lecture 26 - for wattle

8/6/2019 Lecture 26 - For Wattle

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Microeconomics 1

Lecturer: Adam Allanson

Lecture 26

5 May 2011



Impact of Quota / VER



“Equivalent” Tariff



What will happen if domestic demand rises?

Is a 600,000 quota really equivalent to a 50% tariff?



What will happen if domestic demand rises?




What will happen if the world price rises?

Assume specific tariff of $10,000 (rather than 50% ad valorem tariff).




Quotas when domestic demand & world prices change

In summary:

• where domestic demand is increasing, fixed

quantitative quotas become more “distortionary” over

time: under a quota the increase in demand is satisfied

by local producers rather than (more efficient) foreign

producers;• where world prices are rising, fixed quotas become less

distortionary and may become non-binding;

• quotas are less “transparent” than tariffs: their impact

on domestic prices is not immediately obvious; and

• quotas are generally being phased out under

World Trade Organisation (WTO) trade agreements.



Thinking about international trade issues

• Micro 1 is not about giving you the “answers”, but

giving you an analytical framework to enable you to askthe right questions.

• Trade issues are often complex, involving many

competing interests, and analysing them requires an

understanding of the affected markets and institutions.

• An understanding of economic history will help

understand the current situation and (hopefully) help

us avoid repeating the same mistakes.



A brief (and very incomplete) history

• 1930’s: Great Depression caused countries to place tariffs on

goods in order to “protect jobs”.

• Others retaliated with tariffs of their own and international trade

collapsed, exacerbating the economic downturn.

• World War II – 1939 to 1945.

• General Agreement on Tariffs and Trade (GATT) was established

in 1948: multilateral negotiations aimed at reducing tariffs and

reviving trade.

• The EU Common Agricultural Policy (1950s) – EU tries toguarantee food supply (“self sufficiency” being a key goal).

• The US Food Security Act (1985) established the

US Export Enhancement Program.



The EU Common Agricultural Policy (CAP)

CAP: A system of production, export and storage subsidies and price

floors aimed at “ensuring that the EU had a viable agricultural

sector” and that EU was “self -sufficient in food production”.

“The CAP was very successful in meeting its objective of moving

the EU toward self-sufficiency from the 1980s onward. Suddenly,

however, the EU had to contend with almost permanent surpluses

of the major farm commodities, some of which were exported

(with the help of subsidies), others of which had to be stored or

disposed of within the EU. These measures had a high budgetary

cost, distorted some world markets, did not always serve the best

interests of farmers, to the extent that they quickly becameunpopular with consumers and taxpayers.”

European Commission of Agriculture and Rural Development,

“The Common Agricultural Policy Explained”



The US Export Enhancement Program (EEP)

“The Export Enhancement Program (EEP) is designed to

help U.S. farm products meet competition fromsubsidizing countries, especially the European Union.

Under the program, the U.S. Department of Agriculture

pays cash to exporters as bonuses, allowing them to sell

U.S. agricultural products in targeted countries at pricesbelow the exporter’s cost of acquiring them. The major

objectives are to expand U.S. agricultural exports and to

challenge unfair trading practices.”

US Department of Agriculture Fact Sheet (March 2006)



Thinking about price floors and anti-dumping

Price floor: A government-guaranteed minimum price for producers

which is usually above the free market equilibrium price.

• Price floors, domestic subsidy policies and export enhancement

schemes (such as the EU CAP and US EEP) all serve to drive world

prices lower than they would otherwise be.

• EU and US taxpayers pay for these schemes and producers in othercountries suffer from the results of lower world prices and reduced

market access.

Dumping: Selling a product for a price below its cost of production.

• The WTO will allow tariffs to be imposed to offset the effects of dumping.

• But is foreign dumping “bad” for the domestic (importing)

economy?



Dumping and Anti-Dumping Tariffs




• What concerns might you have about this

analysis? – Only measures gains in current period

– What happens next month/year?

–

Is this market “perfectly competitive”?Is there costless entry and exit in this market?

– Are there any “spill-over” benefits from having a local

industry?

– What happens if dumping reduces the number of

suppliers such that the market is less competitive?

– Many concerns about “unfair trade” relate to

potential for abuse of market power (monopoly)

h ld d ( )?



The World Trade Organization (WTO)?(see www.wto.org)

The World Trade Organization (WTO):

•

is an international organisation (based in Geneva) thatenforces international trade agreements between

member countries;

• currently has 153 member countries: member

governments use the WTO as a negiating forum to sortout the trade problems they face with each other;

• was formed in 1995 following the Uruguay Round of the

General Agreement on Tariffs and Trade (GATT);

• works towards reducing tariffs and other trade barriers inorder to promote “free trade” and “fair competition”

(see WTO website and article on Wattle).

h ld d i i ( )?



The World Trade Organization (WTO)?(see www.wto.org)

WTO Objective: the WTO works towards reducing tariffs and other

trade barriers in order to promote “free trade” and “fair

competition” (see WTO website and article on Wattle).

WTO Trade Agreements: set rules and member governments agree to

keep their trade policies within agreed limits and adhere to

agreed principles. For example:

Under WTO “Most-Favoured-Nation” rules, countries cannot normally

discriminate between their trading partners.

Under “National Treatment” rules, imported and locally-produced goods

should be treated equally. Importantly, WTO note that “National Treatmentonly applies once a good or service has entered the market. Therefore,

charging tariffs on an import is not a violation of National Treatment even if

locally-produced products are not charged an equivalent tax.”



Why do some people oppose the

World Trade Organization?

•

Globalisation: The process of countries becoming moreopen to foreign trade and investment.

• Anti-globalisation: Some people believe that free trade

and foreign investment destroy the distinctive culturesof many countries, create environmental and health

problems, and can lead to the exploitation of workers.



The argument over trade policies and globalisation

Protectionism: The use of trade barriers to shielddomestic companies from foreign competition.Protectionism is usually justified on the basis of the following arguments:

1. Saving jobs

2. Protecting high wages

3. Protecting infant industries

4. Protecting national security



“Radical environmentalism” (Hubbard’s term)

1. Argument that trade restrictions should be put in placeagainst countries who lack environmental protection

laws.

•

Poorer countries tend to lack these laws, therefore theWTO does not support this approach.

• WTO recommends maintaining trade, and wealthier

countries offering financial and practical assistance to

help improve production techniques and enforceenvironmental standards.

• (The WTO may not always be “right” – these are “on

balance” issues that need careful consideration.)





“Radical environmentalism” (Hubbard’s term)

2. Argument that free trade increases carbon dioxideemissions due to the transportation of goods and services

around the world.

• Transportation emissions are only part of total

production emissions. Lower total emissions could

occur if production occurred in efficient markets and

trade took place.

•

Key issue is whether transportation costs include theexternal costs to the environment (e.g. appropriate

pricing of carbon here and abroad) irrespective of

whether transportation is within Australia or from

overseas.




Positive versus normative analysis• All interferences with free trade make some people

worse off, some people better off, and reduces totalincome and consumption.

• Positive analysis: The reduction in economic efficiencyfrom a tariff, quota or VER can be measured. This canusefully inform decision making.

•

Normative analysis: Whether a tariff or quota is badpublic policy and should be eliminated is a normativedecision.

lecture 26 - for wattle

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