Teaching/Studying Presentation © R.Baldwin & C. Wyplosz Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation •This presentation looks at.
Download ReportTranscript Teaching/Studying Presentation © R.Baldwin & C. Wyplosz Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation •This presentation looks at.
Teaching/Studying Presentation © R.Baldwin & C. Wyplosz Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation •This presentation looks at a unilateral preferential tariff reduction. “A careful presentation of the PTA Diagram “ To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed © R.Baldwin & C. Wyplosz Figure 4 in the book euros RoW euros Partner XSP XSR XR RoW Exports XP Partner Exports 1. To consider preferential, i.e. discriminatory, Home euros liberalisation we need a diagram that allows us to consider at least two sources of imports for Home. MS To keep things simple, we assume two potential supplying nations, partner FT P “P” and rest of world “RoW”, or R for short. Again, for simplicity’s sake, we suppose that both MD are identical. That is why R and P have identical export supply Home M=XP+XR curves. imports © R.Baldwin & C. Wyplosz euros RoW euros Partner XSP XSR euros Home MS An important point to keep in mind is that the price plotted on the vertical axes of the exporters diagrams (the two leftmost FT P ones) is different from the price plotted on the vertical axes of home diagram (the rightmost diagram). That is ... MD XR RoW Exports XP Partner Exports M=XP+XR Home imports Price received by exporters euros Price received by exporters euros RoW © R.Baldwin & C. Wyplosz Partner XSP XSR euros Home MS PFT On these axes, we plot the price received by exporters (measured in euros) because the export supply curves (the XS’s) tell us howMD much is exported at any given price received by exporters XR RoW Exports XP Partner Exports M=XP+XR Home imports euros RoW euros XSR Partner XSP Price of imports in home euros © R.Baldwin & C. Wyplosz Home MS PFT On this axis, we plot the price of imports inside the home country (i.e. after tariffs have been paid) because the MD curve tells us how much home will import at any given home price. MD To make the MS curve comparable to the MD curve, the MS curve in this diagram will show how the total imports offered to the home Partner RoW the homeP price. Home R nationXvaries with X M=XP+XR Exports Exports imports © R.Baldwin & C. Wyplosz 2. The total import supply curve face home (MS) ... euros RoW euros XSR Partner XSP euros Home MS P’ is the horizontal sum of the two export supply curves. Partner RoW More ... XP’ XR’ graphically Exports Exports M’=XP’+XR’ Home imports © R.Baldwin & C. Wyplosz 3. Click 4 times to see that the import supply facing home at price P’ (there are no trade barriers) is the sum of the amount that R and RoW Partner Home euros euros to home at P’. euros P would want to export XSP XSR MS P’ XR’ RoW Exports XP’ Partner Exports M’=XP’+XR’ Home imports © R.Baldwin & C. Wyplosz 4. Likewise M” is the sum of what R and P would offer at price P” euros RoW euros Partner euros Home MS XSP XSR P’ P” XR” XR’ RoW Exports XP’ XP” Partner Exports M’=XP’+XR’ M”=XP”+XR” Home imports 5. Finally we add in the usual home import demand curve, MD. RoW Partner The free trade equilibrium euros euros import price and import quantity are PFT and M. At PFT RoW exports XR and RPartner exports P XS XS XP. © R.Baldwin & C. Wyplosz euros Home MS PFT MD XR RoW Exports XP Partner Exports M Home imports © R.Baldwin & C. Wyplosz 6. As a first step, consider how a non-discriminatory, i.e. MFN, tariff would change things. RoW Partner Home euros euros euros 7. Since exporters receive the home domestic price minus the tariff, T, both R and P would supply less at any given home price. And ... MS XSP XSR PFT MD XR RoW Exports XP Partner Exports M Home imports © R.Baldwin & C. Wyplosz 8. Graphically this shows up as a shift up of the MS curve to MS w/T. This shift is exactly equal to T. RoW Partner Home euros euros euros XSR w/T XSP w/T 9. Here is why ... MS w/T XSR XSP MS P’ PFT T MD XR RoW Exports XP Partner Exports M’ M Home imports © R.Baldwin & C. Wyplosz 10. With a tariff of T, exporters see a price of P’-T when the home price is P’, so they export less. That is ... RoW Partner Home euros euros euros MS MS XSP XSR P’ T P’-T XR” XR’ RoW Exports XP’ XP” Partner Exports M’=XP’+XR’ M”=XP”+XR” Home imports © R.Baldwin & C. Wyplosz euros RoW euros Partner euros 11. With the tariff, P’-T is the price received by exporters, so they P XP” XSexport and XR” instead of XP’ and XR’. XSR Home MS w/T MS P’ T 12. Thus home sees a smaller import supply offered at any home price. Graphically, this is a leftward shift of MS to MS w/T P’-T XR” XR’ RoW Exports XP’ XP” Partner Exports M’=XP’+XR’ M”=XP”+XR” Home imports © R.Baldwin & C. Wyplosz euros RoW 13. Equivalently, this can be thought of as a shift up of MS by T. To see that