Kinh tế quốc tế

21-Mar-21

Chapter 6

INTERNATIONAL ECONOMICS
Lecturer: PhD. Tran Nguyen Chat
Division: International Trade

Instruments of
Trade Policy

Email:

FOREIGN TRADE UNIVERSITY
HOCHIMINH CITY CAMPUS
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How Do Governments
Intervene In Markets?

How Do Governments
Intervene In Markets?
Governments use various methods to

intervene in markets including tariff and nontariff measures

Tariffs
➢ increase government revenues
➢ force consumers to pay more for certain
imports
➢ are pro-producer and anti-consumer
➢ reduce the overall efficiency of the world
economy

Tariffs - taxes levied on imports that effectively raise
the cost of imported products relative to domestic
products

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Costs and Benefits of Tariffs

Defining tariffs

• A tariff raises the price of a good in the importing
country, so we expect it to hurt consumers and
benefit producers there.

A tariff is a tax (duty) levied on products as they
move between nations
Transaction/ movement of goods
– Import tariff - levied on imports
– Export tariff - levied on exported goods as they leave
the country
Main Purpose
– Protective tariff - designed to insulate domestic
producers from competition
– Revenue tariff - intended to raise funds for the
government budget (no longer important in industrial
countries)

• In addition, the government gains tariff revenue from
a tariff.

• How to measure these costs and benefits?
• We use the concepts of consumer surplus and
producer surplus.

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Tariff welfare effects

Tariff welfare effects

• Consumer surplus measures the amount that a
consumer gains from a purchase by the difference in
the price he pays from the price he would have been
willing to pay.
– The price he
is
determined
buy) curve.

• Producer surplus measures the amount that a
producer gains from a sale by the difference in the
price he receives from the price he would have been
willing to sell at.
– The price he would have been willing to sell at is
determined by a supply (willingness to sell) curve.

would have been willing to pay
by a
demand

(willingness
to

– When price increases, the quantity supplied increases as
well as the producer surplus.

– When the price increases, the quantity demanded
decreases as well as the consumer surplus.

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Costs and Benefits of Tariffs

Consumer and producer surplus


• A tariff raises the price of a good in the importing
country, making its consumer surplus decrease
(making its consumers worse off) and making its
producer surplus increase (making its producers
better off).

• Also, government revenue will increase.

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Who pays for import restrictions?

Tariff trade and welfare effects

• Domestic consumers face increased costs
– Low income consumers are especially hurt by
tariffs on low-cost imports

• Overall net loss for the economy (deadweight
loss)
• Export industries face higher costs for inputs
• Cost of living increases
• Other nations may retaliate, further restricting

trade
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Why Do Governments
Intervene In Markets?

Arguments for trade restrictions
•
•
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Job protection
Protect against cheap foreign labor
Fairness in trade - level playing field
Protect domestic standard of living
Equalization of production costs
Infant-industry protection
Political and social reasons

There are two main arguments for government
intervention in the market
1. Political arguments - concerned with protecting the
interests of certain groups within a nation (normally
producers), often at the expense of other groups
(normally consumers)
2. Economic arguments - concerned with boosting the
overall wealth of a nation – benefits both producers
and consumers

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What Are The Political Arguments For
Government Intervention?


What Are The Political Arguments
For Government Intervention?

1. Protecting jobs - the most common political
reason for trade restrictions

2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security

results from political pressures by unions or
industries that are "threatened" by more efficient
foreign producers, and have more political clout
than consumers

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What Are The Political Arguments
For Government Intervention?

What Are The Political Arguments For
Government Intervention?

3. Retaliation for unfair foreign competition - when
governments take, or threaten to take, specific
actions, other countries may remove trade
barriers

5. Furthering the goals of foreign policy preferential trade terms can be granted
to countries that a government wants
to build strong relations with

➢ if threatened governments do not back down,
tensions can escalate and new trade barriers may
be enacted
➢ risky strategy

4. Protecting consumers from “dangerous”
products – limit “unsafe” products

trade policy can also be used to punish
rogue states


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What Are The Political Arguments For
Government Intervention?

