Lecture 6: Trade Policy
Analysis
Kenneth A. Reinert, Cambridge University
Press 2012
Introduction
Reasons to expect landowners in Japan might oppose the
import of rice from another country
Opposition to imports exists despite overall gains to Japan
from these imports
Trade policy analysts and international affairs professionals
are often called upon to assess impacts of government
interventions in international trade
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.1: Absolute Advantage and Trade in
the Rice Market
Kenneth A. Reinert, Cambridge University
Press 2012
Absolute Advantage Revisited
In moving from autarky to trade in Figure 6.1, there
is a reduction in domestic quantity supplied in Japan
Japanese rice-producing firms would lobby Japanese
government to oppose decrease in domestic quantity
supplied
Demand protection from Vietnam exports
Protective policies are widespread in world economy
Kenneth A. Reinert, Cambridge University
Press 2012
Trade Policy Measures
A country can grant import protection to a sector of
its economy in form of either
Tariffs: a tax on imports
Specific tariff is a fixed tax per physical unit of the
import
Ad valorem tariff is a percentage tax applied to the
value of the import
Non-tariff measures
Governments employ both types of tariffs
See Table 6.1
Kenneth A. Reinert, Cambridge University
Press 2012
Table 6.1: Nontariff Measures
Tax-Like Measures
Anti-dumping duties, countervailing duties, temporary
import surcharges, variable levies
Cost-Increasing Measures
Standard and technical regulations, Sanitary and
Phytosanitary requirements, Prior import deposits,
Customs procedures
Kenneth A. Reinert, Cambridge University
Press 2012
Table 6.1: Nontariff Measures
Quantitative Measures
Quotas, tariff rate quotas, voluntary export restrains (VER),
import licensing, foreign exchange controls, sanctions and
embargoes
Government Procurement Practices
Kenneth A. Reinert, Cambridge University
Press 2012
A Tariff
For our graphical analysis in this chapter, it is much
simpler to consider a specific tariff
Basic results also apply to an ad valorem tariff
A tariff increases domestic price of imported product
above world price
In the case of Japanese rice, domestic price is many
times larger than world price
Causes an increase in Japans production of rice which is
desired effect from Japanese rice farmers
Domestic consumption of rice falls
Imports fall
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.2: A Tariff on Japans Imports of
Rice
Kenneth A. Reinert, Cambridge University
Press 2012
Tariff Effects
Welfare and revenue effects also occur from the
tariff
Consumer surplus of Japanese households fell
Producer surplus of Japanese firms has increased
Japanese rice consumers are paying more and
consuming less
Japanese rice producers are receiving more for their
product and producing more
Japanese government is receiving revenue from
import tax
Kenneth A. Reinert, Cambridge University
Press 2012
Net Welfare Effects
Summarizes welfare impact of policy for the
country as a whole
From an economic standpoint,
Japanese society as a whole
Although it benefits producers and government,
losses imposed on consumers outweigh benefits
Kenneth A. Reinert, Cambridge University
Press 2012
tariff
hurts
Terms of Trade Effects
When Japan imposes a tariff on its imports
from Vietnam, amount of these imports
decreases
As Japans imports of rice decrease, there will be
excess supply in the world market for rice
Will cause the world price to fall
Since Japan is importing rice, this is a good thing for this
country
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.3: The Terms-of-Trade Effects of
Japans Tariffs
Kenneth A. Reinert, Cambridge University
Press 2012
The Terms-of-Trade Effects
If the world price fall by a lot, E could be very large
even larger than B+D
However, we should not conclude that given large
terms of trade effects, tariffs are good for country
Tit-for-tat retaliation trade war
Kenneth A. Reinert, Cambridge University
Press 2012
A Quota
Import quota a quantitative restriction on imports
Type of non-tariff measure
Quota policy is typically administered via import
licenses
A quota results in a shortage of a good relative to
initial situation
Quota premium (difference in prices: P world and P quota)
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.4: A Quota on Japans Rice Imports
Extra value of
the right to
import amount
Z quota rent
Kenneth A. Reinert, Cambridge University
Press 2012
A Quota
Policy usually administered via a system of import licenses
Quota has restricted supply of import licenses
Who receives rents depends on how the quota licenses are
allocated
Allocated to domestic importers
Quota rents accrue to importers and remain in Japan as a gain
Allocated to foreign exporters
Quota rents accrue to exporters and leave Japan as a loss
Kenneth A. Reinert, Cambridge University
Press 2012
Summary of Trade Policies
Tariff
Domestic-allocated quota
Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and government revenue
Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and quota rents
Foreign-allocated quota
Unambiguous net welfare loss that exceeds that of domestic-allocated
quota case
Kenneth A. Reinert, Cambridge University
Press 2012
Comparative Advantage Models
In many instances, the effects of trade policies go beyond a
single sector
In these cases, trade policy analysts turn to trade policy
models based on comparative rather than absolute advantage
The central insight of these models is that a protective
measure in one sector acts as an implicit tax on production in
other sectors
Kenneth A. Reinert, Cambridge University
Press 2012
