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CHAPTER 14
THE IMPACT OF TRADE POLICIES
Learning Objectives:
■ Illustrate how trade policies affect a product market in a small-country setting.
I. Outline
Introduction
– Gainers and Losers from Steel Tariffs
Trade Restrictions in a Partial Equilibrium Setting: The Small-Country Case
– The Impact of an Import Tariff
– The Impact of an Import Quota and a Subsidy to Import-Competing Production
– The Impact of Export Policies
Trade Restrictions in a Partial Equilibrium Setting: The Large-Country Case
– Framework for Analysis
Trade Restrictions in a General Equilibrium Setting
– Protection in the Small-Country Case
– Protection in the Large-Country Case
Other Effects of Protection
Summary
Appendix A: The Impact of Protection in a Market with Nonhomogeneous Goods
Appendix B: The Impact of Trade Policy in the Large-Country Setting Using Export
Supply and Import Demand Curves
II. Special Chapter Features
In the Real World: Real Income Gains from Trade Liberalization in Agriculture
III. Purpose of Chapter
The purpose of this chapter is to explain how trade restrictions affect a country so that the
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costs and benefits of this type of policy action can be more fully understood.
IV. Teaching Tips
A. The chapter begins with the example of the 2002 U.S. steel tariffs. This case provides a
B. The partial equilibrium analysis relies upon the concepts of producer and consumer
surplus to demonstrate the costs and benefits of the various protection instruments. It is therefore
important to review these two surplus concepts so that the students feel comfortable with them
before they are used in the analysis.
C. If you choose to use the large-country approach described on pages 291-303 and in
Appendix B, it is worthwhile to stress that the demand for imports schedule is not the entire
D. We present several different instruments in a variety of settings. You may prefer not to
examine all of them due to time constraints.
E. We do recommend, however, that within the partial equilibrium model, care be taken to
demonstrate the difference between import tariffs, quotas, and domestic subsidies; the effects of
an export tax versus an import tariff; and the differing effects of a tariff or import quota in the
large-country versus the small-country setting. Basic understanding of these differing situations
is necessary for evaluating the effects of trade policy in general.
F. It is important to spend some time discussing the general equilibrium effects of
protection, even though it is, without a doubt, much tougher going. If you do not wish to spend
V. Answers to End-of-Chapter Questions and Problems
1. The winners are:
Producers = (2,000)($1.20) + (0.5)(300)($1.20) = $2,580
2. An equivalent subsidy would shift the supply curve down vertically by $1.20. Producers
would thus be willing to supply 2,300 units at the world price of $12, consumers would continue
to demand 2,600 units, and imports would fall from 600 to 300 units. In this instance, there
3. A quota differs from a tariff in that the quantity of imports is fixed and domestic price
adjusts, whereas with a tariff, the domestic price is altered and quantity adjusts. The effects on
consumers and producers of a quota are analogous to those of an equivalent tariff. However,
4. You would prefer the quota because in this instance you would receive the benefits of the
growth in demand via higher domestic prices and sales without any accompanying increase in
5. An export tax effectively lowers the price received by producers for their product. They
are thus willing to sell at a lower price in the domestic market, as opposed to exporting the good
and paying the tax, up to the point where the domestic price is equal to the international price
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effectively raises the price received by producers for their exports. Producers consequently raise
the domestic price until it is equal to the international price plus the subsidy per unit, which leads
to a decrease in quantity demanded at home, an increase in home quantity supplied, and an
increase in exports. Domestic consumers would clearly prefer the export tax to the export
subsidy.
6. Use of trade restrictions for the small country clearly involves net social losses. The
large country can, however, influence world price by its trade policy. The imposition of a tariff
7. The relevant graph is Figure 14 (page 305) in the text. The loss in real income due to the
tariff is shown by the inward shift of the consumption-possibilities frontier (the international
8. The export subsidy is more costly in the case of the large country because it not only has
9. Consumers pay twice for subsidized exports in that they not only pay a higher domestic
10. The changes in domestic quantity demanded and supplied can be calculated using the
supply and demand elasticities and the increase in domestic price resulting from the 10 percent
tariff.
The percentage change in quantity supplied = (0.10)(elasticity of supply)
= (0.10)(1.6) = 16 percent
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The new domestic price = ($8.00)(1.10) = $8.80
Placing this information along with the initial market information provided in the question on a
graph, the familiar partial equilibrium analysis can be carried out using an approach like that
used in Figure 3 (page 284) in the chapter.
The loss in consumer surplus = ($ 0.80)(640) + (½) ($0.80)(160) = $576
The gain in producer surplus = ($0.80)(500) + (½)($0.80)(80) = $432
The gain in government revenue = ($0.80)(60) = $48
The deadweight losses = (½)($0.80)(160) + (½)($0.80)(80) = $96
VI. Sample Exam Questions
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1. “The imposition of a tariff on a good will always have a negative welfare effect on a
country.” Agree? Disagree? Explain.
2. “Even if home consumers always have perfectly inelastic demand for a product, at
least a portion of the demand curve by those consumers for imports of the product
3. How would an export quota by a home country look in the offer curve diagram? How
4. Discuss why an exporting country II, if faced with a choice between a 100-unit import
quota by importing country I on a given product or a “voluntary” export restriction by II of 100
5. At the international price of $20/unit, domestic production is 5,000 units and domestic
6. Demonstrate why economists argue that, from a country welfare perspective, a domestic
7. An import tariff has a similar impact on a country’s export good as an export tax.
Explain.
8. Explain, using offer curves, how a tariff affects a large country in the context of general
9. If it has been decided that protection is to be given, industry usually prefers quotas and
economic advisers to governments generally argue for subsidies or tariffs. Why might there be a
difference of opinion between these two groups? Would it make any difference which was
chosen if market demand was constant?
10. “While the imposition by a country’s government of an import tariff on a good
clearly injures the country’s domestic consumers of the good, the tariff helps
domestic import-competing producers and enhances overall country welfare
Utilizing traditional supply/demand analysis, illustrate and explain the parts of the above
statement that are TRUE (if any) and the parts that are FALSE (if any). (You can use a “small–
country” case throughout your answer. Also, assume that there are barriers to the import of the
good into the country granting the export subsidy.)
11. (a) Using a demand/supply diagram, illustrate and explain the effects of the imposition
of an export tax on a good Y by a home country’s government on (i) the home country’s
12. (a) Suppose that country A wishes to restrict its imports of good X to 900 units per
month, which is a reduction from the current quantity of imports. Assume that A also
produces good X domestically. In this context, illustrate and explain why the following
statement is either TRUE or FALSE.
“The reduction in imports to 900 units per month will have identical
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month.”
(b) Suppose that country A wishes to expand its home production of good Y (as well as
employment in country A’s Y industry) by 10 percent, and country A is an importer of
good Y.
In this context, illustrate and explain why the following statement is either TRUE or
FALSE.
“The 10 percent increase in home output and employment in the Y
industry will be associated with identical effects on product price,
quantity of imports of good Y, and welfare in country A whether the 10
percent increase is accomplished by the imposition of an import tariff or
by the granting of a subsidy for production and employment to home
producers of good Y.”
13. For each of the three statements below, illustrate and explain why the statement is either
TRUE or FALSE.
(a) “Other things equal, the imposition of a tariff by a (small) country on an imported
good will have a less negative net welfare effect on the country than would the use of a