What Are The Economic Arguments
For Government Intervention?
1. The infant industry argument - an industry
should be protected until it can develop and
be viable and competitive internationally

6. Protecting the human rights of
individuals in exporting countries –
through trade policy actions
7. Protecting
the
environment
–
international trade is associated with a
decline in environmental quality

➢ accepted as a justification for temporary trade
restrictions under the WTO


➢ concern over global warming
➢ enforcement of environmental regulations

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What Are The Economic Arguments
For Government Intervention?
2. Strategic trade policy – first-mover
advantages can be important to success

Politics of protectionism
• “Supply” of protectionism (trade policy)
depends on:
– the cost to society of restricting trade
– the political importance of the import-competing

industries
– Magnitude of the adjustment costs from free trade
– Public sympathy for those sectors hurt by free
trade

➢ governments can help firms from their
countries attain these advantages
➢ governments can help firms overcome
barriers to entry into industries where
foreign firms have an initial advantage

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When Should Governments
Avoid Using Trade Barriers?

Politics of protectionism
• “Demand” for protectionism depends on:

Paul Krugman argues that strategic trade
policies aimed at establishing domestic firms
in a dominant position in a global industry
are:


– The amount of the import-competing industry’s
comparative disadvantage
– The level of import penetration
– The level of concentration in the affected sector
– The degree of export dependence in the sector

beggar-thy-neighbor policies that boost
national income at the expense of other
countries
countries that attempt to use such policies will
probably provoke retaliation
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When Should Governments
Avoid Using Trade Barriers?


Tariffs
Export-import goods tariff nomenclature
(schedule):
o Each country has an export-import goods
tariff nomenclature/Schedule
o VN tariff is based on HS
o There are export tax rate & import tax rate

Krugman argues that since special interest
groups can influence governments, strategic
trade policy is almost certain to be captured
by such groups who will distort it to their own
ends

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Types of tariff

Effective rate of protection

• Specific tariff
– Fixed monetary fee per unit of the product


• Ad valorem tariff
– Levied as a percentage of the value of the product

• Compound tariff

• The impact of a tariff is often different from its
stated amount
• The effective tariff rate measures the total
increase in domestic production that the tariff
makes possible, compared to free trade
– Domestic producers may use imported inputs or
intermediate goods subject to various tariffs,
which affects the calculation

– A combination of the above, often levied on
finished goods whose components are also
subject to tariff if imported separately

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Tariffs

Effective rate of protection
• When tariff rates are low on raw materials and
components, but high on finished goods, the
effective tariff rate on finished goods is
actually much higher than it appears from the
nominal rate
• This is referred to as tariff escalation

Tax calculation for exported goods
AMOUNT OF TAX = VALUE OF GOODS
RATE (%)

X

TAX

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Tariffs

Tariffs

Tax rates for imported goods:

Tax calculation for imported goods
Percentage tax rate:
Amount of tax = Value of goods X tax rate (%)
Value of goods → transaction value → 6 methods
Specific tax rate:
Amount of tax = Quantity of goods X tax rate
Compound tax rate

a) Preferential tax rates (MFN tax rate):
Preferential tax rates are the rates applicable to
imported goods originated from countries or
groups of countries which have reached
agreements on most-favored-nation (MFN)
treatment in trade relations with Vietnam.
Preferential tax rates are specified for every
goods item in the Preferential Import Tariffs.
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Tariffs

Tariffs

Tax rates for imported goods :

Tax rates for imported goods :

b) Specially preferential tax rates (FTA tax rate):
Specially preferential tax rates are the rates applicable
to imported goods originated from the countries or
groups of countries those have reached agreements
with Vietnam on specially preferential import tax rates
under the institution of free trade areas, tariffs
alliance, or aiming to facilitate border trade exchanges
and other cases of specially preferential treatment.
Specially preferential tax rates shall be applicable
specifically to every goods item according to the
provisions of the agreements.


