IntEcA Sem I 2014-5

Seminar 5: Non-Tariff Barriers Import Quota

y Import Quotas y Import quota
y Export Quotas y Physical restriction on the quantity of goods
y Domestic Content Requirements that can be imported during a specific time
period
y Subsidies
y Require an import license
y Dumping & Anti
Anti-Dumping
Dumping
y Specifies the total volume of imports allowed
y Other Non-Tariff Barriers
y On manufactured goods
y Outlawed by the World Trade Organization

1 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 2 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

TABLE 5.1 Examples of U.S. import quotas*

Import Quota
y Global quota
y Permits a specified number of goods to be
imported each year
y Does not specify from where the product is
shipped or who is permitted to import
y Plagued by accusations of favoritism
y Selective quota
y Import quota allocated to specific countries
y May lead to a domestic monopoly of production
and higher prices

3 4 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

Prof Augustine H H Tan 1

IntEcA Sem I 2014-5

FIGURE 5.1 Import quota: trade and welfare effects

Import Quota
y Effects of import quota on economy’s welfare
y Price increase
y Decrease in consumer surplus
y Redistributive effect
y Deadweight loss
Protective effect
y
Consumption effect
y
y Revenue effect
y Windfall profit
By restricting available supplies of an imported product, a quota leads to higher import prices. This price
y Quota rent umbrella allows domestic producers of the import-competing good to raise prices. The result is a decrease in the
consumer surplus. Of this amount, the welfare loss to the importing nation consists of the protective effect, the
consumption effect, and that portion of the revenue effect that is captured by the foreign exporter.
5 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 6
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

Import Quota Import Quota

y Allocating quota licenses y Allocating quota licenses
y Historical share of import market y Auctioning of import licenses
y Oil and dairy products y To the highest bidder in a competitive market
y Discriminates against importers seeking to y Government - capture the windfall profits
import
p goods
g for the first time y Considered by U.S.
y Pro rata basis
y U.S. importers receive a fraction of their
demand
y = Ratio of the import quota to the total
quantity demanded collectively by U.S.
importers

7 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 8 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 2

IntEcA Sem I 2014-5

FIGURE 5.2 Trade effects of tariffs versus quotas

Quotas Versus Tariffs
y During periods of growing demand
y An import quota restricts the volume of imports
y By a greater amount than does an equivalent
import tariff
yQ
Quota
y More restrictive than a tariff
y Suppresses competition

9 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed
In a growing market, an import tariff is a less restrictive trade barrier than an equivalent import quota. With an
import tariff, the adjustment that occurs in response to an increase in domestic demand is an increase in the
amount of the product that is imported. With an import quota, an increase in demand induces an increase in
product price. The price increase leads to a rise in production and a fall in consumption of the import-competing
Sem I 2014-5 good,
10 while the level of imports remains constant.
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

TABLE 5.2 Examples of U.S. tariff-rate quotas

Tariff-Rate Quota: A Two-Tier Tariff Product Within-Quota Import-Quota Over-Quota
Tariff Rate Threshold Tariff Rate
y Tariff-rate quota
Peanuts 9.35 cents/kg 30,393 tons 187.9 percent ad valorem
y Two-tier tariff Beef 4.4 cents/kg 634,621 tons 31.1 percent ad valorem
y A quota that defines the maximum volume of Milk 3.2 cents/L 5.7 million L 88.5 cents/L
Blue cheese 10 cents/kg 2.6 million kg $2.60/kg
imports Cotton 4.4 cents/kg 2.1 million kg 36 cents/kg
y And charges
g the within-quota
q tariff
y Any imports above this level face a higher tariff
rate
y Over-quota tariff

11 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 12
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

Prof Augustine H H Tan 3

IntEcA Sem I 2014-5

Export Quotas Export Quotas

y Export quotas y Export quotas
y Market sharing pact, voluntary export restraint y Study: three major U.S. voluntary export
agreement restraint agreements of the 1980s
y To moderate the intensity of international y Automobiles, steel, and textiles and apparel
competition y 67% of the costs to American consumers -
y Tend to be more costly than tariffs captured by foreign exporters as profit

13 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 14 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Domestic Content Requirements Domestic Content Requirements

y Domestic content requirements y Domestic content requirements
y By organized labor y Higher input prices
y To limit the practice of outsourcing y Higher product prices
y Minimum percentage of product’s total value y Loss of competitiveness
y That must be produced domestically y Subsidizing by domestic consumers of the
y If the product is to qualify for zero tariff rates domestic producer
y Pressure domestic and foreign firms
y To use domestic inputs (workers)

15 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 16 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 4

IntEcA Sem I 2014-5

Welfare effects of a domestic content

TABLE 5.3 Domestic content requirements applied to FIGURE 5.3 requirement
automobiles in selected countries

A domestic content requirement leads to rising production costs and prices to the extent that manufacturers are
“forced” to locate production facilities in a high-cost nation. Although the content requirement helps preserve
domestic jobs, it imposes welfare losses on domestic consumers.
17 18
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

