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Economics
Chapter 9
Trade barriers
Trade barriers Trade barriers are imposed to avoid imports.
Free trade brings mutual benefits to the trading countries.
Why are there trade barriers to discourage international trade?
Trade barriersProtectionism 保護主義 The doctrine that urges for the protection of domestic industry from foreign
competition by imposing trade barriers.
Reasons of imposing trade barriers (Pros):
For the country
To protect the development of domestic industry
To protect agriculture and military
For the whole economy
To protect infant industries and help them to compete with imported goods
To protect local workers and avoid unemployment
To diversify industry and stabilize the economy
For environment
To avoid imports of products which bring environmental and health problem
Trade barriers
Reasons against of imposing trade barriers (Cons): For consumer
Fewer choice for consumers Lower the living standard
For the whole economy Fewer job opportunities for import related industries,
e.g. trading company, transportation services Higher unemployment
For international relationship Trade retaliation International trade recession
Types of trade barriers
1. Import tariffs 進口關稅 Tax imposed on imported goods Supply of imported goods ( higher price to import)∵ Import surcharge in addition tariffs
2. Import quotas 進口配額 Fixed import quantity Supply of imported goods Demand of local goods
Types of trade barriers3. Subsidies on domestic goods
Subsidizing import-competing industries Price of local goods Demand of imported goods
Subsidizing export Price of exported goods Demand of exported goods Dumping 傾銷 : Exporting price < Production cost
(Prohibited by WTO, because severe damage to local production)
4. Foreign exchange controls Gov’t controls
Exchange rate Devaluation Price of imported goods Demand of imported goods
Supply of foreign currencies Not enough foreign to pay
Winners and losers of free tradeAssumption
Small economy Insignificant share of the global trade No influence at all Price taker
Comparative advantage by comparison of prices
Given Country A and Good X
If local price < international price
all people buy Good X from Country A
then, Country A has a comparative advantage in Good X
If local price > international price
no one (both local and foreign residents) will buy Good X from Country A
then, Country A has a comparative disadvantage in Good X
Winners and losers of free trade
Equilibrium before trade At domestic price (PD), Q = 60 units
Clothes (units)
Price ($)
0
Domestic demand
Domestic supply
PD
60
E
Consumersurplus
Producersurplus
Winners and losers of free trade
Suppose International price (PW) > Domestic price (PD)
Domestic producers would like to export
At Pw (where PD to Pw)
Domestic quantity supplied (from 60 units to 100 units)
Domestic quantity demanded (from 60 units to 20 units)
Exports volume= Domestic Qs – Domestic Qd
= (100 units – 20 units)= 80 units
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
PD
60
PW
20 100
Domestic and international demand
Do
me
sti
c s
ale
s
Ex
po
rts
sa
les
Winners and losers of free trade Let’s look at the (domestic) consumer and producer surplus
Also look at the social surplus
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price before trade (PD)
60
A
C
20 100
Domestic and international demand
B
Price after trade (PW)
D
Before trade After trade Change
Consumer surplus A + B A - B
Producer surplus C B + C + D B + D
Social surplus A + B + C A + B + C + D D Net gain from trade
Winners and losers of free trade
Conclusion:
If PW > PD , export of goods Consumer surplus (Area B) Producer surplus (Area B + D) Total social surplus (Area D) Since
increase in producer surplus (Area B + D)
> decrease in consumer surplus (Area B)
Then
export trade is beneficial to the economy. Export trade can improve a country’s economic welfare.
Winners and losers of free trade
Suppose International price (PW) < Domestic price (PD)
There will be import of goods.
At Pw (where PD to Pw)
Domestic quantity supplied(from 60 units to 20 units)
Domestic quantity demanded (from 60 units to 100 units)
Imports volume= Domestic Qd – Domestic Qs
= (100 units – 20 units)= 80 units
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
PD
60
PW
20 100
Domestic and international supply
Domestic consumption
Imports volume
Winners and losers of free trade Let’s look at the (domestic) consumer and producer surplus
Also look at the social surplus
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price before trade (PD)
60
A
C
20 100
Domestic and international supplyB
Price after trade (PW)
D
Before trade After trade Change
Consumer surplus A A + B + D B + D
Producer surplus B + C C - B
Social surplus A + B + C A + B + C + D D Net gain from trade
Winners and losers of free trade
Conclusion:
If PW < PD , import of goods Consumer surplus (Area B + D) Producer surplus (Area B) Total social surplus (Area D) Since
increase in consumer surplus (Area B + D)
> decrease in producer surplus (Area B)
Then
import trade is beneficial to the economy. Import trade can improve a country’s economic welfare.
The effects of tariffs
Import tariff: An import tariff is a tax imposed on imported goods. When PD < PW , no import.
When tariff (t) is imposed, PD < PW + t , no import.
When PD > PW + t , import from foreign countries.