c) Ordinary tax rates:
• Ordinary tax rates are the rates applicable to
imported goods originated from countries or groups
of countries with which Vietnam has not reached any
agreement on MFN or on specially preferential import
tax rates.
• Ordinary tax rate is 50% (fifty percent) higher than
the preferential tax rate of each goods item specified
in the Preferential Import Tariffs Nomenclature (or
equal to 150% MFN rate)

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Customs Valuation

Customs Valuation
The WTO Valuation Agreement:
• The Agreement on Implementation of
Article VII of the General Agreement on
Tariffs and Trade 1994 (GATT 1994)
• Establishes a Customs valuation system
that primarily bases the Customs value on
the transaction value of the imported
goods

• The price actually paid or payable for the
goods when sold for export to the country
of importation, plus certain adjustments

Concept:
• The Customs value on imported goods is
determined mainly for the purpose of
applying ad valorem duties.
• Constitutes the taxable basis for Customs
duties.
• An essential element for trade statistics, for
monitoring quantitative restrictions, tariff
preferences and for collecting internal
national taxes, etc.
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How Do Governments
Intervene In Markets?

Customs Valuation

Governments use various methods to intervene
in markets including tariff and non-tariff
measures

Valuation methods:
1. The transaction value of the imported
goods
2. The transaction value of identical goods;
3. The transaction value of similar goods;
4. The deductive value method;
5. The computed value method;
6. The fall-back method.

Non-Tariffs measures (NTMs) are policy measures —
other than ordinary customs tariffs — that can
potentially have an economic effect on international
trade in goods, changing quantities traded, or prices or
both.

→Trends of tariffication

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WTO AGREEMENTS: GATT 1994

Non-tariff measures

1. Agriculture (AoA)
2. Sanitary and Phytosanitary Measures (SPS)
3. Textiles and Clothing Note (terminated on 1 Jan 2005)
4. Technical Barriers to Trade (TBT)
5. Trade-Related Investment Measures (TRIMs)
6. Anti-dumping (Article VI of GATT 1994) (ADA)
7. Customs valuation (Article VII of GATT 1994) (ACV)
8. Preshipment Inspection
9. Rules of Origin (ROO)
10. Import Licensing (ILP)
11. Subsidies and Countervailing Measures (SCM)
12. Safeguards
13. Trade facilitation (TFA)
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Government procurement: a plural agreement

Some popular NTMs:
• Quantitative restrictions: prohibition, quota, import
licensing (non-automatic license)
• Trading rights
• Para-tariff measures: surcharge, customs valuation

• Price control
• Technical measures (Technical Barriers to Trade –
TBT)
• Distribution restrictions
• Trade-related investment measures
• Administrative procedures
• Trade
remedies
(anti-dumping,
countervailing,
safeguard measures)
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Non-tariff measures

Non-tariff measures


Sanitary and Phytosanitary Measures:
• Measures that are applied to protect human
or animal life from risks arising from:
additives, contaminants, toxins or diseasecausing organisms in food.
• Geographical restrictions on eligibility:
Imports of dairy products from countries.

Technical Barriers to Trade:
• Measures referring to technical regulations,
and procedures for assessment of
conformity with technical regulations and
standards.
• Labelling requirements. Eg: Refrigerators
need to carry a label indicating their size,
weight and electricity consumption level.

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Import Quota

Import quotas
• Quotas are a restriction on the quantity of a
good that may be imported in any one period
(usually below free-trade levels)

• Global quotas restrict the total quantity of an
import, regardless of origin
• Selective quotas restrict the quantity of a good
coming from a particular country

• An import quota is a restriction on the quantity of a
good that may be imported.
• This restriction is usually enforced by issuing
licenses to domestic firms that import, or in some
cases to foreign governments of exporting countries.
• A binding import quota will push up the price of the
import because the quantity demanded will exceed
the quantity supplied by domestic producers and
from imports.

