trade

Panel (b) of Exhibit 8 shows the distribution and

efflciency eifects of the quota'As a result of.the quota'

U.5. consumer surplus declines by the combined biue

and pink areas. Area a becomes producer surplus and

thus invoives no loss of U.S' welfare' Area c shows the

increased economic profit to those permitted by the-q,ro,u ,o sell Americins 3o miliion pounds for $o'r5

pu, pouna, or $o.o5 above the world price' If foreign

"*por,"r, rather than U.S. importers reap this profit'

area c reflects a net loss in U'S' welfare'

Areab shows a welfare loss to the U'S' economy'

because sugar could have been purchased abroad for

io.ro p"t iorrnd, and the U'S' resources employed to increase sugar production could have been used

more efficientt-y proaucing other goods' Area d is

also a welfare loss because it reflects a reduction in

consumer surplus with no offsetting gain to anyone'

Thus, areas b and d in panei (b) of Exhibit 8 measure

the minimum U.S' welfare loss from the quota' If the

frofit from quota dghts (area c) accrues-to foreign

prodrr.err, this increases the U'S' welfare loss'

Quotas *m Practsee The United States has granted quotas to specific countries. These countries, in turn' distribute these

q"o," tignO to their exporters tfrro.uSh a variety of

i-,u"r,t. iy rew ar ding domestic and foreign producers with higher prices, the quota system creotes two -groups

inlent

oi rrriring and'perpetuating these quotas' Lobbyists for foreign producers work the halls of Congress'

seeking

tf,e rlghl to export to the United States' This strong

r"pp"t, from pioducers, coupled with a lack ofoppo-

sition from consumers (who remain rationally igno-

rant for the most part), has resulted in quotas that

have lasted decades. For example, sugar quotas have

been around more than 50 years' In January zoog' the

world price of sugar was about $o'rz a pound' but

U.S. businesses that need sugar to make products'

su.h u, candy, paid more than $o'zo a pound' costing

consumers an extra $z billion annualiy' Sugar grow-

"rr, *ho account for only r percent of-U,S' farm sales'

have accounted for r7 percent of political contribu-

tions from agriculture since r99o'1

Some economists have argued that if quotas are

to be used, the United States should auction them off

to foreign producers, thereby capturing at }east some

of the dlfference between the world price and the U'S'

pri.". A.t.tioning off quotas would not only increase

federai revenue Uut would reduce the profitability of

qrro,"r, which would reduce pressure on V/ashington

i'.'fvfoLurf Schroeder, "Sugar Growers Hold Up Push for Free Trade"'

Wall Street Journal 3 February 2004'

266 PART 4 Ilrl"rr'ariurlrr \l.) :oL cr't0 rt'cs

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91 r;

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to perpetuate them' Anencar "li:;n:eis are li::

,f-t" o"iy victims of sugar quolas' lbousands oi ?::: farmeri around the world miss oui on an oppor:'--

nity to earn a living growing sugarcane for export to

America.

TarFffs end Quotas ewmPared Consider the similarities and differences between

a

tariff and a quota. Because both have identical effects

on the price in our exampie, they both lead to the

,"*" .h"r,ge in quantity demanded' In both cases' U.S. consumers suffer the same loss of consumer

surplus, and U'S. producers reap the same gain of

proit."t surplus. rhe primary difference is that the ,"o"rrrru from the tariff goes to the U'S' government'

whereas the revenue from the quota goes to whom-

ever secures the right to seil foreign goods in the U.S. market. IJ quota-rights accrue to foreigners' then

the

domestic ,rono*y is worse off with a quota than with a

tariff. But even if quota rights go to domestic import-

urr,'qrro,ut, like iariffs, still increase the domestic price, restrict quantity, and thereby reduce consumer

irtptu, and ectnomic welfare' Quotas and tariffs can

"tro ,"ir" production costs' For example' U'S' candy

manufacturers face higher production costs because

of ,rrg", quotas, making them less competitive on

-orti-"itets. Finaliy, and most importantiy' quo-

tas and tariffs encourage foteign governme-nls to retali-

ie witn quito, and tartffs of their orun' thus shrinking U.S. expoit markets, so the loss is greater than

shown in

Exhibits 7 and8.

