Nontariff TradeBarriers

Chapter 5

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Import Quotao definition - restriction on the quantity of a

good imported during a specific time periodo quotas prohibited by WTOo still in use by developed nations – common

examples in agricultureo global quota – limit on the total number of

units of a good from all other countrieso 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 LicensesWith an import quota, the government must find method to allocate limited supply of imports to domestic importers.ohistorical market share – bias against new importersopro rata – each importer receives fraction of its demandoauction import licenses to highest bidder(s) – allows the domestic government to capture the windfall profits (area c = revenue effect)

Quota Versus Tariffinitially similar - however if demand increases

o tariff leads to more imports at the same price o quota leads to a higher price & more importsThus an import quota can be more restrictive.

Tariff-Rate Quotao 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 quotao in practice - may be as restrictive if the over

quota rate is prohibitively higho 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 Quotadomestic government limiting the exports of a certain good to another countryovoluntary export restraint agreement or orderly marketing agreementoeconomic impact identical to import quotaocommon on television sets, steel, textiles, autos and shipsoincreases costs to consumersotranslates to higher profits for foreign exporters

Domestic Content Requiremento 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 Effectconsumer surplus before domestic content requirements

content requirements increase prices

decreasing consumer surplus

increasing domestic producer surplus

decreasing total welfare due to deadweight loss

Subsidieso government funding to domestic producerso include: tax concession, low interest loans,

insurance arrangement & cash disbursementso allows producers to sell goods for a lesser

priceo domestic production subsidy – granted to

producers of import competing goodso export subsidy – granted to producers of

goods that are to be sold in other countries

Domestic Production-Welfare EffectFree 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-WelfareDomestic Production Subsidyincreases domestic supply but price does not changeproducer surplus increases due to greater salesthis increase was partially redistributed consumer surplusand partially protective effect/deadweight lossresult: subsidies do not decrease welfare as much as tariffs or quotas

Export Subsidy – Welfare EffectsFree 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 EffectsWith 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 Dumpingo charging foreign buyers a lower price than domestic buyers for an identical producto also called international price discriminationo sporadic dumping – firm disposes of excess inventory on foreign marketso predatory dumping – temporary reduction in price designed to force foreign competitors out of business to gain monopoly powero 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 = MRcharging price of $500 in each market

Price Discrimination to Maximize Profits

production where MC = MR in each marketresult is a higher price where demand is inelasticand a lower price where demand is elastic

Antidumping Regulationsantidumping duties levied when1)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. price1)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 Laws1) 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 Barrierso 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.