team 3 project

8/22/2019 Team 3 Project

1/14

PRIDON C.A.

A tariffis either (1) a tax on importsorexports(an international trade tariff), or (2) a

list of prices for such things as rail service,bus routes, and electrical usage (electrical tariff,

etc.).

Trade barriers are government-induced restrictions on international trade.

Economists generally agree that trade barriers are detrimental and decrease overall economic

efficiency, this can be explained by the theory of comparative advantage. In theory, free

trade involves the removal of all such barriers, except perhaps those considered necessary for

health or national security. In practice, however, even those countries promoting free trade

heavily subsidize certain industries, such as agriculture and steel.

Trade barriers are often criticized for the effect they have on the developing world.

Because rich-country players call most of the shots and set trade policies, goods such as crops

that developing countries are best at producing still face high barriers. Trade barriers such as

taxes on food imports or subsidies for farmers in developed economies lead to overproduction

and dumping on world markets, thus lowering prices and hurting poor-country farmers.

Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-

intensive processed goods. The Commitment to Development Index measures the effect that

rich country trade policies actually have on the developing world.

Another negative aspect of trade barriers is that it would cause a limited choice of

products and would therefore force customers to pay higher prices and accept inferior quality

Tariff barriers are duties imposed on goods which effectively create an obstacle to

trade, although this is not necessarily the purpose of putting tariffs in place. Tariff barriers are

also sometimes known as import restraints, because they limit the amount of goods which can

be imported into a country. Many organizations which promote trade are concerned about

bothtariff and non-tariff barriers to free trade, and a number of nations have agreed to

radically reduce their trade barriers to promote the exchange of goods across their borders.

A number of different types of duties can be levied when goods cross international

boundaries. With an ad valorem duty, for example, the importer must pay a fee which is

calculated as a percentage of the value of the goods being imported. Specific tariffs are set

amounts which are levied on products which are imported, regardless of values, while

environmental tariffs penalize nations with poor environmental records.

Forimporters, tariff barriers can make it difficult to bring goods into a country. Theimporter may be forced to import less because the tariff barriers cannot be afforded otherwise,

1
http://en.wikipedia.org/wiki/Importshttp://en.wikipedia.org/wiki/Exportshttp://en.wikipedia.org/wiki/Rail_transporthttp://en.wikipedia.org/wiki/Bus_routeshttp://en.wikipedia.org/wiki/Electricalhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttp://www.wisegeek.com/what-is-free-trade.htmhttp://www.wisegeek.com/what-is-ad-valorem.htmhttp://www.wisegeek.com/what-are-importers.htmhttp://en.wikipedia.org/wiki/Importshttp://en.wikipedia.org/wiki/Exportshttp://en.wikipedia.org/wiki/Rail_transporthttp://en.wikipedia.org/wiki/Bus_routeshttp://en.wikipedia.org/wiki/Electricalhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttp://www.wisegeek.com/what-is-free-trade.htmhttp://www.wisegeek.com/what-is-ad-valorem.htmhttp://www.wisegeek.com/what-are-importers.htm


2/14

and it may need to charge more for the goods to make importing worthwhile. Tariffs are

designed to force importers to do this to level the field between domestic producers and

importers, allowing costly domestic producers to compete with importers who may be able to

bring in goods at lower cost.

Protectionism, in which nations promote the interests of domestic producers by

restricting importers, is common in many nations, but it is also frowned upon, primarily by

nations which want to be able to export goods for trade in other countries. Organizations such

as the World Trade Organization have promoted the lifting of tariff barriers to reduce the

burden on importers. Non-tariff barriers such as import quotas are also targeted for

elimination by organizations which promote free trade.

Some tariff barriers are likely to always remain in place, even in nations which are

very open to free trade. Changing the structure of tariffs, taxes, and related expenses is a

continual project, and nations occasionally push back or lash out by radically altering their

tariffs and otherbarriers to trade. Nations may also use trade barriers to make political

statements which are designed to pressure other countries into modifying their behavior. For

example, Country A might refuse to import beef from Country B until Country B can

demonstrate that its meat supply is free of bovine spongiform encephalitis (BSE), also known

as mad cow disease.

