ECONOMICS 3150B
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Transcript ECONOMICS 3150B
ECONOMICS 3150N
Winter 2013
Professor Lazar
Office: N205J, Schulich
[email protected]
736-5068
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Lecture 10: April 4
Ch. 9, 10, 12
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Dumping
• Requirements:
– Imperfect competition – price setters rather than price takers
– Segmented markets – no arbitrage
• By firms in A into B:
– Price in B below price in A
– P(B) < AC(A)
– P(B) < AVC(A)
• Price discrimination
– Elasticity of demand differs between A and B
– Prevent arbitrage
• Warranties
• Price discrimination model:
– MC(A) = MR(A) = MR(B)
– P(A) > P(B)
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P1
P1(A)
P1(B)
MC(A)
D(B)
MR(B)
MR(A)
D(A)
Y1
4
Dumping
• P(B) < AVC(A)
– Beach-head strategy
– Price in short run < price in long run
• Improved competitive position in future and ability to charge higher price
• P(B) < AVC(A)
– Learning curve
– AVC in short run > AVC in long run
• Pricing to move down learning curve and develop cost-based competitive
advantage
• Lower price increases demand and production per period of time
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Dumping
• P(B) < AVC(A)
– Objective: drive competitors out of market to monopolize market
– How to distinguish predatory dumping from dumping based on
competitive behavior not aimed at monopolization?
– Substitute domestic competition law for anti-dumping provisions in trade
agreements companies may be driven out of market before case is
resolved
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Trade Barriers
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Tariffs
Export subsidies
Quotas
Local content requirements
Preferential procurement
Red tape barriers
Foreign investment restrictions
Contingency protection
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–
–
–
Countervail
Anti-dumping
Safeguards
Unfair trade
7
Trade Barriers
• Tariffs
–
–
–
–
Import vs. export
Ad valorem vs. specific
Commodity classification
Base price for applying tariff
• Import Tariffs – protect domestic suppliers
8
Trade Barriers
• Export tariffs
– Government extracts rents rather than domestic
producers when domestic price < world price
oil & gas under NEP in Canada
– Canada receives revenues rather than US
Treasury – case of lumber
– China – tariffs on exports of steel
• Produces 1/3 of world’s total supply of steel
9
Trade Barriers
• Who pays tariff?
– Terms of trade effects, incidence
• Small country
– No market power – no terms of trade effects
– Domestic consumers pay entire tariff
– Revenues collected by government – costs of
administration of tariff system and collection of
revenues
– Income distribution effects, employment effects
10
Trade Barriers
• Large country
– Market power – terms of trade effects
– Foreign suppliers pay tariff because world price
lowered by full extent of tariff
– Decrease in value of imports, but no change in
volume of imports – no change in domestic
production of goods
– No income distribution effects other than as a
result of use of tariff revenues; no employment
effects other than as a result of use of tariff
revenues
11
Non-Tariff Measures (NTMs)
• Export subsidies and auto bail-outs
–
–
–
–
–
–
–
–
–
Terms of trade effects
Production subsidies
Income tax holidays
Capital grants
Labor subsidies ($X per hour) – difference between labor and direct
production subsidies
Below market rate export financing (export credit subsidy) – low interest
rate loans for foreign customers
Government guarantees for receivables – enhances ability of domestic
suppliers to borrow from banks at lower rates of interest to finance
working capital
Government needs to raise revenues to pay for subsidy – incentive
effects, administration and collection costs
Income distribution effects; employment effects
12
Non-Tariff Measures (NTMs)
• Import quotas
– Small country – price taker in world markets
– Tariff rate can be estimated to produce same outcomes as quota
that is auctioned
– Income distribution effects
– Increase in domestic price economic rents created
– Who gets the rents?
• If licenses for quotas given away, recipients of licenses (domestic –
distributors; or foreign recipients – exporters) obtain rents
• If licenses auctioned – government receives rents similar to tariff
– WTO decision against China
• China violated international free trade rules by limiting imports of
books and movies
• Implications for control of information?
