With regard to Fresh Tomatoes from Mexico: Suspension Agreement (http://ia.ita.doc.gov/tomato/), the ITA states that
“. . . on December 4, 2002, the Department of Commerce and producers/exporters accounting for substantially all imports of fresh tomatoes from Mexico signed this agreement suspending the antidumping investigation on fresh tomatoes from Mexico. The basis for the agreement was a commitment by each signatory producer/exporter to sell the subject merchandise at or above the reference price, which will eliminate completely the injurious effects of exports of fresh tomatoes to the United States. ”
Pursuant to Section IV.G. of the 2002 Suspension Agreement, the DOC has conducted an analysis of the reference prices. Effective November 1, 2003, the reference price below which signatories to the agreement may not sell fresh tomatoes from Mexico in the United States during the winter season (October 23–June 30) will be $0.2169/lb. The reference price for the summer season (July 1–October 22) will remain at $0.172/lb.
Who will gain from this agreement? Who will lose from this agreement? Explain.
Please refer to the file attached.
PowerPoint Presentation Week 10: Import Tariffs and Quotas Under Imperfect Competition Reading: Chapter 9 • How do the effect of a tariff and the effect of a quota differ in the case where there is a monopoly in the importing country? • What is the effect of a tariff imposed against imports produced by a Foreign monopolist? • What is the effect of imposing anti-dumping duties? • What is the effectiveness of infant industry protection? 1ECON847 INTERNATIONAL TRADE The Context • In the previous week, we looked at the effects of tariffs and quotas under the setting of perfect competition. That is, we assumed a situation where there are many suppliers both in Home and in Foreign (or the rest of the world). • This week, we consider tariffs and quotas on imperfectly competitive markets. Do the effects of trade policies differ when markets are imperfectly competitive? • This question received a good deal of attention from trade economists in 1980s, in a body of research that became known as strategic trade policy. 2ECON847 INTERNATIONAL TRADE Introduction • The idea of strategic trade policy is that government trade policies could give a strategic advantage to Home firms in imperfectly competitive markets that would enable them to compete effectively with Foreign firms. – That is, free trade may not be the best policy for the nation. • In looking into strategic trade policies, we consider the following four cases: – Effects of trade policies in the case of Home monopoly (and many Foreign firms). – Effects of trade policies in the case of Foreign monopoly (and no Home firms). – The case of dumping (of a Foreign monopolist) and anti-dumping duties (tariffs). – The case of protecting a Home monopolist in an infant industry. 3ECON847 INTERNATIONAL TRADE Home Monopoly • Consider a Home monopolist—a single firm selling a homogenous good. • Opening up to free trade introduces many foreign firms selling the same good. This would eliminate the monopolist’s market power (ability to charge a higher price than its marginal cost). • Recall from week 9 that tariffs and quotas are predicted to have an equivalent effect in Home in the setting of perfect competition. • In the case of Home monopoly, tariffs and quotas are predicted to have different effects. 4ECON847 INTERNATIONAL TRADE Basics of Imperfect Competition: Review • Recall from the introductory econ, the mechanics of profit- maximisation under imperfect competition. • You are expected to understand the followings in conjunction with the diagram below: – A down-sloping demand curve implies a firm’s price-setting power. – A flatter (steeper) demand curve implies that a firm faces more (less) competition in the market. 5ECON847 INTERNATIONAL TRADE – The marginal revenue lies below the demand curve. – The firm maximises its profit when MR = MC. Home Monopoly: No Trade Equilibrium • With no trade, the firm maximises its profit when MR = MC. • The Home monopolist produces QM and charges PM (point A). • Note that PM < mc.