1. Nontariff Trade Barriers
Chapter 5
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

2. Import Quota
definition - restriction on the quantity of a good imported during a specific time period
quotas prohibited by WTO
still in use by developed nations – common examples in agriculture
global quota – limit on the total number of units of a good from all other countries
selective 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 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

6. Import Licenses
With an import quota, the government must find method to allocate limited supply of imports to domestic importers.
historical market share – bias against new importers
pro rata – each importer receives fraction of its demand
auction 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 price
quota leads to a higher price & more imports
Thus an import quota can be more restrictive.
imports
imports
imports
imports

8. Tariff-Rate Quota
allows 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 quota
in practice - may be as restrictive if the over quota rate is prohibitively high
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

9. Export Quota
domestic government limiting the exports of a certain good to another country
voluntary export restraint agreement or orderly marketing agreement
economic impact identical to import quota
common on television sets, steel, textiles, autos and ships
increases costs to consumers
translates 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 rate
popular argument for organized labor
common in auto industry

11. 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

12. Subsidies government funding to domestic producers
include: tax concession, low interest loans, insurance arrangement & cash disbursements
allows producers to sell goods for a lesser price
domestic production subsidy – granted to producers of import competing goods
export subsidy – granted to producers of goods that are to be sold in other countries

13. 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

14. Domestic Production Subsidy-Welfare
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

15. 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

16. 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

17. Product Dumping
charging foreign buyers a lower price than domestic buyers for an identical product
also called international price discrimination
sporadic dumping – firm disposes of excess inventory on foreign markets
predatory dumping – temporary reduction in price designed to force foreign competitors out of business to gain monopoly power
persistent 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 = MR
charging price of $500 in each market

19. 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

20. Antidumping Regulations
antidumping duties levied when
Department of Commerce determines foreign good is sold for less than fair value and
International Trade Commission determines imports are causing or threaten material injury
margin of dumping – amount by which foreign value exceeds U.S. price
price-based definition – import sold in the U.S. for price below foreign price
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

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 dumping
Exchange 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 meats
Sea Transport & Freight Regulations: Nations can use highly restrictive practices on unloading cargo to serve as a barrier to trade.