13
Imports = 1Y1 – 0Y1
P1
S(A)
S(World)
0P1
D(A)
0Y1
1Y1
Y1
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Quota = 2Y1 – 0Y1
P1
S(A)
TS(A)
2P1
S(World)
0P1
D(A)
0Y1
3Y1 2Y1
1Y1
3Y1
Y1
+ Quota
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Non-Tariff Measures (NTMs)
• Voluntary export restraints (VERs)
– Quotas on exports imposed by exporting country effectively a quota
given away to foreign suppliers
– Favored by exporting country as compared to tariffs or quotas that are
auctioned economic rents/revenues accrue to exporting firms rather
than to treasury of importing country
– More costly to importing country but politically appears that exporting
country admits to “unfair trade” practice and voluntarily agrees to rectify
practice importing country does not appear to act as bully
– Example of Japanese autos in 1970s and 1980s – more expensive models
with higher profit margins exported to US enabled Japanese auto
producers to gain foothold in this segment of market
– China (January 2008): 10-15% tariff on exports of stainless steel sheets,
15% on steel tubes, 15% on cold-rolled sheets
• Reduce trade surplus – under pressure from EU and US (both threatening to
impose tariffs
• Cut energy consumption and pollution
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Non-Tariff Measures (NTMs)
• Local Content Requirements
– Specified fraction of final good to be produced domestically – X% of sales
price; Y% of total units sold domestically (case of autos under the Auto
Pact; Canadian content provisions for broadcasting)
– Under NAFTA: what constitutes domestically produced good (Mexico,
US, Canada) exempt for tariffs within North American market – most
goods include some value added from foreign (ex. NA) suppliers
– Comparable to import quota with license given to foreign producers of
intermediate inputs
– Employment guarantees
– Domestic suppliers may have competitive advantage but face market
obstacles: overcoming reputation advantage of long-established foreign
suppliers; late entrant needing to overcome learning curve advantage of
first mover – foreign suppliers
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Non-Tariff Measures (NTMs)
• Procurement Preferences
– Preferential price advantage given to domestic suppliers – government
will buy from domestic supplier as long as price is no more than X%
greater than that of foreign supplier similar to tariff
– Similar to restrictive quota or tariff when foreign suppliers prevented from
bidding
• Red Tape Barriers
– Health and safety standards – infected cattle, SARs
– Customs classifications
– Harassment potential
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Non-Tariff Measures (NTMs)
• Domestic taxes and terms of trade
– Carbon taxes in US and world price of oil
• Changing environmental rules to allow the use of fracking
technologies for oil and gas
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Non-Tariff Measures (NTMs)
• Contingency Protection
– Security of access issue related to FTA
– Countervailing duties – in case of subsidies; definition of subsidies
– Anti-dumping – predatory, sporadic, persistent (price
discrimination)
– Balance of payments, employment safeguards
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Non-Tariff Measures (NTMs)
• Countervailing duties
–
–
–
–
Definition of subsidies – health care system, education, etc.
Value of subsidies
Terms of trade
Costs to domestic industry – distinct from economic shocks,
competition
– Magnitude of tariff to level playing field
– Duration of protection
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Non-Tariff Measures (NTMs)
• Anti-dumping
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–
–
–
Distinguish among predatory, sporadic, persistent
Does nature of dumping matter?
Degree of dumping – price differential
Costs to domestic industry – distinct from economic shocks,
competition
– Magnitude of tariff to level playing field
– Duration of protection
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Non-Tariff Measures (NTMs)
• Safeguards
–
–
–
–
Flexible exchange rates as shock absorber
Global shock or country-specific shock
Herd effect – pace of outsourcing accelerates
Costs to domestic industry – labor adjustment policies,
unemployment insurance, training programs
– Magnitude of tariff
– Duration of protection
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Non-Tariff Measures (NTMs)
• Unfair Trade (S. 301)
– 3rd country and home country effects
– Definition of unfair trade – wide ranging and ambiguous
– Harassment – who pays for investigation and legal proceedings
(asymmetric costs of fighting complaints)
– Ambiguous interpretation of law – susceptibility to political
pressures
• Definition of injury (threshold for injury for retaliation), causation
(links between cause and effect, external variables)
– US domestic laws including trade remedy laws supersede
international obligations of US
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Non-Tariff Measures (NTMs)
• Foreign investment restrictions
– Rights of establishment – limits on foreign investment and control
(airlines, telecommunications, broadcasting, cable, banks)
– Performance requirements
– National treatment
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Canada-US FTA
• Gains from trade
– Traditional: comparative advantage, new products
– Larger markets: economies of scale, plant economies
(specialization), learning curves
– Increased competition: new products, higher quality, lower prices
(border shopping) , efficiency
– Minimize trade disputes – less likely to be side-swiped when
trading partner initiates trade dispute against other countries;
dispute resolution mechanism fairer and quicker in resolving trade
disputes
• Consider softwood lumber under NAFTA, subsidies for regional jets
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Canada-US FTA
•Losses
– Income losses for owners of relatively abundant resources
• Implications for income inequality – skilled vs. unskilled workers; owners of
capital vs. workers
– Adjustment to new trade patterns – unemployment during
transition
– Race to the bottom – “Right to work” laws in the US; lower
minimum wage rates
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Canada-US FTA
• Argument in favor of FTA with US based on
Canada exploiting economies of scale and gaining
secure access to US market (required to encourage
investment in Canada and restructuring)
– Productivity levels in Canada 25% below US because
Canadian branch plant replica of US
• Same number of varieties and shorter production runs;
• Less competition thus X-inefficiency and less incentive to
innovate
– Plant economies of scale
• Standard internal economies of scale and per unit costs
decrease with reduction in number of products produced in
each plant
28
Canada-US FTA
• Problems with argument:
– If economies of scale so important why did
some firms not specialize and drive competitors
out of the market?
