Tutorial 8 for Discussion on the Week of 8 June 2020

1. The recent growth in Chinese industries has enabled them to follow the dumping and
anti-dumping activities in the international market. Elucidate how dumping and anti-
dumping would affect the bargaining power and market price in the dumped country.
(Chapter 9, Problem 5)

Ans: Dumping is a situation of selling the product at a lower price in the international market
compared to the domestic market. An anti-dumping shows that the companies sell the product
lower than the cost of production. When companies follow the dumping and anti-dumping
activities, the consumer purchases the product at a lower price in the dumped country. This
leads to the increase in the purchasing power and welfare of the consumer. The increased
competition forces the domestic producer to cut prices and the overall market price falls.

Suggest Answer；
When companies follow the dumping and anti-dumping activities, importing coutry benefits
from the dumped exports. The consumers can purchase the product at a lower price in the
dumped country (importing country). This leads to the increase in the purchasing power
and welfare of the consumer. The increased competition forces the domestic producer
(especially state-owned enterprises) to cut prices with increasing import competition and the
overall market price falls (diagram). Overall, (dumped country) importing country’s TOT↑
(Px Δ=0/Pm↓) is likely to be better off when rise in consumer surplus is larger than fall in
producer surplus.
2. In a world having two nations, the imposition of tariff adversely affects the import and
export of the country that imposes tariff - evaluate. How would the imposition of
protective tariff by the home country affect employment? Do you believe that this may
also lead to an increase in unemployment in some other industries of the country, which
levies tariff? (Chapter 9, Problem 6 )

Ans:
Effect in Employment：
Yes, the imposition of tariff increases the price of the products at home and consumers, and
jobs lost to tariff can hurt both importing and exporting country. This led to a decrease the
quantity demand in Home, hence a decrease in import of Home. As demand decreases the
income of the exporting country also falls. The tariff will strengthen the importing country
exchange rate making it difficult for exporters from importing country. A decline in income
of the export country leads to a reduction in demand for foreign goods. This means, the
export of the home country also declines. An imposition of protective tariff increases
domestic employment, competing with the foreign industries. This is because, a low import
of commodity results in higher demand for the domestic product hence increasing
employment.

When Home is cloth exporter and food importer:

Impose Tariff → Price Home (food) ↑ → Demand Home (food)↓ →Import Home (food) ↓ →
Export Foreign (food)↓ → Income Foreign ↓ →Import Foreign (cloth) ↓→ Export Home
(cloth)↓

Impose Tariff → Price Home (food) ↑ → Supply Home (food) ↑ → Employment in food
sector (home)↑ [producer increase labor input in food sector for producing more food]

Effect in Unemployment:
Yes, there might be indirect employment losses in other sectors. The countries which imposes
tariff are also unable to export more. This is because an imposition of protective tariff reduces
the income of foreign country, hence reduce demand of Home export good. Similarly, the
domestic industries that use the imported goods as input find it expensive to use those
imported goods with tariff, increasing the operational costs and putting pressure on their
profit margins. This might lead to weaker wage, leading to poorer ales, thus reduce the
employment in other sectors and dampen economics growth.
This leads to a decrease in quantity demanded (point 1 to 2), hence a decrease in import. As
demand decreases the income of the exporting country also falls (points 1 to 3). The tariff
will strengthen the importing country leads to a reduction in demand for foreign goods (Qw
falls to Qt). This means, the export of the home country also declines.
3. Return to the example of problem 2. Starting from free trade, assume that Foreign offers
exporters a subsidy of 0.5 per unit. Calculate the effects on the price in each country and
on welfare, both of individual groups and of the economy as a whole, in both countries.
(Chapter 9, Problem 7 )

Ans:

1. Using Home D=100-20P, Home S=20+20P

From problem 1, the Home import demand is MD=80-40P (use D-S). The price in the
absence of trade is 2 for Home MD (PA – Home's autarky price).

2. Using Foreign D*=80-20P, S*=40-20P

From problem 2, the Foreign export supply curve, XS is XS’=-40+40P (S-D). Thus, in the
absence of trade, the price is 1 for Foreign XS’ (P*A-Foreign autarky price).

