CHAPTER 1: INTRODUCTION

Price instability has been an issue of long concern to economists and recently has received increased attention, mainly because of economic events taking place in the world. At different phases of price fluctuations, different groups become more vocal andmore concerned about price movements rising prices affect consumers and importing nations, whereas falling prices are of vital interest to producers and exporting countries. If price stability in the world market is desired, trade liberalization, not greater restriction, is more likely to provide it. The frame work use in research is partial equilibrium or gravity model. Partial equilibrium model is use to examine trade issues in a single market or, alternatively, in a few closely-related markets. It is adaptations of standard supply and demand analysis to the particular features of trade and trade policies. It is extensively used in the analysis of countervailing and anti-dumping duties, as well as to evaluate the possible effects of many types of trade policy changes in narrowly defined sectors.

Research examines only barriers to Pakistan Textile imports. It is well known that the trade restriction between countries acts as a natural barrier to international trade. A number of authors have examined the size of this barrier and have compared it with the barriers imposed by tariffs or quotas (Waters 1970; Finger and Yeats 1976; Clark 1980). Their goals were to evaluate the potential for unfettered trade to eliminate differences among countries in prices of traded goods and to show the degree to which existing differences could be attributed to natural as opposed to artificial trade barriers. In this paper we identify another, previously unrecognized source of natural trade barriers. Research estimates the impact of trade restriction effecting price stability in textile industry with respect to textile items imported to home country, which helps to understand the impact when each restriction modified. The results indicate that natural trade barriers play a great role in insulating domestic producers from import competition than was previously recognized. Research focus on the trade restriction i.e tariff, import duty and transportation cost, because these are the barriers that determine the protection afforded to various domestic industries and factors of production.

1.1 Chapter Summary

This chapter lays the foundations for the study. It introduces the research objective and a brief description and justification for this study i.e impact of trade restriction on price stability of textile industry of Pakistan is discussed and major terms used in the study are defined. Finally, the out line of the study s presented. This

introduction chapter

introduced the subject focus of this research. The rest of the thesis will be structured in the following manner.

Chapter 2

This is the theoretical part of the dissertation i.e the literature review on ------------------are present- ending with the identification of research problem and setting hypothesis.

After going thoroughly in detail about trade restriction and its relevance to price stability, it can be said that trade restriction is a vast study which has and need to be more focused.

The area for research needs to be focused to understand its major constructs, the relationship between the variables and trade restrictions affecting the price stability in textile.

The different articles illustrated various theories and models of trade restrictions are studied with this in mind, the next section will present a conceptual framework and hypothesis for investigating the impact of trade restriction on price stability of textile industry of Pakistan.

Chapter 3:

In this chapter, a theoretical framework is provided to present the relationship between the trade restriction and textile prices. After defining problem identification / research Problem, the research hypotheses are defined and then hypothesis are established for verification.

Chapter 4

In this chapter, the methodological issues relevant to the investigating the impact of trade restriction on price stability of textile industry of Pakistan are presented and discussed. This chapter covers data collection, research methods and application of statistical test

Chapter 5

In this chapter, the interpretations & assessments of regression analysis for research hypotheses are carried-out.

CHAPTER 2: LITERATURE REVIEW

In this new era of learning and development organization's achievement and competitiveness mainly depends upon constantly humanizing performance by reducing cost, improving and creating new products and process, improving productivity and quality, growing pace to be the first to the market and all aspects of the organization must expose their competence to positively impact trade and performance. Trade is an input part in economic development. An effective use of trade can enhance a country's growth. On the other hand, opening up opportunities and markets to international trade may leave local producers rushed off your feet by more competitive foreign producers. Mainly trade barriers work on the same principle, the imposition of some sort of cost on trade that raises the price of the traded goods. If two or more nations repeatedly use trade barriers against each other, then a trade war outcome. Trade barriers are damaging and decrease overall economic efficiency.

Rousslang & Theodore To (1993) estimates the barriers that the domestic margins enforce against U.S. imports and shows that they surpass the barriers enforce by tariffs and international transport costs collective. Research estimates the size of barriers and compared them with tariffs and international transport costs. Researchers finding indicate that natural trade barriers play a much greater role in domestic producers from import competition than was previously recognized.

Various researchers have examined the size of barrier compared the results with the barriers imposed by tariffs or quotas (Waters 1970; Finger and Yeats 1976; Clark 1980, 1981).

The difference between transportation costs within the home country for imports and the rival domestic output can hand out to either reduce or exacerbated the trade barrier imposed by international transport costs, but they overlook the role of transport costs within the exporting country (Finger and Yeats 1976). Longer delivery time for imports enforce additional inventory storage costs in the United States that caused wholesalers to pay a premium of from 9 to 11 percent for domestic steel over physically identical imports during the 1970s(Chase & Gamble 1982), even though they sold the steel from both sources at the sale price. Wholesale margins on imports can also reflect other cost disadvantages, such as the need for currency exchanges, arising from differences in language and laws, and necessitate for imports to be processed through customs. Research found that costs within country services in transportation, wholesaling, and domestic margins impose significant barriers to international trade. In particular, Researcher estimate that barriers imposed against U.S. imports that are on average greater than those imposed by tariffs and international transportation costs collective. Though, the domestic margins do not appear to alter much the pattern of protection by phase of fabrication from that afforded by the other barriers.

Won W. Koo (1984) reveals that price differences among U.S. export ports are dependent upon export supply of wheat, import demand for wheat, and transportation costs in shipping wheat from producing regions to importing regions under an assumption of free trade. Research also reveals that the West Coast ports have the highest price for winter and spring wheat and the Great Lakes have the lowest price. Price differences between those two ports are approximately 70 cents per bushel. Contrasting tariffs, changes in ocean freight rates influence wheat price at U.S. export ports more than in importing regions. Approximately 80 percent of ocean freight rate increases (85 percent for winter wheat and 70 percent for spring and durum wheat) are borne by producers in the U.S. resulting in substantial decreases in wheat prices at U.S. export ports. This indicates that the major factors affecting wheat prices at the U.S. export ports are trade restrictions, and volatilities in ocean freight rates.