Subsidies Subsidies
y Subsidies y Domestic production subsidy
y Outright cash disbursements, tax concessions, y Granted to producers of import-competing
insurance arrangements, and loans at below- goods
market interest rates y Export subsidy
y From the government for producers y Granted to producers of goods that are to be
y To help improve their market position sold overseas
y Provide domestic firms a cost advantage y Subsidy
y Market products at prices lower than y Net price received by the producer = price paid
warranted by their actual cost or profit by the purchaser + subsidy
considerations

19 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 20 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 5

IntEcA Sem I 2014-5

Subsidies Subsidies
y Welfare effects of domestic production subsidy y Welfare effects of export subsidy
y Higher output y Higher output and price
y Subsidy revenue – some redistributed to the y Higher exports; Lower domestic consumption
more efficient producers - producer surplus y Domestic producers gain at the expense of the
y Deadweight
g loss domestic consumer and taxpayer
p y
y Protective effect y Decrease in the consumer surplus
y Lower welfare loss than a tariff or a quota y Increase in the producer surplus
y Direct cost of the subsidy y Taxpayer - bears the cost of export subsidy
y Financed out of tax revenues paid by the y Deadweight loss of welfare
public

21 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 22 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

TABLE 5.4 North American content of automobiles sold in

the United States, 2007 (sales weighted)
Dumping
y Dumping
y International price discrimination
y Foreign producers charge lower prices than
domestic producers for an identical product
y After allowingg for transportation
p costs and
tariff duties
y Selling in foreign markets at a price below the
cost of production

23 24 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5
Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed

Prof Augustine H H Tan 6

IntEcA Sem I 2014-5

Dumping Dumping
y Sporadic dumping (distress dumping) y Predatory dumping
y A firm disposes of excess inventories on foreign y A producer temporarily reduces the prices
markets charged abroad to drive foreign competitors out
y Selling abroad at lower prices than at home of business
y Mayy be the result of misfortune or p
poor planning
p g y Acquiring a monopoly position
y Beneficial to importing consumers y New higher prices – to offset any losses that
y Disruptive to import-competing producers occurred during the period of cutthroat
pricing
y Prevent the entry of potential competitors
y Home governments - concerned
y Retaliate with antidumping duties

25 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 26 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Dumping Dumping
y Persistent dumping y Successful international price discrimination
y Goes on indefinitely y Submarkets’ demand conditions must differ
y A producer may consistently sell abroad at y Ensure different demand elasticities
lower prices than at home y Firm must be able to separate the two
y International price discrimination submarkets
y Different demand elasticity y Prevent any significant resale of commodities
y Domestic market y Markets – easier to separate internationally
y Foreign market y High transportation costs
y Charge different prices - Higher profits y Governmental trade restrictions

27 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 28 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 7

IntEcA Sem I 2014-5

Other Nontariff Trade Barriers Other Nontariff Trade Barriers

y Government procurement policies y Government procurement policies
y Buy-national policies y 1933, Buy American Act
y 1933, Buy American Act y U.S. suppliers of civilian agencies –
y Federal agencies preferences over foreign firms
Purchase materials and products from U.S.
y y 6-12% ppreference marging
suppliers y 50% preference margin for Department of
y If their prices are not “unreasonably” higher Defense. These preferences are
than those of foreign competitors y Waived if the U.S.-produced good is not
y Domestic product available in sufficient quantities or is not of
y At least 50% domestic component content satisfactory quality
y Manufactured in the United States

29 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 30 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Other Nontariff Trade Barriers U.S. fiscal stimulus and Buy American legislation
y Government procurement policies y $787 billion fiscal stimulus legislation
y Barrier to free trade y During the recession of 2007–2009
y Higher cost for government projects y Federal agencies can waive Buy American
y Deadweight welfare losses preferences
y Protective and consumption effects y If they
y inflate the cost of a construction
project by more than 25% or are deemed to be
against the public interest
y Buy American preferences are waived if they
violate past trade agreements

31 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 32 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 8

IntEcA Sem I 2014-5

U.S. fiscal stimulus and Buy American legislation Other Nontariff Trade Barriers
y $787 billion fiscal stimulus legislation y Social regulations
y City and state (municipal) governments in U.S. y Correct a variety of undesirable side effects
are not obligated to honor the trade agreements markets ignore
of the federal government y Health, safety, and the environment
y Can enact Buy American y CAFÉ Standards
y Corporate average fuel economy standards
y Passenger cars: 27.5 miles per gallon
y European Union
y Ban on hormone-treated meat

33 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 34 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Other Nontariff Trade Barriers Other Nontariff Trade Barriers

y Sea transport and freight regulations y Sea transport and freight regulations
y U.S. shipping companies serving Japanese y Ships docking in U.S. port
ports y U.S. dockworkers
y Highly restrictive system of port services Unload and load 24 hours a day
y
y Clear every
y detail of its visit with Japan’s
p 30% less time
y
stevedore-company association y Half the price
y Dockworkers – available 18 hours a day or y Notify port authorities
less
y Notify the Coast Guard
y Expensive

35 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5 36 Prof Augustine Tan; Text: R. Carbaugh, International Econ 14ed Sem I 2014-5

Prof Augustine H H Tan 9