Problem Set 4

1.	RANKING POLICY OPTIONS: Taiwan is a small-country importer of personal computers (PCs).
	a.	Use a domestic market diagram to depict a free-trade equilibrium.
	b.	The government decides to adopt a policy to expand Taiwan's domestic production of PCs to a target output level (Q*), but wishes to minimize the national welfare cost of the policy. Rank the following policies from most to least desirable from the perspective of national welfare, and use your diagram from part a to support your answer: (1) a tariff on PC imports, (2) a quota on PC imports; (3) voluntary export restraints (VER's) with all major PC exporters; and (4) a subsidy for domestic PC production.
	c.	For the policy you ranked second, briefly explain why it is a second-best alternative compared to your first-best choice and is therefore "like doing acupuncture with a fork."

2.	OPTIMAL POLICY RECOMMENDATIONS: The U.S. is a small-country importer of firearms. Suppose that you are a member of the U.S. International Trade Commission and that you must recommend a policy for the firearms industry. Consider separately each alternative goal below, recommend a "first-best" policy (from the perspective of national welfare) and briefly explain your recommendation (diagrams are optional):
	a.	For national security purposes, it is deemed desirable to increase domestic firearms production by, say, 20 percent (the amount in each case is just suggestive--don't worry about it).
	b.	For national security purposes, it is deemed desirable to reduce dependency on imported firearms by 20 percent.
	c.	For public safety purposes, it is deemed desirable to decrease domestic firearms consumption by 20 percent.

3.	DUMPING: Suppose the U.S. is a small-country importer of frozen concentrated orange juice (FCOJ). Sorry about the long product name; this is based on a true story.
	a.	Use a domestic market diagram to depict an initial free trade equilibrium.
	b.	Suppose exporters begin dumping FCOJ in the U.S. market because of an export subsidy. Depict the impact in your diagram from part a.
	c.	U.S. trade law permits retaliation in the form of antidumping duties which are set equal to the size of the estimated "dumping margin," in this case, the difference between the prices paid by U.S. buyers before and after the export subsidy. Depict the consequences of an antidumping duty implemented in the FCOJ market by the U.S.
	d.	Rank the following FCOJ alternatives from best to worst from the perspective of U.S. national welfare: (1) free trade; (2) dumping by foreign suppliers; and (3) dumping by foreign suppliers plus antidumping duties by the U.S. Briefly explain your ranking, using your diagram for support.

4.	THE POLITICAL ECONOMY OF PROTECTIONISM: Based on the political economy of trade protection, account for each of the following in a sentence or two:
	a.	Why surveys indicate that the majority of the U.S. public favors increased protectionism even though the costs to U.S. consumers of the country's protectionist policies exceed $30 billion per year.
	b.	Why politicians tend to prefer trade protection to production subsidies even when production subsidies cause a smaller national welfare loss than trade protection. (Use a diagram to support your answer to this question.)
	c.	Why the costs of protection may be closer to the entire consumer costs of the protection rather than just the conventional efficiency losses.

5.	CUSTOMS UNIONS: Consider the North American Free Trade Agreement (NAFTA). Based on customs union analysis, does NAFTA necessarily raise the national welfare of Mexico compared to its situation before NAFTA? Support your answer with a domestic market supply and demand diagram for an item that Mexico imports (as a small-country importer).

6.	WTO TRADE DISPUTES: For years, the European Union (EU) has favored banana imports from its former colonies by using trade policy to block imports of bananas grown in Ecuador and Central America and distributed by U.S. fruit companies such as Chiquita Brands and Dole. The EU has defended its policy as a form of foreign aid to its former colonies.
	a.	Use a trade market diagram to illustrate an equilibrium in which the EU is a large-country importer of bananas, but imports only from its former colonies.
	b.	In a number of trade dispute settlement hearings in the 1990s, the WTO sided with the U.S. and and its banana exporting allies in ruling that the EU's discriminatory barriers violate international trade agreements. In your diagram from part a, illustrate the consequences of free trade in bananas, with imports from Ecuador and Central America no longer restricted by the EU.
	c.	Indicate in your diagram:
		(1)	The total change in the EU's gains from trade.
		(2)	The total change in the former colonies' gains from trade.
		(3)	The net change in the EU's gains from trade if the EU increases foreign aid to its former colonies by the amount you indicated in part (2) in order to offset their losses from the trade liberalization..
	d.	Does the WTO ruling leave it possible for all the parties involved in the WTO dispute to end up at least as well off as they were before the ruling? Explain briefly.

7.	TRADE AND THE ENVIRONMENT:  These questions concern the online course readings:
		Taylor, "Is free international trade harmful to the environment (1999)" http://www.oxy.edu/~whitney/xaccess/ec311/iic_env_uw.htm    Smith, "Little by little, breathing easier in Mexico City" (Los Angeles Times, 2000) http://www.oxy.edu/~whitney/xaccess/ec311/iic_envt_lat_2000.htm
	a.	Would you expect Taylor to be surprised by the change in environmental quality in Mexico City in recent years? Why or why not?
	b.	How would Taylor likely link (1) Nafta, (2) economic growth in Mexico, and (3) environmental quality in Mexico?

8.	RESOURCE MIGRATION: Consider the possibility of CAPITAL migration between two countries, one a capital-abundant developed country (DC) and the other a labor-abundant lesser developed country (LDC). Assume that the endowment of capital for each country is perfectly inelastic and that all output requires both labor and capital to produce.
	a.	Depict the pre-migration situation using a diagram for the capital market similar to the resource-migration diagram we used in class.
	b.	Indicate the consequences of some capital migration (but not enough to equate the rate of return on capital in the two countries). Indicate the gains or losses for each country, as well as the gains or losses for the labor and capital belonging to each country. (Assume that all capital-owners retain their original citizenship.)
	c.	Why do you think capital migration might stop short of the amount necessary to fully equalize the return on capital in the two countries?