When trade occurs at zero transportation cost, export supply is equal to import demand,
XS=MD. Thus, world price P=1.50(Pw) and the volume of trade is 20 (Qw).
We use Foreign’s export supply and Home’s import demand curves to determine the new
world price. The Foreign supply of exports curve, with a Foreign subsidy of 0.5 per unit,
becomes XS’=-40+40(1+0.5) x P.
Set:
MD =XS’,
80-40P = -40+60P,
100P=120,
so new Pworld = 1.20 due to subsidy.
The equilibrium world price is 1.20 and the internal Foreign price is **1.8(1.2+0.6). The
volume of trade is 32 [(-40+60*(1.2)) or 80-40(1.2)]. As a result, the export subsidy raises the
domestic price in the exporting country to 1.80, and lower the price of the importing country
to 1.20, so worsens the TOT. [Export subsidy → domestic price↑ → price at importing
country↓ → TOT ↓]

**To get Foreign price =1.80, if P=1.20,Q=32, P=1.50, Q=20, P=?, Q=8, find P.
P-1.2/32-8 =1.5 -1.2/32-20
P-1.2/24 = 0.3/12
P=1.2+0.6
P=1.8
The goverment must provide (1.8 -1.2) x 32 = 19.2 units of output to support the subsidy.
Home consumer and producers face an internal price of 1.2 as a result of the subsidy. Home
consumers surplus rises by 70 x 0.3 + 1/2 (6 x 0.3) = 21.9 (blue), while Home producer
surplus falls by 44 x 0.3 + 1/2 (6 x 0.3) = 14.1(blue), for a net gain of 7.8 units of output
(differences between PS & CS at Home and Foreign respectively).

Foreign producer surplus rises due to the subsidy by the amount of 21.9 units of output
(blue). Foreign consumers surplus falls due to higher price by 14.1 units of the good (blue).
Thus, the net loss to Foreign due to the subsidy is 14.1+19.2 -21.9 = 11.4 units of output.
Export Subsidy (Figure 9.11):
 An export subsidy damages national welfare.
 The triangles b and d represent the efficiency loss.
o The export subsidy distorts production and consumption decisions: producers
produce too much and consumers consume too little compared to the market
outcome.
 The area b+c+d+f+g represents the cost of the subsidy paid by the government.
o The TOT ↓, because the price of exports falls.

4. Use your knowledge about trade policy to evaluate each of the following statements:
(Chapter 9, Problem 8)

a. “An excellent way to reduce unemployment is to enact tariffs on imported goods.”

Ans: False. Unemployment has more directly influenced by the business cycle (stagnation →
recession) and labor market situation of a country than with tariff policy. However, tariff can
influence the unemployment situation. If we impose tariffs on imported goods, other country
will follow and impose tariffs. Therefore, unemployment may be reduced in import
competing sector relatively to export competing sector. Tariffs may increase unemployment
in nonprotected industries. (on both direct and indirect unemployment; recap Q2 —— tariff
and retaliation ended up both countries i.e. exporting and importing countries are likely to
end up worst off by the reduced volume trade)
b. "Tariffs have a more negative effect on welfare in large countries than in small
countries.”

Ans: False. For a small country, tariff cannot lower the foreign price of the good it imports.
Imposes tariff result the price of import rises (P W à PW + t) and import quantity demanded fall
(D1−S1 à D2−S2). When a country is small, tariffs decrease welfare, producers gain, consumers
lose. It has no effect on the world price.

 The opposite is true because tariffs by large countries can reduce world piece, which
helps offset their effect on consumers (↑ CS). [ Figure 9.9 - 9.10 —— large country has
TOT gained "area e" to offset the production/consumption distortion losses “area
b+d” while a small country does not has this TOT gained “no area e, only have area
b+d” —— Figure 9.5)
**Area e will offset area b+d (Tariff)
*Other countries will buy with other countries

c. “Automobile manufacturing jobs are heading to Mexico because wages are so much
lower there than they are in the United States. As a result, we should implement tariffs on
automobiles equal to the difference between U.S. and Mexican wage rates.”

Ans: Automobile production in Mexico decrease and increase in the US, but also increase the
price of automobiles in the US (Pw ↑ to PT or PQ; Figure 9.9 and 9.14). This would result in a
welfare loss associated with any quotas (import quota is a nontariff barrier; welfare loss same
as a tariff situation).
Decrease in consumer surplus and the deadweight loss from the protection and consumption
effects.

