Critical Thinking : Trade Barriers: Additional Issues

Wa89

SEU_ENC500_Module05_PPT_Ch05.pptx

Home >Business & Finance homework help >Economics homework help >Critical Thinking : Trade Barriers: Additional Issues

INTERNATIONAL ECONOMICS SEVENTEENTH EDITION

ROBERT J. CARBAUGH

‹#›

Chapter 5 Nontariff Trade Barriers

‹#›

CHAPTER OUTLINE (1 of 2)

Absolute Import Quota

Tariff-Rate Quota: A Two-Tier Tariff

Export Quotas

Domestic Content Requirements

Subsidies

‹#›

CHAPTER OUTLINE (2 of 2)

Dumping

Antidumping Regulations

Is Antidumping Law Unfair?

Other Nontariff Trade Barriers

‹#›

Absolute Import Quota (1 of 7)

Nontariff trade barriers

Policies other than tariffs that restrict international trade

Absolute quota

Physical restriction on quantity of goods imported during a specific time period

‹#›

Absolute Import Quota (2 of 7)

Import licenses

Government allocates import licenses to importers, permitting them to import product only up to prescribed limit, regardless of market demand

Global quota

Permits specified quantity of goods imported each year; does not specify from where product is shipped or who imports

Plagued by accusations of favoritism

‹#›

Absolute Import Quota (3 of 7)

Selective quota

Import quota allocated to specific countries

May lead to domestic monopoly of production and higher prices

Quotas may lead to domestic monopoly of production and higher prices

‹#›

Absolute Import Quota (4 of 7) Figure 5.1

‹#›

Absolute Import Quota (5 of 7)

Trade and Welfare Effects

Price increase

Decrease in consumer surplus

Redistributive effect (a)

Deadweight loss (b + d)

Protective effect (b)

Consumption effect (d)

Revenue effect (c)

Windfall profits, a.k.a. quota rent

‹#›

Absolute Import Quota (6 of 7)

Quotas versus Tariffs

When demand is growing, an absolute quota restricts volume of imports by greater amount than equivalent import tariff

‹#›

Absolute Import Quota (7 of 7) Figure 5.2

‹#›

Tariff-Rate Quota: A Two-Tier Tariff (1 of 5)

Tariff-rate quota

Two components

Allows specified number of goods to be imported at lower tariff rate (within-quota rate)

Any imports above this level face higher tariff rate (the over-quota rate)

‹#›

Tariff-Rate Quota: A Two-Tier Tariff (2 of 5)

Administration of tariff-rate quotas

License on demand allocation

If demand for licenses is less than quota, system operates on first come, first serve basis

If demand exceeds quota, import volume requested is reduced proportionally among all applicants

Allocation may also be based on historical market share or auctions

‹#›

Tariff-Rate Quota: A Two-Tier Tariff (3 of 5)

WTO requires members to convert all NTBs to tariffs; during transition, tariff-rate quotas permitted

‹#›

Tariff-Rate Quota: A Two-Tier Tariff (4 of 5)

Examples of U.S. Tariff-Rate Quotas

Product	Within-Quota Tariff Rate	Import-Quota Threshold	Over-Quota Tariff Rate
Peanuts	$0.935/kg	30,393 tons	187.9% ad valorem
Beef	$0.44/kg	634,621 tons	31.1% ad valorem
Milk	$0.32/L	5.7 million L	$0.885/L
Blue cheese	$0.10/kg	2.6 million kg	$2.60/kg

Source: From U.S. International Trade Commission, Harmonized Tariff Schedule of the United States, Washington, DC, U.S. Government Printing Office, 2017.

