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Welcome to Welcome to EC 382: International EC 382: International EconomicsEconomicsBy:By: Dr. Jacqueline KhorassaniDr. Jacqueline Khorassani

Week SevenWeek Seven

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Week Seven: Class Week Seven: Class OneOne

Tuesday, October 16Tuesday, October 16 14:10-15:0014:10-15:00

AC 202AC 202

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Your exams are Your exams are graded. I am sograded. I am so I will bring them to class tomorrowI will bring them to class tomorrow Is it ok if I post the results on my Is it ok if I post the results on my

webpage based on your ID webpage based on your ID numbers?numbers?

If you have any objection to this If you have any objection to this method, please let me know before method, please let me know before the end of this week.the end of this week.

If I don’t hear from you, I assume If I don’t hear from you, I assume that you are ok it.that you are ok it.

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NewsNews

Still no news about a new room Still no news about a new room for usfor us

Library had not ordered the book; Library had not ordered the book; the first time we placed the orderthe first time we placed the order– We placed another rush order We placed another rush order

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I received informationI received information

My book arrived the day before My book arrived the day before the exam. ………the exam. ………

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A requestA request

Dear coach Jacqueline, please Dear coach Jacqueline, please don't give us a ICA this week !!! don't give us a ICA this week !!! we studied so much for the exam we studied so much for the exam last week so...we need a rest!!! last week so...we need a rest!!! thank you very muchthank you very much

Oooops!!! I have one planned for Oooops!!! I have one planned for today.today.

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In which case the In which case the domestic bike producer domestic bike producer is more protected? is more protected? Scenario 1:Scenario 1:

– You impose a tariff of 50% on You impose a tariff of 50% on imported bikesimported bikes

– And 80% tariff on imported wheelsAnd 80% tariff on imported wheels Scenario 2:Scenario 2:

– You impose a tariff of 50% on You impose a tariff of 50% on imported bikesimported bikes

– And 20% tariff on imported wheelsAnd 20% tariff on imported wheels

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Effective Rate of Effective Rate of Protection (ERP)Protection (ERP)

Measure the rate of protection of Measure the rate of protection of domestic bike producers from foreign domestic bike producers from foreign completioncompletion

ERP = (TERP = (Tf f – aT– aTcc)/(1-a))/(1-a)

where,where,

TTff = tariff rate on imported final product = tariff rate on imported final product

TTc c = tariff rate on the imported components= tariff rate on the imported components

a= the ratio of the value of imported component to a= the ratio of the value of imported component to the value of final good the value of final good

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Assuming that the wheels represent Assuming that the wheels represent 60 percent of the value of the bike, 60 percent of the value of the bike, What is the ERP in each scenario?What is the ERP in each scenario?

1. ERP = (1. ERP = ((0.5(0.5 – (0.6 * 0.8))/(1-0.6)– (0.6 * 0.8))/(1-0.6)

ERP = (0.5 -0.48)/0.4ERP = (0.5 -0.48)/0.4

ERP = 0.02/0.4 = 0.05 or 5%ERP = 0.02/0.4 = 0.05 or 5%

2. 2. ERP = (ERP = ((0.5(0.5 – (0.6 * 0.2))/(1-0.6)– (0.6 * 0.2))/(1-0.6)

ERP = (0.5 -0.12)/0.4ERP = (0.5 -0.12)/0.4

ERP = 0.38/0.4 = 0.95 or 95%ERP = 0.38/0.4 = 0.95 or 95%

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Just In time ICA4 (in Just In time ICA4 (in teams of 2 or 3)teams of 2 or 3) Please, only one assignment per Please, only one assignment per

teamteam Q # 7, Page 153Q # 7, Page 153

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International International EconomicsEconomics Week Seven- Class 2Week Seven- Class 2

– Wednesday, October 17Wednesday, October 17– 11:10-12:0011:10-12:00– TyndallTyndall

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Q # 7, Page 153Q # 7, Page 153

Suppose that the free trade price of a Suppose that the free trade price of a domestic product is $10,000 and contains domestic product is $10,000 and contains 25 percent imported components. Assume 25 percent imported components. Assume that the tariff on final product is 10 percent that the tariff on final product is 10 percent and a 5 percent tariff is imposed on the and a 5 percent tariff is imposed on the imported components. imported components.

A) What is the product’s price after the A) What is the product’s price after the imposition of tariff?imposition of tariff?