Carmellah Moneta (1959) investigates the relationship between the total cost of an international traded commodity and the portion of this cost incurred in shipping the goods from country of production to country of consumption. He estimate that ratio of transportation cost to total cost varies widely among commodity.

Sampson & Yeats (1977) evaluate the incidence of transport costs facing Australian exports to the United States, and to compare their magnitude with the existing level of most favored nation tariffs. Comparison of the transport and tariff figures reveals that for two thirds of the products (66 per cent) transport costs present a greater obstacle to trade than MFN tariffs. Actually, for all the food and live animals group, except sugar, transport charges exceed tariffs. Transport costs are generally a more formidable trade barrier for chemical products, though the spread between transport costs and tariffs is lower than in the food, beverages, or coal groups. Further pursuing results indicate that attempts to export more highly processed products in a direct processing chain (i.e., pig iron as opposed to iron ore, thread as opposed to raw wool, etc.) will have little overall influence in reducing nominal transport costs. Transport costs pose a much greater barrier to Australian exports than tariffs. Research evaluated the relative importance of tariff and transportation charges on products of export interest to Australia. On an overall basis, research found that the incidence of transport and insurance costs varies greatly across products and poses a barrier at least two to three times the current level of tariffs. It has shown that the incidence of transport costs can be blunted by changing the composition of exports; possibly equal importance attaches to the achievement of economies of scale in shipping. In the bulk trades, port modernization and the use of larger vessels should automatically result in reducing transport costs; but this does not happen in the liner trades, where costs savings may merely result in higher profits to ship-owners.

R. M. Conlon estimates the transport cost protection available to import competing Australian producers, and to compare them with estimates of transport costs barriers protecting similar Canadian manufacturing industries. Research shows that for Canada the international transport costs of a given commodity may be less than the cost of its internal transportation and this fact will tend to provide a stimulus rather than a barrier to international trade. Protection variable significantly lower in Canada than in Australia, but the relative contribution of transport costs to the total protective barrier in Canada is also substantially lower. In Australia transport costs contribute over 40 percent of the total trade barrier; in Canada they contribute just over one-quarter. In effective terms, transport costs provide over 30 percent of the total barrier in Australia; in Canada they provide just over 17 percent. Clearly, Australian manufacturing has developed behind higher average natural and man-made barriers to trade than has the manufacturing sector in Canada.

F. R. Casas study to develop a systematic approach to covenant with a variety of issues carry along from the incorporation of transport costs into the standard models of international trade under different assumptions about the nature of the technology of transportation. It also estimates the effects of transport cost on commodity and factor prices, the allocation of resources and the level of welfare in the trading countries.

Research has attempted to provide the framework within which transport costs can be integrated in the general equilibrium model of international trade without desertion from the simplicity which has enabled economists in this field to end up with the wealth of outcome. The study shows the results that the impact of the transportation on the output of the traded goods at steady domestic prices can be determined. Results also show that technological advances in the transportation segment will not essentially reduce the domestic relative price of the importable commodity.

Henry McFarland (1981) estimates international transportation costs for US imports and changes in these costs from 1976 to 1981. Research also evaluates how the levels and the changes in these costs vary with the level of development of the import supplying country. Transportation cost persist to be a significant barrier to US imports, but comparative transportation costs have decline sharply in recent years. The ratio of transportation costs to significance is greater for US imports form developing countries and is greatest for US imports from least developed developing countries. In addition, the transportation cost disadvantage of least developed developing countries has been increasing. To study the relationship between the level of development and international transportation costs, US trading partners are grouped by per capita gross National product into four separate categories: developed countries (DCs), advanced developing counties (ADCs), middle developing counties (MDCs), and least developed countries (LDDCs), each category is then subdivided by region.

In 1965 the freight factor for US imports declined from 10 percent to 4.5 percent till 1981. The freight factor for all US imports other than petroleum products declined form 11 percent in 1965 to 5.1 in 1981.The decline in these freight factors could have resulted from a decline in freight rates, from changes in the mode of transportation used, from changes in the relative import commodity composition of imports, or from changes in the relative importance of US trading partner. (Freight rates are the ratio of transportation costs to value of a specific product moving between two countries in a specific mode of transport). It contributes the estimates of international transportation costs for US imports and it examines the relationship between international transportation costs and the level of economic development using data for 115 countries and four levels of development. Freight factors are much larger than tariffs for agricultural, mining, and petroleum products. Non manufactured goods usually have lower value per ton and therefore higher freight factors than manufactured goods, whereas manufactured goods usually have higher tariffs than non manufactured goods. Results examines that transportation costs have continued to be a significant barrier to US imports; in 1981 they were 4.5 percent of the value of these imports. However, relative transportation costs have declined sharply in recent years. From 1976 to 1981, these costs declined between 25.8 percent and 29.2 percent. The ratio of transportation costs to value was greater for US imports form developing countries than for US imports form developed countries and was greatest for US imports from least developed developing countries.

Furthermore, the decline in relative transportation costs was smaller for least developed developing countries that for other countries. Thus, the transportation cost disadvantages of these countries has increased.

Finger & Yeats (1976) estimate and compare the importance of transportation costs and tariffs as barriers to international trade. Transportation costs tend to protect domestic producers from foreign competition. As such, the analysis differs from most previous studies of international trade problems that either neglect or assume away the weight of transportation costs. The overall results indicate that, transportation costs create a barrier at least equal to tariffs in the United States whether considered in terms of nominal or effective rates, and like effective tariffs, effective transport costs appear to increase with stage of processing. In addition to an evaluation of current magnitudes, evidence is also presented that suggests that tariffs and transportation costs have been changing in relative importance to each other.

