theory & empirics
TRANSCRIPT
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Lecture 8:
Measuring the impact of trade policy
Previous lecture showed how governmentintervention eg. via taxes, or quotas/permits drives awedge between the consumers marginal willingnessto pay and producers MC.
The consequence is a decline in netwelfarethoughnote certain sectors within society may gain. i.e.policy is also likely to have distributionalconsequences.
This was applied to protection of an industry eg.via tariffs. Analysis indicated a net welfare lossarising from the use of such trade policy.
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Figure 9.11 Effect of a Tariff
Free trade:
CS = A+B+C+D+E
PS = D
TR = 0
Tariff:
CS = A
PS = B+F
TR = D
Welfare
CS = -(B+C+D+E)
PS = B
TR = D
W = -(C+E)
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Trade policy instruments:
Tariffs = a tax on imports. Can either be a specific tax per
unit imported, or an ad valorem tax based on the value of thegood imported.
Quotas: where the amount of imports is limited to a certainquantity. Eg. trade in textiles and clothing.
VERS (Voluntary Export Restraints): signatories to GATTand the WTO are prohibited from introducing / raising tariffsand quotas. One way round this was where countries agreedto voluntarily restrain their exports (eg. Japanese cars in the1980s)
Export subsidies: where specific export industries are offeredsubsidies if they export
Non-tariff barriers to trade: customs formalities, technicalstandards, labelling requirements
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How is the impact of policies measured
Partial Equilibrium Modelling:
Requires information/assumptions about slopes of supply and demandschedules, as well as base data on trade flow, production, and tariffs.
Can be implemented at a high degree of product disaggregation.
Welfare measures based on CS, profits and tariff revenue
General Equilibrium modelling Also requires information on supply and demand, as well as on
intermediate input markets, factor markets, consumer behaviour + onthe interrelationships between these ( Social Accounting Matrix(SAM)).
Level of information required typically means these are implemented
at a much higher degree of aggregation. Welfare measure based on CV or EV, profits and tariff revenue
Both of these techniques are very widely used to measure theimpact of changes in trade policy or tax policy.
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Methodology
1. Choice of model: The model is composed of a system of
simultaneous equations. When these are solved theequilibrium quantities replicate the real world ie they giveyou the same quantities of goods, factors etc that the datatell you really exist
2. The procedure that is employed to ensure that this happensis known as calibration
3. Simulation: you can then change one of the parameters eg.tariffs, run the model again and compare the new valueswith the initial values. The difference gives you the impact
of the policy.4. Output:
Changes in production
Changes in trade flows
Changes in welfare + disaggregation of this
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Partial Eq. Example - Egypt
1. Choice of model: Single importerEgypt
Domestic supply
Three exportersEU, US, Rest of the World (ROW)
28 manufacturing industries
2. Choice of experiment/simulation: Regional integration ie. simulating the Barcelona
process
Multilateral experiment: reduction of tariffs with regard
to all sources Sensitivity analysis over key parameters, eg the
elasticitity of substitution of a good across countries.
See Excel file with simulations.
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Regional Integration: Theory & Empirics Regional integration is where a sub-set of countries
choose to liberalise trade between themselves, but not vis--vis the rest of the world.
Moving from restricted to free trade is welfare increasing,natural to assume that a move from restricted trade toregional integration will also be welfare increasing.
However, this is not necessarily the case. Restricted tradeis a distorted equilibrium, and so is regional integration:
Trade creation: a shift from high cost domestic producers
to lower cost partner country producers Trade diversion: a shift in source of imports from lower
cost rest of world sources to higher cost partner countrysources.
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Trade Creation and Trade Diversion
P
a b c d
pw
Pw(1+ t)
S
D
S1 D1 Q
pbe
Initially no regional integrationand the same import tariffs on world
and on country b.
imports of S1-D1 from world
which is the cheaper supplier.
Now regionally integrate with bie no tariffs on imports b.
The price at home to Pb
CS = a + b + c + dPS = -a
GR = -(c + e)
W = (b + d) - e
where b + d = trade creationand e = trade diversion
Classical theorydoes not offer us an a priori
reason why countries integrate. If you consider
integration as
1) unilateral tariff reduction (leading to TC)
2) then switching import from world to b
therefore why do step 2?
