Exchange regulated domestic trade share using import markups and domestic redistribution tax
Exchange regulated domestic trade share using import markups and domestic redistribution tax
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lanoxx · External communityPost link
External question — Economics Stack Exchange
Author: lanoxx
Original post: https://economics.stackexchange.com/questions/60328
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Imagine a policy framework where, instead of tariffs or quotas, all transactions in a well-defined domain (e.g., a specific commodity or class of tradable goods) must occur through a regulated exchange (digitally automated). The exchange could either trade the product itself or some kind of import certificate which facilitates domestic sales. The goal is to ensure a minimum share of domestic production - say, one-third of total sales — without directly banning or limiting imports.
To enforce this, the exchange dynamically adjusts a markup on foreign-sourced products when the domestic share falls below the target.
Depending on the concrete domain this could either be a real time exchange (like trade of DRAM, oil, grain) or some kind of semi regular adjustment where the markup is fixed daily, or monthly by an agency according to well defined rules.
The revenue collected from this markup is then redistributed through a negative tax among domestic producers in proportion to their actual market share, incentivizing competitiveness and to encourage new market entrants.
This system would aim to:
Maintain a minimum domestic share in key trade domains.
Preserve price-based competition among domestic producers.
Redistribute import markup revenue to strengthen local supply.
Avoid blunt instruments like tariffs or quotas, which are subject to political developments and often lag behind the market realities that they attempt to address.
I assume that i probably missed something that make this idea either infeasible to implement or it might have some unfavorable economic consequences that i did not think of.
What would be the likely economic consequences of such a system and could it help to protect key industries (think steel, cars, solar)? In particular, how would it affect market efficiency, consumer prices, domestic competitiveness, and international trade compliance? And what practical problem could prevent an implementation. Are there historic examples for similar trade policies?
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1muflon1 · External communityPost link
External answer — Economics Stack Exchange
Author: 1muflon1
Original post: https://economics.stackexchange.com/a/60330
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
What you propose is not different from having a system of automated tariffs, quotas or domestic subsidies and the exchange would run an extra operational costs so it does not make much sense.
What would be the likely economic consequences of such a system and could it help to protect key industries (think steel, cars, solar)?
Since this system is just a system of automated tariffs and quotas with extra steps it would have the same effect that tariffs and quotas have. For example, this idea "some kind of import certificate which facilitates domestic sales" is economically indistinguishable from import quotas, and this idea "the exchange could either trade the product itself" from tariffs assuming it will trade it at different prices than would prevail under free trade (in which case I wouldn't see the point). Next the idea "the revenue collected from this markup is then redistributed through a negative tax among domestic producers" is just a very specific example of traditional protectionist subsidies. Hence you are not really presenting anything new here.
The only additional distinction is that it is "automated", but tariffs and quotas could be automated as well, its political decision not to do so, and it is a bit naive to think that if politicians are not willing to give up discretionary power over trade with traditional trade barriers they will be willing to do that with your rebranded trade barriers. There is no
economic
reason why government could not just delegate decision making on quotas/tariffs/subsidies to single agency or to design a computer program to determine it. Hence, there isn't practically any difference in effects per se, you just reinvented, rebranded and repackaged traditional trade restrictions.
Similar to tariffs, quotas and other trade barriers this new aesthetically different version of a trade barrier could protect domestic industry by the same way, by distorting market prices and quantities.
In particular, how would it affect market efficiency, consumer prices, domestic competitiveness, and international trade compliance?
Trade barriers do not affect
market
efficiency per se, since by
market efficiency
we mean how efficiently market transmits information through prices. This would have effect on efficiency of the economy itself. Protectionist measures of all kinds lead to less efficient production, since people would not import goods abroad if the goods abroad would not offer better value/cost ratio, and this is in essence how we measure economic efficiency (officially its value of output/ value of inputs, but in layman terms its in essence value/costs).
In addition, it can be shown that over time these trade barriers can suppress economic growth, since they suppress technological spillovers between countries and reduce dynamic gains from trade (see Krugman et al International Economics Theory and Policy 9th ed pp 221).
The effect on consumer prices is ambiguous because such restrictions change the terms of trade, consumption patterns etc. You would have to provide some specific example, with specific parameters for someone to work it out. Initially there would be almost surely increase in domestic prices in an immediate short run, but the effects in medium and long run and second order effects are a priori ambiguous and would have to be worked out through a model.
