0008,5009,0009,500
10,00010,50011,00011,50012,000
0 10 20 30 40 50 60 70 80 90 100 110Quantity of autos
Free Trade – Good Restriction – BadPr
ice
($) Sd
F Sd+w
Ef G Sd+w+t
a b c d
e
g
Dd
h
Free Trade: Price = World Price = $8,000Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g; Producer Surplus = h
6,0006,5007,0007,5008,0008,5009,0009,500
10,00010,50011,00011,50012,000
0 10 20 30 40 50 60 70 80 90 100 110Quantity of autos
Free Trade – Good Restriction – BadPr
ice
($) Sd
F Sd+w
Ef G Sd+w+t
a b c d
e
g
Dd
h
Tariff: Price = World Price + Tariff = $8,000 + $1,000 = $9,000Domestic Production=40; Domestic Consumption=60; Imports=20 Reduced Consumer Surplus: a+b+c+d
Increased Producer Surplus = a (Redistributive Effect)
Increased Tax Revenue = cDeadweight Loss: Inefficient Production = b
Deadweight Loss:Reduced Consumption = d
Costs of import restrictionsDomestic consumers face increased costs
Low income consumers are especially hurt by tariffs on low-cost imports
Overall net loss for the economy (deadweight loss) Production effect: output that costs more than it has to (b) Consumption effect: surplus lost from reduced
consumption (d) Export industries face higher costs for inputs Cost of living increases Other nations may retaliate
So why restrict trade? Benefits of free trade in final goods are spread widely
Tariffs on intermediate inputs tend to be low so producers who use them don’t complain much
Costs of free trade are felt rapidly by domestic producers Lobbying by business and labor“… those persons who demand cheaper coats would be ashamed of
themselves if they could realize that their demands cut the wages of the women who made those coats.”
Benjamin Harrison, Election Campaign of 1888 Strategic trade policy
Reduce demand for foreign stuff lower its price a lot Big gain on what you still buy
Ways to restrict trade Tariffs/Non-Tariff Barriers
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Flavors of tariffsTariff: a tax (duty) on internationally traded products Import tariffs Export tariffs … unconstitutional in US
Raise revenue Favor domestic users of exported commodities In primary goods exporting countries, favor urban over rural areas
Protective tariff – insulate domestic producers Revenue tariff – raise funds for government Specific tariff – Fixed $/Unit Ad valorem tariff – % of product’s value
“Free-on-board” (FOB) as it leaves port Levied “cost-insurance-freight” (CIF) as it arrives in port
Compound tariff - Combination of fixed and ad valorem tariffs Levied on finished goods whose imported inputs are subject to tariff
Fixed portion offsets tariffs on imports paid by domestic producers % portion protects domestic producers against finished good imports
Effective rate of protection For a finished good, the effective rate of tariff
protection enjoyed by a domestic producer is the net tariff on the imported product as a fraction of the producer’s domestic value added. Net tariff = tariff on imported product that competes with his
product minus any tariffs he has to pay on imported inputs Effective tariff rate =
{Nominal tariff – (Value of Imports/Total Value)x(Tariff on Imports)} (Domestic Value Added)/Total Value
The impact of a tariff is often different from its stated amount Tariff Escalation: If domestic value added (domestic content)
is low and tariffs on imports are also low
Effective tariff >> Nominal tariff.
