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Global Economics Eco 6367 Dr. Vera Adamchik

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Title: Global Economics Eco 6367 Dr. Vera Adamchik


1
Global EconomicsEco 6367Dr. Vera Adamchik
  • Nontariff Trade Barriers

2
  • A nontariff barrier (NTB) to imports is any
    policy used by the government to reduce imports,
    other than a simple tariff on imports.
  • Economists have noted that as tariffs have been
    reduced through multilateral tariff negotiations
    during the past 40 years, the impact of this
    reduction may have been importantly offset by the
    proliferation of NTBs.

3
  • An NTB reduces imports by operating through
    one or more of the following channels
  • limiting the quantity of imports
  • increasing the costs of getting imports into the
    market
  • creating uncertainty about the conditions under
    which imports will be permitted.

4
  • NTB can take many forms (see the Major Types of
    NTBs slide).
  • Although antidumping duties and countervailing
    duties are not listed in the table, they are also
    often considered NTBs. Governments claim that
    they impose these kinds of duties in response to
    unfair practices by foreign exporters.

5
Major types of NTBs
6
IMPORT QUOTA
7
An import quota
  • The best-known nontariff barrier is the import
    quota, a limit on the total quantity of imports
    of a product allowed into the country during a
    period of time (usually, a year).
  • The government gives out a limited number of
    licenses to import the quota legally and
    prohibits importing without a license.

8
  • 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.

9
  • Welfare Effects of
  • an Import Quota,
  • Small Country.
  • Illustration 1

10
Welfare under free trade
Price
of Steel
0
Quantity
of Steel
11
Welfare under free trade
Price
of Steel
0
Quantity
of Steel
12
Welfare effects of an import quota
Price
of Steel
Quota
0
Quantity
of Steel
13
Welfare effects of an import quota
Price
of Steel
Quota
0
Quantity
of Steel
14
  • Welfare Effects of
  • an Import Quota,
  • Small Country.
  • Illustration 2

An example from the textbook
15
An example from the textbook
Import quota welfare effects
With Free Trade U.S. consumer surplus U.S.
producer surplus
16
Import quota welfare effects
An example from the textbook
With Import Quota U.S. consumer surplus U.S.
producer surplus
17
An example from the textbook
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
18
  • Welfare Effects of
  • an Import Quota,
  • Small Country.
  • Illustration 3
  • (Handout)

19
The U.S. market for bicycles with a quota
20
Conclusions (compared to free trade)
  • 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 possible exception is area c. With a
    tariff, area c is government tariff revenue. With
    a quota, what is it? Who gets it?

21
Ways to allocate import licenses
  • The quota license to import is a license to buy
    the product from foreign suppliers at the world
    price and resell these units at the domestic
    price. The quota results in a price markup (or
    economic rent). For all units imported with the
    quota, the markup totals to rectangular area c.
  • Who gets this price markup? That depends on how
    the licenses to import the quota quantity are
    distributed.

22
The main ways to allocate import licenses
  1. The government allocates the licenses for free to
    importers using a rule or process that involves
    (almost) no resource costs.
  2. The government auctions off the licenses to the
    highest bidders.
  3. The government allocates the licenses to
    importers through application and selection
    procedures that require the use of substantial
    resources.

23
Fixed favoritism
  • Import licenses can be allocated for free on the
    basis of fixed favoritism, in which the
    government simply assigns the licenses to firms
    (and/or individuals) without competition,
    application, or negotiation.
  • In this case the importers lucky enough to
    receive the import licenses will get area c.

24
Auction
  • The government can run an import license auction,
    selling import licenses on a competitive basis to
    the highest bidders.
  • How much would some individuals be willing to pay
    in a competitive auction? An amount very close
    to the price difference.
  • If the winning bids are very close to the price
    difference, the government gets almost all of
    area c.

25
  • Public auctions of import licenses are rare. They
    were used in Australia, New Zealand, and Colombia
    in the 1980s.
  • There is informal variant of a quota auction,
    when corrupt government officials sell import
    licenses under the table to whoever pays them
    the highest bribes.