New equilibrium at P2 ,
Quantity transacted = 80 units
Qs by domestic supplier = 40 units
The effects of tariffs
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price (P2) after tariff
60
Price (PW) before tariff
20 100
Tariff = $t
International price
40 80
Import volume before tariff
Import volume
after tariff
Domestic and international supply
The effects of tariffsLet’s look at the (domestic) consumer and producer surplus
Also look at the social surplus
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price after tariff
Price before tariff
20 100
Tariff = $t
International price
45 75
Domestic and international supply
A
B C ED
F
Before tariff After tariff Change
Consumer surplus A + B + C + D + E A - B – D – C – E
Producer surplus F B + F + B
Gov’t revenue (tariff) --- D + D
Social surplus A + B + C + D + E + F A + B + F + D - C – E Deadweight loss
The effects of tariffs
Conclusion
Tariffs Domestic price
Domestic consumer will lose [ Consumer surplus ]
Domestic producers will gain [ Producer surplus ]
Government will gain [ Tariff (tax) revenue ]
Deadweight loss:
Area C: Over-production, where marginal
cost is higher than the international price (Pw)
Area E: Under-production, where marginal
benefit is higher than the international price (Pw)
The effects of quotas
Import quota: Maximum import volumes of goods (e.g. 40 units) When PD < PW , no import.
When PD > PW, exercise the quota and import 40 more units at PW. Supply increases after using up the quotas,
therefore supply curve shifts rightward. New equilibrium at P2 ,
Quantity transacted = 80
Qs by domestic supplier = 40
The effects of quotas
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price (P2) after quota
60
Price (PW) before quota
20 100
International price
40 80Import volume before quota
Domestic and international supply
Quota
Import volume
after quota
The effects of quotasLet’s look at the (domestic) consumer and producer surplus
Also look at the social surplus
Clothes (units)
Price ($)
0
Domesticdemand
Domestic supply
Price after quota
Price before quota
20 100
International price
40 80
Domestic and international supply
A
B C ED
F
Before quota After quota Change
Consumer surplus A + B + C + D + E A - B – D – C – E
Producer surplus F B + F + B
Quota holders’ surplus --- D + D
Social surplus A + B + C + D + E + F A + B + F + D - C – E Deadweight loss
The effects of quotas
Conclusion
Quotas Domestic price
Domestic consumer will lose [ Consumer surplus ]
Domestic producers will gain [ Producer surplus ]
Quota holders’ gain [ Selling of quota ]
Deadweight loss:
Area C: Over-production, where marginal
cost is higher than the international price (Pw)
Area E: Under-production, where marginal
benefit is higher than the international price (Pw)
Summary
Tariffs Quotas
Domestic price
Domestic quantity demanded
Domestic quantity supplied
Import volume
Consumer surplus
Producer surplus
Gov’t tariff revenue -
Quota holders’ surplus
-
Total social surplus
Tariffs
Quotas
Hong Kong’s attempts to overcome trade barriers
1. To examine how Hong Kong overcomes trade barriers
2. To understand the functions of institutions promoting Hong Kong’s trade development
3. To examine the reasons for Hong Kong’s participation in international economic institutions
4. To analyze the effects of CEPA on Hong Kong
Abbreviation: WTO (url: http://www.wto.org/index.htm)
Founded in 1995
Aims at promoting free international trade
Formerly known as General Agreement on Tariffs and Trade
(GATT) 關稅及貿易總協定 153 member countries
Accounting for over 90% of world trade
Highest policy-making body:
The Ministerial Conference 世貿部長級會議
Major functions:
Hosts multilateral trade negotiations.
Ensures the execution of international trade agreements.
Resolves trade disputes among member countries.
Authorizes the implementation of trade sanctions.
Helps developing and underdeveloped economies.
The WTO agreements cover areas ranging from trade in goods
and services to intellectual property rights.
Structure
Hong Kong’s attempts to overcome trade barriers
Practising free trade policy Hong Kong Economic and Trade Offices are set up in many cities
worldwide.
Participating in international economic institutions WTO: Active participation in the multilateral trade system. APEC: Hong Kong joined Asia-Pacific Economic Cooperation in
1991.
Hong Kong’s attempts to overcome trade barriers
Promoting trade The Hong Kong Trade Development Council (HKTDC)
香港貿發局 helps the industrial and commercial sectors to promote and develop markets for trade in goods and services.
OthersTrade and Industry Department 工業貿易署Hong Kong Export Credit Insurance Corporation 香港出口信用保險
局 Hong Kong Productivity Council 香港生產力促進局Hong Kong Science and Technology Parks 香港科技園
Hong Kong’s attempts to overcome trade barriers
CEPA: Closer Economic Partnership Arrangement (2003) The 1st free trade agreement between HK and the mainland
Goods (list of goods) Zero tariff treatment on certain goods E.g. Fiber, digital clock
Services Preferential treatment when setting up business
e.g. Medical Mutual recognition of professional qualifications
e.g. Accountants
Trade and investment facilities Electronic business, simplification of customs clearance facilitation
Hong Kong’s attempts to overcome trade barriers
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