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| a gov't action meant to influence the amount of international trade. |
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| World Trade Organization (WTO) |
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international governing body that acts as a forum for countries to resolve disputes and reach agreements on trade policies.
follows the General Agreement on Tariffs and Trade (GATT) |
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| General Agreement on Tariffs and Trade (GATT) |
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| 1947 to reduce barriers to international trade between nations. |
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| 1986-1994 established the WTO(1995) |
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| Most recent round in Nov 2001 |
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1. Nation must extend the same tariffs to all trading partners that are WTO members. MFN-Most favored nation
2.Tariffs may be imposed in response to unfair trade practices like Dumping.
3. Countries should not limit the quantity of goods and services they import.
4. Countries should declare export subsidies provided to particular firms, sectors or industries.
5. Countries can temporarily raise tariffs for certain products. |
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| the sale of export goods in another country at a price less than that charged at home or, alternatively, at a prices less than that of productions and shipping. |
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| benefits such as tax breaks or other incentives for firms that produce goods specifically for export. |
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| Safeguard Provision (escape clause) section 201 |
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| conditions under which a country can apply a tariff when it imports any product in such increased quantities as to cause or threaten serious injury to domestic producers. |
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| Regional Trade Agreements |
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1. Free trade areas- a group of countries voluntarily agree to remove trade barriers between themselves (NAFTA)
2. Custom union- free trade areas where countries also adopt identical tariffs between themselves and the rest of the world. |
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| the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. |
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| the amount that producers benefit by selling at a market price mechanism that is higher than the least that they would be willing to sell for. |
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| equals consumer surplus plus producer surplus |
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| Net effect on home welfare |
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Rise in consumer surplus +(b+d)
Fall in producer surplus -b
= net effect on home welfare d |
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M1= D1-S1 (imports)
gains= 1/2bh*M1 area of triangle |
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| is a price taker-faces world price Pw |
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shows relationship between the world price of a good and the quantity demanded by home consumers
Higher price would lead to greater supply and less home demand |
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with tariff, consumers pay higher price, Pw+t.
fall in CS is (a+b+c+d)
consumers lose due to higher prices |
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since tariff increases home price, firms can sell more goods at a higher price, increasing their surplus.
Rise in PS-increase in fixed factors (land/capital) |
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| Effect of tariff on Governmental Revenue |
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Gov't Revenue= t*(D2-S2) area (c)
collection of revenue is a gain for gov't in the importing country |
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| Overall effect of tariff on welfare |
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Definition
Fall in consumer surplus -(a+b+c+d)
Rise in producer surplus + a
Rise in gov't revenue + c
= net effect on home -(b+d) |
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(b+d)= net welfare loss in small importing country.
It is not offset by a gain elsewhere in the economy. |
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increase in marginal costs for extra units produced.
area of triangle(b) |
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The drop in CS for those individuals who are no longer able to consume the units between D1 and D2 b/c of higher price
area of triangle (d) |
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| Dead weight loss due to tariff |
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| Dispute Settlement Procedure |
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countries that feel that the rules of the WTO have not been followed can bring their complaint and have it evaluated
Steel case- ruled that US had failed to sufficiently prove that its steel industry had been harmed by a sudden increase in imports and therefore did not have the right to impose safeguard tariffs. |
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| a type of economical conflict between two or more states. In order to pressure one of the states, the other raises taxes or tariffs for some of the products of that state. As a reprisal, the latter state may also increase the tariffs. |
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| the ratio of export prices to import prices |
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| a fall in demand for the taxed good |
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| Multifibre Arrangement (MFA) |
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| worldwide import quota on china's exports of textiles and apparel. abolished in 2005 |
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| Foreign Discriminating Monopoly |
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| charges a lower price at home than in its own local market and dumps its products in to home market |
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| a tariff applied against the foreign discriminating monopoly. |
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| the extent to which a firm can choose its price |
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the extra revenue earned from selling one more unit
=price of unit - fall in price * quantity sold |
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| Infant Industry Protection |
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| an economic rationale for protectionism. The crux of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. |
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| occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth. |
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