26
Resource-using procedures
  • The government can insist that firms (and/or
    individuals) that want to acquire licenses must
    compete for them in some way other than simple
    bidding or bribing.
  • Resource-using application procedures include
    allocating quota on a first-come, first-served
    basis on the basis of demonstrating need or
    worthiness or on the basis of negotiations.

27
  • First-come -- Resource wastage because those
    seeking licenses use resources to try to get to
    and stay at the front of the line.
  • Worthiness -- awarding quota licenses for
    materials and components based on how much
    production capacity firms have for producing the
    products that use these inputs. Resource wastage
    because it causes firms to overinvesting in
    production capacity.
  • Negotiations -- Resource wastage is the time and
    money spent on lobbying with government officials
    to press each firms case.

28
  • Resource-using procedures encourage rent-seeking
    activities, and some or all of area c is turned
    into a loss to society by wasting productive
    resources. Hence, compared to an equivalent
    tariff, the quota can potentially cause an even
    larger deadweight loss, if a political mechanism
    such as lobbying is employed to allocate the
    import licenses.
  • In this case quota is worse than the equivalent
    tariff in its effects on net national well-being.

29
  • There is a fourth way that the quota licenses
    might be distributed. The importing country
    government can allocate the licenses to the
    exporting firms (or to others in the exporting
    country). In this case, the exporters will be
    able to raise their export price and capture area
    c. Hence, this case is essentially identical to
    the VER.

30
More on the distribution of the quotas revenue
(area c)
  • The distribution of the quotas revenue may also
    be determined by the degree of market power that
    domestic importers and foreign exporters possess.
  • Cases A and B below consider the two possible
    outcomes.
  • For simplicity lets assume that import licenses
    are allocated to the importing companies for free.

31
Case A
  • The exporting companies operate as competitive
    sellers and sell the product at the prevailing
    world price (300 in our example).
  • The importing companies organize and become a
    monopoly buyer. They buy the product at the
    prevailing world price (300) and resell it to
    domestic consumers at the domestic market price
    (330).
  • The quotas revenue effect accrues to the
    importing companies.

32
Case B
  • The exporting companies organize and become a
    monopoly seller.
  • The importing companies operate as competitive
    buyers. They will bid against each other to buy
    the product and drive the world market price up
    (from 300 to 330).
  • The quotas revenue effect accrues to the
    exporting companies.

33
Quota vs tariff
  • There are several reasons why protectionists
    and government officials may favor using quota
    instead of a tariff
  • 1. A quota ensures that the quantity of imports
    is strictly limited a tariff would allow import
    quantity to increase if foreign producers cut
    their prices or if our domestic demand increases.

34
Quota vs tariff
  • 2. A quota gives government officials greater
    power. As discussed above, these officials often
    have administrative authority over who gets the
    import licenses under a quota system, and they
    can use this power to their advantage (for
    instance, by taking bribes).

35
Quota versus tariff
  • initially similar - however if demand increases
  • tariff leads to more imports at the same price
  • quota leads to a higher price with the same
    level of imports
  • Thus an import quota can be more restrictive.

36
TARIFF-RATE QUOTA
37
  • A tariff-rate quota allows imports to enter the
    country at a zero or low tariff (the within-quota
    rate) up to a specified quantity ( a quota), and
    imposes a higher tariff (the over-quota rate) on
    imports above this quantity.
  • Hence, a tariff-rate quota is a two-tier tariff.
  • Licenses are required to import at the
    within-quota tariff. Common techniques to
    allocate import licenses are license on demand
    first-come, first-served historical market
    share and auctions.

38
EXPORT QUOTASa.k.a. VOLUNTARY EXPORT RESTRAINTS
(VERs)a.k.a. ORDERLY MARKETING AGREEMENTS
39
  • An export quota is a restriction imposed on own
    exporters, either voluntarily or on the behest of
    other countries. This limit is self-imposed by
    the exporting country.

