Transcript

International Trade
Week 4 – Micro-lecture. 4.3: Protectionist Trading Policy
and Optimal Tariffs

This lecture is on tariff and non-tariff barriers to international trade. In this

lecture, which is lecture two on this topic, I will take you straight to the
lecture two of this, so please bear with me. We will go through that in a
few minutes. So welcome to this, and this is the first part of this lecture
that's already been given. And now we are on lecture two, which is the
impact of tariffs and protectionist trade policy.

I think we need to have a good understanding of how tariff works in

practice and the impact of that on trade policy. So, let's just start with that.
To investigate the impact or imposition of tariffs, we need to distinguish
between two types of countries, so-called large country and small country.
Large country doesn't mean that it's large in terms of geographically or
even in terms of population, basically a large country in the contexts of
imposition of tariff means that the country has got a market power. It's the
key, top, for example, importer of the product or the produce and therefore
can exercise market power and therefore can also impact international
prices. So, the country can be small, for example, as the case of
Netherlands would be small country, and yet it's a top importer of coco
from Ghana. As a top importer it has a control, therefore, on the
international prices and by imposition of tariffs can actually impact prices.
So, by a large country therefore we mean countries that do have a
significant power, market power because they are the significant importer
of those goods. U.S., of course, is a large country, both in terms of its size
and population and market power, and therefore U.S. can influence and
has been influencing market prices, international prices. China also can
be considered to be large, but not because of its size or population,
because of its market power, particularly in terms of importation of raw
material; and here I've given the example, Netherlands, a small country
and yet is a large country in terms of impacting and the ability to impact
the international prices and its market power. Small countries, of course,
are different. A group of countries the majority of the countries fall into this
small country category. they cannot impact international prices. In that
sense, have low market power.

