International trade 13.3 13.4
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Transcript of International trade 13.3 13.4
CHAPTER 13:INTERNATIONAL TRADE
13.3 THE WORLD TRADE ORGANIZATION (WTO)
13.4 RESTRICTIONS ON FREE TRADE: TRADE PROTECTION
HISTORY OF THE WORLD TRADE ORGANISATION (WTO) – JANUARY 1995, 124 COUNTRIES
© Hafiz Halwi 2014
• Suffering major declines in output and very high rates of unemployment
• Resorted to tariffs and other restrictions to limit imports and protect domestic production and unemployment
• Tariff wars – reduce the volume of international trade without positive effects on output and employment
Great Depression of the 1930s
• Intended to gradually liberalise (free up) international trade and prevent further outbreaks of tariff wars.
• Principles:
• Non-discrimination
• Elimination of non-tariff trade barriers
• Consultations to resolve trade disputes
General Agreement on Tariffs and Trade (GATT)
– 1947, 29 countries
WTO – FUNCTIONS AND OBJECTIVES
Provides the institutional and legal framework for the trading system that exists between
member nations worldwide
As of July 2011, it had 153 members, which account for over 97% of global trade.
There are 31 ‘Observer countries’
WTO – FUNCTIONS AND OBJECTIVESIt administers WTO trade arguments
It provides a forum for trade negotiations
It handles trade disputes
It monitors national trade policies
It provides technical assistance and training for developing countries
It facilitates co-operation with other international organisations
The trading system promoted by the WTO is based on the following principles:
Non-discrimination
Free trade
Predictability
Promotion of fair competition
Development and economic reform should be encouraged
Free trade= the absence of government intervention of any kind in the international trade
Trade protection= involves in government intervention in international trade through the imposition of trade restrictions (barriers) to prevent the free entry of imports into a country or to protect the domestic product from foreign competion.
FREE TRADE VERSUS PROTECTION
Definition: tariffs are taxes on imported goods, and are the most common form of
trade restriction (also known as ‘customs duties’)
Purpose:
To protect a domestic industry from foreign
competition (a protective tariff)
to raise revenue for the government (a revenue
tariff)
TARIFFS
Effect of tariff: (must draw graph)
Increase in quantity supplied,
decrease in quantity
demanded and decrease
in imports.
Domestic consumers
are worse off
Domestic producers
are better off
Domestic employment
increase
The government gains tariff revenues
- The revenue that government
gain from tariff is
directly from consumers. (consumers
that paid the tariff price)
Domestic income worsens.
-there is negative impact on income distribution, because tariff is a type of regressive tax (tax rate decrease as the income increase, less equal in income distribution) which burden the people on lower income.
• Increase inefficiency in production
- The increase in domestic output represents an increase
in production by relatively inefficient domestic
producers/ waste of scarce resources
Foreign producers are worse off
They export a smaller quantity for
the world price, since the quantity of import in the
importing county is reduced.
Global misallocation of resources result
- Decrease in consumption, shift of production away
from more effective foreign
producers to more inefficient domestic
producers.
Consumer surplus is the area under
demand curve and above the price
paid by consumers (a+b)
The producer surplus (c+g), also the government
gains the revenue equal to (e)
therefore, social surplus after the
tariff is a a+b+c+e+g
Area (d) and (f) are welfare loss, (d=inefficient producer) &
(f=decrease in consumer
consumption)
EFFECT OF TARIFF ON CONSUMER AND PRODUCER SURPLUS (GRAPH 13.7(B))
Imports quota/quota= legal limit to the quantity of a good that can be imported over a
particular time period (usually a year)
Similar to tariffs, except that they usually do not create revenue for the
government
When government set a quota, it issues a limited
number of quota licenses that determining the legal
limit on the quantity imports.
This license holder gain quota revenues/ quota rents
because whereas they buy the good at the world price, Pw, they sell to consumer at
the higher domestic price, Pq
IMPORTS QUOTAS
• Effect of an import quota: (same as tariff)
Increase in quantity supplied, decrease in quantity demanded and decrease in imports
Domestic consumers worse off
Domestic producer better off
Domestic employment increase
The government neither gains or loses
-because there are no revenues generated from the implementation of quota
Increase inefficiency in production
-(same as tariff)
Domestic income distribution worsen
- Quota result in a higher price. Increase in price have the same effect as the tariff in that it is regressive.
Exporting countries may be worse off or better off.
-it depends on which is larger: the loss of export revenue or the gain of quota revenues
Global misallocation of resources result
- Decrease in consumption, shift of production away from more effective foreign producers to more inefficient domestic producers
• Consumer surplus is area a+b
• Producer surplus is area g+c
• Area d+f is welfare loss, (d=inefficient production) & (f= reduce consumption)
• Area e which represents quota revenue, is transfer abroad to exporting countries.
• The total surplus = d+e+f
• Quota result in greater welfare losses for domestic economy than tariff
EFFECT OF QUOTAS ON CONSUMER & PRODUCER SURPLUS