40
  • Reasons for its imposition may include
  • protection of local industry from shortages of
    raw materials,
  • protection of local population from shortages of
    foodstuffs or other essential goods,
  • maintenance of international commodity prices (an
    orderly marketing agreement),
  • export restraint agreement with the members of a
    producers cartel (such as OPEC), or
  • export restraint agreements with consumer
    countries (a voluntary export restraint).

41
VERs
  • A voluntary export restraint (VER) is an
    odd-looking trade barrier in which the importing
    country government coerces the foreign exporting
    country to agree voluntarily to restrict its
    exports to this country.

42
  • The VER originates primarily from political
    considerations. An importing country that has
    been preaching the virtues of free trade may not
    want to impose an outright import quota because
    that implies a legislated move away from free
    trade.
  • Instead, the country may choose to negotiate an
    administrative agreement with a foreign supplier
    whereby that supplier agrees voluntarily to
    refrain from sending some exports to the
    importing country.

43
  • VERs were used by large countries as a rear-guard
    action to protect their industries that are
    having trouble competing against a rising tide of
    imports.
  • This form of protection became important in the
    1990s, especially in the U.S., EU, Canada where
    the VER was a major form of import restrictions
    for textiles, clothing, agricultural products,
    steel, footwear, electronics, and machine tools.

44
An export quota vs an import quota
  • The graphical analysis of an export quota is very
    similar to that of an import quota.
  • The two key differences between an export quota
    and an import quota are the effect on the export
    price and who gets area c.

45
  • Under a negotiated VER agreement, the exporting
    country government usually distributes licenses
    to export specified quantities to its producers.
  • The main foreign exporters form a cartel among
    themselves, agreeing to cut export quantities and
    to divide up the market.
  • In return, they are allowed to charge the full
    markup on their limited sales to the importing
    country, where the product has become more
    expensive.

46
Who gets area c?
  • The foreign exporters get area c as additional
    revenue on the quota-limited quantity of exports.

47
  • Welfare Effects of
  • an Export Quota,
  • Small Country.
  • Illustration 1

48
Welfare under free trade
Price
of Steel
0
Quantity
of Steel
49
Welfare under free trade
Price
of Steel
0
Quantity
of Steel
50
Welfare effects of an export quota
Price
of Steel
Quota
0
Quantity
of Steel
51
Welfare effects of an export quota
Price
of Steel
Quota
0
Quantity
of Steel
52
  • Welfare Effects of
  • an Export Quota,
  • Small Country.
  • Illustration 2

53
Export quota welfare effects
With Free Trade U.S. consumer surplus U.S.
producer surplus
World price free trade
54
Export quota welfare effects
With Export Quota U.S. consumer surplus U.S.
producer surplus
World price with quota
World price free trade
55
Export quota welfare effects
With Export Quota a redistributive effect b
d deadweight loss b protective effect d
consumption effect c revenue effect
mark-up quota rent
World price with quota
World price free trade
56
  • Welfare Effects of
  • an Export Quota,
  • Small Country.
  • Illustration 3
  • (Handout)

57
The U.S. market for bicycles with an export quota
World price with quota
World price with quota
free trade
free trade
58
Why do exporters agree to VER?
  • The inducement for the exporter to voluntarily
    agree may be the threat of imposition of an
    import quota if the VER is not adopted by the
    exporter.
  • If the VER is replaced with an import quota,
    foreign exporters will lose their markup revenue
    (area c).

59
  • The VER may be a politically attractive way of
    offering protection to an import-competing
    industry, but it is also economically expensive
    for the importing country.

60
DOMESTIC CONTENT REQUIREMENTS
61
  • A domestic content requirement mandates that a
    product produced and sold in a country must have
    a specified minimum amount of domestic value, in
    the form of wages paid to local workers or
    materials and components produced within the
    country.
  • For example, under the NAFTA, members do not
    permit duty-free entry of automobiles from other
    members unless 62.5 of the value of the
    automobile originates in the NAFTA countries.

62
  • Domestic content requirements can create
    import protection at two levels
  • (1) They can be a barrier to imports of the
    products that do not meet the content rules
  • (2) They can limit the import of materials and
    components that otherwise would have been used in
    domestic production of the products.

