Question

3) Assume that country A is importing good x from country B at $ 40. The price of the good under autarky (in country A) is $ 50.

1. Suppose country A suspects that producers of the good in country B were receiving a subsidy for producing x. How should country A respond. Explain, graph, and analyze the response.

2. Suppose country A suspects that producers of good x in country B were engaging in predatory dumping. How should country A respond? Explain and analyze the response.

3. Suppose that producers in country B were neither receiving a subsidy nor engaged in predatory dumping. However, good x is a strategic sector (it has a positive production externality) and country A wants to “protect” this sector. Explain, graph, and analyze the use of direct and indirect policy to protect this sector.

Answer 1

Solution

Reasons countries across the world trade due to two reasons: absolute advantage and comparative advantage

The S.P of the good X in country A is $50 .It imports the good from country B at $40.

Case (i) Suppose country A suspects that producers in country B were receiving subsidies for producing X

In this case,the country A has different options :

(a) Country A can warn and file a complaint against country B in the trade organization that it country B's producers are receiving subsidies. Ex: U.S complaints against India in some agricultural products.

(b) Country A can look to trade for an alternative to country B for acquiring the good X .

(c) Country A can retaliate by subsidizing its own producers whose goods are imported by country B ultimately leveling the game.

Case (ii) Suppose country A suspects that producers in Country B are engaging in predatory dumping

(a) Country A can initially warn country B and then take necessary steps like imposing the anti-dumping duty so that the price of the good X will get increased beyond $ 50 .This is because predatory pricing is very harmful for the producers of Country A.The act of predatory pricing is un-ethical.

Example: Cheap chinese aluminium/steel imports may harm the Indian industry so India may impose anti-dumping duties

(b) Country A can stop importing the good X from country B

Case (iii) Good X is a strategic sector

When we say the good X is having positive externalities we mean that by producing more of the good X will benefit the third party / member in the process.

Example: Take the example of High Speed Rails

Japanese companies which are world renowned for high speed rail system (bullet trains) want to come to India and set up a similar network.This will not be allowed by India (Here Country X) even though this is a boon for the citizens of India as High Speed Rail will come under strategic sector according to  investment policy of India.So only the public companies or the Government directly can invest and develop the system.

Countries categorize some sectors as strategic in order to protect that sector for a variety of reasons like security of the country,requirement of investment in that sector/good.Here this is the strategic sector because if high-speed is developed then the normal rail (which is the largest public employer in the world) will become redundant which will cause a lot unemployment and also developing high speed rail is not required as it is not feasible,keeping in view of huge population and arrival and destination stops required.Direct policy is this.

Indirect policy is where the Indian government /regulatory body would scrutinize and then decide on giving the approvals after accessing the benefits and risks of the same.they may add some clauses in terms of Joint ventures of Foreign player with Indian companies (or) technology transfer from Foreign player to Indian player(or) manufacturing 100% product in India etc.,

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