B) What is the domestic value added before B) What is the domestic value added before and after the imposition of tariff?and after the imposition of tariff?

C) What is the effective rate of protection?C) What is the effective rate of protection?

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Answer?Answer?

a.a.After the imposition of tariff, domestic After the imposition of tariff, domestic price goes up by 10% to $11,000price goes up by 10% to $11,000

b.b.Before the tariff, domestic value added is Before the tariff, domestic value added is (10,000 – 2500 =$7,500) and after the (10,000 – 2500 =$7,500) and after the tariff the domestic value added is tariff the domestic value added is [11,000-(2500 + (.05*2500)) =$8,375].[11,000-(2500 + (.05*2500)) =$8,375].

c.c.TTff = 10%, T = 10%, Tcc = 5%, and a = 25%. ERP = = 5%, and a = 25%. ERP = (0.1 – 0.25 × 0.05) / (1 – 0.25) = 11.67%.(0.1 – 0.25 × 0.05) / (1 – 0.25) = 11.67%.

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Arguments for TariffsArguments for Tariffs

1.1. Infant Government ArgumentInfant Government Argument

2.2. National Defense ArgumentNational Defense Argument

3.3. Infant Industry ArgumentInfant Industry Argument

4.4. Senile Industry ProtectionSenile Industry Protection

5.5. Job Protection ArgumentJob Protection Argument

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FactsFacts

1.1. Tariff creates losses in efficiencyTariff creates losses in efficiency Deadweight lossDeadweight loss

2.2. Economies that have adapted Economies that have adapted the policy of protectionism have the policy of protectionism have grown slowergrown slower

3.3. Subsidy may be a better way to Subsidy may be a better way to protect domestic producersprotect domestic producers

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The effects of a subsidy The effects of a subsidy equivalent to tariff in a equivalent to tariff in a small nationsmall nation

S

D

Price

Quantity

a b c d

35 401510

8

10

Tariff = 2

S’

Subsidy = 2

•no loss in CS

• higher imports

•no dead weight loss d

• no revenue for government

• cost of subsidy = €30

• b is still a loss in efficiency but it is covered by government

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Nontariff Barriers to TradeNontariff Barriers to Trade(Chapter 7)(Chapter 7)

In the study guide, I asked you:In the study guide, I asked you:

1.1. What are GATT and WTO and what is What are GATT and WTO and what is their role in international trade?their role in international trade?

There is little on WTO in you bookThere is little on WTO in you book

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GATT: General GATT: General Agreement on Tariff Agreement on Tariff and Tradeand Trade

Was originally created by the Was originally created by the BrettonBretton Woods Conference Woods Conference as part of a larger plan for economic as part of a larger plan for economic recovery after recovery after World War IIWorld War II. .

The GATT's main objective was the reduction of The GATT's main objective was the reduction of barriers to international barriers to international tradetrade..

This was achieved through the reduction of This was achieved through the reduction of tarifftariff barriers, barriers, quantitative restrictionsquantitative restrictions and and subsidiessubsidies on trade on trade through a series of agreements. through a series of agreements.

Originally, the GATT was supposed to become a full Originally, the GATT was supposed to become a full international organization called the international organization called the International Trade OrganizationInternational Trade Organization. .

However, the agreement was not ratified, so the GATT However, the agreement was not ratified, so the GATT remained simply an agreement. remained simply an agreement.

The functions of the GATT were taken over by the The functions of the GATT were taken over by the World Trade OrganizationWorld Trade Organization which was established during which was established during the final round of negotiations in the early 1990s.the final round of negotiations in the early 1990s.

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International International EconomicsEconomics Week Seven- Class 3Week Seven- Class 3

– Wednesday, October 17Wednesday, October 17– 15:10-16:0015:10-16:00– AC 201AC 201

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In this week’s study guide, I asked:In this week’s study guide, I asked:What are Non-tariff barriers to trade What are Non-tariff barriers to trade and how common are they?and how common are they?

• The answer is in the bookThe answer is in the book• Problems:Problems:1.1.These types of protection are These types of protection are

increasing as tariffs are increasing as tariffs are decreasing.decreasing.

2.2.They are less visible than tariff They are less visible than tariff but in many cases they are more but in many cases they are more restrictive than tariffs.restrictive than tariffs.

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A government policy that limits imports of a A government policy that limits imports of a product to a certain number of units.product to a certain number of units.

It is banned by the It is banned by the WTOWTO but it still exists. but it still exists.

What are Quotas?What are Quotas?