‹#›

Tariff-Rate Quota: A Two-Tier Tariff (5 of 5)

Sugar tariffs are bittersweet

U.S. sugar growers receive government guaranteed minimum price for sugar, but this attracts imported sugar

To prevent imports, U.S. implements tariff-rate quotas

U.S. price of sugar almost twice world market price

Many candy firms that use sugar have left country; those that remain pass price on to consumers

‹#›

Export Quotas (1 of 2)

Export quotas

Governments enter as form of voluntary export restraint agreements

Moderates intensity of international competition; tend to be more costly than tariffs

Identical effect to equivalent import quotas, except implemented by exporting nation

In 1980s, 67% of costs to U.S. consumers of these restraints captured by foreign exporters as profit

‹#›

Export Quotas (2 of 2)

Japanese Auto Restraints Put Brakes on U.S. Motorists

U.S. & Japan agreed to limit Japanese exports for 3 years beginning in 1981; purpose to help U.S. auto industry

But large Japanese car makers largely unaffected; increased prices & earned record profits

In 1984, U.S. consumer paid extra $660 per Japanese auto and $1,300 per U.S. auto

44,000 U.S. jobs saved at cost of $100,000/job

‹#›

Domestic Content Requirements (1 of 2)

To limit outsourcing, labor lobbied for domestic content requirements

Minimum percentage of a good’s value must be produced locally to qualify for zero tariff rates

Pressure domestic/foreign firms to use domestic inputs/workers

Can result in higher input and product prices and loss of competitiveness

Subsidized by domestic consumers

‹#›

Domestic Content Requirements (2 of 2)

‹#›

Subsidies (1 of 4)

Subsidies

May take form of outright cash disbursements, tax concessions, insurance arrangements, and subsidized loans

‹#›

Subsidies (2 of 4)

Domestic Production Subsidy

Results in

Higher output

Redistributive effects – increase in producer surplus for more efficient producers

Deadweight loss - protective effect

Lower welfare losses than a tariff/quota

Financed by taxpayers

‹#›

Subsidies (3 of 4)

Export Subsidy

Whereas domestic production subsidy is granted to producers of import-competing goods, an export subsidy goes to producers of goods to be sold overseas

For both, net price received by producer equals price paid by purchaser plus subsidy, and subsidy revenue redistributed in form of producer surplus

‹#›

Subsidies (4 of 4)

Export Subsidy (cont’d)

Higher output and prices for exporters

Higher exports; lower domestic consumption

Domestic producers gain at expense of domestic consumers and taxpayers

Decrease in consumer surplus

Increase in producer surplus

Taxpayers bear cost of export subsidy

Deadweight losses (welfare)

‹#›

Dumping (1 of 4)

Dumping

A form of international price discrimination

Occurs when foreign buyers are charged lower prices than domestic buyers for identical product

Also, selling in foreign markets at a price below cost of production

‹#›

Dumping (2 of 4)

Forms of Dumping

Sporadic Dumping

A firm disposes of excess inventories in foreign markets by selling at price below domestic price

Predatory Dumping

Producer temporarily reduces price charged abroad to drive foreign competitors out of business

Persistent Dumping

Goes on indefinitely; to maximize economic profits, a producer may consistently sell abroad at lower price than at home

‹#›

Dumping (3 of 4)

International Price Discrimination

Producer charges more at home with less competition, and more overseas to compete

Submarkets’ demand conditions must differ

Different demand elasticities (home/foreign)

Firm must be able to separate submarkets

Prevent arbitrage (resale of goods at higher price)

Markets – easier to separate internationally

High transportation costs

Trade restrictions

‹#›

Dumping (4 of 4) Figure 5.5

‹#›

Antidumping Regulations (1 of 6)

Antidumping duty

Levied when

U.S. Department of Commerce determines foreign merchandise being sold at less than fair value (LTFV); and

U.S. International Trade Commission (ITC) determines that LTFV imports are causing or threatening material injury to domestic industry

Anti-dumping duties imposed in addition to the normal tariff

‹#›

Antidumping Regulations (2 of 6)

Margin of dumping

Amount by which foreign market value exceeds U.S. price

Foreign market value – two definitions

Priced-based definition

Dumping occurs when foreign firm sells good at price in U.S. below home price

‹#›

Antidumping Regulations (3 of 6)

Foreign market value

Cost-based definition (used when price-based definition cannot be applied)

Cost of manufacturing merchandise + general expenses (at least 10% of cost of manufacturing) + profit on home-market sales (at least 8% of manufacturing cost + general expense) + packaging merchandise for shipment to U.S.

‹#›

Antidumping Regulations (4 of 6)

Whirlpool Agitates for Antidumping Tariffs on Clothes Washers

93,000 employees, $21 billion in annual sales, and 70 manufacturing and technology research centers throughout the world in 2017.

