chpt5

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Nontariff Trade Barriers

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PowerPoint slides prepared by:

Andreea Chiritescu

Eastern Illinois University

Import Quota

Import quota

Physical restriction on the quantity of goods that can be imported during a specific time period

Require an import license

Specifies the total volume of imports allowed

On manufactured goods

Outlawed by the World Trade Organization

Examples of U.S. import quotas*

TABLE 5.1

Import Quota

Global quota

Permits a specified number of goods to be imported each year

Does not specify from where the product is shipped or who is permitted to import

Plagued by accusations of favoritism

Selective quota

Import quota allocated to specific countries

May lead to a domestic monopoly of production and higher prices

Import Quota

Effects of import quota on economy’s welfare

Price increase

Decrease in consumer surplus

Redistributive effect

Deadweight loss

Protective effect

Consumption effect

Revenue effect

Windfall profit

Quota rent

By restricting available supplies of an imported product, a quota leads to higher import prices. This price 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.

Import quota: trade and welfare effects

FIGURE 5.1

Import Quota

Allocating quota licenses

Historical share of import market

Oil and dairy products

Discriminates against importers seeking to import goods for the first time

Pro rata basis

U.S. importers receive a fraction of their demand

= Ratio of the import quota to the total quantity demanded collectively by U.S. importers

Import Quota

Allocating quota licenses

Auctioning of import licenses

To the highest bidder in a competitive market

Government - capture the windfall profits

Considered by U.S.

Quotas Versus Tariffs

During periods of growing demand

An import quota restricts the volume of imports

By a greater amount than does an equivalent import tariff

Quota

More restrictive than a tariff

Suppresses competition

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 good, while the level of imports remains constant.

Trade effects of tariffs versus quotas

FIGURE 5.2

Tariff-Rate Quota: A Two-Tier Tariff

Tariff-rate quota

Two-tier tariff

A quota that defines the maximum volume of imports

And charges the within-quota tariff

Any imports above this level face a higher tariff rate

Over-quota tariff

Examples of U.S. tariff-rate quotas

TABLE 5.2

Product	Within-Quota Tariff Rate	Import-Quota Threshold	Over-Quota Tariff Rate
Peanuts Beef Milk Blue cheese Cotton	9.35 cents/kg 4.4 cents/kg 3.2 cents/L 10 cents/kg 4.4 cents/kg	30,393 tons 634,621 tons 5.7 million L 2.6 million kg 2.1 million kg	187.9 percent ad valorem 31.1 percent ad valorem 88.5 cents/L $2.60/kg 36 cents/kg

Tariff-Rate Quota: A Two-Tier Tariff

Administration of tariff-rate quotas

License on demand allocation

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

Historical market share

Auctions

Tariff-Rate Quota: A Two-Tier Tariff

U.S. sugar industry

Government subsidies

Price support

Tariff-rate quota

Sugar tariff-rate quota

Raw cane sugar

Allocated on a country-by-country basis among 41 countries

Refined sugar

Allocated in a global first-come, first-serve basis

Tariff-Rate Quota: A Two-Tier Tariff

Sugar tariff-rate quota

Restrict the supply of foreign sugar from entering U.S.

Higher domestic sugar price

2006, U.S. price = 20.94 cents per pound

World price = 10.42 cents per pound

American consumers - spend extra $2 billion a year on sugar

Tariff-Rate Quota: A Two-Tier Tariff

Sugar tariff-rate quota

Concentrated benefits

Enormous revenues for a very small number of domestic growers and refiners

Dispersed costs

Spread across the U.S. economy

Export Quotas

Export quotas

Market sharing pact, voluntary export restraint agreement

To moderate the intensity of international competition

Tend to be more costly than tariffs

Export Quotas

Export quotas

Study: three major U.S. voluntary export restraint agreements of the 1980s

Automobiles, steel, and textiles and apparel

67% of the costs to American consumers - captured by foreign exporters as profit

Domestic Content Requirements

Domestic content requirements

By organized labor

To limit the practice of outsourcing

Minimum percentage of product’s total value

That must be produced domestically

If the product is to qualify for zero tariff rates

Pressure domestic and foreign firms

To use domestic inputs (workers)

Domestic Content Requirements

Domestic content requirements

Higher input prices

Higher product prices

Loss of competitiveness

Subsidizing by domestic consumers of the domestic producer

Domestic content requirements applied to automobiles in selected countries

TABLE 5.3

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.