="" this="" indicates="" the="" monopolist’s="" market="" power.="" 6econ847="" international="" trade="" •="" the="" monopoly="" quantity="" is="" lower="" and="" the="" monopoly="" price="" is="" higher="" than="" the="" perfectly="" competitive="" equilibrium="" (point="" b).="" home="" monopoly:="" free="" trade="" equilibrium="" •="" under="" free="" trade="" the="" world="" price="" pw="" applies.="" that="" is,="" the="" monopolist="" faces="" new="" marginal="" revenue="" (mr*="PW)." –="" the="" home="" market="" becomes="" perfectly="" competitive.="" –="" the="" monopolist="" (who="" is="" not="" the="" monopolist="" anymore)="" cannot="" sell="" any="" products="" at="" a="" price="" higher="" than="" pw.="" the="" monopolist="" loses="" its="" market="" power.="" •="" given="" the="" new="" mr,="" the="" home="" firm="" supplies="" s1,="" and="" home="" consumers="" demand="" d1.="" 7econ847="" international="" trade="" •="" the="" amount="" of="" imports="" is="" m1="D1" –s1.="" •="" note="" that="" free="" trade="" equilibrium="" is="" same="" as="" the="" case="" under="" perfect="" competition="" from="" the="" last="" week.="" home="" monopoly:="" effect="" of="" a="" home="" tariff="" (1)="" •="" when="" a="" tariff,="" t="" per="" unit,="" is="" imposed,="" the="" price="" of="" imports="" increases="" from="" pw="" to="" pw="" +="" t.="" •="" this="" allows="" the="" home="" firm="" to="" raise="" its="" price="" to="" pw="" +="" t.="" –="" but="" no="" higher="" than="" pw="" +="" t.="" why?="" •="" the="" home="" firm="" increases="" supply="" from="" s1="" to="" s2.="" 8econ847="" international="" trade="" •="" home="" consumers="" decrease="" demand.="" –="" show="" on="" the="" diagram.="" •="" the="" amount="" of="" imports="" decreases.="" –="" show="" it="" on="" the="" diagram.="" home="" monopoly:="" effect="" of="" a="" home="" tariff="" (2)="" •="" let="" us="" analyse="" the="" welfare="" effect.="" •="" cs="" decreases="" by="" (a="" +="" b="" +="" c="" +="" d).="" ps="" increases="" by="" (a).="" •="" government’s="" tariff="" revenue="" increases="" by="" (c).="" 9econ847="" international="" trade="" •="" the="" net="" effect="" of="" a="" tariff="" on="" home="" is="" then="" –(b="" +="" d).="" •="" the="" triangle="" (b)="" represents="" the="" production="" efficiency="" loss,="" and="" (d)="" represents="" consumption="" efficiency="" loss.="" •="" note="" that="" this="" prediction="" is="" the="" same="" as="" the="" case="" of="" perfect="" competition="" from="" the="" last="" week.="" home="" monopoly:="" effect="" of="" a="" home="" quota="" (1)="" •="" now="" we="" look="" at="" the="" effect="" of="" a="" quota.="" •="" recall="" that="" under="" free="" trade="" the="" home="" monopolist="" produces="" at="" point="" b,="" and="" that="" with="" a="" tariff="" it="" produces="" at="" point="" c.="" •="" now="" assume="" a="" quota="" of="" m2.="" 10econ847="" international="" trade="" –="" a="" quota="" that="" restricts="" imports="" to="" the="" same="" amount="" that="" would="" have="" been="" under="" a="" tariff="" t.="" •="" under="" a="" quota="" of="" m2,="" the="" demand="" curve="" for="" the="" home="" monopolist="" shifts="" to="" the="" left="" by="" the="" amount="" of="" a="" quota.="" –="" after="" the="" quota="" is="" filled="" up,="" the="" home="" monopolist="" is="" able="" to="" exercise="" its="" monopoly="" power.="" home="" monopoly:="" effect="" of="" a="" home="" quota="" (2)="" •="" with="" the="" market="" demand="" d="" -="" m2,="" the="" home="" monopolist="" maximises="" its="" profit="" when="" mr="MC:" it="" produces="" s3="" and="" charges="" p3.="" •="" the="" price="" charged="" under="" a="" quota="" is="" higher="" than="" the="" price="" under="" a="" tariff:="" p3=""> P W + t. 11ECON847 INTERNATIONAL TRADE – This is because the Home monopolist enjoys a ‘sheltered’ market once the quota amount has been imported. • The quantity produced by the monopolist is lower under a quota than that under a tariff: S3 < s2.