International Economics Study Set 9

Business

Quiz 10 :
Pushing Exports

Quiz 10 :
Pushing Exports

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You have been asked to propose a specific revision of U.S. antidumping policy, to make the policy more likely to contribute to U.S. well-being. What will you propose
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The objectives of the revision should be make antidumping policy contribute to U. S. national well-being. The policy should be targeted toward predatory dumping and aggressive cyclical dumping. It should take into account domestic consumer interests as well as domestic producer interests. It generally should not impose antidumping duties on persistent dumping that involves international price discrimination in favor of U.S. buyers. The specific provisions could include the following. First, the definition of dumping should be changed. Dumping should be defined as pricing an export below the average variable cost (or marginal cost) of production. This change will permit the definition of dumping to be focused on overly aggressive pricing that is often characteristic of predatory dumping or aggressive cyclical dumping. Second, the test for injury should include consideration of benefits to domestic consumers from low-priced imports, in addition to harm to domestic producers. The injury test should be a test of effect on net national well-being. Alternatively, a radical change would be to abolish the law and substitute use of safeguard policy. Another radical alternative is to abolish the antidumping law, and instead focus on prosecuting any predatory dumping using U.S. antitrust laws that prohibit monopolization.

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What is a countervailing duty
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A countervailing duty is a tariff imposed to offset the amount by which a foreign government subsidizes its exports to the country imposing the duty.

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Consider the case of an export subsidy for an importing country that has some monop­sony power-that is, the case in which the foreign supply-of-exports curve is upward-sloping. Use a graph like that in Figure 11.4. a. In comparison with free trade, what is the effect of the export subsidy on the inter­national price and the quantity traded b. The importing country now imposes a countervailing duty that returns the market to the initial free-trade quantity traded. In comparison with the market with just the export subsidy, explain why the countervailing duty is good for the world. Explain why the countervailing duty can also increase the well-being of the importing country.
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a.With free trade, price is P0 and the quantity exported and imported is M0. The export subsidy "artificially" shifts the export supply curve down to S X . (The original S X curve still shows the resource cost of exports, but the foreign exporters are willing to sell at the lower market prices shown by S X because the foreign government also pays them the export subsidy.) The international market price falls to p1 and the quantity traded increases to M 1.
img b.The countervailing duty returns the market to P0 and M0. This is good for the world, because the marginal resource cost of the last unit exported (shown by the height of S X at M0 ) just equals the marginal benefit of that unit to the buyer (shown by the height of D M at M0 ). We return to the economic efficiency of the free-trade outcome. The export subsidy alone caused a global economic inefficiency equal to triangle ABC, the inefficiency of too much exporting. In comparison with just the export subsidy, the countervailing duty can increase the well-being of the importing country, in the same way that a tariff can increase the well-being of a large country. By imposing the countervailing duty, the importing country loses triangle ACF and gains rectangle p1 FEP S. The importing country gains if the rectangle is larger than the triangle.

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Consider the export subsidy shown in Figure 11.3. Assuming that the export subsidy remains $20, what are the effects of a decline in the world price from $100 to $90 Show the effects using a graph and explain them. img FIGURE 11.7 A Two-Firm Rivalry Game with No Government Subsidies: Airbus versus Boeing
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You have been hired to discredit the argument you just presented in answering question 9. Present a strong case against getting the government into the export-pushing business.
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