Chapter 4: Essential
microeconomic tools and tariff
analysis
Assumptions
- Firms are assumed to behave perfectly competitive
- There are no scale economies
o Unit cost does not fall when they produce more
o Geen schaalvoordelen
Inequality is rising because of the European economic integration and liberalization. (it is
not inevitable)
Preliminaries (inleiding)
Demand curve = Marginal utility (nut) of producing one more good
Supply curve = marginal cost (kost) of producing one more good
shows how consumers and firms are affected by price changes
MS-MD diagram
Open-economy supply and open-economy demand is important in European economic
integration
MDH = Import demand (import vraag): how much will a nation import at a domestic price
because it equals the gap between domestic production and domestic consumption.
Imports and domestic production are perfect substitutes
- Zero import demand in punt waar home supply = home demand
- Border price effect = higher price for imports bcs price rise
- Import volume effect = loss from drop in imports bcs price rise
Zie grafek
,XSF = Export supply (export aanbod) = MSH = import supply curve: how much can a foreign
country export for a domestic price?
Snijpunt tussen importvraag/exportaanbod (importaanbod) is de prijs bij free trade.
Je duidt altijd de border price effect en de import volume effect aan op de algemene curve.
Most Favoured Nation (MFN) tariff analysis
= What is the effect of the introduction of a tariff of T euros per unit?
Most favoured nation tariff = non-discriminatory tariff
Tariff will affect the export supply curve: exporters need to pay the domestic price + T
higher domestic price stimulates production and discourages consumption
Home welfare effects depends on the size of the tariff
Foreign welfare effects are regardless a loss
world loses and domestic economy benefits from the tariff
Tariff as a tax on foreigners: with this tax the foreigners get less for their goods and the
consumers of the domestic country need to more (domestic price rises).
Analysis of Global Value Chains/Global Supply Chains
(see guest lecture)
= supply chains that cross borders; so some products/intermediate goods are imported
The GVC got an effect on export and import of the economy because if you can import
cheaper goods from foreigners than your price will decrease, and export will rise.
TYPES OF PROTECTION
= if a home government collect the profit of the tariff as a rent.
- Domestic captured rents: tariffs, import licenses (quota)
- Foreign captured rents: anti-dumping tariffs and export taxes
o Producing below price and got taxed
- Frictional: no rents because of the costs of importing and exporting because of their
policies
Comparative advantage arises with the differences in competitiveness in the sector by firms.
, Relative labour productivity Relative wage Exchange rate
! important to note that in the Eurozone the exchange rates are 1 (and locked) !
Inter industry trade: a country either exports the good or imports the good
Intra industry trade: exporting goods the same good (different brand) to each other but with
product differentiation.
Chapter 5: The essential
economics of preferential
liberalization
Analysis of unilateral discriminatory liberalization
Preferential liberalization (discriminatory) = Regional Trade Arrangement
Unilateral liberalization is an example of RTA. One nation removes its tariff on imports from
only one of its trading partners. So the price for the consumer/producer will decrease.
ELEMENTS OF RTA
Smith certitude
= Foreign firms gain when tariffs against them are eliminated (get higher prices so will export
more). Foreign firms are directly involved.
Haberler’s spillover
= The third nations in the RTA are excluded from the preferences and will lose although they
are excluded. They will still need to pay the tax
Viner’s ambiguity
= The RTA will harm the preference giving nation because the RTA is liberalization and
discrimination. The liberalization effect is bigger than the discrimination effect.
The liberalization effect = removes taxes, improve efficiency and home welfare
The discrimination effect = new taxes, harm efficiency and welfare
, Analysis of the RTA diagram
1) MFN (Most Favored Nation) tariff (zie chapter 4)
= iedereen die exporteerde naar het binnenlands moest een tarief T betalen dus zouden hun
returns lager liggen en de consumers moesten meer betalen.
Exports dalen door de lagere prijs die ze ervoor krijgen
2) Preferential discrimination (RTA)
= er moet maar één land een tarief T betalen, de rest van de wereld blijft nog taksen betalen.
Domestic export rise more than fall of export of ROW so it is called Supply switching.
You will buy more from countries where there aren’t any tariffs left (like the countries in a
custom union).
Graph
Closer look to: Home welfare effects (graph)
Analysis of a custom union (douane-unie)
In the European economic integration, there will be preferential liberalizations too, but they
will be all reciprocal (so both the home country and partner country will taxes eliminate
exports)
Custom-union versus free trade agreements
- Custom union is a union but with the same external tariff for every country
participating and requires some political integration
- Free Trade Agreement is a custom union without a common external tariff
o Tariff cheats trade deflection (goods to home via ROW via Partner with
lower external tariff)
o Rules of origin as a solution but is very expensive and difficult to check
a lot of the preferential discrimination (RTA) are FTA
Frictional barriers
= Frictional barriers are tariffs where the tariff revenue is thrown away.
European integration expects removal of frictional barriers to trade. This repciprocal
preferential frictional barrier liberalization leads to
- Lower domestic price and border price at home
- Higher prices received by Partner exporters
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