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IMPORT TARIFFS AND QUOTAS UNDER PERFECT COMPETITION 1 A Brief History of the World Trade Organization 2 The Gains from Trade 3 Import Tariffs for a Small.

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Presentation on theme: "IMPORT TARIFFS AND QUOTAS UNDER PERFECT COMPETITION 1 A Brief History of the World Trade Organization 2 The Gains from Trade 3 Import Tariffs for a Small."— Presentation transcript:

1 IMPORT TARIFFS AND QUOTAS UNDER PERFECT COMPETITION 1 A Brief History of the World Trade Organization 2 The Gains from Trade 3 Import Tariffs for a Small Country 4 Import Tariffs for a Large Country 5 Import Quotas 6 Conclusions 8

2 2 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Introduction During the 2000 presidential campaign, President George W. Bush promised to consider implementing a tariff on the imports of steel. This was a political move to secure votes in large steel-producing states as the tariffs would protect the domestic producers of steel. The steel tariff is an example of a trade policya government action meant to influence the amount of international trade.

3 3 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Introduction Because gains from trade are unevenly spread, producers often feel the government should help them limit losses due to competition from trade. Trade policy can include the use of import tariffs (taxes on imports), import quotas (limits on imports), and subsidies for exports. We will assume that firms are perfectly competitive. They produce a homogeneous good and are small compared to the market. Firms are price takers

4 4 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor The Gains from Trade We will now demonstrate the gains from trade using Home demand and supply curves, together with the concepts of consumer surplus and producer surplus. Consumer and Producer Surplus Figure 8.1 (a) shows the Home demand curve D where consumers face a price of P 1. Remember, CS is the difference between the price the consumer is willing to pay and the actual price. Part (b) of figure 8.1 illustrates producer surplus. Remember that PS is the difference between MC and price, where the supply curve represents a firms MC.

5 5 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor The Gains from Trade D P1P1 Price D 2 D 1 Quantity Total Consumer surplus, CS P2P2 Surplus for consumer purchasing quantity D 2 The demand curve gives us the consumers value for each unit of the good. Given P 1, consumers will buy a total of D 1. A consumer who purchases D 2 has a value of P 2, but only has to pay P 1 – that gives surplus equal to (P 2 -P 1 ) Adding up all the individual surplus for each point on the demand curve gives us total consumer surplusthe area between the demand and the price paidup to the quantity sold Figure 8.1 (a)

6 6 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor The Gains from Trade S Price S 0 S 1 Quantity Total Producer surplus, PS P0P0 P1P1 Surplus for firm producing quantity S 0 Figure 8.1 (b) The supply curve gives us the consumers value for each unit of the good. Given P 1, producers will sell a total of S 1. A producer who sells S 0 has a MC of P 0, but gets P 1. That gives surplus equal to (P 1 -P 0 ) Adding up all the individual surpluses for each point on the supply curve gives us total producer surplusthe area between the supply and the price receivedup to the quantity sold.

7 APPLICATION 7 of 136 The Gains from Trade No trade equilibrium Again we consider the world of two countries, Home and Foreign, with producers and consumers. Total Home welfare can be measured by adding up consumer and producer surplus. We will compare the welfare in Home in no- trade and free-trade situations. © 2008 Worth Publishers International Economics Feenstra/Taylor A PAPA D Price S Q 0 Quantity CS PS No-trade equilibrium Figure 8.2

8 8 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor The Gains from Trade Free Trade for a Small Country Suppose Home can now engage in trade. The world price P W is determined by the supply and demand in the world market (shown in in figure 8.2 (b)). Suppose Home is a small country. Price taker in the world market Faces a fixed price at P W Assume P W is below the Home no-trade price P A. At the lower price, Home will be an importer of the product at the world price.