Welfare effects of a domestic content requirement

FIGURE 5.3

Subsidies

Outright cash disbursements, tax concessions, insurance arrangements, and loans at below-market interest rates

From the government for producers

To help improve their market position

Provide domestic firms a cost advantage

Market products at prices lower than warranted by their actual cost or profit considerations

Subsidies

Domestic production subsidy

Granted to producers of import-competing goods

Export subsidy

Granted to producers of goods that are to be sold overseas

Subsidy

Net price received by the producer = price paid by the purchaser + subsidy

Subsidies

Welfare effects of domestic production subsidy

Higher output

Subsidy revenue – some redistributed to the more efficient producers - producer surplus

Deadweight loss

Protective effect

Lower welfare loss than a tariff or a quota

Direct cost of the subsidy

Financed out of tax revenues paid by the public

Subsidies

Welfare effects of export subsidy

Higher output and price

Higher exports; Lower domestic consumption

Domestic producers gain at the expense of the domestic consumer and taxpayer

Decrease in the consumer surplus

Increase in the producer surplus

Taxpayer - bears the cost of export subsidy

Deadweight loss of welfare

A government subsidy granted to import-competing producers leads to increased domestic production and reduced imports. The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect). A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. However, it entails a deadweight welfare loss to the home country in the form of the protective effect and the consumption effect.

Trade and welfare effects of subsidies

FIGURE 5.4

How “foreign” is your car?

Buyers of cars and light trucks

Can learn how American or foreign their new vehicle is

Content labels - where the parts of the vehicle were made

Measured by the dollar value of components

Not the labor cost of assembling vehicles

GLOBALIZATION

North American content of automobiles sold in the United States, 2007 (sales weighted)

TABLE 5.4

Dumping

International price discrimination

Foreign producers charge lower prices than domestic producers for an identical product

After allowing for transportation costs and tariff duties

Selling in foreign markets at a price below the cost of production

Dumping

Sporadic dumping (distress dumping)

A firm disposes of excess inventories on foreign markets

Selling abroad at lower prices than at home

May be the result of misfortune or poor planning

Beneficial to importing consumers

Disruptive to import-competing producers

Dumping

Predatory dumping

A producer temporarily reduces the prices charged abroad to drive foreign competitors out of business

Acquiring a monopoly position

New higher prices – to offset any losses that occurred during the period of cutthroat pricing

Prevent the entry of potential competitors

Home governments - concerned

Retaliate with antidumping duties

Dumping

Persistent dumping

Goes on indefinitely

A producer may consistently sell abroad at lower prices than at home

International price discrimination

Different demand elasticity

Domestic market

Foreign market

Charge different prices - Higher profits

Dumping

Successful international price discrimination

Submarkets’ demand conditions must differ

Ensure different demand elasticities

Firm must be able to separate the two submarkets

Prevent any significant resale of commodities

Markets – easier to separate internationally

High transportation costs

Governmental trade restrictions

A price-discriminating firm maximizes profits by equating marginal revenue, in each submarket, with marginal cost. The firm will charge a higher price in the less-elastic-demand (less competitive) market and a lower price in the more-elastic-demand (more competitive) market. Successful dumping leads to additional revenue and profits for the firm compared to what would be realized in the absence of dumping.

International price discrimination

FIGURE 5.5

Antidumping Regulations

Antidumping duty

U.S. Department of Commerce

Foreign merchandise is being sold at less than fair value (LTFV)

U.S. International Trade Commission (ITC)

Determines that LTFV imports are causing/threatening material injury

Imposed in addition to the normal tariff

Antidumping Regulations

Margin of dumping

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

Foreign market value

Priced-based definition

Dumping occurs whenever a foreign company sells a product in the U.S. market

At a price below that for which the same product sells in the home market

Antidumping Regulations

Foreign market value

Cost-based definition

Cost of manufacturing the merchandise

+ general expenses (at least 10% of cost of manufacturing)

+ profit on home-market sales (at least 8% of manufacturing cost + general expense)

+packaging the merchandise for shipment to U.S.

Antidumping Regulations

Smith Corona, Inc.

