Quiz 2 ppts.pdf

WTO negotiation in progress, Geneva Module 2 Trade Policy  Benefits of Free Trade Trade enhances competition in the market and enforces efficiency Consumers benefit due to reduced prices and wider variety Consumption possibilities increase. BUT, there are costs of trade too:...

WTO negotiation in progress, Geneva Module 2 Trade Policy  Benefits of Free Trade Trade enhances competition in the market and enforces efficiency Consumers benefit due to reduced prices and wider variety Consumption possibilities increase. BUT, there are costs of trade too: - Import competing firms are worse off with trade, businesses shut down, temporary unemployment created.  How does WTO enforce freer trade? Enforcing increase in Market Access for exporters Phasing out Import Tariffs Ban on quota Trade distorting subsidies to phase out Underlying principles Enforcing countries to treat all suppliers equally - MFN Govt.s to encourage laws prohibiting anticompetitive behaviour (explained in next 2 slides) Enhancing Transparency in trade policy administration special and differential treatments for LDCs At each Member nation’s own pace – specific commitments Anti-competitive behaviour – case 1 Microsoft tying internet explorer United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001) is a noted American antitrust law case in which the U.S. government accused Microsoft of illegally maintaining its monopoly position in the personal computer (PC) market primarily through the legal and technical restrictions it put on the abilities of PC manufacturers (OEMs) and users to uninstall Internet Explorer and use other programs such as Netscape and Java. At trial, the district court ruled that Microsoft's actions constituted unlawful monopolization under Section 2 of the Sherman Antitrust Act of 1890, and the U.S. Court of Appeals for the D.C. Circuit affirmed most of the district court's judgments. Anti-competitive behaviour – case 2 The Amazon case of information sharing with companies that are in JV with Amazon On amazon platform, there are 3 types of sellers. 1. Amazon itself 2. Sellers that have JV with Amazon 3. Third party sellers Amazon’s algorithm is such that the JV companies' products apart from amazon’s own products appear top of the list. This is because Amazon shares demand information with the JV companies. This helps the JV companies keep the right amount of stock and deliver in time. The good quality of service helps them to appear top of the list. Indian third-party sellers filed a lawsuit against Amazon for anticompetitive practice under The Competition Commission of India. Result – Amazon was ordered not to have JV with companies beyond a certain percentage. Trade policies: Tariff Quota Export subsidies and countervailing duties VERs Dumping and antidumping policies  Tariff In a competitive market Taxes imposed on imports Payable by foreign suppliers selling in domestic markets to importing country government Unit tariffs: A fixed amount to be paid on each unit of sales Pt = Po + $t Percentage tariff: A fixed percentage of the price of the imported product to be paid Pt = Po (1+ t%) Reasons for imposing a tariff: Discourage consumption. (petroleum / non-renewable energy or resource) Revenue for the government To protect a domestic industry from foreign competition Reduce Balance of payment deficits a) by reducing import, and b) receipt of foreign currency in the form of tax revenue  When the home is a small market S(H) P P P At any price, home supply + exporters supply = world supply S(Ex) S(W) q q World supply q Home supply Exporter’s supply A small importing country is one that faces an infinitely large foreign supply.  When the home is not a small market S(H) S(Ex) P P P S(W) = A+B A B At any price, home supply + exporters supply = world supply q q World supply q Home supply Exporter’s supply A large importing country is one that faces a finite foreign supply.  Home Country’s market before trade S(H) P Before trade : market cleared at P=PH PH D(H) qH Q  Home Country’s (large )market: Free trade S(H) P Free trade price = Pw Import quantity= q2-q1 PH S(H+Ex) Pw D(H) q1 q2 Q  Home Country’s (Large) market: with tariff S(H) P Post tariff price = PT Import quantity = q4-q3 PH Gain of production in domestic industry = q3 - q1 PT t Current account Pw t improves as import PT- t bill reduces D(H) q1 q3 q4 q2 Q  Home Country’s market: with tariff S(H) P Burden of tariff on the importing country consumer = rising price from 50 to 70 100 PH 80 Burden of tariff on the foreign exporter = 70 PT falling receipt from 50 t 30 to 40 50 Pw t 40 PT- t The burden of tariff depends on the slope of S(H+Ex) D(H) and S(H+Ex) +t q1 q3 q4 q2 Q  Home Country’s market: closed S(H) P Free trade price = PH Import quantity = 0 Domestic industry’s production = QH PH Consumers’ surplus = Producers’ surplus = Pw D(H) QH Q  Home Country’s market: free trade S(H) P Free trade price = Pw Import quantity –= q2-q1 Loss of production in domestic industry = QH-q1 PH Consumers’ surplus = Producers’ surplus = Pw D(H) q1 QH q2 Q  Home Country’s market: with tariff S(H) P Price with tariff = PT Import quantity –= q4-q3 Increase in production in PH domestic industry due to tariff = q1 q3 PT Consumers’ surplus = Pw Producers’ surplus = PT- t D(H) q1 q3 q4 q2 Q  Home Country’s market: with tariff S(H) P Post tariff price = PT Import quantity –= q4-q3 Gain of production in domestic industry = q3 - q1 PH Consumers’ surplus = PT Producers’ surplus = Pw Government revenue = PT- t D(H) q1 q3 q4 q2 Q  Home Country’s market: is tariff gainful? S(H) P Welfare under free trade= WF (a + b + c + d + e + f + g) + (h+ j) a Welfare under tariff = WT PH (a + b + c) + (d + h + j) + (f + k) b c Welfare gains from tariff PT = WT – WF d f = k – (e + g) Pw e g h k PT- t j D(H) q1 q3 q4 q2 Q  Finding an OPTIMUM tariff rate S(H) P Optimum tariff: the rate that maximises welfare gains from tariff a PH Welfare gains from tariff b c = WT – WF = k – (e + g) PT d f Pw e g h k PT- t j D(H) q1 q3 q4 q2 Q Exercise The domestic market for the importable is small relative to the world supply. The foreign supplier(s) has an infinitely elastic supply. What is the optimal level of tariff?  