Examination of several transportation rate indices shows that these costs have risen significantly since 1965. It seems probable that recent petroleum price increases will have significant adverse effects on trade barriers arising from transportation costs. Research identifies that transportation charges tend to be higher on products exported by LDC's than on products exported by developed countries. To the extent that this results from inefficient port facilities in the LDC, the prescription, which follows, is obvious. But studies have indicated that shipping rates may frequently be allocated on other than a cost basis. Thus, it may be useful to investigate the development of regional transportation groupings that would improve access of the developing countries to industrial markets and also improve their bargaining position for shipping rates.

Binkley & Harrer (1981) study the Major Determinants of Ocean Freight Rates for Grains. Research pertains to the relationship between international shipping and the comparative position of countries in the world grain trade. Research shows that larger ships lead to lower at sea transport charges. The measurement of the interaction between ship size and port costs did not yield a clear-cut answer, but the evidence points toward a positive relationship. If this is so, inadequate port facilities will hinder further savings in shipping. This is probably why some major exporters recently have made substantial port investments. Such investments are likely to be the primary source of future cost savings in export grain handling. Research shows a negative association between a route's grain trade volume and ship-ping rates, while this reflects the association between traffic volume and efficient port facilities.

Small importers may not be able to generate sufficient trade to benefit from high levels of shipping activity, and their erratic demand may preclude the construction of efficient grain off-loading facilities. LDCs may find themselves at a continuing disadvantage in world trade, worsening problems brought by rising food and fuel prices. Research shows that expansion should occur in the areas with relatively heavy ship traffic. But optimal port improvement and location depend upon the trade-off between inland and export transportation costs. The U.S. export efficiency grain transport system perhaps could be enhanced by a combination of domestic transport changes (such as the introduction of long-haul unit trains to certain ports) and port improvements. But neither change may be justified without the other, and it is difficult to effect such changes without coordinating policy. Research reveals that relative transport costs between producers and importers do not necessarily, nor even primarily, reflect unalterable geographic factors, but are more a function of transport and port technology and overall patterns of trade, both of which are policy relevant. This suggests that the effects of changes in international transport costs on trade is itself worthy of study, and that international trade research which does not consider transportation factors may be based on misconceptions and may generate erroneous conclusions.

Pritchett & Geeta (1994) study tariff rates with the ratio of tariff revenues to import values for Jamaica, Kenya, and Pakistan. It identifies general features of tariff code and study whether these features apply to all developing countries, and discusses implications of these features for tariff reform.

Any tariff reforms are undertaken during periods of stabilization and fiscal austerity, the potential loss of tax revenues from lowering tariff rates is commonly perceived to be an important constraint on tariff reform (Rajaram and Mitra1 992). The data reveal different stages in the countries' trade reforms. Jamaica had already had several rounds of tariff reform, with substantial reductions in the average rate. Pakistan's tariff code had already undergone substantial rationalization as part of the country's adjustment efforts. Kenya's trade reform mainly focused on import licensing to date, including some tariffication that raised the unweighted average. Research finds that revenues are less than the official tariff, because the relevant rate is the marginal tariff rate.Further study reveals that in some cases an exemption will not reduce the protection provided; it will just create a subsidy to the exempted activity. In other cases an exemption will effectively lower the protection provided by the tariff.

John D. Black studies the effect of tariff duties on the prices of a commodity, compare the differentials between the markets of the United States and the potentially importing countries before and after the duty was first imposed, or was raised or lowered to a new level. Products which have an inelastic demand and an inelastic supply in the home country will yield increasingly high returns as the duty is raised. Sugar is an example of such a product. Duties on butter, beef and most products of this nature are of the opposite type, only a small duty being needed to keep out nearly all imports. Effects of duties on price differentials can be only approximately stated and that the effects on prices in the protected country can be ascertained with only still more uncertainty.

Douglas A. Irwin (1998) studies the changes in import prices and in tariff rates. It also provide some insight into the political process that brought about legislated changes in tariff rates and influenced the choice of specific versus ad valorem duties. Research reveals that from century following the Civil War, about two-thirds of dutiable U.S. imports were subject to specific duties, the ad valorem equivalent of which was inversely related to the level of import prices. Specific duties were the choice method of import taxation of the Republicans, whose support for protective tariffs led them to favor such duties for their enforceability, their protective insurance against falling prices, and perhaps for their obfuscation of the actual protection given. Congress retained close control of the tariff prior to 1934 and undesirable price-induced changes in the tariff between legislative acts were not pronounced. After Congress began delegating tariff-negotiating powers to the President in 1934, import price inflation contributed much more to the decline in the tariff than trade agreements.

Lorraine Eden (1983) estimates that when international trade occurs between related firms, customs authorities have two tools that can be used to achieve the goals of tariff policy: tariff rates and the customs valuation method. These methods force certain transfer pricing policies, which may or may not be indirectly tied to the volume of imports, on the MNE with predictable effects on intrafirm trade, output, and tariff revenues. When falling tariff rates are accompanied by a shift in the valuation method, the impact on import-competing MNE affiliates can be significant. Research predicts that the current shift from FMV to TV by Canadian tariff authorities will emphasize the partial equilibrium effects on intrafirm trade and output of secondary import-competing MNE affiliates of the concurrent drop in Canadian tariff rates. Assuming positive net protection from the Canadian tariff structure, the expansion in imports and the fall in domestic production will be larger than one would predict on the basis of the drop in tariff rates alone. The probable drop in tariff revenues, however, will be smaller. To the extent that the MNE can manipulate transfer under the GATT transfer value principle, Research predict that, assuming the tariff rate continues to dominate the tax differential, the effects on imports and domestic production will be stronger and the drop in tariff revenues larger. Since 40 percent or more of Canadian imports are bought in markets where scope for transfer price manipulation exists, the shift from FMV(fair Market value) to TV(transfer value) at the same time as tariff rates are falling will therefore weaken the effectiveness of the Canadian tariff structure as a trade barrier.

