International Economics By Robert J. Carbaugh 10th Edition

1. International EconomicsBy Robert J. Carbaugh10th Edition Chapter 5: Nontariff Trade Barriers

2. Import quotas • Quotas are a restriction on the quantity of a good that may be imported in any one period (usually below free-trade levels) • Eg. Not more than 30 million apples per year • Global quotas restrict the total quantity of an import, regardless of origin • when the specified amount has been imported, additional imports are prevented for the remainder of the year. • Selective quotas restrict the quantity of a good coming from a particular country • Eg. Of 30 mil apples per year, which 14m must come from US, 10m from Mexico & 6m from Canada Carbaugh, Chap. 5

3. Figure 5.1: Import quota: trade & welfare effects • Suppose US is a “small” country in term of the world cheese market, Sus, Dus denote the SS & DD schedules of cheese for US. • SEU denotes the SS schedule of the European Union. • Free Trade: P = $2.50 per pound, QDus = 8 pound, QSus= 1 pound, imports = 7 pounds. Carbaugh, Chap. 5

4. Figure 5.1: Import quota: trade & welfare effects • US impose import quota: 3 pounds • The reduction in imports from 7 pounds to 3 pounds raises the equilibrium price to $5; this leads to an increase in the QSus from 1 pound to 3 pounds and a decrease in QDus from 8 pounds to 6 pounds. Carbaugh, Chap. 5

5. Figure 5.1: Import quota: trade & welfare effects • US CS falls by an amount = a + b + c + d ($17.50). • Area a ($5) represents the distribution effect. • Area b ($2.50) represents the protective effect. • Area d ($2.50) represents the consumption effect. • Deadweight loss = protective effect + consumption effect. • Area c ($7.50)represents the revenue effect. Carbaugh, Chap. 5

6. The Quota’s Revenue Effect EU exporting companies US importing companies US consumers • The distribution of the quota’s revenue effect will be determined by the prices that prevail in the exchanges between exporting and importing companies. • If US importers organize as monopoly buyers, purchase cheese at $2.50 & resell it at $5, the quota’s revenue accrues to US importers as profits. • If EU exporters organize as monopoly sellers & drive up the price to $5, they will capture the quota’s revenue effect. • If the US government auctions import licenses to the highest bidder in a competitive market, it will capture all the quota’s revenue effect. Carbaugh, Chap. 5

7. Quotas vs Tariffs • The impacts of these 2 policies are differ in: • Revenue effect • The tariff’s revenue effect goes to government as collection of duty. • Who obtains the quota revenue effect will depend upon the prices that prevail in the exchanges between exporting and importing companies. • Volume of trade, during periods of growing demand. • An import quota restricts the volume of imports by a greater amounts than does an equivalent import tariff. • Figure 5.3 Carbaugh, Chap. 5

8. Figure 5.3: Trade Effects of Tariffs vs Quotas • A tariff of $1,000 would raise the price of Japanese autos from $6,000 to $7,000; auto imports would fall from 7 million to 3 million units. • An import quota of 3 million units would put US in a trade position identical to that which occurs under the tariff: A rise of price from $6,000 to $7,000. Carbaugh, Chap. 5

9. Figure 5.3(a): Tariff Restriction Suppose domestic demand increases, Dus0 rises to Dus1 • Under an import tariff: • imports rise from 3m to 5 m, but price of imports remains at $7,000. • domestic adjustment takes the form of an increase in the quantity of autos imports rather than a rise in auto prices. Carbaugh, Chap. 5

10. Figure 5.3(b): Quota Restriction • Under the quota: • total imports remains at 3m (as under the quota before the increase in domestic dd), price up to $7,500, domestic production expand to 4m • Adjustment occur in domestic prices rather than in the quantity of auto imported. Carbaugh, Chap. 5

11. Types of non-tariff barriers Tariff-rate quota • The tariff-rate quota is a two-tiered tariff • A specified number of goods (up to the quota limit) may be imported at one (lower) tariff rate, while imports in excess of the quota face a higher tariff rate Carbaugh, Chap. 5