Tariff : the small country case S(H) P Welfare under free trade= WF (a + b + c + d + e + f + g) + (h+ j) a Welfare under tariff = WT PH (a + b + c) + (d + h + j) + (f ) b c S(H+Ex) + t Welfare gains from tariff Pw+ t = WT – WF d f = – (e + g) < 0 Pw e g t S(H+Ex) h k D(H) q1 q3 q4 q2 Q  Tariff : the small country case S(H) P Burden of tariff on the importing country a consumer = 100 PH rising price from b c S(H+Ex) + t 50 to 80 80 Pw+ t No burden of d f 30 tariff on the e g t 50 Pw S(H+Ex) foreign exporter. h k D(H) q1 q3 q4 q2 Q India and its import tariffs Average tariff rates in India > tariff in other developing countries time Vietnam, Brazil, Mexico In the last 11 years, India’s trade weighted average tariff grew by 48% While global trade weighted average tariff fell by 8% On what do we impose most of the tariffs? Nonessential goods Intermediate and capital goods like electrical machinery 10.7% non-electrical machinery 8.2% Transport equipment 29.1% Tariff reduction on Apples from USA USA 2018 : Imposed tariff on India’s Steel products (25%) and Aluminium products (10%) India 2019 : retaliatory tariff on USA’s Apples and some other agricultural products. Who are the likely winners and losers from this tariff on apples? June 2023: USA and India agreed to terminate 6 outstanding disputes under the WTO. September 2023: In response, India reduced tariffs by 20% on imports of Apples and 5 other agro products. The MFN rate remained at 50%, though. J&K People’s Democratic Party and Congress slammed this government action. Who benefits from this tariff reduction? Why would anyone oppose the action? Who are the buyers of apples in India? - the household (in smaller proportions) - the corporates (Adani Agri Fresh, CONCOR, Reliance Fresh, Mother Dairy and Big Basket)  Reading Chapter 9 pages 234-246 from the textbook https://economictimes.indiatimes.com/small-biz/trade/exports/insights/india-should-reconsider- import-duty-on-capital-and-intermediate- goods/articleshow/101860635.cms?utm_source=contentofinterest&utm_medium=text&utm_ca mpaign=cppst https://www.livemint.com/news/india/why-centre-s-decision-to-reduce-tariffs-on-american- apples-is-creating-controversy-explained-11694514552079.html Trade War – a game theoretic explanation Assumptions PLAYERS - Two nations – China and USA China is a LARGE importer of machinery, electronics and aircrafts from USA USA is a LARGE importer of solar panels, steel and aluminum from China Nations want to maximize welfare How does the game work? Case 1 – When free trade is welfare maximising. STRATEGIES – Each country has two policies to choose from : FT - free trade (imposing no tariff on imports) OT - optimal tariff (imposing optimal tariff on imports of goods as a large country) Note that both the strategies are for the import market. Each country (player) chooses the best response to the other country’s choice PAYOFFS When China chooses FT, welfare for USA’s exporters = 50…. And vice versa When China chooses FT, welfare for China’s importers = 50. ….. Same goes for USA When China chooses OT, welfare to China’s import market = 50 + 20 = 70…… Same for USA. When China chooses OT, welfare to USA’s exporters = 50 – 30 = 20…. And vice versa. Here the gain to the importing market due to OT = 20 < loss to the exporting market due to opponent’s OT = 30  China FT OT 50 in X + 50 in M 50 in X + 70 in M Here the gain to FT the importing market due to OT = 50 in X + 50 in M 20 in X + 50 in M 20 < loss to the exporting market USA due to opponent’s 20 in X + 50 in M 20 in X + 70 in M OT = 30 OT 50 in X + 70 in M 20 in X + 70 in M  When USA chooses FT, China chooses OT China When USA chooses OT, FT OT China chooses OT So, China chooses OT anyways. OT is China’s dominant strategy. 100 120 FT If China chooses OT, USA chooses OT. 100 70 So, (OT, OT) is the Nash Equilibrium. That is trade war. USA Notice (FT, FT) would have been a BETTER choice for both countries. This is because, 70 90 the gain to the importing market due to OT OT = 20 < loss to the exporting market due to opponent’s OT = 30 But that is not an outcome of the game. 120 90 The (FT, FT) outcome can be arrived at by an agreement like the WTO. How does the game work? Case 2 – When free trade is not welfare maximising. STRATEGIES – Each country has two policies to choose from : FT - free trade (imposing no tariff on imports) OT - optimal tariff (imposing optimal tariff on imports of goods as a large country) Note that both the strategies are for the import market. Each country (player) chooses the best response to the other country’s choice PAYOFFS When one country China chooses FT, welfare for USA’s exporters = 50…. And vice versa When China chooses FT, welfare for its importers = 50. ….. Same goes for USA When China chooses OT, welfare to its import market = 50 + 30 = 80…… Same for USA. When China chooses OT, welfare to USA’s exporters = 50 – 20 = 30…. And vice versa. Here the gain to the importing market due to OT = 30 > loss to the exporting market due to opponent’s OT = 20  China FT OT 50 in X + 50 in M 50 in X + 80 in M FT Here the gain to the importing market 50 in X + 50 in M 30 in X + 50 in M due to OT = 30 > loss to the USA exporting market 30 in X + 50 in M 30 in X + 80 in M due to opponent’s OT = 20 OT 50 in X + 80 in M 30 in X + 80 in M  When USA chooses FT, China chooses OT China When USA chooses OT, FT OT China chooses OT So, China chooses OT anyways. 100 130 OT is China’s dominant strategy. FT If China chooses OT, USA chooses OT. 100 80 So, (OT, OT) is the Nash Equilibrium. That is trade war. USA Notice that here (OT, OT) is the best choice for both countries. (OT, OT) is the Nash 80 110 Equilibrium of the game too. OT This is because Here the gain to the importing market due to OT = 30 > loss to 130 110 the exporting market due to opponent’s OT = 20 Conclusion Trade war (OT, OT) is a natural outcome whether universal free trade (FT,FT) is welfare maximising or not. A universal free trade policy (FT, FT) can be achieved only with an agreement like the WTO. Free trade may not be welfare maximising If there are externalities, incomplete information or non-competitive markets. Exercise The domestic automobile industry uses imported auto parts. Which of the following case effectively provides strongest protection to the automobile assembling industry? a) A 10% tariff on imported automobiles coupled with a 15% tariff on the imported auto parts b) A 5% tariff on imported automobiles coupled with a subsidy to the domestic auto parts industry c) A 20% tariff on imported automobiles coupled with a 25% tariff on the imported auto parts Effective rate of protection ERP = [V(T) – V(FT)] / V(FT) V(T) = value added with the protectionist trade policy V(FT) = value added under free trade V(FT) = P – a.P where a = value of imported inputs as a share of the final goods price P = price of he final good V(T) = P.(1+tf) – P.a.(1+ti) where tf = nominal tariff rate on imported final good ti = nominal tariff rate on imported input 𝒕𝒇 −𝒂.𝒕𝒊 ERP = [V(T) – V(FT)] / V(FT) = 𝟏 −𝒂 Effective rate of protection Say price of a car under free trade is Rs.10 Lacs. The price of all auto parts before assembling them into a car is Rs. 4 Lacs. Find the value added for the car assembling activity under free trade. That is V(FT). Say a tariff of 20% has been imposed on imported cars of the same variety. There is also a tariff of 40% on the auto parts. Find the value added for the assembling activity under this new tariff system. That is V(T). What is the Effective Rate of Protection for auto assembling? 6% How does the ERP for auto assembling change if the auto parts sector gets a 10% tariff protection? 