One of the most important instruments of trade policy is customs duty. By introducing

tariff a country can influence its volume and structure of foreign trade. By uploading

differentiated goods with duty may change their relative prices, ie the structure of trade flows.

A country can influence even the absolute volume of its trade abroad. The perception

(increase) of duties, usually the international exchange of goods decreases. In an extreme case

might find even a prohibitive level of duties so that trade disappear. Conversely, if tariffs are

reduced, foreign trade increases. Negative duties, subsidies can raise foreign trade volume

over the corresponding free trade.

In mainstream economics, economic surplus (also known as total

welfare orMarshallian surplus (named afterAlfred Marshall) refers to two related

quantities.

Consumer surplus or consumers' surplus is the monetary gain obtained by

consumers because they are able to purchase a product for a price that is less than the highestprice that they would be willing to pay.

2
http://www.wisegeek.com/what-is-protectionism.htmhttp://www.wisegeek.com/what-is-the-world-trade-organization.htmhttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://www.wisegeek.com/what-is-protectionism.htmhttp://www.wisegeek.com/what-is-the-world-trade-organization.htmhttp://en.wikipedia.org/wiki/Mainstream_economicshttp://en.wikipedia.org/wiki/Alfred_Marshall


3/14

Producer surplus orproducers' surplus is the amount that producers benefit by

selling at a market price that is higher than the least that they would be willing to sell for.

Flavius Sichitiu

The effective rate of protection measures how much protection a tariff or other trade

policy provides domestic producers.

It represents the change in value that firms in an industry add to the production

process when trade policy changes.

The change in value that firms in an industry provide depends on the change in prices

when trade policies change.

3


4/14

Effective rates of protection often differ from tariff rates because tariffs affect sectors

other than the protected sector, causing indirect effects on the prices and value added

for the protected sector.

The effective rate of protection is used to estimate the protection really afforded todomestic producers at each stage of production, i.e., how much extra they can charge and still

be competitive with imported goods. If the total value of the tariffs on importable inputs

exceeds that on the output, the effective rate of protection is negative, i.e., the industry is

discriminated against in comparison with the imported product.

For example, suppose that automobiles sell in world markets for $8,000, and they are made

from factors of production worth $6,000.

The value added of the production process is $8,000-$6,000=2000

Suppose that a country puts a 25% tariff on imported autos so that domestic auto assembly

firms can now charge up to $10,000 instead of $8,000.

Auto assembly will occur in the domestic country if the value added is at least

$10,000-$6,000=4000.

The effective rate of protection for domestic auto assembly firms is the change in

value added: ($4,000 - $2,000)/$2,000 = 1=100%

In this case, the effective rate of protection is greater than the tariff rate.

The Stolper-Samuelson Theorem

Assumptions:

One country produces two goods (wheat and cloth) with two factors of production

(capital and labor);

neither good is an input into the production of the other;

competition prevails;

factor supplies are given;

both factors are fully employed;

both factors are mobile between sectors (but not between countries);

one good (wheat) is capital-intensive and the other (cloth) is labor-intensive);

opening trade raises the relative price of the export good.

The Stolper-Samuelson Theorem postulates that moving from no trade to free trade

raises the returns to the factor used intensively in the rising-price industry, and lowers the

4


5/14

returns to the factor used intensively in the falling-price industry, regardless of which goods

the sellers of the two factors prefer to consume.

Suppose that one sector produces exports (capital-intensive, cars) and the other

produces goods that compete with imports (labour-intensive, cloth). What would be the effect

of a tariff or some other change which raises the relative price of cloth? The sector producing

cloth expands, as imports are discouraged; because there is full or close to full employment,

the export sector - cars becomes smaller; demand for labour rises as cloth production is

labour-intensive, thus lowering demand for capital. This results in the wage-earners gaining,

and the capital-owners loosing.

Non-tariff trade barriers

Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not

in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures

and countervailing duties, which, although called non-tariff barriers, have the effect of tariffs

once they are enacted.