9 9 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor PAPWPAPW The Gains from Trade Price S 1 D 1 Quantity S a b c D Figure 8.2 At lower world price, consumer surplus increases to a+b+d an increase of b+d from no-trade At lower world price, producer surplus falls to c a decrease of b from no-trade Imports, M1 Gain in trade is triangle d with area equal to ½(M 1 )(P A -P W ) d (b) Free Trade

10 10 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor The Gains from Trade Home Import Demand Curve We can derive the import demand curve, shown in figure 8.3 The relationship between the world price of a good and the quantity of imports demanded by Home consumers. At the no-trade equilibrium, there are zero imports This is shown as point A in panel (b). At the world price of P W, the quantity demanded is greater than quantity supplied, and we import M 1. This is point B in panel (b). Joining A and B gives import demand curve M.

11 11 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor B The Gains from Trade D PAPWPAPW Price S S 1 Q 0 D 1 Quantity Price M 1 Imports Import demand curve, M A A' No-trade equilibrium Imports, M 1 Each point on the import demand curve is a point that corresponds to Home imports at a given Home price Figure 8.3 (a) (b)

12 12 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Free Trade for a Small Country Since Home is a small country, the tariff does not affect world prices. The Foreign export supply curve X* is horizontal at the world price P W. Effect of the Tariff The new export supply curve shifts up to X*+t. Quantity demanded falls while quantity supplied rises However, as firms increase the quantity produced, the marginal costs of production rise. The domestic price will equal the import price.

13 13 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Quantity M1M1 Imports Foreign export supply, X* B Import Tariffs for a Small Country M Price M2M2 C Figure 8.4 A D X*+t P W +t Price S No-trade equilibrium M2M2 Home price rises by the amount of the tariff. Home supply increases and Home demand decreases Imports fall to M 2 PWPW S 1 D 1 S 2 D 2

14 14 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Effect of the Tariff on Consumer Surplus With the tariff, consumers now pay the higher price, P W +t, and their surplus is the area under the demand curve and above the higher price, P W +t. The fall in consumer surplus due to the tariff is the area in-between the two prices and to the left of Home demand, (a+b+c+d) in panel (a.1) of figure 8.5. This area is the amount that consumers lose due to the higher price caused by the tariff.

15 15 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor P W +t P W Import Tariffs for a Small Country A D Price S S 1 S 2 D 2 D 1 Quantity No-trade equilibrium M2M2 Lost consumer surplus due to the higher price with the tariff is equal to the shaded area (a+b+c+d) a b d c Figure 8.5 (a.1)

16 16 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Effect of the Tariff on Producer Surplus With the tariff, producer surplus is the area above the supply and below the higher price, P W +t. Since the tariff increases Home price, firms can sell more goods, and producer surplus increases This area, a in figure 8.5 (a.2), is the amount that Home firms gain due to the higher price caused by the tariff. Increases in producer surplus can benefit Home workers but at the expense of consumers.

17 17 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor P W +t P W Import Tariffs for a Small Country A D Price S S 1 S 2 D 2 D 1 Quantity No-trade equilibrium M2M2 The gain in producer surplus due to the higher price with the tariff is equal to the shaded area (a) a b d c Figure 8.5 (a.2)

18 18 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Effect of the Tariff on Government Revenue In addition to the tariffs impact on consumers and producers, it also affects government revenue. The amount of revenue collected is the tariff t times the quantity of imports (D 2 – S 2 ). In figure 8.5 panel (a.3), the revenue is shown by area c. The collection of revenue is a gain for the government in the importing country.

19 19 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor P W +t P W Import Tariffs for a Small Country A D Price S S 1 S 2 D 2 D 1 Quantity No-trade equilibrium M2M2 The gain in government revenue due to the tariff is equal to the shaded area (c) This equals the tariff, t, times the quantity of imports, M 2 a b d c Figure 8.5 (a.3)

20 20 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Overall Effect of the Tariff on Welfare Note, we do not care whether the consumers facing higher prices are rich or poor, and do not care whether the specific factors in the industry earn a lot or a little. The overall impact of the tariff in the small country can be summarized as follows: Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Rise in government revenue+c Net effect on Home welfare-(b+d) The areas b and d in figure 8.5 (a) correspond to the triangle (b+d) in figure 8.5 (b) and is the net welfare loss. We refer to this area as a deadweight lossit is not offset by a gain elsewhere in the economy.

