International Trade Simulation

International Trade Simulation

Gina Caraiman

University of Phoenix

ECO 360

Kimberly Swaney

March 5, 2007

International Trade Simulation

Introduction

This simulation will provide reasons for international trade and help me determine which countries to trade with, what products to import or export. Also, help with determining when to impose trade restrictions like: tariffs and quotas, and when to negotiate trade agreements. Overall, the story in this simulation has cast me in the role of the Trade Representative of Rodamia, where my office develops and coordinates international trade and investment policies, and leads negotiations with other countries on above mentioned subjects.

I am the president's Chief Trade Advisor, negotiator and spokesperson on international trade and investment issues. The key players in this scenario are: Michael Jacobs is the president of Rodamia, Lisa Drake is the chairman for the Trade Commission of Rodamia, and Walter Barnes is the Deputy Trade Representative.

Rodamia is a large country in comparison to its neighbors, in terms of population, area and level of economic development. About four percent of Rodamia's Gross Domestic Product comes from agriculture, mainly: corn, wheat, cotton, diary and poultry products; 30% from industry and 66% from services. Rodamia is surrounded by three countries, (Alfazia, Uthania, Suntize), and is considering trading with these countries because this will lead to greater benefits. Trading will enable Rodamia to provide a more diverse price and quality of products to its consumers. Domestic producers can expand their markets to other countries and Rodamia capital gets new avenues of investments. All these aspects will add to making the economy more sparkling and the country richer.

Scenario one: The president has asked me to determine if there are opportunities for trade with Alfazia, Uthania, or Suntize. He has asked me to identify commodities or industries to which tax incentives could be given to encourage production and exports. The research by the Trade Commission has identified certain commodities for trade with these countries.

Scenario two: President of Rodamia has asked me to determine whether to levy an anti-dumping tariff or to impose a quota restriction on imports from Suntize; after the Trade Representative office determined a dumping margin of 25% to equate the price of watches imported from Suntize to the 'market value' of watches.

Scenario three: I need to asses whether an ad valorem tariff should be imposed on corn imported from Uthania and Alfazia for a short time. If a tariff needs to be imposed, then I need to determine the tariff level so the price differential between imported corn and domestically produced corn can be reduced or eliminated.

Scenario four: The growing opinion in Rodamia is that lowering trade barriers and negotiating free trade agreements (FTAs) will be in their best interest of all countries (Rodamia, Alfazia, Uthania). I need to evaluate whether negotiating a bilateral FTA with either or both countries would lead to greater benefits for Rodamia. Also, I need to decide which country would prove to be a more stable FTA partner in the future.

Questions and Answers:

Scenario one:

1. Which of these commodities would you encourage for export?

I would encourage exporting corn and DVD players.

2. From which country would you import other commodities?

I would import cheese from Uthania and watches from Suntize.

I have decided to give export incentives to DVD players because Rodamia has a comparative advantage. I also decided to import watched from Suntize and no product from Alfazia, this being in accordance with the opportunity costs of production in these countries. on the other hand, my decision to import cheese from Uthania is not in line with the opportunity costs of production in this country. My decision to give export incentives to corn is also not in line with the opportunity costs of production in Rodamia. Even tough Roamia does not have the absolute advantage in either corn or cheese, it has been able to maximize its benefits from trade by specializing in the production of goods in which it has a comparative advantage.

Scenario two:

1. Would you levy an anti-dumping tariff or impose a quota?

I would levy and ad valorem anti-dumping tariff, (Ad Valorem Duty means value added; it refers to a duty, tariff, or tax that is a percentage of the price of the product.). Because

2. At what level would you set the tariff or quota?

I would set the tariff at $40/unit, because even though the tariff raises the price of the product and can lead to loss in consumer surplus, some of this loss is compensated by a gain in the government's revenue from the tariff. This leads to a lower deadweight loss as compared to what happens with a quota. This tariff is 25% of the export price which is equal to the dumping margin. As the price of watches increases because of the tariff, imports from Suntize decline to 2.00 million units and domestic production increases to 6.00 million units.

Scenario three:

1. Would you impose a tariff on imported corn?

Yes I would impose a tariff on imported corn from Uthania and Alfazia because I need to protect my infant domestic industry which would give me time to attain productive efficiency.

2. At what level would you set the tariff?

I think a