Assignment 4

International Trade
Muhammad Mussa 14436

Q1

For a large country the optimal tariff rate will be where marginal efficiency loss caused by
production and consumption distortions will be equal to the marginal gain from the country’s
improved terms of trade whereas the optimal tariff rate for a small country is zero. Large countries
can afford to impose small tariff as they can affect international prices of that product due to their
huge market size. When large country imposes a small tariff, it causes decrease in the price of
imports causing increase in its national welfare. At the other end, small country cannot impact world
prices due to imposing a tariff and hence it ends up with decreasing its national welfare if it imposes
even a small tariff.

Q2

The median voter theorem endorses the theory that in a scenario where there are two political
parties, and both want to win the elections, parties use tariff policies to score votes and win
elections. Agriculture producers may gain affirmation because a little change in esteem impacts
them out and out instead of the consumers whose effect is subtle. Considering a 34 rupee change
in cost of sugar. Agriculture producers convey million tons of sugar yearly and a Rupees 4 change
will assemble their salary and advantages fundamentally. In any case, a Rupees 4 change on sugar
costs will have no impact on solitary client and as needs be they would not limit or shape an
aggregate activity.

Q3
A. Domestic Price: 30
Calculations,
In Autarky:
Since, D = S
Therefore, 10 + 10P = 610 – 10P
P = 30 Q = 310 units
In Free Trade:
WP = 5 S: 10 + 10*5 = 60 D: 610 – 10*5 = 560 Qm = 500 units

B. Since a small country,

Tariff Rate = Import Price – Free Trade Price
Pm = 15 S: 10 + 10*15 = 160 D: 610 – 10*15 = 460 Qm = 300 units

C. Now the world price increases to 45 per unit.

Px = 55 S: 10 + 10*55 = 560 D: 610 – 10*55 = 60 Qx = 500 units
D.The following table presents the case for the small country
Import Tariff Export Subsidy
Consumer Surplus Negative Negative
Producer Surplus Positive Positive
Government Revenue Positive Negative
Net Effect Deadweight Loss Deadweight Loss

The following table presents the case for the large country
Import Tariff Export Subsidy
Consumer Surplus Negative Negative
Producer Surplus Positive Positive
Government Revenue Positive Negative
Net Effect Ambiguous* Deadweight Loss

* If tariff rate is low, there is net welfare gain otherwise a deadweight loss.

Since the discussed example is for small country, follow the first table.

Q4
Suppose China provides significant export subsidies to select industries. As an importer in
another country belonging to one of the industries affected by such trade policy, would you
consider such subsidies to be beneficial or harmful to your profits. Discuss. Further, suppose
subsidies were replaced with import tariffs. How would your opinion change?

Export Subsidy by a Large Country:

Importing Country Consumers - Consumers of the product in the importing country
experience an increase in well-being because of the export subsidy. The decrease in the
price of imported goods and the domestic substitutes increases the amount of consumer
surplus.
Importing Country Producers - Producers in the importing country suffer a decrease in well-
being because of the export subsidy. The decrease in the price of their product on the
domestic market reduces producer surplus in the industry. The price decrease also induces a
decrease in output of existing firms, a decrease in employment, and a decrease in profit
and/or payments to fixed costs.
Importing Country Government - There is no effect on the importing country government
revenue because of the exporter's subsidy.

Tariff by a Large Country:

Exporting Country Consumers - Consumers of the product in the exporting country
experience an increase in well-being because of the tariff. The decrease in their domestic
price raises the amount of consumer surplus in the market.
Exporting Country Producers - Producers in the exporting country experience a decrease in
well-being because of the tariff. The decrease in the price of their product in their own
market decreases producer surplus in the industry. The price decline also induces a
decrease in output, a decrease in employment, and a decrease in profit and/or payments to
fixed costs. Refer to the Table and Figure to see how the magnitude of the change in
producer surplus is represented.
Exporting Country Government - There is no effect on the exporting country government
revenue because of the importer's tariff.

Therefore, an export subsidy or tariff by a large country will be harmful to the exporter in
another country.

Q5

Considering the benefits and costs of both the policies the most recommended policy would be of
free trade if both the countries avoid from triggering a war. Although for US is gaining less from free
trade than protection. The gain is just $150bn while it is $350bn more when it opts for protection.
But going for a protective policy might result in war breaking out which would lead to a $450bn loss.
Both the countries know the possible consequences if they opt for a protective policy for their
industries. This scenario is almost like the prisoner’s dilemma in the case if one of them goes for a
protection policy. The best solution to solve this dilemma would be to collude or reach agreement
amongst themselves and agree on free trade rather than triggering a war and resulting in a loss for
both countries.