Most countries allow free import of raw materials. However, because manufacturing proceeds through several stages, and there are tariffs at various stages, substantial anti protection can exist for industries using imports or import competing products as inputs. Therefore, primary tariffs should not be dismissed as irrelevant in countries where raw imports are duty free but should be treated as tariffs applying to earlier stages of manufacturing. (Williams 1978) Since Canada is both lowering tariff rates and shifting from FMV to TV, Research finds that the expansion in imports will be larger than that predicted on the basis of the drop in rates alone. The probable contraction in tariff revenues will, however, be smaller. Therefore the joint policy changes of lowering rates and moving from FMV to TV have conflicting effects on the goals of Canadian tariff policy. Research also find that if the transfer value principle allows the MNE more freedom to manipulate transfer prices, assuming tariff rates dominate, the multinational will reduce the acceptable lower bound , imports will expand, domestic secondary production will contract, and tariff revenues will decline. This freedom therefore further weakens Canadian tariff policy as a trade barrier

Bela Balassa (1965) estimates the height of national tariff levels are designed to give expression to the restrictive effect of duties on trade flows. In a general equilibrium framework, the restrictive effect of a country's tariff can be indicated by the difference between potential and actual trade, when the former refers to trade flows that would take place under ceteris paribus assumptions if the country in question eliminated all of its duties. Tariffs affect the pattern of production and consumption and generally reduce imports and exports under full employment conditions as changes in relative prices associated with the imposition of tariffs lead to resource shifts from export industries to import competing industries. Research shows that, in international comparisons of the protective effect of national tariffs, one should use effective rather than nominal rates of duties.

Kara M. Reynolds (2005) estimates the impact of U.S. tariff reductions on imports from the developing world using a panel of import data from 76 countries and 2,389 Generalized System of Preferences (GSP) eligible products between 1998 and 2001.

Research find that reductions in normal U.S. tariff rates over the past 30 years have slowly eroded the tariff preferences granted to developing countries through this program. Empirical results from show that tariff reductions have indeed had a large impact on U.S. imports from developing countries.

Specifically, Research find that a one percent reduction in MFN tariff rates on GSP-eligible products results in a 0.6 percent decline in U.S. imports of these products from the average developing country. Furthermore, the largest beneficiary countries those in Asia experience an even larger decline in imports. Based on these estimates, developing countries would have had approximately $1.0 billion more in exports to the United States in 2001 if not for the decrease in U.S. tariff rates under the Uruguay Round trade agreement between 1997 and 2001.

These results do not suggest, however, that developing countries can not significantly benefit from future global trade negotiations that reduce tariff rates around the world. Many of the products produced by developing countries such as textiles and apparel and agriculture products are ineligible for the GSP program. Moreover, the results show that a few more developed countries are reaping the lion's share of benefits from the GSP program and, thus, will see the largest declines due to the reduction in tariff margins. However, these countries are the very ones that are most likely to lose GSP-eligibility due to competitive need limitations and income thresholds. Research shows that the reduction in preference margins on GSP-eligible products will have very little impact on trade between the United States and the poorest developing countries. Research also suggests that the United States and other industrialized countries may want to revisit whether the GSP program is the best tool to encourage economic development. The large impact that tariff reductions have had on imports from certain GSP beneficiary countries suggests that the GSP program has resulted in a significant amount of trade diversion to a few, large beneficiary countries. However, the program does not appear to be assisting the poorest countries at all.

Gardner & Kimbrough (1989) estimate the behavior of U.S tariff rates. Research shows that tariffs and the trade balance suggest that only temporary increases in tariffs are likely to improve the trade balance significantly. Indeed, if an increase in the current tariff rate is taken to signal additional future increases as is implied by the empirical results for the income tax period, then a tariff increase will lower the relative price of current consumption and tend to worsen the trade balance. There-fore, the proposed new trade restrictions will have their intended effect of improving the trade balance only if the private sector believes they are temporary. Such a belief re-quires the private sector to ignore the history of U.S. tariffs. The logic behind using tariffs and other trade restrictions to reduce a trade balance deficit is that they raise the price of importable relative to exportable and thereby shift demand from foreign goods to domestic goods (Avinash Dixit and Victor Norman 1980). Temporary tariff increase raises the cost of consumption today relative to consumption tomorrow and thus raises the domestic real interest rate. This rise in the real interest rate decreases current consumption and leads to an improvement in the trade balance. A permanent tariff increase, on the other hand, changes the price of both current and future consumption and has an ambiguous effect on the trade balance. Se-bastian Edwards (1987).

Turunen-Red & Woodland (1991) Strict Pareto-Improving Multilateral Reforms of Tariffs and specify a many nation, many commodity model of international trade containing distor arising from trade tariffs and examine the possibilities for the gradual multilateral reform of tariffs. Attention is focused upon the attainment of strict Pareto improvements in welfare, whereby every nation gains from the tariff reform, since only these reforms are guaranteed to get unanimous approval. Proportional reductions in all tariffs and a reduction of extreme ad valorem tariff rates can be welfare improving. Demonstrations that a proportional reduction in all tariffs in welfare improving in a small open, single- household economy have been provided by Foster and Sonnenschein (1970), Bruno (1972), Lloyd (1974), Hatta (1977), and Fukushima (1979). Various results rates, which typically rely upon substitutability assumptions, have been derived by Bertrand and Vanek (1971), Hatta (1977), and Fukushima (1979).