21 21 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor P W +t P W Import Tariffs for a Small Country A D Price S S 1 S 2 D 2 D 1 Quantity No-trade equilibrium M2M2 The deadweight loss is the loss to Home that is not offset by a corresponding gain a b d c Figure 8.5 (a) a is a transfer from consumers to producers c is a transfer from consumers to government (b+d) is deadweight loss losses not offset by other gains b = production distortion d = consumption distortion

22 22 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Small Country Figure 8.5 (b) M1M1 Imports X* M Price M2M2 X*+ t C Dead weight loss due to tariff, b+d

23 23 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Why are Tariffs Used? Why do so many countries use tariffs if they always lead to deadweight losses? One idea is that developing countries do not have any other source of revenue. Import tariffs are easy-to-collect relative to income taxes. However, to the extent that developing countries recognize that tariffs have a higher deadweight loss, we would expect that over time they will shift away from such easy-to-collect taxes. A second reason is politics. The might government care more about producer surplus than consumer surplus. The benefits to producers (and their workers) are typically more concentrated on specific firms and states than the costs to consumers, which are spread nationwide.

24 APPLICATION 24 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel We will estimate the deadweight loss due to the U.S. steel tariff in place from March 2002 to December President Bush requested that the U.S. International Trade Commission (ITC) initiate a Section 201 investigation into the steel industry. The tariffs varied across products, ranging from 10 to 20%shown in Table 8.1then falling over time to be eliminated after 3 years.

25 APPLICATION 25 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel President Bush took the recommendation of the ITC but applied even higher tariffs, ranging from 8% to 30%. Knowing the U.S. trading partners would be upset by this, President Bush exempted some countries from the tariffs. These included Canada, Mexico, Jordan, and Israel, which all have free trade agreements with the U.S., and 100 small developing countries that were exporting only a very small amount of steel to the U.S.

26 APPLICATION 26 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Table 8.1

27 APPLICATION 27 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Deadweight Loss due to the Steel Tariff We need to estimate the areas of triangle b+d we found in figure 8.5(b). The base is the change in imports, ΔM, and the height is the increase in domestic price, ΔP = t. Deadweight loss then equals DWL = ½ t ΔM. It is convenient to measure the deadweight loss relative to the value of imports, which is P W *M. We will also use the percentage tariff, t/P W, and the percentage change in the quantity of imports, % ΔM = ΔM/M.

28 APPLICATION 28 of Worth Publishers International Economics Feenstra/Taylor PWPW P W +t U.S. Tariffs on Steel Price M 2 M 1 Imports M Deadweight loss due to the tariff, b+d c Figure 8.5 (b) ΔMΔM t We can measure DWL with the area of the triangle b+d from figure 8.5 (b) DWL = ½ t ΔM

29 APPLICATION 29 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Using these definitions, the deadweight loss relative to the value of imports can be rewritten as: The most commonly used products had a tariff of 30%, so the percentage increase in the price is t/P W = 0.3, leading to %ΔM = 0.3.

30 APPLICATION 30 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel This leads to a DWL of The value of steel imports affected by the tariff was about $4.7 billion prior to March 2002 and $3.5 billion after March Average imports over the two years were $4.1 billion. The dollar magnitude of deadweight loss is equal to $185 million.

31 31 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Under the small country assumption that we have used so far, the importing country is always harmed due to the tariff. The small country is a world price taker. If we consider a large enough importing country or a large country, however, then we might expect that its tariff will change the world price. Its imports are large enough that it can affect world price with a change in its imports.

32 32 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Foreign Export Supply If the Home country is large, then the Foreign export supply curve X* is no longer horizontal at the world price P W. We construct the Foreign export supply curve in a fashion similar to the import demand curve. In panel (a) of figure 8.6, we show the Foreign demand curve D* and supply curve S*, giving price of P A * at A*. At this point, Foreign exports are zero. Suppose the world price is P W above P A *. At the higher price, there is a Foreign excess supply of X 1 * = S 1 * - D 1 *, which will be exported at the price of P W at point B*.