26% The ERP > or = tf (ie.,nominal rate of protection) if tf > or = ti Effective rate of protection and tariff escalation tariff ERP Apparel 27% 50% Textiles 14% 28% Cotton yarns 6% 9% Tariffs often rise with the level of processing in many industrial economies. This is especially true for agricultural processed goods sectors. How should this affect an exporting country that has a cost advantage in primary goods production? What if the exporting country’s suppliers wish to diversify into processed goods too? WTO and tariffs Bound Tariff Rates should be gradually phased out at a rate mutually agreed upon by Members. Special and differential treatment - The pace of phasing out can be slower for developing countries. Least developed countries can keep tariffs or phase out at an even slower pace. MFN clause - If applied, tariffs should be equal on all export suppliers. Countries in a regional or preferential agreement may enjoy lower tariff levels from partners in such agreements. A new tariff may be imposed or raised to a higher rate As antidumping duty in response to an unfair trade practice like Dumping As countervailing duties In response to the use of export subsidies To safeguard domestic industry, when imports threaten to cause serious injury to domestic producers WTO negotiations, bound tariff rates and deceptive liberalization Bound tariff rate: the committed specified rate beyond which the Member shall not raise applied tariffs. When Member countries at WTO negotiate to reduce tariffs, the rate under negotiation is BOUND tariff rates, and not applied tariff rates. This allows Member countries to raise tariffs. Bound rate 30% ad Applied rate valorem tariff 12% ad valorem tariff Negotiated Bound rate Post negotiation 20% ad Applied rate 17% valorem tariff ad valorem tariff  Protecting export market while imposing tariff: the case of outsourcing US instead of imposing a 10% tariff on Components of the value of the entire computer, Apple computer Imposes 10% tariff on value added that is (value of computer – value of USA Taiwan computer parts). Assembled computer A similar system of tariff is applied on import of Dominican cigars made with US tobacco. This tariff system would protect the US firm by reducing its cost through outsourcing. Least affect the export markets Tobacco for component manufacturers. Taiwan / Dom. Rep would try to Dominican USA reduce their value-added part to Republic bring down the tariff payments Dominican cigar Example: When tariff is 10% of (Taiwan’s) Value When tariff is 10% of price added per unit Pf = 100 Pi = 60 Pf = 100 Pi = 60 USA’s VA tariff Pft = 110 T = 10 VA/ unit = 40 T=4 benefits USA’s input Qo = 500 Pft = 104 industry if the Q1 = 600 demand for the final product is elastic. Taiwan’s VA Taiwan’s Total VA = Qo X VA/unit = Q1 X VA/unit = 500 X 40 = 600 X 40 = 20,000 = 24,000 USA gets USA’s tariff revenue = 10% of 24000 = 2400 Tariff revenue = 10% of 500X100 = 5000 Input revenue = 60X600 = 36000 Input revenue = 60X500 = 30000 Total receipt for US = 38400 Total receipt for US = 35000 Reading Slides used in class https://saylordotorg.github.io/text_international-trade-theory-and-policy/s10-09-retaliation- and-trade-wars.html  Quota In a competitive market Quantitative restriction – limit on the quantity of imports Domestic firms that wish to be import dealers are issued import licenses against license fees. License fees are determined through auctions. Each license holders is given a limit on imports of the commodity. Say, the government of the HOME country imposes a quota of 1000 units on imports of vehicles from FOREIGN suppliers.  Quota: impact on home country markets P 1000 D(H) Q  Quota: impact on home country markets S(H) P Price raised to P’ Quantity of import falls to 1000, the quota amount. PH P’ Pw g D(H) 1000 q1 q3 q4 q2 Q  Quota: impact on home country markets (AN ALTERNATIVE S(H) P S(H+quota) REPRESENTATION) This is an alternative representation of the quota. A quota can be represented by the domestic demand splitting between Quota amount and the rest , PH as in the earlier and the next slide. A quota can also be represented by a shift in the supply curve from Home P’ supply S(H) to total supply including quota S(H+Quota), as in this slide. We Pw will follow the representation given in the earlier slide. D(H) Price raised to P’ Quantity of import falls to 1000, the 1000 quota amount. q1 q3 q4 q2 Q  Quota: impact on home country markets S(H) P PH Under free trade Consumers’ Surplus = P’ Producers’ Surplus = Pw D(H) 1000 q1 q2 Q  Quota: impact on home country markets S(H) P Price raised to P’ Quantity of import falls to 1000, the quota amount. PH Consumers’ Surplus = P’ Producers’ Surplus = Pw g D(H) 1000 q1 q2 Q  Quota: impact on home country markets S(H) P Price raised to P’ Quantity of import falls to 1000, the quota amount. PH Consumers’ Surplus = P’ Producers’ Surplus = Pw g Profit of the import license holder = D(H) 1000 q1 q2 Q  Welfare gains/losses from a quota S(H) P Welfare under free trade= WF (a + b + c + d + e + f + g) + (h+ j) a Welfare under quota= WQ PH (a + b + c) + (d + h + j) + (f ) b c Welfare gains from quota P’ = WQ – WF d f = – (e + g) < 0 Pw e g h k PT- t j D(H) 1000 q1 q3 q4 q2 Q  Welfare effect, on the importing country, of a quota and an equivalent tariff is identical if - importing country is small (relative to the exporter’s supply) - the product market is perfectly competitive A tariff and quota equivalence t* = [P’ – Pw] results in import amount [q4 - q3] quota of q* = [q4 - q3] is equivalent to tariff of t* = [P’ – Pw] tariff of t* = [P’ – Pw] is equivalent to quota of q* = [q4 - q3] In presence of competitive market, q* and t* are equivalent in terms of price quantity and welfare. India’s recent experience with Quantitative restrictions on imports 1. Computer hardware 2. Pulses  India’s PC and Laptop market top 10 Computer Hardware companies in India 1.Acer India Pvt. Ltd. 2.Compuage Infocom Ltd. 3.Dell International Services India Pvt. Ltd. 4.HCL Infosystems Ltd. 5.Hewlett-Packard India Sales Pvt. Ltd. 6.Ingram Micro India Pvt. Ltd. 7.Intel Technology India Pvt. Ltd. 35% of the total 8.Intex Technologies India Ltd. consumption is 9.Iris Computers Ltd. 10.Lenovo India Pvt. Ltd. produced locally India’s PC and Laptop imports Share of exporters in India’s PC and Laptop imports Proposed Import Ban / quantitative restrictions on IT hardware products Products - HSN 8741 category Why this policy? Laptops, PCs, Microcomputers , tablets, large mainframe 1. To reduce current account deficit with China computers, certain data processing machines. Policy: 2. Protection to domestic industry and help it grow Import only valid with licenses with effect from 1st Nov 2023. 3. India cannot raise import tariff due to the Korea objected – the policy is inconsistent with WTO Information Technology Agreement 1997, WTO rules 4. To attract FDI in the computer hardware Policy application postponed till September 2024 market In May 2023, GOI introduced a Rs.17K Crores PLI Affected Companies – Dell, HP, Apple, Samsung, Lenovo scheme to attract IT hardware manufacturers to set etc. up operation in India. Not many applications were Affected Countries – China, Korea, Taiwan, Singapore, filed. GOI raised allocation on this scheme and Hong Kong. proposed this import ban.  