63
  • A closely related NTB, sometimes called a mixing
    requirement, stipulates that an importer or
    import distributor must buy a certain percentage
    of the product locally.
  • For instance, the government may require that
    certain retail stores in the country must source
    at least a specified percentage of their
    inventory in the country.

64
GOVERNMENT PROCUREMENT
65
  • Governments are major purchasers of goods and
    services (about 1/10 of all product sales in the
    industrialized countries).
  • Government procurement practices can be a
    nontariff barrier to imports if the purchasing
    processes are biased against foreign products, as
    they often are.
  • In the U.S., the Buy American Act of 1933 is the
    basic law that mandates that government-funded
    purchases favor domestic products.

66
  • For different types of purchases the bias takes
    different forms, including
  • prohibitions on buying imports
  • local content requirements
  • mandating that domestic products be purchased
    unless imported products are priced much lower
    (6-12-up to 50 above the foreign suppliers
    price).
  • More than half of the states and many cities and
    towns also have buy American or buy local
    rules for purchases by their governments.

67
  • A WTO-sponsored agreement on government
    procurement went into effect on January 1,1996,
    but not all purchases or all WTO members are
    included.
  • In addition, government procurement provisions
    are increasingly being expanded to include
    nonprice considerations (for example, eco-safe,
    eco-audit, etc.).

68
TECHNICAL AND PRODUCT STANDARDS
69
  • Product standards laws and regulations
    pertaining to protect quality, including those
    enforced in the names of health, sanitation,
    safety, and the environment.
  • These standards need not discriminate against
    imports. But, if a government is determined to
    protect local producers, it can always write
    rules that can be met more easily by local
    products than by imported products.

70
  • Product standards usually do not raise tariff or
    tax revenues for the importing countrys
    government. On the contrary, enforcing these
    rules uses up government resources (and
    businesses must use resources to meet the
    standards.)
  • The standards can bring a net gain in overall
    well-being to the extent that they truly protect
    health, safety, and the environment.
  • Yet it is easy for government to disguise costly
    protectionism in virtuous clothing.

71
  • Product standards, domestic content and mixing
    requirements do not generate tariff or tax
    revenue for the government.
  • The gains on the price markups are captured by
    the protected home-country sellers of the
    protected products.

72
OTHER CUSTOMS PROCEDURES
73
  • Arbitrary administrative classification decisions
    can influence the size of imports.
  • Because tariffs on goods coming into a country
    differ by type of good, the actual tax charged
    can vary according to the category into which a
    good is classified
  • There is some leeway for customs officials, as
    the following example makes clear

74
In-class exercise
  • Read the handout on Carrots Are Fruit, Snails
    Are Fish, and X-Men Are Not Humans.

75
  • ADVANCE DEPOSIT REQUIREMENTS

76
  • Advance deposit requirements are sometimes used
    by developing countries.
  • In this situation, a license to import is awarded
    only if the importing firm deposits funds with
    the government equal to a specified percentage of
    the value of the future import. The deposit is
    refunded when the imports are brought into the
    country, but in the meantime the firm has lost
    the opportunity cost of the funds.

77
  • OTHER NTBs

78
  • As mentioned above, countervailing duties and
    antidumping duties are not NTB per se, but they
    are often considered NTBs.
  • A countervailing duty is a tariff to offset the
    price or cost advantage created by the subsidy to
    foreign exporters.
  • An antidumping duty is a tariff equal to the
    discrepancy (the dumping margin) between the
    actual export price and the fair value.

79
  • SUBSIDIES

80
  • Government funding to domestic producers allows
    producers to sell goods for a lesser price. It
    includes tax concession, low interest loans,
    insurance arrangement and cash disbursements.
  • 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.

81
DOMESTIC PRODUCTION SUBSIDY (a subsidy to an
import-competing industry)
82
A subsidy to an import-competing industry
  • If the intent of a tariff, quota, or VER is to
    provide an incentive to increase domestic
    production and sales in the domestic market, then
    an equivalent domestic production result could be
    achieved by paying a sufficient per-unit subsidy
    to domestic producers, who are thereby induced to
    supply the same quantity at international prices
    that they were willing to provide at the higher
    tariff inclusive domestic price.