– Tariff barriers had been declining since 1947 –
what if management a problem?
– Security of access limited incentives to
restructure
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FTA, NAFTA
• Objectives
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Eliminate barriers to trade in goods and services
Expand liberalization of conditions for cross-border investments
Dispute resolutions – more binding, more effective enforcement
Facilitate conditions for fair competition (labor and environment codes)
Rules of origin: 50% of value added (62.5% for autos) must originate in
free trade area
– Eliminates import and export restrictions on energy products, no price
discrimination between domestic and foreign consumers of energy
products
– National treatment
• Trade in services – subject to regulation (professional services); labor
mobility; foreign ownership restrictions (financial services,
broadcasting, transportation)
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NAFTA
• Ch. 11
• Allows companies to sue any of the NAFTA governments for violation
of that government’s commitments under the agreement
• Allows company to sue if it believes it has experienced either
expropriation or government conduct tantamount to nationalization or
expropriation – any regulation or policy change that reduces a firm’s
profits and value
31
GATT
• GATT/WTO [General Agreement on Tariffs and Trade/World Trade
Organization]
– 3 basic principles
• Nondiscrimination (MFN) – preferential trading arrangements violate this
principle; NAFTA an example of preferential trading arrangement
• Elimination of quotas (except for balance of payments problems) –
international system of quotas in textiles, proliferation of VERs, exploitation
of escape clause
• Consultation to solve trade disputes – weak enforcement mechanism; US
domestic laws supersede GATT, NAFTA
– As Tariffs , NTMs because D for protection constant
– NTMs higher cost form of protection
– Canada essentially bystander in MTNs – EU, US and Japan dictated
outlines of agreements
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GATT
• 9 Rounds of multilateral trade negotiations –
Kennedy, Tokyo, Uruguay and Doha rounds
addressed NTMs as first 5 focused on tariffs only
– Tokyo, Uruguay and Doha also attempted to extend
trade rules to services and establish investment rules
– WTO created to replace GATT secretariat
• Responsible for enforcement of agreement and dispute
resolution
• More formal procedures with tighter deadlines
– GATS (General Agreement on Trade in Services)
– TRIPS (Agreement on Trade-Related Aspects of
Intellectual Property
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GATT
• Difficulties in reducing NTMs
– Definition of subsidies
– Escape clause provisions
– Dispute settlement mechanism with effective
enforcement – market power of different countries
– Trade-offs: Problems in measuring concessions
– North-South issues: need to develop economies
– Agriculture sector and political importance of farmers
• Major problem for Doha Round
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Agriculture Support
Government support, 2008: % of gross farm receipts
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Canada:
Australia:
Brazil:
China:
EU27:
Japan:
Russia:
S. Korea:
Mexico:
Turkey:
US:
13.0%
5.9%
5.0%
8.6%
24.9%
47.8%
10.8%
51.7%
13.1%
24.5%
6.8%
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GATT
• GATT includes articles on anti-dumping (Article
6), countervail (Article 16) and escape clause
(Article 19)
– Dumping: export price below domestic market price
(below cost of production or normal home market
price)
– Escape clause: temporary protection to limit imports
causing serious injury to domestic producers
– Countervail: tariffs to offset effects of subsidies
– Problems: defining subsidies, determining existence of
dumping, measuring degree of dumping, measuring
injury, determining causation
36
GATT and US Trade Laws
• US contingency protection legislation –
countervail, anti-dumping, escape clause
and unfair trade (S. 301)
– First three deal with imports, unfair trade deals
with exports as well
– US definitions of injury and causation differ
from spirit and letter of GATT
– Unfair trade not part of GATT – trade panel has
found S. 301 to violate GATT
• Issue of sovereignty for US
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