In terms of compliance there is no reason why this should have a better or worse compliance with regulation.
And what practical problem could prevent an implementation.
As already mentioned, traditional trade barriers can be automated as well. You are not really offering anything new here. You are just arguing for some automated coordination of traditional trade barriers. If politicians do not want to do it currently, I don't see why they would suddenly change their mind just because you slap a new names/terminology/organizational structure for a bureaucracy that would enforce it.
Are there historic examples for similar trade policies?
Sure there are some historic example of something like this existing. For example, in Japan during the Nanban bōeki jidai (age of Nanban trade), when Japan would require all foreign trade to be routed through Nagasaki subject to their mercantilist policies. Of course, the trade policy was not set up by a computer algorithm, but my best knowledge there isn't any example of country regulating trade purely via algorithm without executive discretion.
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Quoted from Forex.com.bd-Editorial External answer — Economics Stack Exchange Author: 1muflon1 Source score (net votes, not local likes): 1 Original post: https://economics.stackexchange.com/a/60330 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. What you propose is not different from having a system of automated tariffs, quotas or domestic subsidies and the exchange would run an extra operational costs so it does not make much sense. What would be the likely economic consequences of such a system and could it help to protect key industries (think steel, cars, solar)? Since this system is just a system of automated tariffs and quotas with extra steps it would have the same effect that tariffs and quotas have. For example, this idea "some kind of import certificate which facilitates domestic sales" is economically indistinguishable from import quotas, and this idea "the exchange could either trade the product itself" from tariffs assuming it will trade it at different prices than would prevail under free trade (in which case I wouldn't see the point). Next the idea "the revenue collected from this markup is then redistributed through a negative tax among domestic producers" is just a very specific example of traditional protectionist subsidies. Hence you are not really presenting anything new here. The only additional distinction is that it is "automated", but tariffs and quotas could be automated as well, its political decision not to do so, and it is a bit naive to think that if politicians are not willing to give up discretionary power over trade with traditional trade barriers they will be willing to do that with your rebranded trade barriers. There is no economic reason why government could not just delegate decision making on quotas/tariffs/subsidies to single agency or to design a computer program to determine it. Hence, there isn't practically any difference in effects per se, you just reinvented, rebranded and repackaged traditional trade restrictions. Similar to tariffs, quotas and other trade barriers this new aesthetically different version of a trade barrier could protect domestic industry by the same way, by distorting market prices and quantities. In particular, how would it affect market efficiency, consumer prices, domestic competitiveness, and international trade compliance? Trade barriers do not affect market efficiency per se, since by market efficiency we mean how efficiently market transmits information through prices. This would have effect on efficiency of the economy itself. Protectionist measures of all kinds lead to less efficient production, since people would not import goods abroad if the goods abroad would not offer better value/cost ratio, and this is in essence how we measure economic efficiency (officially its value of output/ value of inputs, but in layman terms its in essence value/costs). In addition, it can be shown that over time these trade barriers can suppress economic growth, since they suppress technological spillovers between countries and reduce dynamic gains from trade (see Krugman et al International Economics Theory and Policy 9th ed pp 221). The effect on consumer prices is ambiguous because such restrictions change the terms of trade, consumption patterns etc. You would have to provide some specific example, with specific parameters for someone to work it out. Initially there would be almost surely increase in domestic prices in an immediate short run, but the effects in medium and long run and second order effects are a priori ambiguous and would have to be worked out through a model. In terms of compliance there is no reason why this should have a better or worse compliance with regulation. And what practical problem could prevent an implementation. As already mentioned, traditional trade barriers can be automated as well. You are not really offering anything new here. You are just arguing for some automated coordination of traditional trade barriers. If politicians do not want to do it currently, I don't see why they would suddenly change their mind just because you slap a new names/terminology/organizational structure for a bureaucracy that would enforce it. Are there historic examples for similar trade policies? Sure there are some historic example of something like this existing. For example, in Japan during the Nanban bōeki jidai (age of Nanban trade), when Japan would require all foreign trade to be routed through Nagasaki subject to their mercantilist policies. Of course, the trade policy was not set up by a computer algorithm, but my best knowledge there isn't any example of country regulating trade purely via algorithm without executive discretion.
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