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

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

Import Quota Welfare Effects Before Trade: U.S. consumer surplus is area in red. U.S. producer surplus is area in green.

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.

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

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)

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

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

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

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

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

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

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

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

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

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

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

Maximizing Profits - One Price the firm maximizes profits by producing at a quantity where MC = MR charging price of $500 in each market

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

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

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.

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.