2 Import Quotadefinition - restriction on the quantity of a good imported during a specific time periodquotas prohibited by WTOstill in use by developed nations – common examples in agricultureglobal quota – limit on the total number of units of a good from all other countriesselective quota – limit on the number of units of a good from a specific country or countries
3 Import Quota Welfare Effects Before Trade:U.S. consumer surplus is area in red.U.S. producer surplus is area in green.
4 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.
5 Import Quota Welfare Effects With Import Quota:a = redistributive effectb + d = deadweight lossb = protective effectd = consumption effectc = revenue effect“windfall profit”“quota rent”portion to foreign exporters and portion to U.S. importers
6 Import LicensesWith an import quota, the government must find method to allocate limited supply of imports to domestic importers.historical market share – bias against new importerspro rata – each importer receives fraction of its demandauction import licenses to highest bidder(s) – allows the domestic government to capture the windfall profits (area c = revenue effect)
7 Quota Versus Tariff initially similar - however if demand increases tariff leads to more imports at the same pricequota leads to a higher price & more importsThus an import quota can be more restrictive.importsimportsimportsimports
8 Tariff-Rate Quotaallows specified number of goods at one tariff rate – “within quota rate”additional imports are subject to higher tariff rate – “over quota rate”in principle - less restrictive than a quotain practice - may be as restrictive if the over quota rate is prohibitively highlicense on demand allocation – importers apply for licenses on first come-first served basis – if demand exceeds quota, volume is reduced proportionally for all importers
9 Export Quotadomestic government limiting the exports of a certain good to another countryvoluntary export restraint agreement or orderly marketing agreementeconomic impact identical to import quotacommon on television sets, steel, textiles, autos and shipsincreases costs to consumerstranslates to higher profits for foreign exporters
10 Domestic Content Requirement minimum percentage of product’s total value produced domestically required to qualify for zero tariff ratepopular argument for organized laborcommon in auto industry
11 Domestic Content - Welfare Effect consumer surplus before domestic content requirementscontent requirements increase pricesdecreasing consumer surplusincreasing domestic producer surplusdecreasing total welfare due to deadweight loss
12 Subsidies government funding to domestic producers include: tax concession, low interest loans, insurance arrangement & cash disbursementsallows producers to sell goods for a lesser pricedomestic production subsidy – granted to producers of import competing goodsexport subsidy – granted to producers of goods that are to be sold in other countries
13 Domestic Production-Welfare Effect Free Trade - No Subsidyassuming the domestic market is relatively small in relation to the world free trade will lower priceconsumer surplus substantial because of the lower price caused by free tradeproducer surplus is a small area for the same reason
14 Domestic Production Subsidy-Welfare increases 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
15 Export Subsidy – Welfare Effects Free Trade - No Subsidyassuming the domestic market is relatively small in relation to the world free trade will raise the price in this caseconsumer surplus is relatively limited because of higher price associated with free tradeproducer surplus is a large area for the same reason
16 Export Subsidy – Welfare Effects With Export Subsidyexport subsidy raised the priceconsumer surplus is decreased further because of higher priceproducer surplus increases for same reasoncost to taxpayersdeadweight loss of welfare to society
17 Product Dumpingcharging foreign buyers a lower price than domestic buyers for an identical productalso called international price discriminationsporadic dumping – firm disposes of excess inventory on foreign marketspredatory dumping – temporary reduction in price designed to force foreign competitors out of business to gain monopoly powerpersistent dumping – indefinite reduction in foreign price in order to maximize profits
18 Maximizing Profits - One Price the firm maximizes profits by producing at a quantity where MC = MRcharging price of $500 in each market
19 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
20 Antidumping Regulations antidumping duties levied whenDepartment of Commerce determines foreign good is sold for less than fair value andInternational Trade Commission determines imports are causing or threaten material injurymargin of dumping – amount by which foreign value exceeds U.S. priceprice-based definition – import sold in the U.S. for price below foreign pricecost-based definition – absence of price-based Commerce Department uses (1) manufacturing cost; (2) general expenses; (3) home profits; (4) cost of packaging for shipment
21 Fairness of Antidumping Laws 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 dumpingExchange Rates: An increase in the exchange rate value of the dollar would lower prices on imports even if there without product dumping.Overuse: Antidumping actions may be used as protectionism or as retaliation to genuine allegations from other countries.
22 Other Nontariff Trade Barriers Government Procurement Policies: National and local governments buy many goods but many have buy-national policies giving preference to domestic over foreign goods.Social Regulations: Governments attempt to correct health and environmental side effects of trade; examples: fuel economy standards and limits on hormone-treated meatsSea Transport & Freight Regulations: Nations can use highly restrictive practices on unloading cargo to serve as a barrier to trade.