KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 1

International EconomicsPart 4

Dr. Stefan KoothsBiTS Berlin

(winter term 2013/2014)www.kooths.de/bits-ie

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 2

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 3

Goals of protectionism

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 4

Mercantilism

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 5

Tariffs vs. nontariff barriers to trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 6

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 7

Tariff as a tax on imports

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 8

Types of custom duties

Specific tariff Ad valorem tariff

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 9

Effect on domestic producers

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 10

Effect on domestic consumers

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 11

Government revenues

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 12

Net national effect

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 13

Terms-of-trade effect: Small vs. large countries

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 14

Nationally „optimal“ tariffs

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 15

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 16

Types of nontariff barriers

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 17

Import quotas: Small country analysis

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 18

Allocating import licenses

Fixed favoritism Auction Resource-using procedures

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 19

Import quotas: Large country analysis

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 20

„Voluntary“ export restraints

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 21

Other nontariff barriers

Product standards Domestic content requirements Government procurement

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 22

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 23

Dumping vs. fair market value

„Normal“ value» Comparative (prices charged in domestic market)» Cost-based (selling below average cost)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 24

Types of dumping

Predatory Cyclical Seasonal Persistent (price discrimination)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 25

Small exporting country analysis

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 26

Large exporting country analysis

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 27

Retaliation

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 28

Strategic trade policy: Boing vs. Airbus (1/2)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 29

Strategic trade policy: Boeing vs. Airbus (2/2)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 30

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade

policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 31

Stages of economic integration

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 32

Regional economic integration

Source: http://en.wikipedia.org/wiki/File:Economic_integration_stages_(World).png

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 33

Trade creation and trade diversion

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 34

Other effects of economic integration

Increase in competition (reducing monopoly power)» Lower prices (static efficiency)» Higher productivity/lower cost of production (dynamic efficiency)

Lower cost by expanding scales of production More opportunities for business investments (FDI)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 35

Case study: The European Union

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 36

Trade embargoes

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International trade disputes

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 38

GATT and WTO

GATT (1947)» General Agreement on Tariffs and Trade

WTO (1994)» World Trade Organization» www.wto.org

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 39

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism

Protectionism: Goals and instruments Tariffs Nontariff-barriers to trade Export subsidies (dumping) Economic integration and multilateral trade policy Free trade: Pros and cons

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 40

First best vs. second best

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 41

Costs of protection

Loss of welfare (deadweight losses) Foreign retaliation Enforcement costs Renk-seeking costs Rents to foreign producers (VERs) Dynamic inefficiencies (loss of dynamic efficiency)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 42

Externalities

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 4 43

Promoting domestic production or employment

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The infant industry/dying industry arguments

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Public revenues

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Noneconomic objectives

„National pride“ National defense Domestic income redistribution