33 33 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Price Quantity Exports D* S* Home import demand, M D1*D1* S1*S1* A* A*' PA*PA* PWPW B* X1*X1* Foreign exports, X 1 * Foreign export supply, X* World price increases to P W, increasing exports to X 1 * Figure 8.6 This gives us our Foreign export supply curve for the large country At the world price, P A *, exports are zero at A* (a) Foreign Mkt (b) World Mkt

34 34 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Effect of the Tariff Figure 8.7 we show the effect when Home applies a tariff of t dollars on imports. Foreign export supply curve shifts up by exactly the amount of the tariff, shifting from X* to X*+t. The Home price rises by less than t, and the Foreign producers receive, P*, which is less than P W. The tariff drives a wedge between what Home consumers pay and what foreign producers receive, with the difference, t, going to the Home government.

35 35 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor M2M2 M1M1 Import Tariffs for a Large Country A Price P*+t S Price Imports D S 1 S 2 D 2 D 1 Quantity M 2 M 1 M X*+t (a) Home market X* B* C C* No-trade equilibrium t (b) Foreign market t t Figure 8.7 (without welfare effects) PWPW P*

36 36 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Home Welfare Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Rise in government revenue+(c + e) Net effect on Home welfaree – (b+d) + (e) The triangle (b+d) is the deadweight loss due to the tariff. Area e offsets part of the loss. If e > (b+d), then Home is better off. If e < (b+d), then Home is worse off.

37 37 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country A Price a c P*+t P W P* S b d Price Imports e D S 1 S 2 D 2 D 1 Quantity M 2 M 1 M X*+t e X* B* C C* b+d No-trade equilibrium t (a) Home market (b) Foreign market Figure 8.7 (with welfare effects) If the gain of e is greater than the loss of (b+d), Home gains

38 38 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country Home welfare may improve, but it comes at the expense of foreign exporters. Foreign and World Welfare The Foreign loss, measured by (e+f) also in figure 8.7, is the loss in Foreign producer surplus from selling fewer goods to Home at a lower price. The area e is the terms-of-trade gain for Home (P*


39 39 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Tariffs for a Large Country A Price a c P*+t P W P* S b d Price Imports e D S 1 S 2 D 2 D 1 Quantity M 2 M 1 M X*+t e X* B* C C* b+d No-trade equilibrium t (a) Home market (b) Foreign market Figure 8.7 (with welfare effects) Foreign loses (e+f) as loss of Foreign producer surplus, from selling fewer goods at a lower price f

40 APPLICATION 40 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Once Again Optimal Tariff Compute the deadweight loss (area b+d) and the terms-of- trade gain (area e) for each imported steel product. Rather than do all these calculations, however, we can use the concept of the optimal tariff. The tariff that leads to the maximum increase in welfare for the importing country. We have shown that for a small tariff, a large country can gain. But if the tariff is too large, the country will still lose. Figure 8.8 graphs Home welfare against the level of the tariff.

41 APPLICATION 41 of Worth Publishers International Economics Feenstra/Taylor Free Trade Importers Welfare No Trade U.S. Tariffs on Steel Once Again B A C Terms of trade gain exceeds deadweight loss Terms of trade gain is less than deadweight loss B' Optimal Tariff Prohibitive Tariff Tariff The Optimal tariff maximizes the Importers welfare, Point C Too high of a tariff will decrease importers welfare and can increase to the point where there is no trade Figure 8.8

42 APPLICATION 42 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Once Again Optimal Tariff Formula The optimal tariff depends on the elasticity of Foreign export supply, E X *. Optimal Tariff Formula Optimal Tariff = 1/E X *. For a small importing country, the elasticity of Foreign export supply is infinite, and so the optimal tariff is zero. As the elasticity of Foreign export supply decreases, Foreign export supply curve is steeper, the optimal tariff is higher.