In 2011, Whirlpool filed anti-dumping and anti-subsidy petitions against Samsung & LG, which it contended were selling in U.S. at prices substantially less than fair value

‹#›

Antidumping Regulations (5 of 6)

2016: Whirlpool filed again

2017: U.S. International Trade Commission approved Whirlpool’s petition for safeguard protection

‹#›

Antidumping Regulations (6 of 6)

Vaughan-Bassett Furniture Company: Furniture Dumping from China

Vaughan-Bassett Furniture and other U.S. furniture manufactures (over opposition of many U.S. furniture retailers) filed antidumping complaint against China

In 2005, U.S. government imposed dumping duties of on most Chinese furniture shipped to U.S.

Resulted in decrease in Chinese furniture sold in U.S.

However, imports from Vietnam, Indonesia, and other countries filled vacuum

Returned Vaughan-Bassett Furniture to profitability; is now largest wood bedroom manufacturer in U.S.

‹#›

Is Antidumping Law Unfair? (1 of 4)

Antidumping laws

Supporters claim such laws needed to ensure level playing field by offsetting artificial sources of competitive advantage

Critics note that although protected industries gain, consumers lose more and economy as whole therefore suffers net loss

‹#›

Is Antidumping Law Unfair? (2 of 4)

Should Average Variable Cost be the Yardstick for Defining Dumping?

Economists argue that fair value should be based on average variable cost rather than average total cost, especially when domestic economy experiences temporary downturns in demand

Under competitive conditions, firms price goods at average variable cost

Antidumping laws punish competitive behavior

U.S. firms selling at home not subject to same rules

‹#›

Is Antidumping Law Unfair? (3 of 4) Table 5.3

Dumping and Excess Capacity

	No Dumping	Dumping
Home sales	100 units @ $300	100 units @ $300
Export sales	0 units @ $300	50 units @ $250
Sales revenue	$30,000	$42,500
Less variable costs of $200 per unit	−20,000	−30,000
	$10,000	$12,500
Less total fixed costs of $10,000	−10,000	−10,000
Profit	$0	$2,500

‹#›

Is Antidumping Law Unfair? (4 of 4)

Should Antidumping Law Reflect Currency Fluctuations?

Fluctuations in exchange rate can cause a foreign producer to “dump,” according to legal definition

Are Antidumping Duties Overused?

Now, nations small and large bring antidumping cases, leading to retaliation

In many cases where imports were determined to be dumped, they would not have been questioned under the same countries’ antitrust laws

‹#›

Other Nontariff Trade Barriers (1 of 5)

Government procurement policies: “Buy American”

1933, Buy American Act

Requires federal agencies to purchase materials and products from U.S. suppliers if prices not “unreasonably” higher than foreign

“Domestic product,” must 50% domestic component content and be USA manufactured

‹#›

Other Nontariff Trade Barriers (2 of 5)

Government procurement policies (cont.)

1933, Buy American Act

U.S. suppliers of civilian agencies – preferences over foreign firms

6-12% preference margin

50% preference margin for Department of Defense

Preferences waived if U.S.-produced good is not available in sufficient quantities or is not of satisfactory quality

‹#›

Other Nontariff Trade Barriers (3 of 5)

Social Regulations

Correct a variety of undesirable side effects markets ignore

Health, safety, and the environment

CAFÉ Standards

Corporate average fuel economy standards

Passenger cars: 37.8 miles per gallon (2016)

Light trucks: 28.8 miles per gallon (2016)

‹#›

Other Nontariff Trade Barriers (4 of 5)

Europe Has a Cow over Hormone-Treated U.S. Beef

Ban on hormone-treated meat

‹#›

Other Nontariff Trade Barriers (5 of 5)

Sea transport and freight regulations

U.S. shipping companies serving Japanese ports complained of highly restrictive system of port services

Required to clear every detail of visits with Japan’s stevedore-company association

Dockworkers available only 18 hours a day or less

Made U.S. goods more expensive in Japan

In 1997, U.S. and Japan, on brink of trade war, reached agreement to liberalize port services in Japan

‹#›