Proposed Import Ban / quantitative restrictions on IT hardware products How will the policy affect prices of PCs and Laptops? What are the welfare implications? https://www.india-briefing.com/news/india-announces-import-restrictions-on- laptops-tablets-and-pcs- https://www.livemint.com/politics/policy/why-india-wants-to-push- 29164.html/#:~:text=On%20August%203%2C%20via%20Notification,now%20req homemade-laptops-11691496135192.html uire%20a%20valid%20license.  India’s import quota on pulses 2020 Why this policy? A bumper harvest and large-scale imports had pushed the prices down. So, farmers were able to obtain only very low (Non-remunerative) prices. This policy would help increase income for farmers. Who raised concerns at the WTO? Australia, Canada, USA and Russia. A temporary quota to help farmers was acceptable. But why is this continued so long? Product – Pulses (Urad) After 3 years of existence, the restrictions on Policy – A quota on imports for 1 year extended pulses were withdrawn. to 3 years https://economictimes.indiatimes.com/news/economy/for https://www.thehindubusinessline.com/ec eign-trade/indias-2020-21-pulses-import-may-fall-by-50-if- onomy/agri-business/wto-members-raise- government-doesnt-extend-import-quotas-says- queries-yet-againon-indias-pulses-import- ipga/articleshow/74132554.cms?from=mdr restrictions/article29825381.ece Tariff rate quotas (applied to replace quotas and to be replaced by pure tariff) Product Within-quota tariff Quota threshold Over quota tariff Milk 32 Cents per Litre 5.7 million Ltr 180% ad valorem Cheese 10 Cents per Kg 2.6 million kg $2.6 per kg India’s trade policy 2021-25: Products under tariff rate quota Tariff and quota to protect a domestic monopoly Till 2005, Ford Motor’s Laguna plant accounted for almost all Philippine car production. In 2003, the company had announced its intension to make Philippines its principle export platform for Asian market. But the Japanese – Philippines Economic Partnership Agreement surprised the company as it allowed for automobile imports from Japan. As a result VP Mark Schulz decided not to invest ‘another penny’ in Philippines. Philippines govt. refused to derail the agreement. The Japanese govt. had suggested that it might allow Filipino professionals to work in Japan’s auto industry as part of the agreement. How would Ford Motor be affected by the ‘Agreement’? Would Ford (Laguna) have to shrink production? What kind of labour market impact can you expect in Philippines due to this agreement with Japan? As the VP of Ford (Laguna) you would have to accept the liberalised trade environment. If you have the choice to lobby to the government for a tariff or an equivalent quota, which would you prefer?  Domestic monopoly under closed border: P, AC, Profit maximizing condition MC, for a monopolist is MR MC = MR AR MR Pm A MC E Qm Q  Domestic monopoly under free trade: Pm > Pw P, AC, Domestic firm faces MC, competition from foreign MR suppliers. AR MR Market structure changes from A monopoly to competition. Pm MC In competition, profit maximizing condition is P = MC Price falls, consumers benefit at Pw the cost of the monopolist E Domestic production may increase. (Q1) beyond Qm Domestic consumption is Q2 Qm Q1 Q2 Q Import under free trade = Q1Q2  Domestic monopoly with tariff protection: Price with tariff = PT = Pw + t P, AC, Pm > > PT > Pw MC, MR Market structure is competitive AR like the case of free trade. Any MR one can sell in this market at a price of PT. Pm A MC In competitive markets P = MC Domestic production is increased PT to Q3. Pw Domestic consumption = Q4. Import Q3Q4. E Tariff revenue Qm Q1 Q2 Q Q4 Q3  Domestic monopoly under quota: With quota, apart from the quota P, amount, … that is within the rest AC, of the market, MC, the market structure turns back MR to monopoly. AR Therefore profit maximizing condition is MC = MR Pm A MC MR E Qm Q  Domestic monopoly under quota: P, Pm > Pq > > Pw AC, MC, MR AR Pm A MC Pq MR E Qq Qm Q  Domestic monopoly under quota: P, AC, MC, MR Pm > Pq >> PT > Pw AR Pm A MC Pq MR PT Pw E Qq Qm Q  Domestic monopoly: P, AC, MC, MR Pm > Pq >> PT > Pw AR Import = Qd – Qq A (equivalent to import Pm MC under tariff) Pq MR Revenue to import license holder = PT Maximum bid amount Pw earned by the E government = Qq Qm Q Qd  Domestic monopoly: Price Pm > Pq > PT > Pw P, AC, Import quantity under free MC, trade > under tariff = under MR equivalent quota > under closed AR border Domestic monopolist’s Profit Pm A MC under closed border > under Pq quota > under tariff > under free MR trade PT Domestic production under tariff > under free trade >under Pw closed border > under quota E (depends on how low Pw is) Tariff revenue under quota > Qq Qm Q under tariff > under free trade = under closed border Qd In presence of a monopolist at home, which should be the preferred policy? Tariff or Quota? When domestic market is monopolistic, Both tariff and quota raises prices Pm > Pq > PT > Pw Quota protects the monopolistic market structure and ensures the import competing monopolist a much higher price than under free trade Tariff protects the domestic industry by raising a price, but the market structure becomes competitive, only with a little rise in prices. Tariff revenue < possible quota rent Quota is inferior to tariff from the consumers’ point of view since the price with quota is higher. But quota is more likely since both the producer (proposing lobby) and the government (the policy imposer) gains from the quota. Producer gains monopoly power and government gains more revenue. Exercise Long Island Rail Road (LIRR) is a monopolist firm manufacturing railroads with the marginal cost schedule MC = 2Q. In the domestic market the company faces the demand schedule: P = 200 – 3Q. Railroads can be imported to the domestic market at a price of 50. Seeking protection from import competition LIRR requests the government to impose a tariff of 100% or an equivalent quota on imported rail roads. Note the tariff is an alternative to the quota and vice versa. A. How much should be the quota? B. What should be the price after the tariff is imposed? And after the quota is imposed? C. Considering the revenue to be earned from the import restriction, would the government agree to impose the tariff? Or impose the equivalent quota?  