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CGE results: perfect competition, CRS
Authors Scenario
Welfare gains (US$ Billion)
Global LDCs
Lippoldt & Kowalski
(Base = 1998)
100% in manufacturing
tariffs
63.3 51.4
100% in manufacturing
+ agricultural tariffs
97.2 68.4
World Bank, 2004
(Base = 1997)
Manuf cut to 5% in DCs,
10% in LDCs
98 58
Andersen, Francois et.al
(Base = 1995)
100% M liberalisation 254.3 108.1
Dessus, et.al
(Base = 1995)
100% in manuf and ag.
Tariffs
82 18*
* = non OECD countries
Source: Trade and the Global Economy, HM Treasury and DTI, May 2005
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CGE results: imp. comp, dynamic models
Authors Scenario
Welfare gains (US$ Billion)
Global LDCs
Nagarajan
(base = 1995, IC, IRS)
50% in protection on
M, A & S + trade
facilitation
385
World Bank, 2004
(1997 base, dynamic)
100% liberalisation in A
+ M aby all
832 539
Dessus, et.al
(Base = 1995, dynamic)
100% A +M tariffs 1212 455
Source: Trade and the Global Economy, HM Treasury and DTI, May 2005
Note, that in contrast, the Edinburgh G8 summit agreed to boost aid to
$50 billion!
Total support to agriculture in the OECD countries, in 2001 was $311
billion
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Hufbauer & Elliot on the US
1. Tariffs and quantitative restrictions in 1990 cost
American consumers about $70 billion = more than1% of GDP
2. Net change in welfare for the economy was of theorder of $11 billion. 70% of this was captured by
foreign producers as quota rents3. Nearly 50% of the consumer costs are accounted
for by 21 industries
4. More than a third ($24 billion) are from protectionin textiles and clothing.
5. In terms of net national welfare, the cost perprotected job is about $54,000.
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Messerlin on the EU
1. EC protection (tariff and NTB) highly concentrated
in certain sectorsagriculture, process foodstuffs,textiles & clothing, steel and chemicals.
2. Many highly protected goods are intermediategoods in which LDCs have a comparative
advantage3. The costs to EU consumers add up to
approximately 7% of EU GDP.
4. The estimated rents from protection correspond toabout 30-40% of the total costs of protection
5. In terms of net national welfare the cost per jobsaved is of the order of220,000
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And for the LDCs
Similarly Robinon et. al. show that protectionism
and subsidies by developed countries, cost LDCs$24 billion annually. Latin America & the Caribbean: $8.3 billion
LDCs in Asia: $6.6 billion
Sub-saharan africa ~ $2 billion
However, note that successful development policyis not simply about having a liberal trade regime. Requires appropriate domestic policies, regulations and
structures, macro-economic stability, appropriateinvestment, lack of corruption
Also simply liberalising (agricultural) trade maynot be the answersee eg. article by D. Rodrik
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Summary
Wide variety of protectionist measures that can be used,though note the constraints of GATT and the WTO
Estimating the costs of these policies typically involves
either partial or general equilibrium models.
The underlying welfare measures are then consumersurplus, and CV/EV.
Cost of these policies can be very high for both DCs and
LDCs
Note however that models are sensitive to assumptionstherefore have to be very careful in interpreting results
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Additional Readings
1. Feenstra, R. (1992), How Costly is Protectionism,Journal of Economic
Perspectives, 6(3), 159-78.2. Hufbauer,G. C and Elliott K A (1994) Measuring the Costs of
Protection In the US. Institute for International Economics,
Washington, DC. (Read pp. 1-42, plus a couple of case studies.)
3. Hufbauer, G.C. Surveying the cost of protection: A partial equilibrium
approach,http://www.iie.com/publications/chapters_preview/66/2iie2350.pdf
4. Messerlin, P, The real cost of European Protectionism,
http://www.which.net/campaigns/other/freetrade/messerline.pdf
5. Diao, X, Diaz-Bonila,E and Robinson, S, How much does it hurt: The
impact of agricultural trade policies on developing countries.6. Dani Rodrik, How to Make the Trade Regime Work for
Development, February 2004. A few thoughts on the Doha and
post-Doha trade agenda
http://www.iie.com/publications/chapters_preview/66/2iie2350.pdfhttp://www.which.net/campaigns/other/freetrade/messerline.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://www.which.net/campaigns/other/freetrade/messerline.pdfhttp://www.iie.com/publications/chapters_preview/66/2iie2350.pdf