83
  • Welfare Effects of
  • the Domestic Production Subsidy,
  • Small Country.
  • Illustration 1

An example from the textbook
84
Domestic Production-Welfare Effect
An example from the textbook
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
85
Domestic Production Subsidy-Welfare
An example from the textbook
Domestic Production Subsidy 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
86
  • Welfare Effects of
  • the Domestic Production Subsidy,
  • Small Country.
  • Illustration 2
  • (Handout)

87
Conclusions
  • The domestic market price remains equal to the
    international price. Hence, consumers are not
    worse off.
  • There is, however, a production-efficiency loss.
    The increased domestic production at a resource
    cost exceeds international price on the margin.
    It can be viewed as the cost of moving from a
    lower-cost foreign supply to a higher cost
    domestic supply on the margin.

88
Conclusions
  • Consumers surplus No change.
  • Producers gain surplus equal to area a.
  • The cost to the government of paying the domestic
    production subsidy is area ab.
  • The net welfare effect in the country is the loss
    of area b.

89
EXPORT SUBSIDY
90
  • Rather than granting a production subsidy to
    import-competing producers, a government could
    pay a subsidy on exports only.

91
Export Subsidy Welfare Effects
An example from the textbook
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
92
Export Subsidy Welfare Effects
An example from the textbook
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
93
Conclusions
  • Producers gain surplus equal to area abc.
  • Consumers lose surplus equal to area ab.
  • The cost to the government of paying the export
    subsidy is area bcd.
  • The net welfare effect in the exporting country
    is the loss of areas b and d.

94
Conclusions
  • An export subsidy expands exports and production
    of the subsidized product. In fact, the export
    subsidy can switch the product from being
    imported to being exported.
  • An export subsidy lowers the price paid by
    foreign buyers, relative to the price that local
    consumers pay for the product.

95
Export subsidy, Small country vs Large country
  • When the exporting country is a small country,
    the export subsidy does not affect the world
    price.
  • When the exporting-country is a large country the
    export subsidy will lower the world price. When
    government offers the export subsidy, exporting
    firms want to export more to get more of the
    subsidy. To get foreign consumers to buy more of
    the exported product, the exporting firms must
    lower the export price. (Read the last paragraph
    on p. 162 in the textbook.)

96
DUMPING
97
  • Dumping is selling exports at a price that is too
    low less than normal value (or fair market
    value, as it is often called in the US). There
    are two legal definitions of normal value

98
  • (1) the long-standing definition of normal value
    is the price charged to comparable domestic
    buyers in the home market (or to comparable
    buyers in other markets). Under this traditional
    definition, dumping is international price
    discrimination favoring buyers of exports

99
  • (2) the second definition of normal value arose
    in the 1970s. It is cots-based the average cost
    of producing the product, including overhead
    costs and profit. Under this second standard,
    dumping is selling exports at a price that is
    less than the full average cost of the product.

100
  • Please keep in mind that in trade disputes over
    dumping, the government compares the price that a
    foreign firm earns in the countrys market, NET
    OF TRANSPORTATION COSTS, to the price that the
    foreign firm earns in its domestic market.

101
In-class exercise
  • Exercise 1 (handout).

102
Forms of dumping
  • Sporadic dumping (distress dumping) - firm
    disposes of excess inventory on foreign markets
  • Predatory damping - 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

103
Maximizing Profits - One Price
An example from the textbook
the firm maximizes profits by producing at a
quantity where MC MR charging price of 500 in
each market
104
Price Discrimination to Maximize Profits
An example from the textbook
production where MC MR in each market result is
a higher price where demand is inelastic and a
lower price where demand is elastic
105
Fair value Recent debates
  • Many economists argue that Average Variable Cost
    (and not Average Total Cost) should be the
    yardstick for defining dumping.

106
  • Governments often impose stiff penalties against
    foreign commodities that are believed to be
    subsidized or dumped in the home country see pp.
    200-205 in Chapter 6.
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