5 For a competitive market, the effects of a quota on price, quantities, and well-being are the same as those of an equivalent tariff, with one possible exception. The import quota is worse than the tariff in two cases: If quota licenses are allocated through resource-using application and selection procedures. If a dominant domestic firm can use the quota to assert its monopoly pricing power.
7 If the quota licenses can be distributed with minimal resource costs, then the effect on net national well- being of the import quota is the gain of area e less the loss of area b+d. If the exporters are passive, then a large country can gain net national well-being by imposing an import quota, and there is an optimal quota that maximizes the gain in national well-being. An optimal quota are the same as those for the optimal tariff. The quota hurts the foreign country, and the foreign country may choose to retaliate. Even if the foreign country does not retaliate, the quota causes worldwide inefficiency.
8 Methods of import-license distribution Import-license auction The government gets (almost all of) area c, in the form of auction revenues. Fixed favoritism In this case the importers lucky enough to receive the import licenses will get area c. Resource-using application With resource-using procedures, some or all of area c is turned into a loss to society by wasting productive resources.
9 Voluntary Export Restraints A voluntary export restraint (VER) is an export quota administered by the exporting country. It is also known as a voluntary restraint agreement (VRA). VERs is a barrier in which the importing country government coerces the foreign exporting country to agree “ voluntarily ” to restrict its exports to this country. The export restraint usually requires that foreign exporting firms act like a cartel, restricting sales and raising prices.
10 Voluntary Export Restraints A VER is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country. A VER is always more costly to the importing country than a tariff that limits imports by the same amount. A VER produces a loss for the importing country. Vs. import quota, VER causes a loss of area c. Vs. free trade, the net loss is b+c+d from VER. For many products foreign producers can adjust the mix of varieties or models of the product that they export, while remaining within the overall quantitative limit.
11 DUMPING Selling exports at a price that is “ too low, ” a price below “ normal value ” or “ fair market value. ”
12 DUMPING Either The export price is lower than the price charged for comparable domestic sales in the home market of the exporter. Or The export price is lower than the full unit cost (including a profit margin).
13 Types of dumping Predatory dumping occurs when a firm temporarily charges a low price in the foreign export market, with the purpose of driving its foreign competitors out of business. Cyclical dumping occurs during an industry downturn in demand, with sales at prices that cover average variable cost but are below average total cost.
14 Types of dumping Seasonal dumping unloads excess inventories, especially on products that are perishable or going out of fashion. Persistent dumping is international price discrimination, with the exporting firm facing a less elastic demand curve in the home market, and having some way to limit or prevent re- import back into its home market.
16 Persistent dumping Dumping can occur only if three conditions are met: Imperfectly competitive industry Different demand elasticity in different market E d <E f Segmented markets
17 What should the importing country think of dumping ? Predatory dumping is potentially the most troubling to the importing country. If the exporter succeeds, it will raise prices in the future, and the importing country can be harmed. But predatory dumping probably is rare. The importing country could also have concerns about cyclical dumping. If used aggressively, it can export unemployment.
18 Export subsidy An export subsidy is really a negative export tax or a payment to a firm by the government when a unit of the good is exported, attempts to increase the flow of trade of a country.
20 The effect of export subsidy on export country An export subsidy expands exports and production of the subsidized product. An export subsidy lowers the price paid by foreign buyers, relative to the price that local consumers pay for the product. The export subsidy reduces the net national well-being of the exporting country.
21 b a Export subsidy (large country) PSPS PWPW P*SP*S Price, P Quantity, Q Exports g f e Subsidy d c = producer gain (a + b + c) = consumer loss (a + b) = cost of government subsidy (b + c + d + e + f + g) D S
23 Export subsidy For a large exporting country an export subsidy causes a decline in its international terms of trade. For both a small and a large country, an export subsidy results in net national loss as well as a loss for the whole world.
24 Switching an importable product into an exportable product
25 Countervailing Duties A tariff used to offset the price or cost advantage created by the subsidy to foreign exports. If the exporting country is large, the importing country overall is better off, but the import-competing industry is harmed. The importing country government is permitted to impose a countervailing duty.
27 Under export subsidy, the net importing country gain from the exporting country subsidy is w+y+z. Vs. the export subsidy and no countervailing duty, the importing country is worse off for imposing the countervailing duty (w+z), but good for the whole world (the deadweight loss of excessive trade x is eliminated). Free trade and the combination of the export subsidy and countervailing duty. The well-being of importing country is higher than it would be with free trade, because the exporting government is now effectively paying its taxes (area y). Because export subsidies are bad for the world as a whole, and retaliating against them is good for the world as whole, WTO rules are wise to allow importing countries to impose countervailing duties.
30 Strategic export subsidies Strategic trade policy---government policy helps its own firm’s strategy to win the game and claim the prize. The subsidy might be a good thing for the exporting country. The case for giving the subsidy is fragile, depending on too many conditions to be a reliable policy.
31 Questions What are import quotas? Why do some governments use them instead of just using tariffs to restrict imports by the same amounts? Is it because quotas bring a bigger national gain than tariffs?
32 Questions What are voluntary export restraint agreements? Why do some governments force foreign exporters into them instead of just using quotas or tariffs to restrict imports by the same amounts? Is it because VERs bring the importing country a bigger national gain than quotas or tariffs?
33 Questions For a small country, consider a quota and an equivalent tariff that permit the same initial level of imports. The market is competitive, and the government uses fixed favoritism to allocate the quota permit, with no resources expended in the process. There is now an increase in domestic demand (the domestic demand curve D d shifts to the right). If the tariff rate is unchanged, and if the quota quantity is unchanged, are the two still equivalent? Show this using a graph. Be sure to discuss the effects on domestic price, production quantity, and consumption quantity, on import quantity, and on producer surplus, consumer surplus, deadweight losses, and government revenue or its equivalent for the quota.
34 Questions Consider the export subsidy shown in Figure 10.3. Assuming that the export subsidy remains $20, what are the effects of a decline in the world price from $100 to $90? Show the effects using a graph and explain them.