EC306 LECTURE 9

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Published on May 7, 2008

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LECTURE 9:  LECTURE 9 PUSHING EXPORTS Slide2:  The focus here is on the artificial promotion of exports. How would a country sell more exports than it would sell under ordinary competition? The underlying policy questions are: Can a country export too much than for its own good or for the good of the world? Slide3:  What would the importing country do about another country’s excessive exports? These questions are important in the sense that for a long time a number of importing countries have fought over what they consider are excessive exports from other countries or what they dub as ‘unfair trade’. Slide4:  The importing countries imply that these are repeatedly violating the WTO rules of trade. First we examine dumping. Dumping: is selling exports at a price that is too low – less than the ‘normal value’ or the ‘fair market value’. There are two meanings of ‘normal value’. Slide5:  A long standing definition is the price charged to comparable buyers in the home market or comparable buyers in other markets. The implication is that dumping is international price discrimination favouring buyers of exports. The second definition is selling the exports at a price that is less than the full average cost of the product. Slide6:  Why would an exporting firm engage in dumping? Predatory dumping: a firm may temporarily charge a low price to drive out the foreign competitors. Once it does that, it would use its monopoly power to raise price to earn monopoly profits. Cyclical Dumping: occurs during periods of recession. When demand is low, firms to limit the decline in quantity sold sell as long as price exceeds average variable cost. Slide7:  Seasonal Dumping: sell off excess inventories at the end of a fashion season. With the production costs sunk, any price above average variable cost is sensible. Perishable agricultural products is another example. Dumping can be a technique to promote new products in new markets. Persistent Dumping: occurs because a firm uses price discrimination between markets to increase its total profits. Slide8:  A firm would charge a lower price to its foreign buyers if: It has less monopoly power in the foreign market than at home market. Buyers at home cannot avoid the high prices at home by buying the good abroad and importing it cheaply. Diagram Slide10:  In terms of demand curves the firm faces a more inelastic demand curve in the home market than in the more competitive foreign market. How would a Dumpee react to Dumping? The importing country in one sense welcome dumping as it gets exports at a lower price. This is certainly the case with persistent dumping. There are gains in terms of lower prices for consumers and better terms of trade for the country. Slide11:  The importing country may view predatory dumping negatively. In the SR there will be lower prices that will benefit the country but in the longer term, once the exporting firm establishes its monopoly power, it would levy high prices. Predatory though possible may be rare. The main reason is uncertain future profits when it raises prices and face competition from new exporters. Slide12:  Cyclical Dumping: The importing country may not be completely convinced that cyclical dumping is fair. Because of a lack of demand, the exporting country trying to maintain its production levels, lower prices in the importing country is like exporting their unemployment to importing countries. If the problem in the exporting country is unemployment, the specificity rule suggests that the country should provide unemployment insurance or adjustment assistance. Slide13:  The importing country’s policy towards dumping should consider each case of dumping for its benefits and costs to the nation before imposing anti-dumping duties. The WTO rules permit countries to retaliate against dumping if dumping injures domestic import-substituting producers. If the exporting country government feels that an importing country’s government has violated the WTO’s rules in deciding to impose an anti-dumping duty, it can complain to the WTO. Slide14:  The WTO rules is an important item in the WTO Doha round. The main emphasis has been on three possible reforms. Anti-dumping be limited to predatory dumping. The injury standard could be extended to require that weight be given to consumers and users of the product. Anti-dumping could be replaced by more active use of safeguard policy. Safeguard policy is the use of temporary protection when a sudden increase in imports causes injury to domestic producers. Slide15:  The intent is to give some time to import-competing firms and their workers to adjust to the increased import competition. Export Subsidies: Governments promote or subside exports more often than they restrict or tax exports. Some government efforts are not controversial like provision of foreign market research, information on export procedures and foreign government regulations and help with contacting buyers through export promotion events and other organized trips. Governments also establish export processing zones that allow imports of materials at low or no tariff and easier customs procedures. Slide16:  The financial assistance to exporters in the form of export subsidies are controversial because violate international norms about fair trade. Governments can subsidize exports in a number of ways: They can give low interest loans to their exporters or their foreign customers. Governments charge low prices on inputs that go into the export product. Income tax is also used to give relief to exporters on the basis of their exports. Slide17:  The analysis of effects of export subsidy in a competitive industry gives the following results: An export subsidy expands exports. It can switch a product from being imported to being exported. Export subsidy lowers the price paid by foreign buyers. The export subsidy lowers the well-being of the exporting country. Let us examine a small country case. Diagram Slide19:  In the small country case, exports of steel do not affect the world price. With free trade, firm’s in the industry produce 160m pipes And export 90m. The government of this country decides to offer an export subsidy of $20 per pipe. The revenue per pipe is $120, equal to $100 paid by foreign buyers and $20 subsidy. The firm receives $120 per pipe exported and will not sell to any domestic buyer for less than $120. The quantity produced increase to 190million pipes. Slide20:  The local decreases to 50m pipes. Export quantity increases to 140m pipes. Who are the winners and losers in the exporting country? The producers in this country gain surplus equal to e + f + g. Consumers` lose e + g. The cost to the government is f + g + h. Slide21:  The export subsidy has increased the exports and production for this country. But has the country gained? By canceling out the losses and gains, the net loss to the economy is f and h. f is the consumption effect of the export subsidy. These consumers have been squeezed out of the market. h is the production effect of export subsidy. This is the loss due to encouraging domestic production that has a resource cost greater than the world price. Examine a large country case. Slide23:  The world price before subsidy is $100 per pipe. The exports is 90m pipes. The export subsidy is $20 per pipe. Production increases due to the subsidy. Exports increase to 110m pipes. Export price decreases to $88 per pipe. But domestic consumers pay $108 per pipe. Domestic consumption decreases from 70m pipes to 62m pipes. Slide24:  What are the effects on the well being of the exporting country? Producer surplus increases by e + f + g. Consumer surplus falls by e+f. The export subsidy costs the government f+g+h+i+j+k+l+m OR g+f+h+n+r+t+u. The net loss to the exporting country is given in 3 parts: Slide25:  Consumption effect – f. Production effect – h. Loss in the terms of trade: i+j+k+l+m = n+r+t+u. The effect of world well being. Gains in consumer surplus: n+r+t. The net loss to the world : f+h+u. This is the loss from too much pipes produced. Slide26:  SWITCHING AN IMPORTABLE PRODUCT INTO AN EXPORTABLE ONE Slide27:  The world price (free trade) is $2 per unit. Domestic production is 40 and imports is 80 units. The government offers a export subsidy of $2 per unit. The revenue per unit rises to $4. With export subsidy the country becomes a net exporter of the product. Domestic producers gain ACFE. Slide28:  Domestic consumers lose ABJE. The cost to Government of subsidy is BCHG. Net national loss is BJG plus CHF. WTO RULES ON SUBSIDY WTO has clear rules for subsides that benefits exports. Subsidies directly related to exports are prohibited except for the least developing countries. A firm receives tax break. Slide29:  Subsidies that are not directly related but has an impact on exports. A low priced electricity for production, a part of which may be exported. Some subsidies are non-actionable. Subsidies for R & D, assistance to disadvantaged regions and assistance in meeting environmental regulations. If an importing country finds that a foreign country is using an actionable subsidy, it can do two things: Slide30:  File a complaint with WTO and use its dispute settlement procedure. It is permitted to use a countervailing duty, a tariff used to offset the price or cost advantage created by the export subsidy. Should an importing country impose countervailing duties? Slide32:  Discuss. Strategic Export Subsidy could be good.

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