Vnaek (1964), Hatta & Fukushima (1979) consider tariff reform in a many nation world that trades in just two commodities and show that a reduxtin of the world's highest ad valorem tariff rate will yield a potential increase in welfare for all nations.Hatta & Fukushima also prove that a proportional reduction in all tariff rates is potentially welfare improving. Results show necessary and suffiecient conditions for the existence of such reforms, and demonstrate that various particular tariff reform proposals satisfy these conditions. Results of tariff reforms constrained to strict Pareto improviemnts and showed that the outcomes of negotiated tariff reforms are Pareto superior to the tariff war even if they may not be free trade situations.

Marcelo Olarreaga (1998) study Tariff Reductions under Foreign Factor Ownership that In the presence of foreign factor ownership, the traditional welfare effects of tariff reform shave to be reconsidered to include income redistribution between national and foreign-owned factors. Bhagwati & Brecher (1980) showed that when the relative amount of foreign-owned factors in the host country is sufficiently large to induce a change in the direction of the trade pattern, immiserizing tariff reductions may occur. It is shown that in the mirror case when foreign-owned factors tend to support the existing trade pattern (i.e., trade promoting), similar results can be obtained.

Mutti (1979) analyzes the economic efficiency effects of tariff concessions. Research shows the importance of considering terms of trade changes from multilateral trade negotiations. Import and export demand elasticity have been applied without adequate attention to whether competing goods change in price at the same time; this issue becomes particularly important when trading blocs play a major role in world trade.To incorporate the role of trade with developing countries show that the factor can be significant for countries that carry on a relatively large share of their trade with non-OECD nations.

Shea (1997) investigate the impact of tariff induced capital movement on the welfare of a small country.The general condition under which tariff induced capital inflow and outflow will increase or reduce the welfare of a small tariff ridden economy is investigated. Tariff induced capital movement can either increase or reduce welfare depending on the cost of capital. Result shows that tariff-induced capital movement must reduce welfare despite the possibility of taxing the return to the migrated capital. Under other conditions, however, tariff-induced capital movement can increase welfare if the return to the migrated capital is taxed appropriately.

Irwin and Temin (2001) study The Antebellum Tariff on Cotton Textiles Revisited that American textile manufacturers were well established by the 1830s and not dependent upon the tariff for their survival. The effect of changes in the relative price of imports on domestic production (estimated using time-series data) appears to be small, even in the late 1820s and after the mid-1840s when potentially redundant tariff protection is not an issue. Part of the explanation for the relative unimportance of the tariff during this period is that, as historical contemporaries observed, British and American products were quite different from one another. Result shows that high tariffs were not an essential component of the survival and success of the later antebellum domestic cotton-textile industry, although the early cotton industry may have been protected by the Tariff of 1816.

Sebastian Edwards (1989) study Tariffs, Capital Controls, and Equilibrium Real Exchange Rates. A general equilibrium with optimizing consumers and producers is developed to analyze how the equilibrium real exchange rate (RER) reacts to changes in the degree of restrictions to trade. In particular, the effects of changes in the level of import tariffs and of changes in taxes on foreign borrowing on the path of equilibrium RERS are investigated. In research import tariffs, both temporary and anticipated changes are considered. It is shown that in this equilibrium real exchange rates can exhibit interesting and convoluted behavior. Under the more general conditions, and contrary to the traditional wisdom, tariff liberalization doesn't necessarily result in an equilibrium real depreciation. The direction in which the equilibrium RER will move will depend on a number of key parameters, and will likely vary from country to country. Expected future tariff hikes will generate an (equilibrium) real appreciation in the current period. Research shows that the long-run equilibrium real exchange rate can experience wide swings.

Earl R. Rolph (1947) estimated the shifting and burden of import duties. An examination of import duties, like other taxes, involves the dual task of determining the payment burden and the economic effects of the levies. To the extent that import taxes yield revenue to governments imposing them, some people or groups must be giving up the money which the government receives. The people who pay money to the government in the first instance, the legal taxpayers, may or may not be the final taxpayers. If they are not the final taxpayers, they act as a conduit for the money paid by other groups on its way to the Treasury. The determination of what people or groups contribute the money which becomes the Treasury's tax revenue is the problem of tax incidence.

Taxes may, in addition, affect production, resource allocation, and the composition of products made available in the economy. Import taxes may reduce (or increase) the volume of imports or alter the composition of imports. Domestically, the production of exports may be curtailed because of import taxes and the output of products for domestic sale may be increased, and if the economy is not capable of sufficient adjustment, import duties may lead to unemployment of resources. In addition to real effects, import taxes may alter the absolute level of the national money income and change its distribution among various members of the community.

The foreign exchange relations between countries where freedom exists to buy and sell foreign exchange and to export and import goods, services, securities, and money ranges from absolutely fixed exchanges to automatically fluctuating exchanges, If the tax acts to restrict the amount of the commodity imported, it may raise the price, and thus buyers are said to bear the tax which their government imposes.