Won several antidumping cases from the 1970s to the 1990s

Ferocious competition from Brother Industries Ltd. of Japan

1989, Canadian government

U.S. Delicious apples - dumped on the Canadian market

Injury to 4,500 commercial apple growers

Normal value and the margin of dumping: Delicious apples, regular storage, 1987–1988*

TABLE 5.5

Swimming upstream: the case of Vietnamese catfish

Vietnamese catfish

Comparative advantage

Vietnam’s Mekong Delta and cheap labor

Half-million Vietnamese earn income from the catfish trade

20% of the frozen catfish-fillet market in U.S.

Lower prices

TRADE CONFLICTS

Swimming upstream: the case of Vietnamese catfish

Catfish farmers in Mississippi

Trade war: product labeling, antidumping tariffs

Persuade the U.S. government to close the catfish market to Vietnamese farmers

Out of 2,000 types of catfish, only the American-born family could be called “catfish”

Disinformation campaign - Vietnamese catfish

“slippery catfish wannabe”

“probably not even sporting real whiskers”

“floating around in Third World rivers nibbling on who knows what”

TRADE CONFLICTS

Swimming upstream: the case of Vietnamese catfish

Catfish farmers in Mississippi

Antidumping case against Vietnamese catfish

U.S. Department of Commerce

Did not have strong evidence that the imported fish were being sold in America more cheaply than in Vietnam, or below their cost of production

Declared Vietnam a “nonmarket” economy

Dumping tariffs: 37-64% (permanent)

TRADE CONFLICTS

Swimming upstream: the case of Vietnamese catfish

This nonmarket designation

Should not have been used

Because the U.S. government was encouraging Vietnam to become a market economy

TRADE CONFLICTS

Is Antidumping Law Unfair?

Antidumping laws

Ensure a level playing field by offsetting artificial sources of competitive advantage

Protected industries gain

Consumers of the protected good lose more

Whole economy lose more

Dumping

When a foreign producer sells goods in U.S. at less than fair value

Is Antidumping Law Unfair?

Fair value

Average total cost

+ 8% allowance for profit

Average variable cost

Better measure than average total cost

Firms facing excess production capacity

Incentive to stimulate sales

Cutting prices charged to foreigners

To levels that just cover average variable cost

Dumping and excess capacity

TABLE 5.6

Is Antidumping Law Unfair?

Antidumping law – unfair

Uses average total cost to determine fair value

Under competitive conditions

Firms price their goods at average variable costs,

Punish firms that are simply behaving in a manner typical of competitive markets

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

Is Antidumping Law Unfair?

Antidumping law - does not account for currency fluctuations

Fluctuations in exchange rates can cause prices to “dump” according to the legal definition

American firms are not required to meet the standard imposed on foreign firms selling in the United States

Other Nontariff Trade Barriers

Government procurement policies

Buy-national policies

1933, Buy American Act

Federal agencies

Purchase materials and products from U.S. suppliers

If their prices are not “unreasonably” higher than those of foreign competitors

Domestic product

At least 50% domestic component content

Manufactured in the United States

Other Nontariff Trade Barriers

Government procurement policies

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. These preferences are

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

Other Nontariff Trade Barriers

Government procurement policies

Barrier to free trade

Higher cost for government projects

Deadweight welfare losses

Protective and consumption effects

U.S. fiscal stimulus and Buy American legislation

$787 billion fiscal stimulus legislation

During the recession of 2007–2009

Federal agencies can waive Buy American preferences

If they inflate the cost of a construction project by more than 25% or are deemed to be against the public interest

Buy American preferences are waived if they violate past trade agreements

TRADE CONFLICTS

U.S. fiscal stimulus and Buy American legislation

$787 billion fiscal stimulus legislation

City and state (municipal) governments in U.S. are not obligated to honor the trade agreements of the federal government

Can enact Buy American

TRADE CONFLICTS

Other Nontariff Trade Barriers

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: 27.5 miles per gallon

European Union

Ban on hormone-treated meat

Other Nontariff Trade Barriers

Sea transport and freight regulations

U.S. shipping companies serving Japanese ports

Highly restrictive system of port services

Clear every detail of its visit with Japan’s stevedore-company association

Dockworkers – available 18 hours a day or less

Expensive

Other Nontariff Trade Barriers

Sea transport and freight regulations

Ships docking in U.S. port

U.S. dockworkers

Unload and load 24 hours a day

30% less time

Half the price

Notify port authorities

Notify the Coast Guard