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Import Quota

Tariff-rate quota

• When a quota instead of a tariff is used to
restrict imports, the government receives no
revenue.

• The tariff-rate quota is a two-tiered tariff
– A specified number of goods (up to the quota
limit) may be imported at one (lower) tariff rate,
while imports in excess of the quota face a higher
tariff rate

– Instead, the revenue from selling imports at high
prices goes to quota license holders: either
domestic firms or foreign governments.
– These extra revenues are called quota rents.

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Voluntary Export Restraint

Tariff-rate quota: trade & welfare effects

• A voluntary export restraint works like an
import quota, except that the quota is imposed
by the exporting country rather than the
importing country.

• However, these restraints are
requested by the importing country.

usually

• The profits or rents from this policy are earned
by foreign governments or foreign producers.
– Foreigners sell a restricted quantity at an
increased price.
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Local Content Requirement

Local Content Requirement

• A local content requirement is a regulation that
requires a specified fraction of a final good to be
produced domestically.
• It may be specified in value terms, by requiring that
some minimum share of the value of a good
represent domestic valued added, or in physical
units.
• Often has the effect of forcing lower-priced imports
to include higher-cost domestic components or be
assembled in a higher-cost domestic market

• From the viewpoint of domestic producers of
inputs, a local content requirement provides
protection in the same way that an import
quota would.
• From the viewpoint of firms that must buy
domestic inputs, however, the requirement
does not place a strict limit on imports, but

allows firms to import more if they also use
more domestic parts.

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Subsidies

Local Content Requirement
• Local content requirement provides neither
government revenue (as a tariff would) nor quota
rents.
• Instead the difference between the prices of
domestic goods and imports is averaged into the
price of the final good and is passed on to
consumers.

• Domestic subsidy
– Payments made to import-competing producers to
raise the price they receive above the market
price

• Export subsidy
– Payments and incentives offered to export
producers intended to raise the volume of exports


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Export Subsidy (WTO)

Export Subsidy
• An export subsidy can also be specific or ad valorem

Subsidies: A form of financial aid or support
extended to an economic sector.
There are two general types of subsidies: export
and domestic.
An export subsidy is a subsidy conferred on a

firm by the government that is contingent on
exports.
A domestic subsidy is a subsidy not directly
linked to exports.

– A specific subsidy is a payment per unit exported.

– An ad valorem subsidy is a payment as a proportion of the
value exported.

• An export subsidy raises the price of a good in the
exporting country, making its consumer surplus
decrease (making its consumers worse off) and
making its producer surplus increase (making its
producers better off).
• Also, government revenue will decrease.

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BCA on Export Subsidy

Export Subsidy
• An export subsidy raises the price of a good in
the exporting country, while lowering it in

foreign countries.

• In contrast to a tariff, an export subsidy
worsens the terms of trade by lowering the
price of domestic products in world markets.

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Export Subsidy

Main instruments of trade restrictions

• An export subsidy unambiguously produces a
negative effect on national welfare.


All four trade policies benefit producers and
hurt consumers.
Subsidy and VER definitely hurt the nation
as a whole, while tariffs and import
quotas are potentially beneficial only for
large countries that can drive down
world prices.
Why, then, do governments so often act to
limit imports or promote exports?

• The triangles b and d represent the efficiency loss.
– The tariff distorts production and consumption decisions:
producers produce too much and consumers consume too
little compared to the market outcome.

• The area b + c + d + f + g represents the cost of
government subsidy.
– In addition, the terms of trade decreases, because the
price of exports falls in foreign markets to P*s.

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Dumping


Dumping
Dumping is a situation of international price discrimination,
where the price of a product when sold in the importing
country is less than the price of that product in the market
of the exporting country.
Thus, in the simplest of cases, one identifies dumping simply
by comparing prices in two markets.
However, the situation is rarely, if ever, that simple, and in
most cases it is necessary to undertake a series of
complex analytical steps in order to determine the
appropriate price in the market of the exporting country
(known as the “normal value”) and the appropriate price
in the market of the importing country (known as the
“export price”) so as to be able to undertake an
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appropriate comparison.