In the taxing country, the reduction in the supply of heavily taxed imports and the increase in the supply of lightly taxed or exempt imports is accompanied by a rise in the prices of the first group and a fall in the prices of the second. This occasions some redistribution of the real gain of economic activity in favor of the users of imports which are lightly taxed. The protective action of non-uniform schedules of import taxes is particularly marked in cases where tariff schedules provide heavy duties for classes of commodities which are deemed competitive with domestic production and low or zero duties upon "raw materials." Foreign-produced items such as highly fabricated articles are, in general, subject to high rates whereas raw materials (with many exceptions) are taxed at low rates or not at all. With full adjustments to gold flows, such a pattern of rates has a double-barreled action. Imports of manufactured items are curtailed and this provides a more favorable domestic market for domestic producers of commodities which are substitutes for such imports and hence "protects" the domestic market. If domestic producers of such products use imported raw materials in some measure, the low rates on such imports and the selective effect of the tariff lowers the domestic prices of these commodities. To the extent that these prices constitute a part of costs, the profitability of the production of items using imported raw materials is increased. Thus protection is offered both by increasing the demand for products which are substitutes for imports and by reducing the costs of producing them, to the extent that their production requires the use of imported raw materials. On the other hand, those producers of products which are substitutes for low-taxed or exempt imports are exposed to more competition from a "protective" tariff and are made worse off in terms of income than they would be with no tariff at all.

J. Wemelsfelder (1960)estimates the short-term effect of the lowering of import duties in Germany. It present that within a short period import duties were more than halved.

Research estimates the German tariff reduction on the German economy. Notably the cut in import duties on industrial end-products appears to have had a highly stimulating effect on imports. The import elasticity has even been estimated at 8 or 10. Research shows that the increase in imports as a result of the tariff reduction has probably been at the cost of the development of the domestic production (a large substitution effect) rather than the consequence of greater consumption. In reviewing the German tariff reduction it should be noted that it came about in the course of two years and amounted to more than 50% of the tariff applied. In spite of the forced character of this reduction the output of industrial end-products hardly showed a ripple, because the normal rate of growth, and particularly the greater export opportunities, offered sufficient compensation for the effects of the tariff reduction. That in terms of welfare the part played by the tariff in the whole of the modern economic structure of a large industrial country is negligible is shown by the tentative calculation that was made of the effect of the German tariff reduction on the prosperity of the German economy. The short-term increase in the national income as a result of the cut in import duties was minimal.

The cut in the import duties on semi-manufactures appears not to have caused any distinct large shifts. In all probability the economic effect has been small, in any case much smaller than it has been in the case of finished products.

Cheng, Qiu & Wong (2001)investigate the design of optimal incentive compatible anti-dumping (AD) measures. When the domestic firm's profit was given weight in the government's objective function is relatively small and if the foreign firm reports its own costs it is shown that no AD duty should be imposed, but a constant AD duty should be imposed if the domestic firm reports the foreign firm's cost. When this weight is large, the AD duty is a prohibitive tariff in either case of reporting. Research estimates the optimal incentive compatible AD measures. The foreign firm's marginal cost is known to the home and foreign firms but not to the home government. Consistent with the actual implementation of AD measures, it assume that the optimal AD measures are chosen so as to maximize some weighted average of consumer surplus, producer surplus, and net government revenue.

The explosive use of AD actions, especially those taken by the United States and European producers, to restrain foreign competitors since the 1980s has resulted in what some policy analysts call 'anti-dumping protectionism.' Like other trade policy tools, itwould be reasonable to expect that the imposition of AD measures reflects national welfare.Indeed, according to Veugelers and Van-denbussche (1999), 'European antidumping legislation requires policy makers to consider the "Community's Interest" as a whole when taking protectionist action. This Community Interest Clause corresponds quite well with economists' notion of national welfare, which is composed of three elements, local consumer surplus, domestic firms' profits . . . and any possible tariff revenue.'

To arrive at an average dumping margin when an AD duty is to be imposed, the government excludes all transactions where dumping did not occur (Morkre and Kelly 1994). Research pursue if the home government attaches a large weight to the home firm's profits, then the optimal AD duty is a prohibitive one for all. If the weight attached to the home firm's profit is small, then the government needs to know (through policy design, not investigation) only whether dumping has occurred. If it has occurred, the home firm will file an AD petition, and the government simply applies an optimal constant specific duty, and a corresponding constant lump-sum tax.

Even though the government is free to design measures that depend on the reported cost, it is not optimal to do so, owing to the incentive compatibility constraint. If the government has information about the foreign firm's marginal cost and attaches a relatively small weight then, it should set a lower duty when the foreign firm's cost is higher. Research investigates the design of optimal incentive compatible AD measures that can induce the firms involved to report their truthful information and thus save both time and costs. When the home firm is relied upon to report the foreign firm's cost, it has found that the optimal AD duty is either a prohibitive tariff (if the relative weight attached to the domestic firm's profits is high) or one that is independent of the actual dumping margin (if the relative weight attached to the domestic firm's profits is low). If the foreign firm is asked to report its own cost, it has found that the optimal AD duty is zero if the weight attached to the domestic firm's profit is not large enough. The optimal AD duty is a prohibitive tariff, if the weight is sufficiently large. If the weight is intermediate, then the optimal AD duty is an increasing function of the dumping margin. Under the GATT/WTO rule, the optimal incentive compatible AD duty is modified by setting the optimal AD duty equal to the dumping margin.

R. I. Nowell (1932) studies the Effects of a Duty on Philippine Sugar. All of the islands have shared in increase the growth of sugar export, but the Philippines have increased their exports to the United States the most rapidly of the group. Puerto Rico, Hawaii and the Virgin Islands have about reached their maximum limits of expansion, but in the Philippines there still remain large tracts of land suitable for cane production which has yet to be brought under cultivation. Imports from Cuba during the period 1924-28 amounted to 54.1 percent of consumptionbut since have gradually decreased until in 1931 they represented only 37.2 percent. In the years 1924-28 the United States took 79.2 percent of Cuba's exports, and in 1931, 76.5 percent. Cuba, however, is still the largest single contributor to the United States' sugar supply, and is the largest exporter of sugar in the world. If the imports from the Philippines were entirely excluded by a tariff, Cuba would have ample sugar Owing to the relative ease with which sugar can be stored or transportedprices in the various markets throughout the world are kept in fairly close alignment with due allowance of course for tariff and freight differences. The Smoot-Hawley Tariff Act of 1930 imposed a rate of $2.50 per hundred on full duty sugar. But under the Cuban Reciprocity Treaty of 1903, Cuba is granted a 20 percent preferential which makes the rate now prevailing on Cuban sugar $2.00 per hundred pounds. Since Cuba stands prepared to supply all sugar required to supplement our continental and insular production, at the Havana price plus the freight and preferential duty, the rate of $2.00 per hundred represents approximately the protection afforded the continental and insular sugar producers.