I think in this presentation, I'm going to be focussing on the large country

and imposition of tariffs, its impact on the large country and global trade
as well and see what sort of situation we'd like to get. Let's see what
happens. The country imposes tariffs that could be, of course, to put a
percentage rise in the price of imported goods. Here we have consumers,
and domestic producers will face high domestic prices, goes up by about
10-15 percent. Ad valorem type acquisition of tariffs or could be a special
unit type tariff. In both cases, domestic prices as a result of the imposition
of tariffs will go up and therefore the consumption of those goods that are
subject to imposition of tariffs because the prices have gone up would fall.
So, there is a negative impact on production domestically that uses those
imported goods subject to tariffs and consumption of those goods and you
can call that so-called efficiency loss. It has a negative impact on
consumption as well as on production producers domestically using this
tariffs using the imported goods subject to greater higher prices and
consumers consuming these goods also of course have to pay higher
prices. So there's a loss and we call that so-called efficiency loss is not
the price that they like to pay they are paying more than they like to pay.
And therefore, there is an efficiency loss. What happens to International
prices is quite interesting, however. The, because the country is large in
terms of its market power and because these countries do not wish to, in
most cases, transmit or transfer all the rise in imported sort of input levy
to the consumers or producers domestically. They would try to reduce the
international prices, and they do that because, of course, the domestic
consumption has fallen because of the domestic users are facing the high
prices because of tariffs. Therefore, there's a fall there, and here, because
of the market power of the large country, they can shift the burden of tariffs
from their own country to a large extent to the exporting countries. And
this has been happening quite a few times and it's happening as well. So,
the usually applied for industrial country, would be able to influence the
international prices by imposition of tariffs. And through that mechanism,
because the demand this own country has fallen to reduce the demand
for exported goods and further because of the effort to shift the burden of
the burden of increase in prices to the developing countries where whose
export has been subject to import duties. I think it's a very important point
for you to understand when is the burden of the tariffs are being shifted
from the tariff, imposing country, usually the powerful country to exporting
country, which is usually in this case a developing country they tend to
sort of export, for example, cocoa beans, they export coffee they export
tea, and therefore they really have very little market power to resist a fall
in the price. Before the international price of a product or a produce
ensures that the domestic price does not rise by the same amount as the
amount of a tariff imposed. And therefore, there's an improvement in
terms of trade, terms of trade. And I hope that you follow what's going to
happen here. The international price falls. Therefore, the domestic price
rises, not by as much as rise in the import levy. And therefore, the loser
here, in a sense, would be the exporter, which are usually are developing
countries, exporting raw material, and what's happened here, of course,
the terms of trade for the powerful large country has been improved. So,
we have got two effects here. Efficiency lost due to increasing prices
inevitably coming about because of the import duties, but also, we have
got terms of trade again. Which means that input prices, international
prices are reduced because of the market power. And therefore, not as
much as increase in levy has been transferred to domestic income. So,
there is, in a sense, terms of trade again. By doing this activity, the
powerful country has been able to reduce the international price of the
imported goods.
What's happening here, of course, is also important that it's impacting
other industries we look at here. So not only we have got efficiency loss,
but also, we have got some sort of benefit one, lots of commentators
argue for new industries or infant industries where they are subject to, of
course, less competition and they become more competitive, they can sell
more. And therefore, in that sense, they become more competitive. But as
we said before, infant industry type argument doesn't really hold in here.
It doesn't have a great evidence supporting it because in most cases,
infant industries that have been subject to protection, have become very
inefficient in practice. Nevertheless, there is that gain. One can argue in
the large countries and also, of course, there's a revenue effect for the
government by imposition of this tariff large economy, large country has
actually increased the levying of the government. So, let's see what we
have got here. We have infant industry gains. Possibly. Well, that's subject
to more evidence we do have terms of trade gain by reducing the price of
imported goods and we have also got another loss here, which is, of
course, efficiency loss Consumers and producers establishing the
economy are subject to greater increased prices. So, the net impact
weather is going to be a positive negative of imposing tariffs in a large
economy. Depends on whether any gains from terms of trade, just this
cause and possibly impact on infant industries and the revenue effect are
greater than the resulting efficiency loss for most countries. So, one has
got really to do a cost benefit analysis here by imposing this tariff.
And, of course, the large economy that can increase its terms of trade
benefits because they have that power, and they can bring down even
further the international price. Remember if they reduce the international
prices further then the developing countries mainly and other countries
trading partners are going to be negatively, badly impacted by those sort
of policies. anyway, we know the impact of levying tariffs is positive. A
largest country with market power what would they actually gain from
imposing tariffs. And this gain can be shown here.
If you're using economic theory, some of those are in your textbooks could
actually be even more than cost from the gain from trade under free trade
conditions. And that is quite significant I think result. With the large
economy that can impose tariffs and can increase its terms of trade to a
level that is more than efficiency loss, then the economy can benefit, can
actually large economy can benefit from it by imposing tariffs. And that
benefit to the economy could even be more than under conditions of free
trade type environment. But is significant result. But remember the losers
here are not just the people in the domestic economy, but people who are
exporting to that large economy. They could be trading partners. They
could also, of course, be lots of developing countries in need of being able
to export to large markets. For a small economy, for a large, for a smaller
country with little market power, terms of trade effect would be zero
because they can't obviously impact the international prices. There would
be some inter-industry protection through the levying of tariffs as efficient
before. There is also the revenue effect. But at the same time, there is
opposing efficiency loss. So, again, whether this has been useful or not
depends on the net impact of these positive and negative impacts. By in
large, one, has got to say that evidence suggests that imposition of tariffs
where small countries really by in large not providing significant positive
impact on the economy. In the case of large economy however is different
and I think you should be aware of that there is some positive impact by
imposition of tariffs. But there are lots of losers who are not in that
economy and exporters. And it may be raw material exporters to those
countries. And they do actually suffer. So, let's see about the political
economy, tariffs and so-called optimal tariffs a large country would be able
to gain from imposition of tariffs on certain products or produce because
of its market power. And that is that can be quite dangerous because that
suggests a particular policy which is based on so-called optimal tariffs for
large countries such as US, such as China. These countries with a great
market power on the international prices. And that's really the optimal so-
called tariff implies maximum and maximises the net gains for a large
country from imposing tariffs. And then obviously has a massive impact
on its trading partners. So, one of the policies that some people have
suggested and some countries, I think the U.S. in recent two or three
years has actually used under the U.S. America first policy is so-called
optimal tariff policy here. The idea is to maximise the net gain for a large
country. And they can do that but impose by imposing tariffs and using
their market power to bring down international prices and therefore to
reduce the negative impact of the negative impact of efficiency loss and
therefore increase the gains through that mechanism. It's dangerous
though because they are going to have a significant impact, negative
impact on your trading partners while impacting the international prices
and in particular by concentrating on what you are actually exporting, their
goods and services and obviously produce to a large country.

A lot of consumer price producers, for example, had been badly impacted
by the recent U.S. policies using this type of optimal tariff type policies
using market power to reduce international prices and reduce the income
of the trading exporting countries obviously is quite dangerous and it
doesn't really in the end generate sufficiently large income for a large
country to justify such a sort of confrontational type policies. This foreign
policies would lead to trade wars and the consequences of this. Those
countries they tit-for-tat. They increase their tariff as has been happening
in recent years. We have seen this for example between US and China.
They increased tariffs on different products and through this mechanism,
they creating sort of atmosphere for even more tariffs So it's not a policy
to pursue to suggest, although theoretically, theoretically, it does imply
that the large countries can themselves, at a very high cost to others,
benefit from so-called optimal tariff policy.
Okay let’s just summarise this. The impact and imposition of tariffs
depends critically on the market power of the tariff living, levying rather,
the country. If the country has market power impacting international
prices, then there is it's possible to by imposing tariffs. It actually gains
from that. And that gain, even could be more than the gain from free trade
type agreements. A large country can in certain cases in theory, and I
think that's a key point in theory, benefit from pursuing an optimal tariff
policy, this policy idea has in practice would negatively impact countries
trading partners leading to trade wars and fall in international trade
activities, as we know, of course, fall in international trade activities,
implies a reduction of income.
World income for everybody and really creates an atmosphere, which is
not good for conducting trade. So, with that issue, with that point, in mind
optimal tariff policy in practice. I think, is not the right policy to pursue
because of its negative impact, huge negative impact on other trading
partners.

Thank you for your attention.