Nominal and Effective Tariff Rates(US and Japan, early 1980s)
US JapanNominal Effective Nominal
EffectiveAgriculture, fish, forest. 1.8% 1.9% 18.4%
21.4%Food, beverages,tobacco 4.7 10.6 25.4 50.3Footwear 8.8 15.4 15.7 50.0Furniture 4.1 5.5 5.1 10.3Leather products 4.2 5.0 3.0 -14.8Paper and paper products 0.2 -0.9 2.1 1.8Textiles 9.2 18.0 3.3 2.4Wearing apparel 22.7 43.3 13.4 42.2Wood products 1.6 1.7 0.3 -30.6
Avoiding and postponing tariffs Production sharing special treatment for
foreign assembly using domestic inputs OAP: Offshore Assembly Provision
Maquiladoras Bonded warehouses
Assemble imported components and reexport duty free If sell domestically, tariff is levied only on imported value at
time good leave the warehouse Foreign trade zones (FTZ)
Duties imposed like for bonded warehouse Greater flexibility to process imported components
Arguments for trade restrictions Job protection
… but losses elsewhere Protect against “cheap” foreign labor
… but is foreign labor “cheap”? Worker productivity Fairness in trade – “level playing field”
Principles of Fair Trade … Trade Not Aid
Democratic organization Producer cooperatives
Recognize unions No child labor Decent working conditions Environmental sustainability Prices that cover production costs
Price guarantees irrespective of world prices Social premiums
Pay premiums to organizations public goods Long-term relationships
Reduce uncertainties
Arguments for trade restrictions Job protection
… but losses elsewhere Protect against “cheap” foreign labor
… but is foreign labor “cheap”? Worker productivity Fairness in trade – level playing field
… but sacrifice gains from trade Equalization of production costs
… but whose costs? [Their low cost producer = Our high cost?] Infant-industry protection Achieve efficient scale
… but protect senile industries too? Political and social reasons
Protect against cultural imperialism National defense/Self–sufficiency…reduce dependence... but could build strategic reserves instead
Import quotas Quota: how much can be imported in a year
Global quotas Selective quotas
Government loses tariff revenue Quota is insensitive to demand shifts
Tariff-rate quota: a two-tiered tariff More can be imported if demand increases … but
only at a higher tariff rate
Non – Tariff Barriers (NTBs)
Voluntary export restraints (VERs) Impose export quota … or else!
Japanese auto exports unintended consequences Domestic content requirements Subsidies
Domestic subsidy … e.g. R & D “Green jobs”
Export subsidy Government procurement policies Social regulations (health, environmental and safety
rules) Hormones in beef / genetically engineered produce
Sea transport and freight restrictions
Other NTBs
Costs of import restrictions redux
Domestic consumers face increased costsOverall net loss for the economy (deadweight loss)
Production effect: output that cost more than it has to (b) Consumption effect: surplus lost from reduced
consumption (d) Export industries face higher costs for inputs Cost of living increases Retaliation
Problem 4.15 “Australian market for TVs”
In autarky Market clearing price Quantity supplied and bought Consumer surplus Producer surplus
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$500 400 300 250 200 100 0
0102025304050
504030252010 0
503010-
(10)(30)(50)
“Australian market for TVs”
World price = $100 Quantity bought Quantity supplied by Australian producers Consumer surplus Producer surplus
Problem 4.15
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$500 400 300 200 100
0
01020304050
5040302010 0
503010
(10)(30)(50)
“Australian market for TVs”
World price = $100 / Tariff = $100 Quantity bought Quantity supplied by Australian producers Consumer surplus Producer surplus Revenue Redistributive effect Protective effect / Consumption effect / Deadweight loss
Problem 4.15
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$500 400 300 200 100 0
01020304050
5040302010 0
503010
(10)(30)(50)
Problem 5.16 “Venezuelan market for TVs”
World price = $150 / Free trade Quantity bought Quantity supplied by Venezuelan producers Consumer surplus Producer surplus
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$100 150 200 300 400 500
900800 700 500 300 100
0100200400600800
(900)(700)(500)(100)200700
Problem 5.16 “Venezuelan market for TVs”
World price = $150 / Import quota = 300 TVs Price in Venezuela … Quantity bought Quantity supplied by Venezuelan producers Reduced consumer surplus Increased producer surplus Earnings of Venezuelan importers who buy at world price Net loss to Venezuelans
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$100 200 300 400 500
900 700 500 300 100
0200400600800
(900)(500)(100)200700
Problem 5.16 “Venezuelan market for TVs”
World price = $150 / Import quota = 300 TVs Price in Venezuela … Quantity bought Quantity supplied by Venezuelan producers Reduced consumer surplus Increased producer surplus Earnings of foreign monopolists who sell at Venez’n price Net loss to Venezuelans
PriceQuantity
DemandedQuantity Supplied
Export(Import)
$100 200 300 400 500
900 700 500 300 100
0200400600800
(900)(500)(100)200700
Problem 5.16 “Venezuelan market for TVs”
World price = $150 / Subsidy to producers = $100/TV Price in Venezuela … Quantity bought Quantity supplied by Venezuelan producers Increased producer surplus Increased production cost Cost of subsidy to Venezuelan taxpayers Net loss to Venezuelans
Price to Consumers
Quantity Demanded
Quantity Supplied
Export(Import)
$100 200 300 400 500
900 700 500 300 100
200 400 600 8001000
(700)(300)100500900