Q6
Infant firms fail to grow because of failures in financial markets. These financial failures leave infant
firms with very little money to invest in further production process and business growth. To counter
this negative effect of these failures, tariffs are imposed to inflate profits for such industries as it
provides them a chance to improve efficiency and gain a competitive advantage.
Various reasons such as lack of information access, property rights and benefits to new industries for
providing public goods act as a barrier in growth of infant industries.
Until the 1970s, from World War II, numerous creating nations endeavored to quicken their
improvement by restricting imports of fabricated merchandise, keeping in mind the end
goal to cultivate an assembling division serving the local market. As indicated by the S
newborn child industry contention, creating nations have a potential similar preferred
standpoint in assembling, however new assembling enterprises in creating nations can't
contend with the assembling ventures in created countries. Import-substituting
industrialization is the procedure of empowering residential industry by restricting imports
of made products. This procedure delivered blended outcomes. In a few nations like Latin
America it worked, while in others it fizzled.
I don't support import-substituting industrialization because the infant industry contention
isn't as generally substantial the same number of individuals had accepted. A time of
protection won't make a focused assembling segment if there are key reasons why a nation
does not have a near favorable position in assembling. Experience has demonstrated that
the purposes behind inability to grow regularly run further than a straightforward absence
of involvement with assembling. Poor nations need gifted work, business people,
administrative skill and social association that make Sit troublesome for these nations to
keep up solid supplies of everything. These issues can't be tackled S utilizing exchange
strategy. Also, the protectionist arrangements of some less-created nations seriously
mutilated motivators and tariff rates were as high as at least 200% in a few nations. This
likewise advanced generation at a wastefully small scale.

Q7
a. Infant industry 3 protection would be supported if the automobile 3 business does not have
monetary establishments that would enable reserve funds to be utilized to back venture or that it
produces social advantages for which the business isn't adjusted. Besides, the industry should
demonstrate that, when ensured, it is making up for lost time with cutting edge nations.

b. If one firm has borne the expenses of learning and isn't protected, at that point other global firms
can exploit this data and create without bringing about the underlying expenses of learning. This will
make the domestic business again lag 3 behind in its advancement. In this way, with a specific end
goal to ensure the local business and prevent global firms from taking undue preferred 3
standpoints, the infant ought to be protected.
Q8

TREND ANALYSIS:
The Average 3 MFN Tariff applied by the US in 2015 is 4.38% which has gone up to14.26% in 2016.
Now notice that Pakistan is an exporter of nonmetallic minerals and some protectionist policies
might have pulled up this tariff drastically towards 3 the end of 2016/beginning of 2017. The AHS
tariff did not face such a hefty increase going from 1.1 to 1.43.
The MFN tariffs imposed by Pakistan on India have followed a downward trend. It has gone from
20.91% to 15.36% from 2014 to 2016. The AHS tariff has also 3 followed a very similar trend.
The MFN and AHS tariffs with China have majorly remained unchanged over time with a
very slight downward movement. Pakistan doesn’t import a lot of nonmetallic minerals
since it has got access to such minerals itself; hence, the tariffs don’t mean a lot.