this is true note that euros if the homePartner price were P#, exporters euros would see a price that would make them want to export zero. Home MS w/T MS XSP XSR T P# T P#-T XR=0 RoW Exports XP=0 Partner Exports M=XR + XP=0 Home imports © R.Baldwin & C. Wyplosz 14. Finally we see now that with the MFN tariff, the new equilibrium home price will be P’, and the new level of imports will be M’, with R and P exporting XR’ and XPRoW ’. Partner Home euros euros euros To make things clear, we label the shifted MS curve “MSMFN” MSMFN MS XSP XSR P’ PFT T P’-T MD XR’ XR RoW Exports XP’ XP Partner Exports M’ M Home imports © R.Baldwin & C. Wyplosz Chapter 3-1: Figure 4 RoW Border price, euros Partner Home Domestic price, euros Border price, euros MSMFN MS XSP XSR P’ PFT T P’-T Pa Pa-T XR’ XR RoW Exports XP’ XP Partner Exports MD M’ M Home imports Teaching/Studying Presentation © R.Baldwin & C. Wyplosz Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation •This presentation looks at a unilateral preferential tariff reduction. “A careful presentation of the positive effects of unilateral discriminatory tariff liberalisation “ To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed Positive Effects © R.Baldwin & C. Wyplosz Click to advance 1. To consider preferential liberalisation, we will remove the tariff from just partner and not from RoW. Our goal is to find the price and quantity effects of this. 2. As usual, the starting point is the new domestic price but to find this we must find the MS curve, call it MSPTA (for preferential trade arrangement), when Home imposes a tariff equal to T on imports from RoW but not tariff of imports from Partner. We turn now to finding MSPTA ... © R.Baldwin & C. Wyplosz The PTA Diagram 3. Start by finding the total imports offered when the domestic price is, for example, P1. RoW Partner Home Domestic price, Border Border price, 3a.price, When the domestic price is P1 Partner and RoW exporters euros euros euros receive different prices (due to the preferential liberalisation). MSMFN MSPTA MSFT 3b. Since Partner exporters pay no tariff, the price they receive is P1. R 3b. Since RoWXS exporters do pay T, the price XSPthey receive is P1-T. Since both RoW and Partner exporters would offer zero exports when the domestic price is P1, we know that A is one point on the MSPTA curve. P1 is the domestic price and the price paid to Partner exporters T A P1 MD T P1-T RoW Exports Partner Exports Home imports © R.Baldwin & C. Wyplosz The PTA Diagram 3. Next see what imports are when the domestic price is P2. RoW Partner Home - When the domestic price is P2 Partner and RoW exporters receive (due to the preferential liberalisation). Domestic price, Border price, different prices Border price, P2 while RoW exporters get P2-T. euros euros- Partner exporters get euros 3a. At these prices, Partner will offer XP 2 but MSMFN MSPTA MSFT RoW will offer no exports. 3b. Thus another point on MSPTA is point B. P XS XSR B P2 T P2-T XR2=0 RoW Exports A XP2 Partner Exports MD M2=XP2+0 Home imports © R.Baldwin & C. Wyplosz The PTA Diagram RoW Border price, euros Partner Home Domestic price, euros Border price, euros MSMFN MSPTA MSFT XSP XSR 3c. At point C on the MSPTA curve, both RoW and Partner offer exports. C T P3-T B A RoW Exports Partner Exports P3 4. The MSPTA curve is the combination of all such examples. MD Note that it lies between MSFT and MSMFN. Home imports © R.Baldwin & C. Wyplosz Now that we have the MSPTA curve, we can easily determine the equilibrium domestic 10. The impact of is tariff quite different. 9.price What happens to RoW the price facing the exporters? Two very different things. after the preferential liberalisation. >Because they continues to pay T,P’ the drop inlevel home price from P’M’. to P” has the effect of - Before liberalisation the price was and the of imports was RoW Partner Home lowering price RoW exporters from to euros P”-T euros euros For Partnerthe exporters, since they payreceive no tariff, P”P’-T becomes the price they face. R” instead of XR’ >RoW therefore exports less,Partner X >Notice thatitthis means exporters see a higher price, P” instead of P’-T. - Afterwards, is P” sincethat this isnamely where import demand MS MFN >Consequently, they will export more, XP” instead of XP’. equals import supply. Note that the liberalisation lowers the domestic price. MS PTA XSP XSR - The lower price for imports increases Home imports to M” P” P” T T P’-T P’ P” P’-T P”-T MD XR” XR’ RoW Exports XP’ XP” Partner Exports M’ M” Home imports 11. To sum up the positive effects Home Partner RoW Price RoW Partner euros euros Imports n.a. n.a. Exports n.a. © R.Baldwin & C. Wyplosz euros Home MS MFN MS PTA XSP XSR P’ P” P” P’-T P’-T P”-T MD XR” XR’ RoW Exports XP’ XP” Partner Exports M’ M” Home imports © R.Baldwin & C. Wyplosz Figure 4-7 euros RoW Partner euros euros Home MS MFN MS PTA XSP XSR P’ P” P” P’-T P’-T P”-T MD XR” XR’ RoW Exports XP’ XP” Partner Exports M’ M” Home imports Teaching/Studying Presentation © R.Baldwin & C. Wyplosz Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation •This presentation looks at a unilateral preferential tariff reduction. “A careful presentation of the welfare effects of preferential liberalisation “ To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed © R.Baldwin & C. Wyplosz Click to Advance 1. Here we look at the welfare effects of the preferential liberalisation. 