="" home="" monopoly:="" effect="" of="" a="" home="" quota="" (3)="" •="" also="" note="" that="" a="" quota="" could="" make="" the="" home="" monopolist="" produce="" less="" than="" under="" free="" trade:="" s3="">< s1.="" –="" this="" is="" not="" a="" necessary="" result.="" it="" could="" be="" s3=""> S1 depending the position of MR. – However, this implies that workers in the industry could fail to be protected due to the reduction in output under a quota. 12ECON847 INTERNATIONAL TRADE – That is, a quota can have undesirable effects as compared to a tariff when the Home industry is a monopoly. Home Monopoly: Effect of a Home Quota (4) • A higher price under a quota implies lower CS compared to the case of a tariff: and the Home monopolist earns higher profit from a quota than from a tariff. – We can say that the deadweight loss would be higher under a quota than under a tariff due to a higher domestic price. 13ECON847 INTERNATIONAL TRADE – This is another rationale for WTO’s effort to ‘tarrificate’ non-tariff measures. • A higher price also implies a larger amount of quota rents: (P3 - PW) x M2. – This is more than the government revenue under a tariff: t x M2. – Note that quota rents can disappear through rent-seeking or go to the foreign producer in case of VER. Foreign Monopoly: Free Trade Equilibrium • Consider a Foreign firm that is an international monopolist. – That is, Home does not have domestic producers and the Foreign monopolist considers the whole Home demand (D). • Under free trade, the Foreign monopolist maximises its profit when MR = MC (point A). It exports X1 to Home and charges P1. 14ECON847 INTERNATIONAL TRADE Foreign Monopoly: Effect of a Home Tariff (1) • When a tariff, t per unit, is applied, the Foreign monopolist’s marginal cost rises from MC* to MC* + t. • Foreign monopolist maximises its profit when MC*+t = MR. • The Foreign monopolist’s exports fall from X1 to X2. 15ECON847 INTERNATIONAL TRADE • The Home’s domestic price rises from P1 to P2. – Note that the price rise is less than the tariff t. – This is because the Foreign monopolist absorb part of the tariff itself by lowering its ‘take-home’ price from P1 to P3 (= P2 – t). Foreign Monopoly: Effect of a Home Tariff (2) • Due to the price rise in Home, CS decreases by (c + d). • Home collects tariffs revenue (c + e). • The net welfare effect of a tariff on imports from the Foreign monopolist is (e – d). 16ECON847 INTERNATIONAL TRADE • The area (e) is the terms-of- trade gain for Home due to the reduction in the price of imports. – Note that the effect of a tariff applied against a Foreign monopolist is similar to that of a tariff imposed by a large country. Dumping (1) • Dumping is selling exports at a price that is ‘too low’. • An imported product is considered dumped if a foreign firm sells a product abroad at a price that is either i) less than the price it charges in its local market, or ii) less than its average cost to produce the product. • Dumping would benefit consumers but hurt import-competing producers. 17ECON847 INTERNATIONAL TRADE Dumping (2) • Why foreign firms dump their products at all? 1. A foreign firm may try to drive competitors out of business and secure a market share. This is called predatory dumping. – It is believed that such practice is rare and would be temporary as it is not sustainable for the foreign firm. 2. It can be profitable to sell at low prices abroad, even at prices lower than average cost. This is called price discrimination. 18ECON847 INTERNATIONAL TRADE Dumping (3) • Recall from the introductory microecon, that firms in imperfect competition (e.g. monopolist) can charge different prices across different groups of people whenever that pricing strategy is profitable. This pricing strategy is called (the third degree) price discrimination (e.g. regular price vs. student price). • This occurs in international trade as well: firms with market power (in multiple countries) may set different prices across countries. – Note that for foreign firms to discriminate in international trade, consumers in the high-price market should not be able to import directly from