Non-tariff barriers to trade include import quotas, special licenses, unreasonable

standards for the quality of goods, bureaucratic delays at customs, export restrictions, limiting

the activities of state trading, export subsidies, sanitary measures, buy national policies, over-

valued currency etc.

Import Quotas put a legal limit on the amount that can be imported, creating

shortages which cause prices to rise. A quota benefits domestic producers in the same way a

tariff does, but the additional money expended on foreign goods goes to the foreign

producers, not the domestic government. The aim of the Import quota is to promote domestic

supply of a certain good.

It is a direct administrative form of government regulation of foreign trade. Its effects

are: on the consumer:

higher prices.

limited selection of goods; these 2 lead to lower consumption.

on the companies:

costs increase as imported the prices become higher.

Import quotas are redistributive from consumer to producer

5
http://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/Countervailing_dutieshttp://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/Countervailing_duties


6/14

Voluntary export restraints is a government imposed limit on the quantity of goods

that can be exported out of another country during a specified period of time. This is typically

done to prevent the imposition oftrade tariffs.

Despite being heavily used in the second part of the 20 th century, there are a

number of inconveniences regarding voluntary export restraints:

shutting out one country (most are bilateral) only leaves a gap for another to come in

with the same export;

limiting the quantity of the export of a certain product only leads to the exporting

country delivering a more expensive and more complex product to maximise gains

Japan;

it is highly discriminatory/arbitrary, making it very harmful to trade.

A cartel is a formal (explicit) "agreement" among competing firms. It is a formal

organization of producers and manufacturers that agree to fix prices, marketing, and

production. Cartel members may agree on such matters as price fixing, total industry output,

market shares, allocation of customers, allocation of territories,bid rigging, establishment of

common sales agencies, and the division of profits or combination of these. The aim of such

collusion (also called the cartel agreement) is to increase individual members' profits by

reducing competition.

One can distinguish private cartels from public cartels. In the public cartel a

government is involved to enforce the cartel agreement, and the government's sovereignty

shields such cartels from legal actions. Inversely, private cartels are subject to legal liability

under the antitrust laws now found in nearly every nation of the world. Furthermore, the

purpose of private cartels is to benefit only those individuals who constitute it, public cartels,

in theory, work to pass on benefits to the populace as a whole.

Murray Rothbard considered the federal reserve as a public cartel of private banks.

Game theory suggests that cartels are inherently unstable, as the behaviour of

members of a cartel is an example of aprisoner's dilemma. Each member of a cartel would be

able to make more profit by breaking the agreement (producing a greater quantity or selling at

a lower price than that agreed) than it could make by abiding by it. However, if all members

break the agreement, all will be worse off. The incentive to cheat explains why cartels are

generally difficult to sustain in the long run.

6
http://www.businessdictionary.com/definition/trade.htmlhttp://en.wikipedia.org/wiki/Price_fixinghttp://en.wikipedia.org/wiki/Market_sharehttp://en.wikipedia.org/wiki/Bid_rigginghttp://en.wikipedia.org/wiki/Collusionhttp://en.wikipedia.org/wiki/Profit_(economics)http://en.wikipedia.org/wiki/Antitrusthttp://en.wikipedia.org/wiki/Murray_Rothbardhttp://en.wikipedia.org/wiki/Federal_reservehttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Prisoner's_dilemmahttp://www.businessdictionary.com/definition/trade.htmlhttp://en.wikipedia.org/wiki/Price_fixinghttp://en.wikipedia.org/wiki/Market_sharehttp://en.wikipedia.org/wiki/Bid_rigginghttp://en.wikipedia.org/wiki/Collusionhttp://en.wikipedia.org/wiki/Profit_(economics)http://en.wikipedia.org/wiki/Antitrusthttp://en.wikipedia.org/wiki/Murray_Rothbardhttp://en.wikipedia.org/wiki/Federal_reservehttp://en.wikipedia.org/wiki/Game_theoryhttp://en.wikipedia.org/wiki/Prisoner's_dilemma


7/14

7


8/14

Farid Malikzade

Dumping

Dumping is the export of a commodity at below cost or at least the sale of a commodity at a

lower price abroad than domestically. Dumping is classified as persistent, predatory, and

sporadic.

