December 18, 2017

A geometry of international trade

In this Livemint articleVivek Dehejia, Resident Senior Fellow at IDFC Institute, writes on the geometry and geometric methods behind modern trade theory. Excerpts below:


"While commenting on trade policy reform, Rodrik observes that when tariffs are already low, the main effects of further tariff reduction are more redistributive than they are efficiency enhancing. While not often pointed out in a policy context, as Rodrik does, his argument is immediately apparent to those familiar with the geometry of international trade, and can be argued more broadly than he does.


In particular, the efficiency costs of distorting taxes, subsidies, tariffs, or quotas, show up in the geometry of demand and supply analysis as a pair of triangles—known as “Harberger triangles” in jargon, or, in today’s less felicitous usage, deadweight loss triangles. By contrast, the redistributive effects show up as rectangles (or trapezoids, essentially the union of a rectangle and a triangle). Now, the crux is that the triangles are small, while the rectangles are large, and this is true in a very strict geometrical sense. To be more precise, as the distorting tax (or other instrument) goes to zero, the welfare costs become vanishingly small (disappearing to a point), while the redistributive effects do not (disappearing to a line which is the base of a rectangle). Put in reverse, as classical theory tells us, the welfare costs of a small tariff are second order of smalls, while the revenue gain is first order of smalls. In the limit, an infinitesimally small tariff creates an infinitesimally small welfare loss..."


Read the whole article here.


This article was republished on Stratfor here.

Topic : State Capacity / In : OP-EDS
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