Q9
Pros of Tariffs:
Most business analysts concur that facilitated commerce is the most ideal approach to
boost a nation's development potential, however chose authorities may have different
objectives as a top priority. Tariffs shield businesses from remote rivalry, which can meet
vital objectives or political targets. Whether its local needs or remote approach objectives,
exchange protectionism can be enticing for policymakers.
Tariffs can shield infant commercial ventures from worldwide rivalry, permitting them to
develop without the risk of being snuffed out by more develop or progressed remote
organizations. They can likewise be utilized to ensure zones that nations consider to be
deliberately critical. For instance, a nation may limit farming imports to support its own
ranchers, not having any desire to place itself in a powerless position where it needs to
import all its sustenance. Steel assembling and substantial industry additionally can be the
recipients of tariffs, as pioneers hope to keep their capacities primed and ready if there
should arise an occurrence of vital need.
At the point when the US government decides to place a levy on a foreign decent, the
maker can decide to lessen their cost to make up for the tariff or to go on the expense to
the buyer. At the point when makers decide to go on the expense to American customers by
expanding their value, it advances American items. If American organizations are creating a
comparable item at a comparative value point, the outside item turns out to be more
extravagant. Thusly, customers decide on the less costly alternative and buy the American
item, giving American organizations an unmistakable point of preference.
At the point when commercial enterprises are secured, the occupations that accompany
them additionally are ensured. While financial analysts contend that this keeps laborers
from taking occupations that are more advantageous to themselves and the nation,
concentrating work and capital in wasteful commercial enterprises, which is little solace to
specialists in an auto organization that goes under claiming it can't rival lower-cost remote
adversaries. Ensuring occupations can be much to a greater degree an objective for state
and nearby governments that face losing their assessment base when a major manager
shuts its entryways.
Infrequently, tariffs can advantage an economy by guaranteeing its organizations have a
notwithstanding playing field. Case in point, a few tariffs are executed as a component of
against dumping laws, as a response when an organization based abroad offers items
beneath its expenses or underneath what it offers them for short of what it does at home,
with an end goal to take out opponents and construct its position in the business sector so
as to charge higher costs later. Others are intended to ensure when the opposition isn't
square with. In the event that one nation finances its vehicle industry, and another does
not, a duty can keep that error from unjustifiably affecting a household industry.
Authorities can likewise utilize tariffs and quantities to meet outside strategy targets,
whether they're being utilized as a carrot or a stick. Exchange authorizes regularly are
utilized as a stage shy of equipped clash as an endeavor to stop undesirable conduct from
different nations. In the event that a nation relies on upon grain sends out or outside
automobile deals as a key driver of its economy, the risk of tariff or assents can be an in-
number prevention. Likewise, uprooting existing exchange hindrances can help cover up a
precarious transaction with outside pioneers.

Cons of Tariff:
A standout amongst the most talked about issues in worldwide exchange is protectionism.
On one hand, countries accept a certain sum is important to protect employments and
domestic businesses. On the other, protectionism may welcome countering from
exchanging accomplices, foster extra protectionism and result in squares to unhindered
commerce. Two generally utilized protectionist devices are tariffs and portions.
Tariffs raise the cost of imports. This effects customers in the nation applying the tariff as
costlier imports. At the point when exchanging accomplices strike back with their own tariff,
it raises the expense of working together for sending out commercial enterprises. Some
examiner accept that tariffs cause a reduction in item quality. Organizations search for
approaches to slice generation expenses to record for tariffs. Tariffs are more
straightforward and less demanding to regulate than standards. This makes it less
demanding for exchanging accomplices to bring them down or dispense with them.
Tariffs may make nearby commercial enterprises less productive because of diminished
worldwide rivalry. They might likewise prompt exchange wars as trading nations counter
with their own tariffs on imported items. At the point when exchanging partners respond
with their own tariffs, it raises the expense of working together for exporters. This
circumstance might likewise trade off the nature of merchandise and administrations as
businesses search for approaches to cut generation costs.
A duty alludes to an assessment forced on items and administrations. Tariffs are utilized to
control exchange, claiming they expand the cost of imported items, making them more
extravagant to the end buyers. An expense is forced as a settled toll considering the item.
Furthermore, a commercial valorem tariff is forced considering item's quality.
The target behind tariffs is to reduction interest for imports while expanding interest for
household items. Governments might likewise force tariffs to shield nearby commercial
enterprises from outside rivalry, claiming buyers generally pick imported items or
administrations when they are less expensive. Tariff give extra wellsprings of pay to the
forcing nation to the detriment of customers and remote makers.
Singular purchaser decision stays as one of the best shopper advantages to worldwide
exchange. At the point when tariffs are put on imported merchandise, the expanded costs
and lessened exchange preclude people from all decisions that could be accessible in the
business sector. If American organizations don't deliver an item like the foreign made great,
customers may be ransacked of the chance to buy an item out and out claiming they pushed
a remote item out of the business with a levy.

Q10

No data available on US-Pak tariffs for Mineral Industry in 2015 and 2016.

The average tariff rates imposed by Pakistan on imports from India and China for the
Mineral Industry are as follows:
2015 2016
China
AHS 5 5.3
MFN 9.31 9.15
PRF 3.22 3.35

India
AHS 4.13 6.08
MFN - 10.04
PRF - 4.51

We see that Pakistan have increased the Affectively Applied Tariff Rates (AHS) on China
from 5% to 5.3% which is a 6% increase. The Preferences Tariffs (PRF) are also increased
from 3.22% to 3.35% which is 4.01% rise. However, the Most Favored Nation (MFN) tariffs
are reduced by 1.7%.
For India we see that AHS are increased by 47.2% from 4.13% to 6.08% which is a big rise.
Also, Pakistan is charging AHS, MFN, PRF to India 21.6%, 11.9% and 34.6% higher to India
than China in 2015 respectively. This suggests that Pakistan is more restrictive on India than
China possibly due to historical frictions.