economics chapter 9 trade barriers. trade barriers are imposed to avoid imports. free trade brings...

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


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


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.


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


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


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


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


The effects of tariffsLet’s look at the (domestic) consumer and producer surplus


Clothes (units)

Price ($)

0

Domesticdemand

Domestic supply

Price after tariff

Price before tariff

20 100

Tariff = $t

International price

45 75


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


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


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


Quota

Import volume

after quota

The effects of quotasLet’s look at the (domestic) consumer and producer surplus


Clothes (units)

Price ($)

0

Domesticdemand

Domestic supply

Price after quota

Price before quota

20 100

International price

40 80


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


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

http://www.wto.org/index.htm

http://www.wto.org/index.htm

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


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.


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


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

economics chapter 9 trade barriers. trade barriers are imposed to avoid imports. free trade brings...

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