Profit maximising price = price on A = PA = 200 – 3Q = 125 P, AR, MR, MC = 2Q Price on E = 2Qm = 50 MC Point B: Intersection of MC and AR A That is, on B, AR = MC PA = 125 Or 200 – 3Q = 2Q Or Q = 40 on B PT = 100 Price on B = PB = 2*40 = 80 PB = 80 Pw = 50 (given) B Demand: P=200-3Q PT = Pw(1 + 100%) = 100 With tariff the market structure is competitive. Therefore MC is the PE = Pw E supply curve. = 50 At PT (=100), Supply (from MC curve) > Demand (From AR or demand curve) Therefore price cannot settle at PT or 100 Price has to come down to the level of B, that is PB = 80 Qm 40 Q Thus price with tariff = 80 = 25 Import with tariff = 0 MR Tariff revenue for govt. = 0 Equivalent quota = 0 Price with quota = 125 MC = 2Q and Demand : P = 200 – 3Q Import with equivalent quota = 0 Or AV. Rev = AR = 200 – 3Q Quota revenue = 0 Total Rev = TR = 200Q – 3Q2 The government does not get any revenue with this high tariff or the MR = 200 – 6Q equivalent quota. So government will not agree to any of these. Profit maximising condition : MC = MR Or 2Q = 200 – 6Q Or Q = Qm = 25  Exercise The world price is 100. consider a tariff quota system. The quantities demanded and supplied in domestic market for quota 200 detergent powders are as follows. Tariff within quota 100% P Q Q Tariff beyond quota 200% demanded supplied Where should price settle when the 0 2500 0 system of tariff quota is introduced? 100 2000 200 200 1800 400 What should be the level of imports? 300 1500 600 400 1100 900 How much is the tariff revenue 500 1000 1000 earned by the government? 600 500 1200 700 200 1400 800 0 1600  S P D 500 P with t:200%= 300 P with t:100%= 200 Pw = 100 Import Import within above quota quota 200 400 600 800 1500 1800 2000 Q Reading Chapter 9 (page 252 – 255) Appendix to chapter 9 (264-267) from the textbook Dumping and Antidumping duty Dumping: selling at the export market at less than normal value. Selling at a lower price in the export market, relative to that charged in the domestic market or, Selling in the export market below average cost Sporadic dumping Persistent dumping Perceived as a Predatory activity Dumping is considered a predatory activity by WTO. But dumping may occur without any predatory motive, just as an outcome of profit maximization. (explained in slide 4 and 5) Persistent dumping as international price discrimination (1) Dumping may occur when Domestic market of the exporter is a monopoly But export destination is a competitive market Here the entire supply is made from one plant. P Dumping margin = P2 - PF 3 MC P2 P1 2 1 Foreign PF demand E Dom. Domestic MR demand Q2 Qo Q1 Q Dom Export  Persistent dumping as international price discrimination (2) Dumping may occur when Domestic market of the exporter has a higher willingness to pay than the export destination. Monopoly in both domestic market and export destination of the exporter. Here two markets are supplied from two different plants. P P Dumping margin = P1 – P2 P1 1 MC MC 2 Domestic P2 E demand Foreign E’ demand Dom. For. Dom MR Export MR Q1 Q Q2 Q Domestic Export destination Antidumping rules under WTO Provides Members the right to apply anti-dumping measures, How to identify dumping as per WTO rule? Dumping - export of a product at an export price (PH) below its “normal value”. F H G Exporting Export Third country destination country Price PF PH PG Av. cost AC Dumping : PH < a normal value Normal value = some comparable price, PF In absence of PF, normal value = PG (F exports the commodity to H and G) In absence of PF or PG, normal value = AC Note: In some cases China’s domestic market price (PF) is not compared to, because China is not given a ‘market economy’ status by the EU.  Conditions for use of AD measures if such dumped imports cause injury to a domestic industry in the territory of the importing Member. Establishment of a clear causal relationship between dumped imports and injury to the domestic industry. Domestic Industry – (1) the domestic producers as a whole of the like products (substitutes) Or (2) those, whose collective output of the products constitutes a major proportion of the total domestic production.  provisional measures to be used before the case is settled, use of price undertakings in anti-dumping cases. Terms of expiry of the ADD measure -five years after the date of imposition (unless a determination is made that, in the event of termination of the measures, dumping and injury would be likely to continue or recur) Immediate termination of an anti-dumping investigation, if (1) margin of dumping is < 2% of the export price of the product or (2) volume of dumped imports is negligible (from an individual country < 3% of the imports of the product in question into the importing country).  Objective of Antidumping duty (ADD): to stop the unfair practice of predatory pricing Used primarily as a protectionist measure Most frequently used by USA, India, EU, China, Mexico, Argentina. India is a frequent user, and also one of the most targeted countries Developed nations and AD duty: Antidumping Act 1916 USA: requires dumping firms to pay 3 times the damage + imprisonment + fine Byrd Amendment USA 2000 AD collections to be paid to firms that brought the petition. Direct incentives to domestic industry to bring an AD complaint. Costly for developing nations to incur legislation costs in US and EU courts. EU 2004 : was allowed by WTO to take mirror legislations as in US Developing nations’ challenges : Have to ensure special and differential treatment Enactment of AD laws similar to US and EU needed. More than 30 nations including India, Argentina. China, Indonesia have enacted AD rules. India is one of the largest initiators of AD actions Persistent dumping as international price discrimination (1) P 3 MC P2 P1 2 1 Foreign PF demand E Dom. Domestic MR demand Q2 Qo Q1 Dom Export Persistent dumping as international price discrimination (1) Impact of antidumping duty Reduction of dumping margin from P2-PF to P3-PF, reduction in export. See note below. P MC + ADD Implications of the ADD: 3 MC P2 1. Dumping margin is 7 P3 only partially 2 4 1 Foreign PF reduced, not demand eliminated 6 5 2. Price in the export destination does E Dom. Domestic not rise, only price MR demand in the domestic market falls. Q2 Q3 Q4 Q1 3. Exports reduced Dom Export  Persistent dumping as international price discrimination (2) P P P1 1 MC MC 2 Domestic P2 Foreign E demand demand E’ Dom. For. Dom MR Export MR Q1 Q2  Persistent dumping as international price discrimination (2) Impact of antidumping duty Dumping margin and exports are reduced. But reducing the dumping margin close to 0 is less likely. P P MC +ADD P1 1 MC MC 3 P3 2 Domestic P2 Foreign E E” demand demand E’ Dom. For. Dom MR Exp MR Q1 Q3 Q2 Implications of the ADD: 1. Dumping margin is only partially reduced, not completely gone 2. Price in the export destination rises. 3. Exports reduced What would have been a true test of predatory motive?  How predatory dumping should ideally be detected? Cost based method Proof of predatory intent: PH < MC or PH < AVC (Av. Variable cost) This implies a negative operating profit. Hence should be a proof of predatory intent. Information about MC or AVC may be difficult to obtain. So alternative proof of predatory intent : PH < AC But PH < AVC is a more conclusive proof of predatory motive. Recoupment method Period 1: predation and elimination of competition Period 2: After competition has been eliminated If estimated profit in pd-2 > estimated loss in pd-1 Below cost pricing can be proved.  