That is the fundamental implication of largeness. For example, if a country imposes an export tax, the world market price will rise because the exporter will supply less. It was shown in Section that an export tax set optimally will cause an increase in national welfare due to the presence of a positive terms of trade effect.
This effect is analogous to that of a monopolist operating in it's own market. A monopolist can raise its profit i. In much the same way, a large exporting country can restrict its supply to international markets with an export tax, force the international price up, and create benefits for itself with the terms of trade gain.
The term monopoly "power" is used because the country is not a pure monopoly in international markets. There may be other countries exporting the product as well. Nonetheless, because its exports are a sufficiently large share of the world market, the country can use its trade policy in a way that mimics the effects caused by a pure monopoly, albeit to a lesser degree.
Hence the country is not a monopolist in the world market but has monopoly "power" instead. Similarly, when a country is a large importer of a good we say that it has "monopsony power. A monopsonist raises his own welfare or utility by restricting his demand for the product and thereby forcing the sellers to lower their price to him.
By buying fewer units at a lower price the monopsonist becomes better-off. In much the same way, when a large importing country places a tariff on imports, the country's demand for that product on world markets falls, which in turn lowers the world market price. It was shown in Section that an import tariff, set optimally, will raise national welfare due to the positive terms of trade effect. The effects in these two situations are analogous.
We say that the country has monopsony "power" because the country may not be the only importer of the product in international markets, yet because of its large size it has "power" like a pure monopsonist. The next question to ask is whether the optimal tariff, or the optimal export tax, each of which is the very best "trade" policy that can be chosen, will raise national welfare to the greatest extent.
Or, whether there is another, purely domestic, policy that can raise welfare to a larger degree. Because a formal graphical comparison between the first-best and second-best policies is difficult to construct in this case, we will rely on an intuitive answer based on what has been learned so far. It is argued in Section that the first best policy will always be that policy that attacks the market imperfection or market distortion most directly.
In the large country case it is said that the market imperfection is a country's monopsony or monopoly power.
Tariffs: Tariff and Tax in International Trade
This power is exercised in "international" markets, however. Since benefits accrue to a country by changing the international terms of trade in a favorable direction, it is through trade that the monopsony or monopoly power can "best" be exercised. This observation clearly indicates that trade policies will be the first-best policy options. When a country is a large importing country, an optimal tariff or import quota will be first-best. When a country is a large exporting country, an optimal export tax or VER will be first-best.
Now of course, this does not mean that a purely domestic policy cannot raise national welfare when a country is "large.
Trade: Chapter Monopoly/Monopsony Power in Trade
To see that this is true, let's consider a large importing country initially in free trade. Because it is in free trade, there is a market imperfection present that has not been taken advantage of. Suppose this country's government implements a production subsidy provided to the domestic import competing firm.
We can work out the effects of this production subsidy in the adjoining figure. The free trade price is given by P FT. The domestic supply in free trade is S 1 and domestic demand is D 1 which determines imports in free trade as D 1 - S 1 the red line. When a specific production subsidy is imposed the producer's price rises, at first by the value of the subsidy.
The consumer's price is initially unaffected. This increase in the producer's price induces the producer to increase its supply to the market. The supply rises along the supply curve and imports begin to fall.
Trade 100-6
However, because the country is a large importer, the decrease in imports represents a decrease in the world demand for the product. As a result, the world price of the good falls, which in turn means that the price paid by consumers in the import market also falls. Note that the production subsidy causes an increase in supply from S 1 to S 2 , and an increase in demand from D 1 to D 2. Because both supply and demand rises, the effect of the subsidy on imports is, in general, ambiguous. The welfare effects of the production subsidy are shown in the Table below.
The state-controlled pricing policies of international cartels such as the Organization of Petroleum Exporting Countries have some of the characteristics of export duties. Export duties may act as a form of protection to domestic industries. As examples, Norwegian and Swedish duties on exports of forest products were levied chiefly to encourage milling, woodworking, and paper manufacturing at home. Similarly, duties on the export from India of untanned hides after World War I were levied to stimulate the Indian tanning industry.
In a number of cases, however, duties levied on exports from colonies were designed to protect the industries of the mother country and not those of the colony. But if the country produces a significant fraction of the world output and if domestic supply is sensitive to lower net prices, then output will fall and world prices may rise and as a consequence not only domestic producers but also foreign consumers will bear the export tax.
How far a country can employ export duties to exploit its monopoly position in supplying certain raw materials depends upon the success other countries have in discovering substitutes or new sources of supply. Import duties are the most important and most common types of custom duties. As noted above, they may be levied either for revenue or protection or both, but tariffs are not a satisfactory means of raising revenue, because they encourage uneconomic domestic production of the dutied item. Even if imports constitute the bulk of the available revenue base, it is better to tax all consumption, rather than only consumption of imports, in order to avoid uneconomical protection.
Import duties are no longer an important source of revenues in developed countries. In the United States, for example, revenues from import duties in amounted to twice the total of government expenditures, while in they were less than one-third of such expenditures. Until near the end of the 19th century the customs receipts of the U. This share had fallen to about 6 percent of all receipts before the outbreak of World War II and it has since further decreased. A tariff may be either specific, ad valorem, or compound i. An ad valorem duty, on the other hand, is calculated as a percentage of the value of the import.
Ad valorem rates furnish a constant degree of protection at all levels of price if prices change at the same rate at home and abroad , while the real burden of specific rates varies inversely with changes in the prices of the imports. A specific duty, however, penalizes more severely the lower grades of an imported commodity. This difficulty can be partly avoided by an elaborate and detailed classification of imports on the basis of the stage of finishing, but such a procedure makes for extremely long and complicated tariff schedules.
Specific duties are easier to administer than ad valorem rates, for the latter often raise difficult administrative issues with respect to the valuation of imported articles. A list of all import duties is usually known as a tariff schedule. A single tariff schedule, such as that of the United States, applies to all imports regardless of the country of origin. This is to say that a single duty is listed in the column opposite the enumerated commodities. A double-columned or multi-columned tariff schedule provides for different rates according to the country of origin, lower rates being granted to commodities coming from countries with which tariff agreements have been negotiated.
Every country has a free list that includes articles admitted without duty.
By looking at the free list and the value of the goods imported into the United States under it one might be led to conclude that tariff protection is very limited, for more than half of all imports are exempt from duties. Such a conclusion, however, is not correct, for it ignores the fact that the higher the tariff, the less will be the quantity of dutiable imports.
Attempts to measure the height of a tariff wall and make international comparisons of the degree of protection, based upon the ratio of tariff receipts to the total value of imports, are beset by difficulties and have little meaning. A better method of measuring the height of a tariff wall is to convert all duties into ad valorem figures and then estimate the weighted-average rate.
- deadkidsongs;
- Barbies Frolics 18 And Bi Curious In 1971.
- Reference:.
- Tariff reduction and the growth of international trade.
- A Modern Idyll.
- In Constant Prayer (Ancient Practices);
- Monopoly/Monopsony Power in Trade.
The weight should reflect the relative importance of the different imports; a tariff on foodstuffs, for example, may be far more important than a tariff on luxuries consumed by a small group of people. A more appropriate measure of protection is that of effective protection. It recognizes that the protection afforded a particular domestic industry depends on the treatment of its productive inputs, as well as its outputs. Suppose, for example, that half of the inputs to an industry are imported and subject to a duty of percent.