The burden of a tariff duty on a commodity is normally shifted in part backwards to the foreign producers and in part forwards to the domestic consumers. The distribution of the burden between producers and consumers depends upon the relation between the elasticity of supply on the one hand and the elasticity of demand on the other.

In the study of tariff on sugar, there is considerable evidence that it is largely shifted forwards to the consumer and that if the duty were entirely removed prices would ultimately be lower than otherwise by an amount approaching the duty.

The effects of a United States tariff on Philippine sugar would depend much upon the rate imposed. A limitation would differ from a tariff in that it would not work such an immediate hardship on the Philippines; in fact, the Philippine people would have much to gain in the short run because they would share in the price increase brought about by the Cubans. Producers in all of the insular possessions, including the Philippines to the extent permitted free entry, in the continental United States, and in Cuba, would stand to gain by approximately 50 cents per hundred, largely at the expense of the American consumer. The treasury would receive but little additional revenue from the restriction as compared with the 30 millions which it would receive if a tariff were imposed on all of the imports from the Philippines.

It thus appears that producers of sugar in the continental United States would stand to gain but little by having Congress place a tariff on imports of Philippine sugar. Perhaps, however, such action would induce Cuba to make preferential duty price-effective. It is possible that under the stress of the depression Cuba might be driven temporarily, as evidenced by the recent Presidential decrees, to use its already established export monopoly to raise prices irrespective of the influence of this on Philippine production. In that event a tariff on Philippine sugar would have a negligible effect on sugar prices in the United States but would represent welcomed protection for the Cubans.

Karp and Newbery (1991) estimate buyers exercise market power by setting optimal import tariffs, taking as given the tariffs set by other buyers and the extraction paths of the suppliers.Research reveals a time consistent import tariff for exhaustible resources which is the natural counterpart to the time consistent strategy for a set of exhaustible resource producers. The tariff is easy to characterize and compute, is a function of currently observed variables (price, demand elasticity) alone, and will continue to apply to cases where both producers and importers exercise market powerResearch shows how to derive an equilibrium for the world oil market in which OPEC behaves no more collusively than a duopoly facing a competitive fringe, and in which the United States and other large importers all impose optimal import tariffs. The resulting equilibrium begins with a lower rate of extraction than the competitive equilibrium. The import tariffs tend to lower the initial price, but the producers' oligopolistic behavior tends to increase it. The net result is to reduce the initial price. In this sense, the model suggests that oligopsony power is more effective than oligopoly power, at least for this specification of demand, and the given parameters. The inefficient early extraction of high cost producers tends to increase the initial price, The resulting equilibrium has the property that OPEC will initially have a lower share of current production than of current reserves, it shown that the implied rate of import tariff for the United States appears to be quite large.

2.1 Chapter Summary

After going thoroughly in detail about trade restriction and its relevance to price stability, it can be said that trade restriction is a vast study which has and need to be more focused.

The area for research needs to be focused to understand its major constructs, the relationship between the variables and trade restrictions affecting the price stability in textile.

The different articles illustrated various theories and models of trade restrictions are studied with this in mind, the next section will present a conceptual framework and hypothesis for investigating the impact of trade restriction on price stability of textile industry of Pakistan.

CHAPTER 3: THEORETICAL FRAME WORK AND CONSTRUCTION OF HYPOTHESIS

3.1 Problem Identification / Research Problem

There are many trade restriction that affect price stability of textile industry, but this research focuses on some of the important and very relevant restriction out of them and hence this research provides “to study the impact of trade restriction on price stability of Textile industry of Pakistan”.

3.2 Research Hypothesis

H#1: There is a positive relation between tariff and domestic market price of imported textile items.

H#2: There is a positive relation between import duties and domestic market price of imported textile items.

H#3: There is a positive relation between transportation cost and domestic market price of imported textile items.

3.3 Chapter Summary

In this chapter, a theoretical framework is provided to present the relationship between the trade restriction and textile prices. After defining problem identification / research Problem, the research hypotheses are defined and then hypothesis are established for verification.

CHAPTER 4 : RESEARCH METHODS

4. 1 Data Collection & Procedure

The Secondary data was obtained from the different websites and Economic Environment of textile sector of Pakistan over a period of last 3 years activity on prices.

4.2 Research Methods

To evaluate the relationship of explanatory variables were regressed using Curve estimation (Linear and Logarithmic) In the Multiple regression analysis the proposed variables to be studied are the following:

Dependent variable

Price Stability

Independent Variables

Trade restriction:Import duties TariffandTransportation cost.

4.3 Application of Statistical Test

To investigate variables and to test the hypothesis, following statistical hypothesis model were made.

P = α + β 1 (Tariff) + β 2 (Import Duty) + β 3 (Transportation Cost) +µ

L og P = α + β 1 log ( Tariff) + β 2 log ( Import Duty) + β 3 log ( Transportation Cost) + µ

4.4 Chapter Summary

In this chapter, the methodological issues relevant to the investigating the impact of trade restriction on price stability of textile industry of Pakistan are presented and discussed. This chapter covers data collection, research methods and application of statistical test.

CHAPTER 5 : RESULTS AND HYPOTHESIS TESTING

5.1 Interpretation & Assessment of Regression Analysis

H # 1 states, “ There is a positive relation between tariff and domestic market price of imported textile items”.

