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
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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
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Trade Barriers
• Tariffs
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Import vs. export
Ad valorem vs. specific
Commodity classification
Base price for applying tariff
• Import Tariffs – protect domestic suppliers
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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
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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
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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
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Non-Tariff Measures (NTMs)
• Export subsidies and auto bail-outs
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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
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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?
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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
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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
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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
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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
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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
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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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