Supply Automobile (Mexico↓) & (US↑) → Price US ↑ → Loss in Welfare (consumer

surplus↓)

*PS gain (a) is smaller than CS loss (a+b+c+d) and efficiency loss (b is production loss + d is
consumption loss)
5. The nation of Acirema is "small" and unable to affect world prices. It imports peanuts at
the price of $10 per bag. (Chapter 9, Problem 9)

The demand curve is D = 400 - 10P

The supply curve is S = 50 + 5P

Determine the free trade equilibrium. Then calculate and graph the following effects
of an import quota that limits imports to 50 bags.

When P = 10,
D = 400 – 10(10)
= 300

S = 50 + 5(10)
= 100

MD = D – S
= 300 – 100
 = 200

As imposes import quota,

MD = D – S
50 = 400 – 10P - (50+5P)
= 400 – 10P – 50 –5P
50 = 350 –15P
P = 20

D = 400 – 10 (20)
= 200

S = 50 + 5 (20)
= 150

a. The increase in the domestic price.

Ans: P= 20 (from 10 to 20)

b. The quota rents.

 Ans: (P2 – P1) x (D2 – S2) = quota rents
(20 – 10) x (200 – 150) = 500

c. The consumption distortion loss.

Ans: The consumption distortion loss is 0.5 ´100 bags ´$10 per bag =$500 (Blue
area)

d. The production distortion loss.

Ans: The production distortion loss is 0.5 ´50 bags ´$10 per bag =$250 (Green area)

6. Suppose Brazil - the largest producer of sugar – provides 20 percent export subsidy to
sugar companies. By what extent would the domestic prices and the terms of trade be
affected in Brazil? If the export subsidy of Brazil hampers the sugar manufacturers of
importing countries, what countervailing action would you suggest to protect the
domestic industries and prices of the latters? (Chapter 9, Problem 10)

Ans: An export subsidy would reduce the supply of sugar in Brazil and hence raise the
domestic price (Ps). (Export subsidy → Supply sugar↓ → Price sugar↑) The rise in domestic
price is less than 20%. The terms of trade will worsen for Brazil. (TOT ↓) This is because it
lowers the price of sugar in the foreign market due to the increased supply. (Price Foreign↓
→ Supply ↓) This leads to an additional loss in the terms of trade, equal to the price
difference, due to the increased supply in the importing country. The government can impose
countervailing import duties (CVD) to protect the domestic producers and the price in the
importing country (protectionist tariff to raise price; Ps* → Pw).
MCQ

1. If a good is imported into (small) country H from country F, then the imposition of a tariff
in country H
A) raises the price of the good in both countries.
B) raises the price in country H and does not affect its price in country F.
C) raises the price of the good in H and lowers it in F.
D) lowers the price of the good in H and could raise it in F.

2. A tax of 20 percent per unit of imported garlic is an example of a(n)

A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff.

3. If the tariff on computers is not changed, but domestic computer producers shift from
domestically produced semiconductors to imported components, then the effective rate of
protection (ERP) in the computer industry will
A) increase.
B) decrease
C) remain the same.
D) no longer apply

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4. Throughout the post-World War II era, the importance of tariffs as a trade barrier has
A) increased.
B) decreased.
C) remained the same.
D) fluctuated wildly

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5. The European Union's Common Agricultural Policy (CAP) is
A) a tariff imposed on agricultural exports.
B) a tariff imposed on agricultural imports.
C) a subsidy that reduces the cost of agricultural exports.
D) a quota that limits production of agricultural goods by EU nations.

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6. A voluntary export restraint will ________ producer surplus, ________ consumer surplus,
________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; decrease; decrease
B) increase; decrease; have no effect on; have an ambiguous effect on
C) increase; decrease; have no effect on; decrease
D) increase; increase; decrease; have an ambiguous effect on

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7. Suppose an import-competing firm is imperfectly competitive. Replacement of an export
tariff with an import quota that yields the same level of imports will ________ market price,
________ producer surplus, ________ consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; increase; increase; decrease; have an ambiguous effect on
B) decrease; decrease; increase; decrease; increase
C) increase; increase; decrease; decrease; decrease
D) increase; have no effect on; decrease; decrease; increase

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8. Suppose the United States eliminates its tariff on ball bearings used in producing exports.
Ball bearing prices in the United States would be expected to
A) increase, and the foreign demand for U.S. exports would decrease.
B) decrease, and the foreign demand for U.S. exports would decrease.
C) decrease, and the foreign demand would be unchanged.
D) increase, and the foreign demand for U.S. exports would increase

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9. When the U.S. placed tariffs on French wine, France placed high tariffs on U.S. chickens.
This is an example of
A) a trade war.
B) deadweight losses.
C) bilateral trade negotiations.
D) international market failures.