2. First we consider the impact on the exporters (since this is easy) and then we look at the impact on home. 3. We can work out the welfare effects with much less information than was presented in Figure 5, so to keep the diagram as uncluttered as possible, we drop all the unnecessary lines and quantities. © R.Baldwin & C. Wyplosz 4. RoW receives a lower price for its exports and its sells less, so it definitely loses by the gray area, marked as “E”. RoW Partner Home euros euros euros XSP XSR P’ P” P” E P’-T P’-T P”-T P”-T MD XR” RoW Exports Partner Exports XR” M’ Home imports © R.Baldwin & C. Wyplosz 5. Partner exporters receive a higher price and they sell more, so they gain. The size of the gain is givenHome by the gray RoW Partner euros euros euros area, “D”. XSP XSR D P’ P” P” P’-T E P’-T P”-T P”-T MD XR” RoW Exports Partner Exports XR” M’ Home imports © R.Baldwin & C. Wyplosz 6. The welfare impact on the home nation is more complex. To make this easier to see, we increase the scale of the home RoW Partner Home euros euros euros market diagram and get rid of the RoW and Partner diagrams for the moment ... XSP XSR P’ P” P” P’-T D E P’-T P”-T P”-T MD XR” RoW Exports Partner Exports XR” M’ Home imports © R.Baldwin & C. Wyplosz euros RoW euros Partner Home euros XSP XSR P’ P” P” P’-T P’-T P”-T P”-T MD XR” RoW Exports Partner Exports XR” M’ Home imports © R.Baldwin & C. Wyplosz 7. The home welfare effect 7a. The consists private of the private impact impact (net change (net change in consumer in consumer surplus surplus plus producer plus producer surplus)surplus) is equal to andthe thegray public area. That impact is ... (change in the tariff revenue). Home euros P’ P” The lower import price helps home P’-T consumers but hurts home P”-T producers. Yet since home is consuming more of the good than it is producing (that is why it is MD to importing the stuff) the gain consumers is greater than the loss to producers. XR” M’ Home imports © R.Baldwin & C. Wyplosz 8. The level of tariff revenue also 10. After removing 9.changes. This was the tariff T on imports from revenue collected Partner, this is what before the the tariff revenue liberalisation. becomes. Home euros P’ P” P’-T P”-T MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Home euros minus 11. The change in tariff revenue is thus minus the blue stripped area plus the green stripped area. P’ P” P’-T P”-T plus MD Since this area is paid both before and after the liberalisation XR” M’ Home imports © R.Baldwin & C. Wyplosz Home euros NB: this part (rectangle) of the private gain is offset by a loss in tariff revenue. Leaving ... P’ P” P’-T only the triangle as the net private gain P”-T MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Home euros plus 12. Putting the net private change together with the net public change, the net home welfare effect consists of 3 parts. P’ P” minus P’-T P”-T plus MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Home 13. As drawn, it looks euros like home loses from the preferential liberalisation. However, depending upon the slopes of the XS and MD curves, the net effect might also be positive. plus P’ P” minus P’-T P”-T plus The result that home may gain or lose from a unilateral preferential tariff cut is known as “Viner’s ambiguity”. MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Home euros plus 14. It may be helpful to think a little bit more carefully about the 3 areas. P’ P” minus P’-T P”-T plus MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Home euros plus 15. The gain from the triangle is related to the increase in the volume of imports. >It is therefore called the trade volume effect. P’ P” P’-T P”-T MD XR” M’ M” Home imports © R.Baldwin & C. Wyplosz 16. The two rectangles euros correspond to 2 distinct trade price effects (also called terms-of-trade effects). >The liberalisation means that home now pays more for imports from Partner. The net welfare cost of this equals the blue stripped rectangle. Home P’ P” minus P’-T P”-T plus XR” MD M’ Home imports © R.Baldwin & C. Wyplosz Home euros 17. By contrast, home now pays less for imports from RoW and the net welfare gain from this equals the green stripped rectangle. P’ P” minus P’-T P”-T plus MD XR” M’ Home imports © R.Baldwin & C. Wyplosz Figure 4-9 RoW euros euros Partner Home euros XSP XSR A P’ P” P” P’-T D E P”-T C P’-T P”-T B MD XR” RoW Exports Partner Exports XR” M’ Home imports © R.Baldwin & C. Wyplosz