C. Global market power and trade

    What we're about to see is an example in which global welfare and national welfare do not always move in the same direction.

    Context now: a large country in a global market:  has international market power: a potential to influence global prices
    Examples? OPEC

    How is the policy situation different in an international context vs. a domestic context?
    National welfare for a closed economy:
    Exercising market power makes us worse off:
    Profits come at the expense of a greater loss of welfare to domestic consumers
    Market power profits = redistribution and cannot offset efficiency loss

    National welfare for an open economy:
    In trade markets, exercising market power can make us better off:
    Profits come at the expense of foreign consumers
    Profits from abroad = new wealth and can offset a country's efficiency loss.

    Policy intervention for these purposes =
    "exploitative intervention" or
    "beggar-thy-neighbor" policies
    Home gains at the expense of its trading partners and of global welfare

    Note: It is unfriendly, and globally minded economists do not endorse it

1. Optimal trade restrictions: Terms of trade manipulation

    This power arises in 2 situations:
    Market power as an Exporter (seller): monopoly
    ? Goal: raise or lower Px? raise Px => export less
    Market power as an Importer (buyer): monopsony
    ? Goal: raise or lower Pm? lower Pm => import less
    Either situation: restrict trade volume to improve terms of trade and increase trade benefits

Recall trade market:    For any Q traded:       Dm tells Pm (price in importing country)       Sx tells Px (price in exporting country) In diagram:     A = ordinary trade gains for importer     F = ordinary trade gains for exporter     BD = policy gains--go to the country that imposes the trade restriction     CE = global welfare loss

Policy Options:
Exporter		Importer
1. Export quota 2. Export tax	-->Charge importer Pm'	3. Import quota 4. Tariff	--> Pay exporter Px'

Monopsony power and the optimal tariff

    Consider a large-country importer of trucks
    See optimal tariff worksheet

    Lesson: A large country can use trade policy to raise its welfare by improving its terms of trade
    Importer: optimal tariff or quota
    Exporter: optimal export tax or export quota

    Note: Optimal tariff for a small country = 0
    By definition, market power argument does not apply to small countries

    --not a friendly policy
    Global welfare falls

    Concluding observations:
    A large country can avoid a fall in welfare when its supply increases and threatens to lower its ToT too much
    Just restrict trade and come out ahead for sure
    Ex: Brazil buying up coffee and destroying it

    In practice: ToT manipulation opportunities are rare and unlikely to amount to much.
    OPEC may be our best exception.

    If the number of domestic firms is small, government can simply allow them to collude on trade prices, and they can reach the profit-mazimizing optimum directly
    Risk: collusion won't stop at the border--it will likely spillover into the domestic market too

    Japan: Bargaining over license fees for imported technology. Coordianted by MITI to prevent Japanese firms from competing with each other and bidding up the fees they paid.

    US: allows exploitation of market power in exports:
    Export Trade Act of 1918: (Webb-Pomerene Act (1918)): Collusion OK on X's as long as domestic market is not affected. Used especially by US motion picture industry
    US Export Trading Company Act (1982)
    allows advance approval of trade behavior that would ordinarily violate domestic antitrust laws. Actions are then OK even if the effects do spill over into domestic markets

    Terms of trade effect is the strongest argument for tariffs
    Problem in practice: retaliation; then all are worse off.