12. Types of non-tariff barriers Orderly marketing agreements • Market sharing pact signed by trading partners • Intended to protect less efficient domestic producers • Usually involve voluntary export restraints, or export quotas Carbaugh, Chap. 5

13. Types of non-tariff barriers Domestic content requirements • Rules that require a minimum of certain percentage of a product’s total value to be produced domestically if the product is to qualify for zero tariff rate. • To pressure firms who sell products in that country to use domestic inputs in the production of those products. • Often has the effect of forcing lower-priced imports to include higher-cost domestic components or be assembled in a higher-cost domestic market • Leads to rising production costs and prices • Although it helps to preserve domestic jobs, it imposes welfare losses on domestic consumers. Carbaugh, Chap. 5

14. Types of non-tariff barriers Subsidies • By providing domestic firms a cost advantage, a subsidy allows them to market their products at prices lower than warranted by their actual cost or profit consideration. • Domestic subsidy • Payments made to import-competing producers to raise the price they receive above the market price • Export subsidy • Payments and incentives offered to export producers intended to raise the volume of exports • In both cases, government adds an amount to the price the purchaser pays. • The net price actually received by producer equals the price paid by purchaser plus subsidy. Carbaugh, Chap. 5

15. Figure 5.6(a): Domestic Subsidies: trade & welfare effects • SUS0 and DUS0 are US’s initial supply and demand schedules, so market equilibrium price is $430 per ton. • Given a free-trade price of $400 per ton, US consumes 14 tons, produces 2 tons and imports 12 tons. Carbaugh, Chap. 5

16. Figure 5.6(a): Domestic Subsidies: trade & welfare effects Government grants a production subsidy of $25 per ton: • A shift in US supply schedule from SUS0 to SUS1 • Domestic production expands from 2 to 7m, imports falls from 12 to 7m. • Subsidy = ($25 x 7m) = $175m Carbaugh, Chap. 5

17. Figure 5.6(a): Domestic Subsidies: trade & welfare effects Where does this subsidy revenue go? • Producer surplus: Part of it redistributed to more efficient US producer as producer surplus, area a ($112.5m) • Protective effect: More costly domestic output is allowed to be sold in the market as a result of subsidy, area b ($62.5m). Protective effect is a deadweight loss Carbaugh, Chap. 5

18. Figure 5.6(b): Export Subsidies: trade & welfare effects Granting of export subsidy yields 2 direct effects for the home country: • Term-of-trade effect: Subsidies reduce the foreign price of home nation exports, the home nation’s terms of trade is worsened. • Export-revenue effect: Should the foreign demand for exports be relatively elastic, % drop in foreign price is offset by rise in export volume. The home nation’s export revenues will increase. Carbaugh, Chap. 5

19. Figure 5.6(b): Export Subsidies: trade & welfare effects Free-trade: Equilibrium at point E, Japan export 1 million TV to US at $100 per unit. Export subsidy of $50 per unit: • Supply schedule shift from SJ0 to SJ1 ; Equilibrium moves to point F • Term-of-trade worsened:Export price falls from $100 to $75. • Japan’sexport revenue rising from $100m to $112.5m. Carbaugh, Chap. 5

20. Types of non-tariff barriers Dumping • The practice of selling a product at a lower price in export markets than at home (or exporting at prices below production cost) • Sporadic dumping - to clear unwanted inventories or cope with excess capacity • Predatory dumping - to undermine foreign competitors • Persistent dumping - reaping greater profits by engaging in price discrimination Carbaugh, Chap. 5

21. Types of non-tariff barriers Antidumping Regulations • Antidumping duty is levied when • the US Department of Commerce determines a class or kind of foreign merchandise is being sold at less than fair value (LTFV), and • the US International Trade Commission (ITC) determines that LTFV imports are causing or threatening a US industry. • Such antidumping duties are imposed to neutralize the effects of price discrimination or below-cost sales. Carbaugh, Chap. 5