Even P < AVC (Av. Variable cost) not AC (average of total cost) signify predatory intent P > AC implies profit Signifies no predatory intent. AC P = AC Break even point. AVC < P < AC implies negative net profit but Proves no predatory intent. positive operating profit. Signifies no predatory intent. Firms could go on producing as long as they have positive operating profit. Firm is recovering the operating cost. The fixed cost is not recovered. But they may wait for AVC price to rise later to recover the fixed cost. P < AVC implies negative operating profit. Neither the fixed cost nor the variable cost (operating cost) is recovered. Charging such low price proves predatory intent. Tests developed to establish predatory dumping 1. The US way - to show that PH < AC and High probability that predator recoups the lost profit 2. The EU way – to show that Only PH < AC As this price choice is a proof that the predator estimates that the probability of recouping lost profit is high 3. The WTO way – to show that PH < PF Only in absence of PF, PH < PG or PH < AC Dumping should be identified as unfair as long as it is done with a predatory intent. Consider the following cases that show that Dumping may occur without a predatory intent A predatory intent may be present without dumping being identified Case 1 AVC = 80 PH = 90 (in importing country) PF = 110 PH > AVC PH < PF Dumping identified as per WTO rule, as PH < PF (price discrimination) With no proof of a predatory intent. PH > AVC PF > AVC Profit in both markets May be a result of international price discrimination Case 2 AVC = 100 PH = 95 (in importing country) PF = 90 PH < AVC PF < AVC PH > PF No occurrence of dumping as per WTO definition, since PH is not < PF Predatory intent in both domestic and international markets. Thus WTO’s PH < PF rule to prove dumping May identify and penalise dumping even when predatory motive is absent May not identify dumping, even if predatory motive is present. The alternative P < AC rule May identify dumping although predatory intent may not be present. P < AVC should be sufficient to prove a predatory intent. But this rule is not adopted in WTO or in the AD regulations of its members  ADD and Safeguard duties – which is preferred as protection to domestic industry? ADD Safeguard duty Applied if dumping occurs and it causes Applied when import is surging causing injury (if not inconsequential) serious injury to domestic industry provisional ADD duty can be imposed Proof of a serious or substantial injury, as even before injury is proven required in case of safeguard duties is A price undertaking can be obtained from difficult to establish. the allegedly dumping firm before No provisional duty can be imposed even dumping is proven. before injury is proven No price undertaking can be obtained ADD is much more frequently used than safeguard measures because  ADD and Safeguard duties - as protection to domestic industry Issues 1. Surging imports may not cause serious injury to domestic industry particularly with falling prices. Even in such cases ADD or safeguard measures can be imposed. 2. Similarly, injury to domestic industry may be serious even without dumping, or without substantial increase in imports. May be due to other reasons, e.g., due to development of cheaper substitute products, general recessionary trend etc. In such cases, imports can be wrongly identified as the cause of injury and ADD or safeguard may be wrongly misused. Exercise ‘Coated paper rolls’ are produced in UK and exported to Brazil and Mexico. The average total cost for a firm in UK exporting the product is 60, and average variable cost is 35. Consider the following price combinations and determine whether the product has been dumped according to WTO’s definition of dumping. Also determine if a sufficient proof of predatory intent exist in any market in each case. The proof of predatory intent may not be according to the WTO’s AD regulation. Price combination A: P(UK) = $85 P(Mexico) = $25 P (Brazil) = $55 Price combination B: P(UK) = $32 P(Mexico) = $76 P (Brazil) = $48 Reading “International Predation and Anti-Dumping” by Prabhash Ranjan Chapter 8 from text book – page 212-14 Voluntary Export Restraints In a competitive market  The exporting country chooses to limit export voluntarily. Unilateral VERs – Japan’s VER agreement with USA (1981) India’s export ban 2023 on Basmati Rice Multilateral VERs – OPEC’s choice to control petroleum export Superior to accepting an import quota. Japan’s VER to USA 1981 1960s-early 1970s: US’s large cars sold well in domestic market 1973: preference of US consumers shifted towards small cars with petroleum price hike 1973-1981: domestic auto sells fell drastically in US 1981: US’s demand for restraint from Japanese exporters for 3 years During 1980s US successfully negotiated VERs for Automobile, Steel, Textile and Apparel imports Why did Japan agree? VERs – effect of the importing country  VERs – effect of the importing country (with a VER from Japan) S(H) The VER is administered by P S(H + Quota) the exporting country in the very way an importing country administers an import quota. 0 Effects on the importing PH country are similar to quota. 5 4 P1 Effectively, the import price rises. Pw 1 2 The revenue margin 3 Goes to the exporter, rather than the importing country government. D(H) 1000 q1 q2 Q  VERs – effect of the importing country (with a VER from Japan) S(H) The VER is administered by P S(H + Quota) the exporting country in the very way an importing country administers an import quota. PH Effects on the importing country are similar to quota. P1 Effectively, the import price rises. Pw The revenue margin Goes to the exporter, rather than the importing country government. D(H) 1000 q1 q2 Q Reading Slides VERs – effect of the exporting country VERs – effect on the exporting country When the home is a small exporter P P P D(H) D(W+H) D(W) q q q Home Demand Foreign demand Total demand When home is a small exporting country, it faces an infinitely large Foreign demand. VERs – effect on the exporting country When the home is a large exporter market P P P D(H) D(W+H) A B A+B D(W) q q q Home Demand Foreign demand Total demand When home is a Large exporting country, it faces finite Foreign demand (at any price). Export quota effects on the SMALL exporting country  Home Country’s market before trade P Before trade : market cleared at P=PH S(H) PH D(H) qH Q  Home Country’s market under free trade P Free trade : market cleared at P= PW 1 2 S(H) PW D(W) 0 PH D(H) q1 qH q2 Q  Home Country’s market with export quota P Post export quota : market clears at P = P’ Home consumers pay less. Foreign consumers pay PW (Unaffected) 1 Export 3 2 S(H) Domestic Excess PW D(W) Export license holders buy Demand quota supply 5 4 from home at P’ and sell P’ in foreign country at Pw. 0 PH D(H + Quota) D(H) q1 q3 qH q4 q2 Q Note – When the importing country is small the price of the product rises in importing country with the VER. A small importing country implies that the exporting country’s supply is relatively large. When the exporting country is small the price of the product falls in the exporting country but does not change in other (or importing) countries with the export quota. A small exporting country implies that the importing country’s demand are relatively large.  