43 APPLICATION 43 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Once Again Optimal Tariffs for Steel If we apply this formula to the U.S. steel tariffs, we can see how the tariffs applied compare to the theoretical optimal tariff. Table 8.2 shows various steel products along with their respective elasticities of export supply to the U.S. We can compare the actual tariff to the optimal tariff to see where there were gains and where there were losses from the tariffs. But what about retaliation?...

44 APPLICATION 44 of Worth Publishers International Economics Feenstra/Taylor U.S. Tariffs on Steel Once Again Table 8.2

45 45 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas On January 1, 2005, China was poised to become the worlds largest exporter of textiles and apparel. On that date, the Multifibre Arrangement (MFA) was abolished. Under the MFA, import quotas restricted the amount of nearly every textile and apparel product that was imported to Canada, Europe, and the U.S. The quotas were to protect their own domestic firms producing those products. The threat of import competition from China led the U.S. and Europe to negotiate new quotas with China.

46 46 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas Import Quota in a Small Country Suppose the import quota of M 2

47 47 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas Figure 8.9 (with quota) B A Quantity D Price S Imports M1M1 Foreign export supply, X* Home import demand, M P2P2 C No-trade equilibrium c a d b+d c b (a) Home market (b) Import market With the Quota, the Foreign export supply becomes vertical at the quota quantity The new Export Supply curve crosses the Import Demand curve at a new price and quantity of imports At the new higher price P 2, Home Supply increases to S 2, Demand decreases to D 2 and imports fall to M 2 Always have a deadweight loss of (b+d) like the tariff Consumers loses surplus of (a+b+c+d), producers gain (a). Welfare of Home depends on what happens to (c), the total quota rents. PWPW S1S1 S2S2 D2D2 D1D1 M2M2

48 48 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas There are four possible ways these rents can be allocated. 1.Giving the Quota to Home Firms: Quota licenses can be given to Home firms Permits to import the quantity allowed under the quota system. The net effects on Home welfare due to the quota are then as follows: Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Quota rents earned at Home+c Net effect on Home welfare:-(b+d) This is the same loss we saw with a tariff. (b+d) is still a deadweight loss associated with the quota.

49 49 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas 2.Rent Seeking Because of the gains associated with owning a quota license, firms have an incentive to engage in inefficient activities in order to obtain them. How licenses are allocated matters. a.If licenses are allocated in proportion to each firms production, Home firms will likely produce more than they can sell just to obtain the import licenses for the following year. b.Firms might engage in bribery or other lobbying activities to obtain the licenses.

50 50 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas Some suggest that the waste of resources devoted to rent seeking could be as large as the value of the rents themselves, c. If rent seeking occurs, welfare loss of quota is: Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Net effect on Home welfare:-(b+c+d) This loss is larger than a tariff. It is thought rent seeking is worse in developing countries.

51 51 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas 3.Auctioning the Quota The government of the importing country to auction off the quota licenses. In a well-organized, competitive auction, the revenue collected should exactly equal the value of the rents. Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Auction revenue earned at Home+c Net effect on Home welfare:-(b+d) This is the same loss as the tariff.

52 APPLICATION 52 of Worth Publishers International Economics Feenstra/Taylor Auctioning Import Quotas in Australia and New Zealand During the 1980s, Australia and New Zealand both auctioned the quota licenses to import specific goods. Table 8.3 shows the value of imports covered by quotas curing 1981–1987. In 1988, New Zealand announced plans to phase out import quotas as part of a liberalization of trade, and all quota licenses were eliminated by 1992.

53 APPLICATION 53 of Worth Publishers International Economics Feenstra/Taylor Auctioning Import Quotas in Australia and New Zealand Table 8.3 also shows the value of bids for the quota licenses. These are estimates of rents. If we take the ratio of the value of bids to the value of imports covered by the quota, we obtain an estimate of the tariff equivalent to the quota. These are shown in the final column of table 8.3 Since there was no penalty from not following through, some firms decided not to purchase the licenses after all.