• The practice of selling a product at a lower
price in export markets than at home (or
exporting at prices below production cost)
– Sporadic dumping - to clear unwanted inventories
or cope with excess capacity
– Predatory dumping - to undermine foreign
competitors
– Persistent dumping - reaping greater profits by
engaging in price discrimination
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Other Trade Policies

Strategic trade policy

• Export credit subsidies
– A subsidized loan to exporters
– US Export-Import Bank subsidizes loans to US exporters.

• Government procurement
– Government agencies are obligated to purchase from
domestic suppliers, even when they charge higher prices
(or have inferior quality) compared to foreign suppliers.

• Bureaucratic regulations
– Safety, health, quality or customs regulations can act as
a form of protection and trade restriction.

• Response to competition in sectors with
imperfect competition - small number of

producers, each large enough to affect
market price
• Subsidies can give the advantage to
domestic manufacturers over foreign ones
• Critics argue that it is too difficult to
determine
where
assistance
makes
economic sense

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Import-Export strategies

Import substitution: pros

• Import substitution

• Risk of establishing home import-replacing
industry is low because home market already
exists
• Easier for developing nations to protect their
own markets than to force industrial nations to

open theirs
• Gives foreign firms an incentive to locate
production in developing country, providing
jobs

– Trade barriers protect emerging domestic
industries
– Popular in 1950s and 1960s

• Export-led growth (export-oriented strategy)
– Focus on export of manufactures as engine of
growth
– Became more common starting in 1970s

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Import substitution: cons

Export-led growth: pros

• Trade restrictions shelter home industry from
competition, giving no incentive for efficiency
• Small size of most developing country
markets makes it difficult to benefit from
economies of scale
• Protection of import-competing industries
draws resources away from all other sectors,
including potential exporters

• Encourages industries in which developing
countries are likely to have a comparative
advantage - such as labor-intensive
manufactures
• Export markets allow domestic producers to
utilize economies of scale
• Low level of trade restrictions forces domestic
firms to remain competitive

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The effects of Trade Policy:
Summary

Export-led growth: cons
• Main disadvantage to export-led growth is that
it depends on the ability and willingness of
industrial nations to absorb large quantities of
manufactures from developing countries
• In other words, it is sensitive to economic
cycles and protectionist pressures in the
export markets

1. A tariff drives a wedge between foreign
and domestic prices, raising the
domestic price but by less than the tariff
rate.
An important and relevant special case,
however, is that of a “small” country that
cannot have any substantial influence on
foreign prices.
In the small country case, a tariff is fully
reflected in domestic prices.
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The effects of Trade Policy:
Summary

The effects of Trade Policy:
Summary

2. The costs and benefits of a tariff or other
trade policy may be measured using the
concepts of consumer surplus and
producer surplus.

3. If we add together the gains and losses from a
tariff, we find that the net effect on national
welfare can be separated into two parts:
On one hand is an efficiency loss, which results from the
distortion in the incentives facing domestic
producers and consumers.
On the other hand is a terms of trade gain, reflecting the
tendency of a tariff to drive down foreign export
prices.


Using these concepts, we can show that the
domestic producers of a good gain because
a tariff raises the price they receive; the
domestic consumers lose, for the same
reason. There is also a gain in government
revenue.
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In the case of a small country that cannot affect
foreign prices, the second effect is zero, so that
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there is an unambiguous loss.
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The effects of Trade Policy:
Summary
4. The analysis of a tariff can be readily adapted to
analyze other trade policy measures, such as
export subsidies, import quotas, and voluntary
export restraints.
An export subsidy causes efficiency losses similar to
those of a tariff but compounds these losses by
causing a deterioration of the terms of trade.
Import quotas and voluntary export restraints differ from
tariffs in that the government gets no revenue.

Instead, what would have been government
revenue accrues as rents to the recipients of

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import quota and to foreigners (VER).
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