Home Country’s market welfare before trade P S(H) PW D(W) P’ PH D(H + Quota) D(H) q1 q3 qH q3 q2 Q  Home Country’s market welfare under free trade P S(H) PW D(W) P’ PH D(H + Quota) D(H) q1 q3 qH q3 q2 Q  Home Country’s market welfare under export quota P Export quota for a small exporter reduces welfare a and c = dead wt. loss b = gain to the export license holder, may be transferred to the government S(H) d = gain to domestic PW D(W) consumers d a b c P’ PH D(H + Quota) D(H) q1 q3 qH q3 q2 Q Export quota effects on the LARGE exporting country  Home Country’s market before trade P Before trade : market cleared at P=PH D(H) S(H) PH qH Q VERs – effect on the exporting country When the home is a large exporter market P P P D(H) D(W+H) A B A+B D(W) q q q Home Demand World demand Total demand  Home Country’s market under free trade P D(H +W) Free trade : market cleared at P= PW D(H) S(H) 1 2 PW 0 PH D(W) q1 qH q2 Q  Home Country’s market with export quota P Post export quota: D(H +W) market clears at P = P’ 6 Home consumers Pf pay less (P’). D(H) D(H + Quota) Foreign consumers pay Pf. Dom. 1Export 3 Excess supply 2 PW demand quota 5 4 P’ 0 PH q1 q3 qH q4 q2 Q  Home Country’s market welfare pretrade P D(H +W) Pf D(H) D(H + Quota) Export Excess PW quota supply P’ PH q1 q3 qH q4 q2 Q  Home Country’s market welfare under free trade P D(H +W) Pf D(H) D(H + Quota) Export Excess PW quota supply P’ PH q1 q3 qH q4 q2 Q  Home Country’s market welfare export quota P D(H +W) Net welfare gain with export Pf quota for the large country = e – (a+c) D(H) D(H + Quota) e PW d a b c P’ PH q1 q3 qH q4 q2 Q  For a small exporting country VER is a better choice than accepting a quota or a tariff imposed by the importing country government. Example: All VERs that resulted from negotiation with importing countries or demanded by importing countries. For a large exporting country (capable of influencing world price for the exportable), VER may be better than even free trade. Example – OPEC’s export quota to push up petroleum prices Crude oil market transition and OPEC’s existence Market Fragmented between 7 Sisters 1961 1973 2015 2016 OPEC formed Israel Palestine Oil price drops by OPEC PLUS formed with 5 member Conflict. 70% due to rising with 13 OPEC countries. OPEC’s oil efficiency of US members and 10 embargo works shale oil other members successfully with production including Russia 12 members. Crude oil price since WW2 Syrian Civil war OPEC Gulf World Shale – OPEC + embargo war demand expansion Financial crisis & SE Asian Crisis recession Iraq defected New technology Pandemic reduced cost of finding oil outside middle east  Petroleum: Market structure before 1970 Seven sisters Between 1940 and 1970, the following seven major oil companies dominated the oil market: Anglo-Persian Oil Company (now British Petroleum) - UK Gulf Oil (acquired by BP and Cumberland Farms) - USA Standard Oil of California (Now Chevron Corporation) - USA Texaco (now Chevron Corporation) (CVX) - USA Royal Dutch Shell – Netherlands / UK Standard Oil of New Jersey (also known as Esso, later acquired by Exxon) - USA Standard Oil Company of New York (now Exxon Mobil) (XOM) - USA Being politically influential, vertically integrated, well organized, and able to negotiate cohesively as a cartel, the Seven Sisters were initially able to exert considerable power over Third World oil producers. However, in recent few decades, the dominance of the Seven Sisters and their successor companies has been challenged by the following trends: the increasing influence of the OPEC cartel (formed in 1960 and expanded steadily through 1975), the declining share of world oil and gas reserves held by OECD countries, and the emergence of powerful state owned oil companies in emerging-market economies. As of now, International oil market accommodates not only these western companies. State owned oil companies and domestic oil firms of the OPEC and non OPEC states also exist side by side. 1973 - Israel Palestine conflict USA supported Israel. Arab nations (with oil reserves) supported Palestine under the leadership of Egypt and Syria. Put an embargo on export of oil to the USA. This raised oil prices successfully in the USA. Consequently oil shortage in the rest of the world raised oil prices around the world from $3 to $12 per barrel within 6 months. This was the beginning of successful operation of OPEC. From then onwards OPEC has an export quota that has been pulling up oil prices in foreign nations and reducing oil prices at home. There was a similar conflict earlier in 1967. But some how, possibly because of lack of adequate support from the rest of Arab world, the embargo on oil export could not be executed. First 5 OPEC members (1960) Venezuela, Saudi Arabia, Iran, Iraq and Kuwait Equatorial Guinea Joined in 2017. Indonesia joined in 1962 but later left OPEC. Ecuador left OPEC in 2020. Distribution of crude oil production worldwide in 2022, by leading country Global oil production share 2022, by country Share of total crude oil production 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% United States 18.9% Saudi Arabia 12.9% Russia 11.9% Canada 5.9% Iraq 4.8% China 4.4% United Arab Emirates 4.3% Iran 4.1% Brazil 3.3% Kuwait 3.2% Mexico 2.1% Norway 2% Kazakhstan 1.9% Qatar 1.9% Algeria 1.6% Note(s): Worldwide; 2022 Further information regarding this statistic can be found on page 8. 2 Source(s): Kearney; KPMG; Energy Institute; ID 236605  How does OPEC PLUS work? How does OPEC administer the VER? Saudi Arabia is no longer the swing oil producer, but Every member country is given a quota for OPEC+ is currently playing this role. Russia is the production. This is called the BASE LINE quota. primary swing player of the OPEC PLUS members. The baseline quota is revised time to time depending on the world demand for crude oil. OPEC PLUS decide the production quota jointly with Saudi Arabia / OPEC. Saudi Arabia worked (so far) as the SWING PLAYER in the coalition. If any OPEC member Why does USA companies not form a cartel like over produces or under produces, Saudi Arabia OPEC? adjusts its own production to maintain the total OPEC quota. USA competes for global market share. Unlike OPEC, US Companies are subject to antitrust provisions, barring them to coordinating supply plans. Besides US companies are privately owned unlike Saudi or Russian companies.  