CHAPTER 13:INTERNATIONAL TRADE

13.3 THE WORLD TRADE ORGANIZATION (WTO)

13.4 RESTRICTIONS ON FREE TRADE: TRADE PROTECTION

HISTORY OF THE WORLD TRADE ORGANISATION (WTO) – JANUARY 1995, 124 COUNTRIES

© Hafiz Halwi 2014

• Suffering major declines in output and very high rates of unemployment

• Resorted to tariffs and other restrictions to limit imports and protect domestic production and unemployment

• Tariff wars – reduce the volume of international trade without positive effects on output and employment

Great Depression of the 1930s

• Intended to gradually liberalise (free up) international trade and prevent further outbreaks of tariff wars.

• Principles:

• Non-discrimination

• Elimination of non-tariff trade barriers

• Consultations to resolve trade disputes

General Agreement on Tariffs and Trade (GATT)

– 1947, 29 countries

WTO – FUNCTIONS AND OBJECTIVES

Provides the institutional and legal framework for the trading system that exists between

member nations worldwide

As of July 2011, it had 153 members, which account for over 97% of global trade.

There are 31 ‘Observer countries’

WTO – FUNCTIONS AND OBJECTIVESIt administers WTO trade arguments

It provides a forum for trade negotiations

It handles trade disputes

It monitors national trade policies

It provides technical assistance and training for developing countries

It facilitates co-operation with other international organisations

The trading system promoted by the WTO is based on the following principles:

Non-discrimination

Free trade

Predictability

Promotion of fair competition

Development and economic reform should be encouraged

RESTRICTIONS ON FREE TRADE: TRADE PROTECTION

Free trade= the absence of government intervention of any kind in the international trade

Trade protection= involves in government intervention in international trade through the imposition of trade restrictions (barriers) to prevent the free entry of imports into a country or to protect the domestic product from foreign competion.

FREE TRADE VERSUS PROTECTION

Definition: tariffs are taxes on imported goods, and are the most common form of

trade restriction (also known as ‘customs duties’)

Purpose:

To protect a domestic industry from foreign

competition (a protective tariff)

to raise revenue for the government (a revenue

tariff)

TARIFFS

Effect of tariff: (must draw graph)

Increase in quantity supplied,

decrease in quantity

demanded and decrease

in imports.

Domestic consumers

are worse off

Domestic producers

are better off

Domestic employment

increase

The government gains tariff revenues

- The revenue that government

gain from tariff is

directly from consumers. (consumers

that paid the tariff price)

Domestic income worsens.

-there is negative impact on income distribution, because tariff is a type of regressive tax (tax rate decrease as the income increase, less equal in income distribution) which burden the people on lower income.

• Increase inefficiency in production

- The increase in domestic output represents an increase

in production by relatively inefficient domestic

producers/ waste of scarce resources

Foreign producers are worse off

They export a smaller quantity for

the world price, since the quantity of import in the

importing county is reduced.

Global misallocation of resources result

- Decrease in consumption, shift of production away

from more effective foreign

producers to more inefficient domestic

producers.

Consumer surplus is the area under

demand curve and above the price

paid by consumers (a+b)

The producer surplus (c+g), also the government

gains the revenue equal to (e)

therefore, social surplus after the

tariff is a a+b+c+e+g

Area (d) and (f) are welfare loss, (d=inefficient producer) &

(f=decrease in consumer

consumption)

EFFECT OF TARIFF ON CONSUMER AND PRODUCER SURPLUS (GRAPH 13.7(B))

Imports quota/quota= legal limit to the quantity of a good that can be imported over a

particular time period (usually a year)

Similar to tariffs, except that they usually do not create revenue for the

government

When government set a quota, it issues a limited

number of quota licenses that determining the legal

limit on the quantity imports.

This license holder gain quota revenues/ quota rents

because whereas they buy the good at the world price, Pw, they sell to consumer at

the higher domestic price, Pq

IMPORTS QUOTAS

• Effect of an import quota: (same as tariff)

Increase in quantity supplied, decrease in quantity demanded and decrease in imports

Domestic consumers worse off

Domestic producer better off

Domestic employment increase

The government neither gains or loses

-because there are no revenues generated from the implementation of quota

Increase inefficiency in production

-(same as tariff)

Domestic income distribution worsen

- Quota result in a higher price. Increase in price have the same effect as the tariff in that it is regressive.

Exporting countries may be worse off or better off.

-it depends on which is larger: the loss of export revenue or the gain of quota revenues

Global misallocation of resources result

- Decrease in consumption, shift of production away from more effective foreign producers to more inefficient domestic producers

• Consumer surplus is area a+b

• Producer surplus is area g+c

• Area d+f is welfare loss, (d=inefficient production) & (f= reduce consumption)

• Area e which represents quota revenue, is transfer abroad to exporting countries.

• The total surplus = d+e+f

• Quota result in greater welfare losses for domestic economy than tariff

EFFECT OF QUOTAS ON CONSUMER & PRODUCER SURPLUS

FIN