10. In an inflationary environment, then over time

A) an import quota would raise more revenue than a specific tariff.
B) an optimum tariff will tend to raise more revenue than an escalating tariff.
C) a tariff quota will tend to raise more revenue than a specific tariff.
D) a specific tariff will tend to raise more revenue than an ad valorem tariff.
E) an ad valorem tariff will tend to raise more revenue than a specific tariff.

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11. The graphs above show the case for a tariff imposed by a large country. According to
these graphs, if the world price of the product is given as $30, then home market firms will
produce _____ and the total demand for the good will be _____.

A) 40; 100
B) 20; 80
C) 20; 100
D) 40; 80

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12. Suppose that the free-trade price of a ton of steel is €500. Finland, a small country,
imposes a €60 per-ton specific tariff on imported steel. With the tariff, Finland produces
300,000 tons of steel and consumes 600,000 tons of steel. Who will gain and who will lose as
a result Finland's €60 per-ton tariff on imported steel?
A) Both Finnish steel producers and steel consumers will be worse off with the tariff than
without it.
B) Finnish steel producers will be better off; Finnish steel consumers will be worse off
with the tariff than without it.
C) Finnish steel producers will be worse off; Finnish steel consumers will be better off with
the tariff than without it.
D) Both Finnish steel producers and steel consumers will be better off with the tariff than
without it.

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13. In the 1980s, the United States negotiated a voluntary export agreement with Japan in
which each Japanese auto producer voluntarily agreed to reduce the number of its
automobiles exported to the United States. This voluntary export agreement caused each
Japanese auto producer to:
A) raise the prices of its automobile exports to the United States.
B) lower the prices of its automobile exports to the United States.
C) not change the prices of its automobile exports to the United States.
D) increase the number of automobiles exported to the United States.

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14. In 2012, the United States imposed countervailing duties ranging from 24 to 36% on
imports of about solar panels from China. Which of the following do you predict will happen
if the United States decides to eliminate these duties?
A) U.S. production of solar panels will rise.
B) U.S. imports of Chinese solar panels will fall.
C) Chinese production of solar panels will fall.
D) The U.S. price of solar panels will fall.

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15. In autarky, suppose that equilibrium sugar price is $100 per ton in Mozambique, a small
agricultural nation. Now, suppose Mozambique engages in free trade with the rest of the
world. The world price of sugar is $125 per ton. Now suppose that the government of
Mozambique gives an export subsidy of $50 per ton to its sugar producers. What will happen
to the domestic price of sugar in Mozambique?
A) It will not change.
B) It will rise to $175 per ton.
C) It will rise to $150 per ton.
D) It will rise to between $125 and $175 per ton.

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16. Sixty years after the signing of GATT and following eight completed round of trade
negotiations,
A) trade barriers are no longer an issue.
B) trade barriers have been successfully reduced.
C) trade barrier have actually increased.
D) there has been no real change in trade barrier.

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17. One reason why producers have an incentive to organize in favor of protection is because
A) producer gains are spread across so many firms that no one gets a large share of the
benefits.
B) producer gains are relatively concentrated.
C) there is no real cost to the economy.
D) producer gains outweigh consumer losses.

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18. Direct subsidies to agriculture, whether they are export subsidies or production subsidies,
are viewed as harmful because of all the following reasons EXCEPT
A) they lead to overproduction.
B) they crowd out imports.
C) they can lead to dumping of surplus production.
D) they encourage overconsumption through low market prices.

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19. Which industrialization policy used by developing countries places emphasis on the
comparative advantage principle as a guide to resource allocation in particular successes of
the high-performance Asian economies?
A) export promotion
B) import substitution
C) infant industry promotion
D) intra-industry trade practice
 26
True or False

20. Suppose the United States eliminates its tariff on petroleum used in producing plastics
and exports. Petroleum prices in the United States would be expected to decrease, and the
foreign demand for US exports would increase.
True

21. Import-substituting industrialization was a trade policy adopted by many low- and
middle-income countries aimed to encourage domestic industries by limiting competing
imports.
True