Persistent dumping or international price discrimination, is the continuous tendency of a

domestic monopolist to maximize total profits by selling the commodity at a higher price in

the domestic market than internationally.

Predatory dumping is the temporary sale of a commodity at below cost or at a lower price

abroad in order to drive foreign producers out of business, after which prices are raised to take

advantage of the newly acquired monopoly power abroad.

Sporadic dumping is the occasional sale of a commodity at below cost or at a lower price

abroad than domestically in order to unload and unforeseen and temporary surplus of the

commodity without having to reduce domestic prices.

8


9/14

Under the World Trade Organization (WTO) Agreement, dumping is condemned but is not

prohibited. In the United States, domestic firms can file an antidumping petition under the

regulations determined by the United States Department of Commerce. European Union anti-

dumping is under the purview of the European Council.

Export Subsidies

Export Subsidies are direct payments or the granting of tax relief and subsidized loans to the

nations exporters, or potential exporters, and/or low interest loans to foreign buyers so as to

stimulate the nations exports. As such, export subsidies can be regarded as a form of

dumping. Though export subsidies are illegal by international agreement, many nations

provide them in disguised and not-so-disguised forms.

Most countries have income support programs for their nation's farmers. These are often

motivated by national security or self-sufficiency considerations. Farmers' incomes are

maintained by restricting domestic supply, raising domestic demand, or a combination of the

two.

Protectionism

Protectionism is the economic policy of restraining trade between states through methods

such as tariffs on imported goods, restrictive quotas, administrative barriers, exchange rate

manipulation and employment-based immigration restrictions. This is done to allow "fair

competition" between imports and goods and services produced domestically. This policy

contrasts with free trade, where government barriers to trade are kept to a minimum. In recent

years, it has become closely aligned with anti-globalization. The term is mostly used in the

context of economics, where protectionism refers to policies or doctrines which protect

businesses and workers within a country by restricting or regulating trade with foreign

nations.

Fallacious and Questionable Arguments for Protectionism

One fallacious argument is that trade restrictions are needed to protect domestic labor against

cheap foreign labor. The reason this argument is fallacious is that even if domestic wages are

9
http://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_Department_of_Commercehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Councilhttp://en.wikipedia.org/wiki/Farmerhttp://en.wikipedia.org/wiki/National_securityhttp://en.wikipedia.org/wiki/Economic_policyhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_Department_of_Commercehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Councilhttp://en.wikipedia.org/wiki/Farmerhttp://en.wikipedia.org/wiki/National_securityhttp://en.wikipedia.org/wiki/Economic_policyhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Import_quotahttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/Anti-globalizationhttp://en.wikipedia.org/wiki/Economics


10/14

higher than wages abroad, domestic labor costs can still be lower if the productivity of labor

is sufficiently higher domestically than abroad.

Another fallacious argument for protectionism is the scientific tariff. This is the tariff rate

that would make the price of imports equal to domestic prices and allow domestic producers

to meet foreign competition.

Infant-industry Argument a nation may have a potential comparative advantage in a

commodity, but because of lack of know-how and the initial small level of output, the

industry will not be set up or, if already started, cannot compete successfully with more

established foreign firms.

Strategic Trade Policy a nation can create a comparative advantage (through temporary

trade protection, subsidies, tax benefits, and cooperative government-industry programs) in

such fields as semiconductors, computers, telecommunications and other industries that are

deemed crucial to future growth in the nation.

Common Agricultural Policy

The Common Agricultural Policy is the agricultural policy of the European Union. Its main

objectives are to ensure a fair standard of living for farmers and to provide a stable and safe

food supply at affordable prices for consumers.

Latest proposals, for the CAP after 2012, have 3 priorities:

viable food production

sustainable management of natural resources

balanced development of rural areas throughout the EU

The CAP's budget is spent in 3 different ways:

Income support for farmers who receive direct payments, provided they live up to

strict standards for food safety, environmental protection and animal health and

10


11/14

welfare. These payments are fully financed by the EU, and account for 70% of the

CAP budget.

