This chapter has four major purposes: 1.Present analysis of an import quota and a voluntary export restraint (VER), for both a small importing country and a large one. 2.Provide an overview of other nontariff barriers (NTBs) to imports. 3.Examine estimates of the costs of actual tariffs and nontariff barriers. 4.Introduce the World Trade Organization (WTO).
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9-3 Figure 9.1 Major Types of NTBs
Analysis of an import quota (small country) If both the domestic industry and the foreign export industry are perfectly competitive, then the effects of a quota are almost all the same as the effects of a tariff that permits the same quantity of imports. For a small importing country, the increase in domestic price, the increase in domestic production, the decrease in domestic consumption, the increase in domestic producer surplus, the decrease of domestic consumer surplus, and the net national loss are the same.
The possible difference is what happens to the amount that would be government revenue with a tariff. With an import quota this is the amount that is the difference between the cost of imports purchased from foreign exporters at the world price and the value of these quota- limited imports when sold in the domestic market at the higher domestic price. We presume that the holders of the import quota rights can continue to buy at the world price. If any foreign exporter tried to charge more, the importers would turn to other export suppliers who would sell at the going world price.
If the government gives away these quota rights to import with no application procedure (fixed favoritism), then the import price markup goes as extra profits to whoever is lucky enough to receive the rights. If the government auctions the quota rights (import-license auction), then the government gains the markup as auction revenues because bidders vie for these valuable import rights. If the government uses elaborate applications procedures (resource-using application procedures), then some of the markup amount is lost to resource usage in the application process, leading to a larger net national loss because of the extra resource costs of the quota process.
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9-7 Exports Plus Imports as a Percentage of GDP Figure 9.2 The Effects of an Import Quota under Competitive Conditions, Small Importing Country
Analysis of an import quota (large country) Again the effects of imposing a quota are nearly all the same as the equivalent tariff, except for what happens to what would be tariff revenue. Specifically, the importing country can benefit from imposing an import quota, if the rectangle of gain from the lower price paid to foreign exporters for the quota quantity imported is larger than the triangle losses from distorting domestic production and consumption. If the domestic industry is a monopoly, then the effects of imposing a quota are different from the effects of imposing a tariff. The box “Domestic Monopoly Prefers a Quota” explains that a quota cuts off foreign competition, so the quota permits the domestic firm to use its monopoly power. The quota leads to a higher domestic price and greater net national losses.
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9-9 Figure 9.3 The Effects of an Import Quota under Competitive Conditions, Large Importing Country
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9-10 Tariff, Domestic Monopoly Extension: A domestic Monopoly prefers a quota
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9-11 Figure 2.2 The Market for Motorbikes: Demand and Supply Import Quota, Domestic Monopoly
Voluntary Export Restraint The VER is usually not voluntary, but it is an export restraint. Because the government of the exporting country must organize its exporters into a kind of cartel, they should realize that they should raise the export price. If the exporters do raise the export price, then the exporters get the amount that otherwise would be government revenue with a tariff, or the price markup with an import quota. The net national loss is larger for the importing country with a VER because of this additional rectangle loss. The box “Auto VER: Protection with Integrity” provides estimates of the costs to the United States of this VER.
Three other NTBs based on product standards, domestic content requirements, and government procurement. 1.Product standards can be worthy efforts to protect health, safety, and the environment. But they can also be written to limit imports and protect domestic producers. 2.Domestic content requirements mandate that a minimum percentage of the value of a product produced or sold in a country be local value added (wages and domestically produced components and materials). They can limit imports that do not meet the requirements, and they can limit the import of components and materials used to produce the product. 3.Government purchasing practices are often an NTB because they are often biased against buying imported products.
How large are the effects of actual tariffs, quotas, VERs, and other nontariff barriers to imports? The net national loss is probably a small fraction of the value of domestic production (GDP), for a country like the United States that has moderate import barriers and is not highly dependent on imports, if the only national losses are the deadweight-loss triangles. The true cost is probably larger than this basic analysis indicates, because of foreign retaliation and losses in export industries, the costs of enforcing import barriers, the costs of rent-seeking activities like lobbying for import protection, the losses from such barriers as VERs when foreign exporters raise their prices, and the losses from reduced pressures to innovate. In addition, the costs from raising barriers would accelerate in a nonlinear way, and the areas of the triangles would increase rapidly.
Section 301 of the U.S. Trade Act of 1974 It aims to lower foreign barriers to U.S. exports, including failure of foreign countries to protect intellectual property rights (patents, trademarks, copyrights, and trade secrets). But it tries to do this by threatening to raise U.S. barriers to the foreign country’s exports if the foreign country does not change its policies. Other countries resent such a heavy-handed approach. And, if the U.S. government carries out the threat, then the approach backfires—it probably lowers well-being for both countries. Fortunately, the United States has decreased its use of Section 301. With the establishment of the WTO with its strong dispute settlement procedures, the United States is more likely to send its complaints about unfair foreign trade practices to the WTO for resolution.
WORLD TRADE ORGANIZATION (WTO) Principles: Liberalization of trade restrictions, move toward free trade Nondiscrimination among countries, often called the most favored nation (MFN) principle No unfair encouragement for exports