2014 2015 2016 Deviation USD price USD price USD price from India 2016 India $1.11 1.00 0.93 - Saudi Arabia $0.16 0.16 0.24 -74% Iran $0.26 0.33 0.4 -57% Retail petrol prices around the world in 2014 – 2016 Russia $0.76 0.57 0.58 -37% USA $0.83 0.73 0.65 -30% When OPEC lost market Brazil $1.16 0.91 1.14 22% share to non-OPEC Canada $1.20 0.94 0.92 -1% countries China $1.17 0.99 0.94 1% Kuwait $0.24 0.21 0.22 -77% Mexico $1.03 0.86 0.81 -13% Qatar $0.27 0.26 0.4 -57% Export quota and WTO WTO prohibits all quantitative restrictions including export quotas. Only justification for export quota are - controlled extraction for conservation of natural resources - controlled production to ensure environmental protection - temporary export restriction due to short supply OPEC and WTO 9 out of 13 members of OPEC ( Angola, Equatorial Guinea, Gabon, Kuwait, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela) are also members of WTO, even though the export restraint of OPEC is prohibited by the WTO. Till now the OPEC question is an unresolved issue. But “WTO system allows several important exceptions that could arguably accommodate OPEC and OPEC-like behavior by its members. GATT Article XX(g) on trade- restrictive measures intended for the conservation of exhaustible natural resources is the most potent force here. But, given the acute divergence between these two organizations in almost every respect, a definitive conclusion has to await ‘judicial’ decisions in the future.” Exercise China imports steel and aluminum from the USA, while exporting iron ore and bauxite to USA. China’s steel and aluminum industries demands protection from import competition from US. What are the possible trade policies that can benefit steel and aluminum in China? Negative oil prices? Year 2020 is the first time in history when crude oil prices came to negative. How do we get negative oil prices? For oil futures prices to turn negative, Demand for oil needs to fall Supply needs to exceed demand Storage space needs to be running out Negative oil rates appeared for the first time in history in April 2020 for West Texas Intermediate (WTI) contracts. This happened because the coronavirus caused demand for oil to halt, while supply cuts from the OPEC weren’t scheduled to come into effect until 1 May 2020. The production cuts can be administered only with a time lag after the decision. Rising crude oil prices in 2021 Why was oil prices rising till July 2021? Successful vaccination and economic recovery in western world. => increase in Demand for oil But OPEC wants the prices to come down. Otherwise, non-OPEC countries would cut price below OPEC and capture oil markets. Why was OPEC not able to reduce oil prices till July? Because of a conflict between Saudi Arabia and UAE. SA proposes that production should be raised by OPEC members till December 2021. Post Dec 2021, production Why is oil prices falling since July 2021? should go back to the baseline quotas. UAE is challenging the dominance of SA. UAE demands that Conflict Resolution After July 6th, 2021: UAE’s base line quota has post 2021 December, the base line quota for UAE should be been increased. => UAE cooperating with SA to increase OPEC’s increased. production of oil. Resolution of this conflict took time till July 1st week. Due to the emergence of the delta variant of coronavirus economic recovery in parts of the world (China particularly) has been slow. => slow growth in oil demand.  Rising oil prices in 2022 https://www.indiainfoline.com/article/news-top-story/why-are-crude-oil-prices-rising- 122060800133_1.html#:~:text=Crude%20oil%20price%20increase%20has,by%20the%20end%20of%202022.  Reasons behind rising oil prices in 2022 The Russia Ukraine war and sanctions on Russian oil exports Global oil supply constrained by Ukraine Russia war. European Union has imposed sanctions on Russian oil imports into EU. These sanctions will put a stop on around 90% of Russian oil imports into EU by the end of 2022. These sanctions only cover oil that is imported into EU through the sea route. It does not cover oil that comes into EU through the pipeline route. Supply cut by OPEC during Covid Lockdown and slow adjustment to demand During two years of COVID-induced lockdowns and restrictions, OPEC cut down its production and supply of oil. Now when demand for oil has returned back to pre-COVID level, OPEC is not increasing production and supply back to pre-COVID level. It has said that it will increase supply back to pre-COVID level only gradually. Reduced investment in expansion of refining capacity in the past two years. In the meantime, Russia is selling oil cheap. Urals benchmark is currently trading at $34 per barrel less than Brent crude. Payment for oil purchased from Russia to be made in Russian currency or by some other means. India is one major country that is taking advantage of the cheaper Russian oil, amidst rising prices all around. https://www.indiainfoline.com/article/news-top-story/why-are-crude-oil-prices-rising- 122060800133_1.html#:~:text=Crude%20oil%20price%20increase%20has,by%20the%20end%20of%202022. Reading Handout sent over email “Export Quotas and Subsidies” – [ page – 184 – 187] https://www.investopedia.com/articles/investing/081315/opec-vs-us-who-controls-oil-prices.asp https://www.numbeo.com/cost-of-living/prices_by_country.jsp?displayCurrency=USD&itemId=24 https://www.eia.gov/todayinenergy/detail.php?id=56420 Preferential Trade Agreements India Proposes Slashing EV Import Taxes in UK Free Trade Deal India currently levies taxes between 70% and 100% on imported cars, depending on their value. India is proposing reducing import taxes on some electric vehicles from the U.K. in an effort to clinch a free- trade deal between the two nations by the end of the year. Exercise Say the world consists of 3 countries. A (India), B (Britain) and C (China). With closed borders: Pc < Pb < Pa A, a small country - allows imports of EVs from B and C. - imposes a unit tariff of ‘t’ on imports from B and C Market for the product is competitive. Say If A intends to enter into a preferential trade agreement, which country should it choose as the partner? [PTA: A reduces tariff for partner countries, while keeping tariff levels for others as high as earlier.]  Prices Price Pa Pb + t Price with tariff Pc + t t Pb t Price with free Pc trade Quantity  Preferential trade Comparing welfare with agreement with the (1) tariff Price more efficient exporter And (C) (2) PTA with C and trade creation Pa Pb + t Price with tariff Pc + t t Gain in CS from Pb Loss in Tariff t PTA = the PS revenue loss coloured area Price with PTA Pc with C or with Import before PTA free trade Import after PTA Q3 Q1 Q2 Q4 Quantity  Preferential trade Comparing welfare with agreement with the (1) tariff Price more efficient And exporter (C) (2) PTA with C and trade creation Gain from trade Gains from trade creation due to the creation PTA with C = gain Pa from adopting free trade Pb + t Price with tariff Pc + t t Pb t Price with PTA Pc with C or with Import before PTA free trade Import after PTA Q3 Q1 Q2 Q4 Quantity Trade Trade creation creation  Preferential trade Comparing welfare with agreement with (1) tariff Price the less efficient And exporter (B) (2) PTA with B And Trade Creation Gains from trade creation Pb + t Price with tariff Pc + t Loss in