Global Economics Eco 6367 Dr. Vera Adamchik

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Global EconomicsEco 6367Dr. Vera Adamchik

• Nontariff Trade Barriers

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• 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.

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• 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.

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• 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.

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Major types of NTBs
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IMPORT QUOTA
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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.

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• 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.

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

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

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

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The U.S. market for bicycles with a quota
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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?

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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.

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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.

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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.

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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.

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• 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.

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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.

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• 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.

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• 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.

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• 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.

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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.

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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.

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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.

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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.

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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).

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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.

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TARIFF-RATE QUOTA
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• 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.

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EXPORT QUOTASa.k.a. VOLUNTARY EXPORT RESTRAINTS
(VERs)a.k.a. ORDERLY MARKETING AGREEMENTS
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• 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.

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• 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).

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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.

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• 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.

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• 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.

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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.

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• 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.

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Who gets area c?

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

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

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

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Export quota welfare effects
With Free Trade U.S. consumer surplus U.S.
producer surplus
World price free trade
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Export quota welfare effects
With Export Quota U.S. consumer surplus U.S.
producer surplus
World price with quota
World price free trade
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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
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• Welfare Effects of
• an Export Quota,
• Small Country.
• Illustration 3
• (Handout)

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The U.S. market for bicycles with an export quota
World price with quota
World price with quota
free trade
free trade
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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).

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• 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.

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DOMESTIC CONTENT REQUIREMENTS
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• 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.

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• 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.

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• 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.

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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.

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• 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.

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• 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.).

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TECHNICAL AND PRODUCT STANDARDS
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• 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.

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• 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.

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• 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.

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OTHER CUSTOMS PROCEDURES
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• 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

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In-class exercise

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

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• ADVANCE DEPOSIT REQUIREMENTS

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• 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.

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• OTHER NTBs

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• 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.

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• SUBSIDIES

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• 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.

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DOMESTIC PRODUCTION SUBSIDY (a subsidy to an
import-competing industry)
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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.

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

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

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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.

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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.

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

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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
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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.

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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.

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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.)

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DUMPING
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• 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

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• (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.