ECONOMICS 3150B Lecture 19 November 29, 2005

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ECONOMICS 3150BLecture 19November 29, 2005
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There will be no class on Thursday, December 1.
The last class for this term will be next
Tuesday, December 6
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Trade barriers

• Tariffs
• Export subsidies
• Quotas
• Local content requirements
• Preferential procurement
• Red tape barriers
• Foreign investment restrictions
• Contingency protection
• Countervail
• Anti-dumping
• Safeguards
• Unfair trade

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Trade Barriers

• Tariffs
• Import vs. export
• Ad valorem vs. specific
• Commodity classification
• Base price for applying tariff
• Import Tariffs protect domestic suppliers
• Export tariffs
• Government extracts rents rather than domestic
  producers when domestic price lt world price ? oil
  gas under NEP in Canada
• Canada receives revenues rather than US Treasury
  case of lumber

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Trade Barriers

• Who pays tariff?
• Terms of trade effects, incidence
• Small country
• No market power no terms of trade effects
• Domestic consumers pay entire tariff
• Revenues collected by government costs of
  administration of tariff system and collection of
  revenues
• Income distribution effects, employment effects
• Large country
• Market power terms of trade effects
• Foreign suppliers pay tariff because world price
  lowered by full extent of tariff
• Decrease in value of imports, but no change in
  volume of imports no change in domestic
  production of goods
• No income distribution effects other than as a
  result of use of tariff revenues no employment
  effects other than as a result of use of tariff
  revenues

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Non-Tariff Measures (NTMs)

• Export subsidies
• Terms of trade effects
• Production subsidies
• Income tax holidays
• Capital grants
• Labour subsidies (X per hour) difference
  between labour and direct production subsidies
• Below market rate export financing (export credit
  subsidy) low interest rate loans for foreign
  customers
• Government guarantees for receivables enhances
  ability of domestic suppliers to borrow from
  banks at lower rates of interest to finance
  working capital
• Government needs to raise revenues to pay for
  subsidy incentive effects, administration and
  collection costs
• Income distribution effects employment effects

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Non-Tariff Measures (NTMs)

• Import quotas
• Small country price taker in world markets
• Tariff rate can be estimated to produce same
  outcomes as quota that is auctioned
• Income distribution effects
• Increase in domestic price ? economic rents
  created
• Who receives the rent?
• If licenses for quotas given away, recipients of
  licenses (domestic distributors or foreign
  recipients exporters) obtain rents
• If licenses auctioned government receives rents
  ? similar to tariff

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Imports 1Y1 0Y1
P1
S(A)
S(World)
0P1
D(A)
0Y1
1Y1
Y1
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Quota 2Y1 0Y1
P1
S(A)
TS(A)
2P1
S(World)
0P1
D(A)
0Y1
1Y1
2Y1
3Y1
Y1
3Y1 Quota
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Non-Tariff Measures (NTMs)

• Voluntary export restraints (VERs)
• Quotas on exports imposed by exporting country ?
  effectively a quota given away to foreign
  suppliers
• Favoured by exporting country as compared to
  tariffs or quotas that are auctioned ? economic
  rents/revenues accrue to exporting firms rather
  than to treasury of importing country
• More costly to importing country but politically
  appears that exporting country admits to unfair
  trade practice and voluntarily agrees to rectify
  practice ? importing country does not appear to
  act as bully
• Example of Japanese autos in 1970s and 1980s
  more expensive models with higher profit margins
  exported to US ? enabled Japanese auto producers
  to gain foothold in this segment of market

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Non-Tariff Measures (NTMs)

• Local Content Requirements
• Specified fraction of final good to be produced
  domestically X of sales price Y of total
  units sold domestically (case of autos under the
  Auto Pact Canadian content provisions for
  broadcasting)
• Under NAFTA what constitutes domestically
  produced good (Mexico, US, Canada) exempt for
  tariffs within North American market most goods
  include some value added from foreign (ex. NA)
  suppliers
• Comparable to import quota with license given to
  foreign producers of intermediate inputs
• Employment guarantees
• Domestic suppliers may have competitive advantage
  but face market obstacles overcoming reputation
  advantage of long-established foreign suppliers
  late entrant needing to overcome learning curve
  advantage of first mover foreign suppliers

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Non-Tariff Measures (NTMs)

• Procurement Preferences
• Preferential price advantage given to domestic
  suppliers government will buy from domestic
  supplier as long as price is no more than X
  greater than that of foreign supplier ? similar
  to tariff
• Similar to restrictive quota or tariff when
  foreign suppliers prevented from bidding
• Red Tape Barriers
• Health and safety standards
• Customs classifications
• Harassment potential

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Non-Tariff Measures (NTMs)

• Contingency Protection
• Security of access issue related to FTA
• Countervailing duties in case of subsidies
  definition of subsidies
• Anti-dumping predatory, sporadic, persistent
  (price discrimination)
• Balance of payments, employment safeguards

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Non-Tariff Measures (NTMs)

• Countervailing duties
• Definition of subsidies health care system,
  education, etc.
• Value of subsidies
• Terms of trade
• Costs to domestic industry distinct from
  economic shocks, competition
• Magnitude of tariff to level playing field
• Duration of protection

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Non-Tariff Measures (NTMs)

• Anti-dumping
• Distinguish among predatory, sporadic, persistent
• Does nature of dumping matter?
• Degree of dumping price differential
• Costs to domestic industry distinct from
  economic shocks, competition
• Magnitude of tariff to level playing field
• Duration of protection

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Non-Tariff Measures (NTMs)

• Safeguards
• Flexible exchange rates as shock absorber
• Global shock or country-specific shock
• Herd effect pace of outsourcing accelerates
• Costs to domestic industry labour adjustment
  policies, unemployemnt insurance, training
  programs
• Magnitude of tariff
• Duration of protection