Rural development measures to help farmers modernize their farms and become

more competitive while protecting the environment, and to keep rural communities

thriving. These payments are part financed by the member countries, and account for

some 20% of the CAP's budget.

Market support for example when bad weather destabilizes markets. These payments

account for less than 10% of the CAP budget.

For more information: http://ec.europa.eu/agriculture/cap-overview/2012_en.pdf

Catalin Mihai BEHERCI

What is economic integration?

Economic integration is a commercial policy that eliminates tariff and non-tariff trade barriers

among a group of states.

The different forms (stages) of economic integration are the followings:

1. Preferential trade arrangements - they provide lower barriers on trade for the

participating states in comparison with nonmember states.

A very good example of a preferential trade arrangement is represented by the

British Commonwealth Preference Scheme, which was established in 1932 by the United

Kingdom with members of the British Empire.

2. Free trade area -is a form of economic integration which reduces or removes tariff

and non-tariff barriers to trade between member states, but also each state retains personal

barriers to trade with nonmembers.

The European Free Trade Association (EFTA) is a good example of a free trade

area. It was formed in 1960 by the United Kingdom, Austria, Denmark, Norway, Portugal,

Sweden, Switzerland and Finland as an associate member in 1961.

11
http://ec.europa.eu/agriculture/cap-overview/2012_en.pdfhttp://ec.europa.eu/agriculture/cap-overview/2012_en.pdf


12/14

The North American Free Trade Agreement (NAFTA) is another example of a free

trade area.

3. Customs union - is a trade agreement that requires members to eliminate trade

barriers with each other and takes economic integration a step further by establishing identical

barriers to trade against nonmembers (free trade area + a common set of tariffs to the rest of

the world); it does not allow free movement of labor and capital among member states.

The European Economic Community (EEC) as an example here. It was formed in

1957 by West Germany, France, Italy, Belgium, Holland and Luxembourg.

4. Common market - is a form of economic integration which includes all the aspects of

a customs union, but takes economic integration further by granting free movement of goods

and services, labor and capital.

In 1993, the European Union moved closer to full common-market status by

implementing the Single European Act, which consists of provisions to remove some or all

tariff and nontariff barriers to trade in goods and services, labor and capital.

5. Economic union - it represents the most complete and advanced type of economic

integration which harmonizes and unifies taxation, fiscal and monetary policies.

In 1944, Belgium, the Netherlands and Luxembourg formed Benelux, which is part of

the European Union from 1951.

Trade Creation and Trade Diversion (Jacob Veiner, 1950)

Trade creation refers to the increase in economic welfare from joining a free trade

area, such as a customs union. In this sense, trade creation will occur when higher-cost

imports of a member state are replaced by lower-cost imports from another member state. It

increases the welfare of a state.

A trade-creating customs union is a union that leads to trade creation only and

increases the welfare of both member and nonmember nations.

Trade diversion occurs when consumption shifts from lower-cost imports outside a

customs union to higher-cost imports from a union member. Also, trade diversion shifts

production from more efficient producers outside the customs union to less efficient

producers inside the union. It decreases the welfare of a state.

12


13/14

In this sense, a trade-diverting customs union will lead to both trade creation and

trade diversion and can increase or reduce the welfare of member states (it can also reduce the

welfare of the nonmember states).

Static Welfare Effects of a Customs Union

1. Administration savings from the elimination of customs officers and border patrols.

This is a benefit and does not depend if the customs union is trade-creating or trade-diverting.

2. A trade-diverting customs union is likely to improve the collective terms of trade

of the customs union. For a trade-creating customs union, the opposite is true.

3. Any customs union is likely to have much more bargaining power than all of its

member states, such as the European Union.

Dynamic Benefits of a Customs Union

1. Increased competition - producers must become more efficient to meet the

competition of other producers inside a customs union.

2. Economies of scale - refers to the cost advantages that resulted from the market

expansion.

3. Stimulus to investment in order to have an advantage of the enlarged market and to

meet the increased competition.

4. Better use of economic resources - resulted from the free movement of capital and

labor.

Radu Alexandru Cristian

13


14/14

5. NAFTA, EU, MERCOSUR, ASEAN

Definitions and their roles.

14

team 3 project

Documents