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How common is quota?How common is quota? In 1955 Ireland suspended its import quota In 1955 Ireland suspended its import quota

on fertilizers.on fertilizers. China's Grain and sugar import quotas China's Grain and sugar import quotas

remain unchanged in 2008remain unchanged in 2008 In 2002 the European Commission In 2002 the European Commission

announced plans to impose a wheat import announced plans to impose a wheat import quota of 2.3 million tones a year quota of 2.3 million tones a year

In 2005 the European Union decided to In 2005 the European Union decided to increase quotas for Chinese textilesincrease quotas for Chinese textiles

In 1989 we learned thatIn 1989 we learned that t the sugar import he sugar import restrictions and the quota regime for imports, restrictions and the quota regime for imports, maintained by the United States since 1982, maintained by the United States since 1982, has been held by a three-member GATT has been held by a three-member GATT panel to be illegal in terms of U.S. obligations panel to be illegal in terms of U.S. obligations in GATT. in GATT.

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1.1. Not all countries are members of Not all countries are members of the WTOthe WTO

2.2. Members of WTO are allowed to Members of WTO are allowed to maintain quotas for a specified maintain quotas for a specified period of time.period of time.

• Transition periodTransition period

3.3. How much power does WTO How much power does WTO have?have?

• Some countries implement quotas Some countries implement quotas defying WTO rules.defying WTO rules.

FactsFacts

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• Quota on textileQuota on textile• Uruguay Round negotiations of Uruguay Round negotiations of

GATT have led to phasing out of the GATT have led to phasing out of the MFA.MFA.

What are Multifibre What are Multifibre Arrangements? Arrangements?

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It is an agreement by a country to limit It is an agreement by a country to limit its exports to another country to a its exports to another country to a certain number of units.certain number of units.

It differs from a quota because the It differs from a quota because the exporting country administers VERexporting country administers VER

Since it is “voluntary” it is legal under Since it is “voluntary” it is legal under WTO regulations.WTO regulations.

VER is difficult to negotiateVER is difficult to negotiate

What are What are Voluntary Export Voluntary Export Restraint (VER)Restraint (VER)??

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Examples of VERsExamples of VERs

IIn May 1981, Japanese car makers n May 1981, Japanese car makers agreed to limit exports of passenger agreed to limit exports of passenger cars to the United States.cars to the United States.

In late 1970s, UK negotiated VERs In late 1970s, UK negotiated VERs restrictions on the imports of two restrictions on the imports of two types of leather footwear.types of leather footwear.

In 1991 a VER was established In 1991 a VER was established between the European Union (EU) and between the European Union (EU) and Japan that established “voluntary” Japan that established “voluntary” quotas on Japanese cars until 1999. quotas on Japanese cars until 1999.

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S

D

E

Price of Cloth

Quantity of Cloth

20

7020

10

Moving from no trade to free Moving from no trade to free trade trade

World Price = 10, Domestic Price = 20

Imports = 50, CS goes up

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S

D

Price of Cloth

Quantity of Cloth

a b c d

G

60 703020

10

12

S + Q

Quota

The Economic Effects of a The Economic Effects of a QuotaQuota

Quota = 30

Supply curve shifts right by 30

At P =10 there is a shortage of ______ Price goes up to ____

CS goes down by?

Who gets a?

What is b?

What is d?

Who gets c?

50

20 12

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Who gets c?Who gets c?

In case of tariff c went to government.In case of tariff c went to government. In case of quota:In case of quota:

1.1. Domestic license holders, if they buy Domestic license holders, if they buy 30 units at p =10 and sell it at p = 1230 units at p =10 and sell it at p = 12

2.2. Domestic government, if it sells Domestic government, if it sells licenses at $2 per unit of imported licenses at $2 per unit of imported good.good.

3.3. Foreign producer, if this is VER.Foreign producer, if this is VER.

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Suppose initially quota has Suppose initially quota has the same effect as tariffthe same effect as tariff

S

D

Price of Cloth

Quantity of Cloth60 703020

10

12

S + Q

Tariff

The only difference may be in who gets c

c

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Now domestic demand grows Now domestic demand grows to D’to D’

S

D

Price of Cloth

Quantity of Cloth

b c d

60 703020

10

12

S + Q

Tariff D’

13

Under tariff, P is still 12, import grows to 40, CS↑

Under quota, at p =12 there is a shortage P up to 13, CS?

35 65

a

Quota is more

restrictive