54 APPLICATION 54 of Worth Publishers International Economics Feenstra/Taylor Auctioning Import Quotas in Australia and New Zealand Table 8.3

55 APPLICATION 55 of Worth Publishers International Economics Feenstra/Taylor Auctioning Import Quotas in Australia and New Zealand The government therefore did not collect all the winning bids as revenue. For those that did buy their licenses, they could be resold and some were at much higher prices. This makes it appear that the government was not collecting all of the rents in area c.

56 56 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas 4.Voluntary Export Restraint The importing country can give authority for implementing the quota to the exporting government. This is often called a voluntary export restraint (VER) or a voluntary restraint agreement (VRA). In the 1980s the U.S. used this type of arrangement to restrict imports of Japanese automobiles. The Japanese government told each Japanese firm how much it could export to the U.S.

57 57 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas With VERs, quota rents are earned by foreign producers, making Home welfare: Fall in consumer surplus-(a+b+c+d) Rise in producer surplus+a Net effect on Home welfare:-(b+c+d) This is a higher net loss than with a tariff. Why would an importing country do this? It is typically politicalthe exporting country is less likely to retaliate since they gain the area c. This can often avoid a tariff or quota war.

58 58 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas Costs of Import Quotas in the U.S. Table 8.4 presents some estimates of Home deadweight losses and quota rents for some major U.S. quotas in the 1980s. In all cases except Dairy, the rents were earned by Foreign exporters. Adding up the costs in the table, the total U.S. deadweight loss due to these quotas ranged from $8– $12 billion annually. Quota rents transferred another $7–$17 billion to foreigners. Some, but not all, of these costs are relevant today since many of the quotas are no longer in place.

59 59 of 136 © 2008 Worth Publishers International Economics Feenstra/Taylor Import Quotas Table 8.4

60 APPLICATION 60 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement One of the principles of GATT was that countries should not use quotas to restrict imports. The MFA was a major exception to that which allowed the industrialized countries to restrict imports of textile and apparel products from the developing countries. Organized under GATT, importing countries could join the MFA and arrange quotas bilaterally or unilaterally. Under the Uruguay round of WTO, developing countries were able to negotiate an end to this system of import quotas. Some developing countries and large producers in importing countries were concerned with the potential of Chinese exports on their economies.

61 APPLICATION 61 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Growth in Exports from China Immediately after January 1, 2005, exports of textiles and apparel from China grew rapidly. In 2005, Chinas textile and apparel imports to the U.S. rose by more than 40% compared to Figure 8.10 (a) shows the change in the value of exports of textiles and apparel from different countries. Note China. The increases from China came at the expense of some higher-cost exporters, some of whose exports to the U.S. declined by 10 to 20%.

62 APPLICATION 62 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Figure 8.10

63 APPLICATION 63 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Panel (b) of figure 8.10 shows the percentage change in the prices of textiles and apparel products from each country, depending on whether the products were subject to the MFA quota before January 1, 2005, or not. China had the largest drop in the prices from 2004 to Many other countries had a substantial fall in their prices due to the end of the MFA quota.

64 APPLICATION 64 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Figure 8.10

65 APPLICATION 65 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Welfare Cost of the MFA Given the drop in prices in 2005, it is possible to estimate the welfare loss due to the MFA. Using the price drops from figure 8.10, the welfare loss for the U.S. (b+c+d), is estimated at $6.5 to $16.2 billion in 2005 from the MFA. Averaging out all losses and dividing among households gives an estimate of $100 per household, or 7% of total annual spending on apparel.

66 APPLICATION 66 of Worth Publishers International Economics Feenstra/Taylor China and the Multifibre Arrangement Import Quality Quotas are set on the quantity, not the quality of items imported. Selling a higher value good for the same quantity will still meet the quota limit but will bring more money back home. Incentive to export higher quality products. Prices dropped the most for the lower- priced items. An inexpensive T-shirt had a greater drop in price than a more expensively priced item. U.S. demand shifted towards the lower-priced items imported from China: there was quality downgrading in the exports from China. When a quota like the MFA is applied, there is an effect on quality.


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