Transcript Lecture Slides Chapter 05

Nontariff Trade
Barriers
Chapter 5
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
Import Quota
o definition - restriction on the quantity of a
good imported during a specific time period
o quotas prohibited by WTO
o still in use by developed nations – common
examples in agriculture
o global quota – limit on the total number of
units of a good from all other countries
o selective quota – limit on the number of units
of a good from a specific country or countries
Import Quota Welfare Effects
Before Trade:
U.S. consumer
surplus is area in
red.
U.S. producer
surplus is area in
green.
Import Quota Welfare Effects
With Free Trade:
U.S. consumer
surplus increases
substantially due
to lower price.
U.S. producer
surplus decreases
to a lesser degree.
Overall increase in
welfare is b,c,d
and area above.
Import Quota Welfare Effects
With Import Quota:
a = redistributive effect
b + d = deadweight loss
b = protective effect
d = consumption effect
c = revenue effect
“windfall profit”
“quota rent”
portion to foreign
exporters and portion to
U.S. importers
Import Licenses
With an import quota, the government must find
method to allocate limited supply of imports to
domestic importers.
o historical market share – bias against new
importers
o pro rata – each importer receives fraction of its
demand
o auction import licenses to highest bidder(s) –
allows the domestic government to capture the
windfall profits (area c = revenue effect)
Quota Versus Tariff
initially similar - however if demand increases
o tariff leads to more imports at the same price
o quota leads to a higher price & more imports
Thus an import quota can be more restrictive.
Tariff-Rate Quota
o allows specified number of goods at one tariff
rate – “within quota rate”
o additional imports are subject to higher tariff
rate – “over quota rate”
o in principle - less restrictive than a quota
o in practice - may be as restrictive if the over
quota rate is prohibitively high
o license on demand allocation – importers
apply for licenses on first come-first served
basis – if demand exceeds quota, volume is
reduced proportionally for all importers
Export Quota
domestic government limiting the exports of a
certain good to another country
o voluntary export restraint agreement or orderly
marketing agreement
o economic impact identical to import quota
o common on television sets, steel, textiles,
autos and ships
o increases costs to consumers
o translates to higher profits for foreign exporters
Domestic Content Requirement
o minimum percentage of product’s total value
produced domestically required to qualify for
zero tariff rate
o popular
argument for
organized
labor
o common in
auto industry
Domestic Content - Welfare Effect
consumer surplus before
domestic content
requirements
content requirements
increase prices
decreasing consumer
surplus
increasing domestic
producer surplus
decreasing total welfare
due to deadweight loss
Subsidies
o government funding to domestic producers
o include: tax concession, low interest loans,
insurance arrangement & cash disbursements
o allows producers to sell goods for a lesser
price
o domestic production subsidy – granted to
producers of import competing goods
o export subsidy – granted to producers of
goods that are to be sold in other countries
Domestic Production-Welfare Effect
Free Trade - No Subsidy
assuming the domestic
market is relatively small
in relation to the world free
trade will lower price
consumer surplus
substantial because of the
lower price caused by free
trade
producer surplus is a
small area for the same
reason
Domestic Production Subsidy-Welfare
Domestic Production Subsidy
increases domestic supply
but price does not change
producer surplus increases
due to greater sales
this increase was partially
redistributed consumer
surplus
and partially protective
effect/deadweight loss
result: subsidies do not
decrease welfare as much as
tariffs or quotas
Export Subsidy – Welfare Effects
Free Trade - No Subsidy
assuming the domestic
market is relatively small
in relation to the world free
trade will raise the price in
this case
consumer surplus is
relatively limited because
of higher price associated
with free trade
producer surplus is a large
area for the same reason
Export Subsidy – Welfare Effects
With Export Subsidy
export subsidy raised the
price
consumer surplus is
decreased further
because of higher price
producer surplus
increases for same reason
cost to taxpayers
deadweight loss of welfare
to society
Product Dumping
o charging foreign buyers a lower price than
domestic buyers for an identical product
o also called international price discrimination
o sporadic dumping – firm disposes of excess
inventory on foreign markets
o predatory dumping – temporary reduction in
price designed to force foreign competitors out of
business to gain monopoly power
o persistent dumping – indefinite reduction in
foreign price in order to maximize profits
Maximizing Profits - One Price
the firm maximizes profits by producing at a
quantity where MC = MR
charging price of $500 in each market
Price Discrimination to Maximize Profits
production where MC = MR in each market
result is a higher price where demand is inelastic
and a lower price where demand is elastic
Antidumping Regulations
antidumping duties levied when
1) Department of Commerce determines foreign good is
sold for less than fair value and
2) International Trade Commission determines imports
are causing or threaten material injury
margin of dumping – amount by which foreign
value exceeds U.S. price
1) price-based definition – import sold in the U.S. for
price below foreign price
2) cost-based definition – absence of price-based
Commerce Department uses (1) manufacturing cost;
(2) general expenses; (3) home profits; (4) cost of
packaging for shipment
Fairness of Antidumping Laws
1) Average Variable Cost: Current definition of
dumping implies any price below average total
cost indicates dumping; however lower price
still above average variable cost would not
necessarily imply dumping
2) Exchange Rates: An increase in the exchange
rate value of the dollar would lower prices on
imports even if there without product dumping.
3) Overuse: Antidumping actions may be used
as protectionism or as retaliation to genuine
allegations from other countries.
Other Nontariff Trade Barriers
o Government Procurement Policies: National
and local governments buy many goods but
many have buy-national policies giving
preference to domestic over foreign goods.
o Social Regulations: Governments attempt to
correct health and environmental side effects
of trade; examples: fuel economy standards
and limits on hormone-treated meats
o Sea Transport & Freight Regulations: Nations
can use highly restrictive practices on
unloading cargo to serve as a barrier to trade.