Textile Machinery (Linear regression model )

The result indicates that coefficient of correlation R= 0.999 which means there is a strong relationship of Tariff on Textile Machinery. Coefficient of determination R2 = 0.996 or 99.6% which means the regression model explains 99.6% to the dependent variable. When independent variable is zero than the value of the Textile Machinery will be 112482703.237. If the value of Tariff changes by 1 unit than the value of Textile Machinery will Decrease by -0.590 unit and significance value of Tariff is 0.029 it means hypothesis is accepted and relationship exists between Tariff and Textile Machinery. ANOVA Model is explained by 479500864470424.000 (99.79%) and remaining 1022220196241.865 (0.21%) is residuals. Significance value is 0.029 it means model is best fit.

Textile Machinery ( Logarithmic regression model )

The result indicates that coefficient of correlation R = 0.1 which means there is a strong positive relationship of Tariff on Textile Machinery. Coefficient of determination R2 = 0.999 or 99.9% which means the regression model explains 99.9% to the dependent variable. When independent variable is zero than the value of the Textile Machinery will be 1640182469.939. If the value of Tariff changes by 1 unit than the value of Textile Machinery will Decrease by -85902587.891 unit and significance value of Tariff is .010 it means hypothesis is accepted and relationship exists between Tariff and Textile Machinery. ANOVA Model is explained by 480399521658463 (99.9%) and remaining 2297934179196111 (0.1%) is residuals. Significance value is 0.010 it means model is best fit.

Worn Clothing (Linear regression model )

The result indicates that coefficient of correlation R = 0.998 which means there is a Strong relationship of Tariff on Worn Clothing. Coefficient of determination R2 = 0.992 or 99.2% which means the regression model explains 99.2% to the dependent variable. When independent variable is zero than the value of the worn clothing will be -5578188.752. If the value of Tariff changes by 1 unit than the value of worn clothing will increase by 0.78 unit and significance value of Tariff is 0.040 it means hypothesis is accepted and relationship exists between Tariff and worn clothing. ANOVA Model is explained by 8290238900517.870 (99.6%) and remaining 32907099482.123 (0.4%) is residuals. Significance value is 0.040 it means model is best fit.

Worn Clothing ( Logarithmic regression model )

The result indicates that coefficient of correlation R = 0.999 which means there is a Strong relationship of Tariff on Worn Clothing. Coefficient of determination is R2 = 0.998 or 99.8% which means the regression model explains 99.8% to the dependent variable. When independent variable is zero than the value of the Worn Clothing will be -206560804.839. If the value of Tariff changes by 1 unit than the value of Worn Clothing will Increase by 11300946.517 unit and significance value of Tariff is 0.021 it means hypothesis is Accepted and relationship exist between Tariff and Worn Clothing. ANOVA Model is explained by 8314185508923.260 (99.8%) and remaining 8960491076.738 (0.2%) is residuals. Significance value is 0.021 it means model is best fit.

H # 2 states, “ There is a positive relation between import duty and domestic market price of imported textile items”.

The result indicates that in both Linear and Logarithmic model P > 0.05; it suggests that the involved regression would explain the variable non-significantly. Hence, hypothesis is rejected.

H # 3 states, “ There is a positive relation between transportation cost and domestic market price of imported textile items”.

The result indicates that in both Linear and Logarithmic model P > 0.05; it suggests that the involved regression would explain the variable non-significantly. Hence, hypothesis is rejected.

5.2 Summary of Hypothesis Assessment

Summary of hypothesis assessment is enclosed herewith from table 01-02

5.3 Chapter Summary

In this chapter, the interpretations & assessments of regression analysis for research hypothesis are carried-out.

Above diagram shows change in tariff that cause effect on imports due to which imports decline, this decline cause increase in demand and decrease in supply. Domestic buyers seek to initiate their own manufacturing facilities to cater domestic demand therefore price of domestic textile machinery increases and imported textile machinery price decline.

Above diagram shows change in tariff that cause effect on imports due to which imports decline and price of imported worn clothing increases.

CHAPTER 6 : SUMMARY AND CONCLUSION

This study has discussed three independent variables in which one independent variable (tariff) has shown significant impact on textile machinery and worn clothing. Subsequently, the best models of the Price stability in relation to theses three variables (tariff, transportation cost and import duty) have successfully formulated. Meanwhile only one hypothesis in this study has been accepted through the selected tests where as rest of them were rejected. From the analysis of Textile prices for the past three years it has been investigated that there is a change of price in imported textile machinery and imported worn clothing in the domestic market subsequently, tariff has been diagnosed as the cause of their change.

Despite the data shortcomings, however, Research calculations demonstrate that one dominant variable (tariff) that shows significant impact on the domestic price of imported textile machinery and worn clothing. The result further indicated that liberalized trade may result in price stability. Some evidence was found that point to differential effects of import prices in Pakistan is associated with macro economic policies and prudent approach by government.

The previous studies are likely to understate seriously the size of the natural and total levels of protection that domestic producers enjoy against competition from imports. Better data on trade restrictions for traded goods are needed to help economists explain observed differences among countries in prices of traded goods and in rewards to factors of production.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/price-instability.php


Not what you're looking for?

Search:


About this resource

This Economics essay was submitted to us by a student in order to help you with your studies.


Rating:

Rating  
No ratings yet!

  • Order a custom essay
  • Download this page
  • Print this page
  • Search again

Word count:

This page has approximately words.


Share:


Cite:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Price instability. Available from: <http://turkiyegoz.com/free-essays/economics/price-instability.php> [17-12-18].


More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:


Essay and dissertation help

badges

 
The Picture of Dorian Gray | 12 Monkeys – HD – DUB/LEG Online | Love Live! School Idol Project