Sttrer Trade Restrieticms Besides tariffs and quotas, a variety of other measures

limit free trade. A country may provide export subsidies

to encourage exports and low-interestloans to foreign

brryurr. S o rie c ountrie s irnp o s e dome strc co-ntent r e quir e -

ments specifying that a certain portion of a final good

must bL ptoalri"a domestically' other requirements

.on.eming health, safety' or technical standards often discriminate against foreign goods' For

exampie'

European countries once prohibited beef from hor-

mone-fed cattle, a measure aimed at U'S' beef' Purity

laws in Germany bar many non-German beers' Until

the European Community adopted-uniform standards'

Jiff"ti"i technical requirements- forced manufactur- ers to offer as many "i '"u"tt

different versions of the

same TV for that market' Sometimes exporters will

voluntariiy limit exporls, as when Japanese automak-

ers agreed to cutexports to the United States'The point

is thit tarifs and quotas are only two of many devices used

to restrict foreign trade.

g

F

g

!

Recent research on the cost of protectionism indicates that international trade barriers slow the introduction of new goods and better technologies. So, rather than simply raising domestic prices, trade restrictions slow economic progress.

il*4 R*du*ti*n mf TYad* ffias rf*rs In recent decades, countries have worked to reduce trade barriers and increase the flow of international trade. Let's examine multilaterai agreements, the World Tlade Organization, and com- mon markets more closely.

Freer Trede hy F* u EtE $ atctre € &g neerment Mindfui of how high tariffs cut world trade during the Great Depression, the United States, after World War II, invited its trading partners to negotiate lower tariffs and other trade barriers. The result was the Gen*::al Agr€emerlt ,:n Tariffs and 'frade (GAT'|), an international trade treaty adopted in ry47 by z3 countries, including the United States. Each GATT member agreed to (r) reduce tariffs through multi- national negotiations, (z) reduce import quotas, and (3) treat all members equally with respect to trade.

Ttade barriers have been reduced through trade negotiations among many countries, or "trade

rounds," under the auspices of GATT. Trade rounCs offer a package approach rather than an issue-b,v- issue approach to trade negotiations. Concessio::s that are necessary but otherwise difficult to defenci in domestic poiitical terms can be made more accep:- able in the context of a package that also contains politically and economically attractive benefits. Most early GATT trade rounds were aimed at reducing tar- iffs. The Kennedy Round in the mid-r96os inclucled new provisions against dumping, which is selilng a commodity abroad for less than is charged in the home market or }ess than the cost of produclion- The Tokyo Round of the r97os was a more sweeping attempt to extend and improve the system'

The most recently completed round was iauncheci in Uruguay in September r986 and ratifred by 723par- ticipating countries in r994. The number of signing countries now exceeds t4o. This so-called tjru-guay' R*und, the most comprehensive of the eight postwar multilateral trade negotiations, included 550 pages of tariff reductions on 85 percent of world tratie' The Uruguay Round also created the World Trade Organization (VVTO) to succeed GATT.

Yhe Worfid Trade #rganiaetion The Warlci Tracie Organiza- tion iV/TC) now Provides the legal and institutional foundation for world trade.

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The Bush Administration was often ac-

cused of being soft on China regarding

trade, but on December 1 9, 2008, the

United States filed a broad petition with

the WTO alleging that China was using

subsidies and cheap loans to provide

Chrnese exporters an unfair advantage.

China has irequently been accused of

dumping by American manufacturets,

pafticularly steel makers. Between

April 2008 and the end of the year,

China's monthly steel exports to

the United States nearlY triPled,

while U.S. steel mills had reduced

production Io 43o/o ol capacity. China currently produces about 4070 of global steel, though only six years

before, it barely produced any. And while controversial, in many cases it is yet to be seen whether China's

policies have actually been illegal.

S0URCE; Pete Engardio, "Chjna: An Early Test for Obama," Eusrness Week, 12 January 2008. pp.1 9-20.

Gen*ral Agreer::e ;:; r:n T'ariffs at-icl -liac.-

{sArr} an ifi terft atiofl el tariif ' rer!uetion treaiy ed*p1' ed irr 194? that fe$irtt*d in a *esies ei neg*ti- atesl "rcunds" ain:*ri *t lreer traele; tl:a Uiufiuav FountJ ereat€d GATT'€ suecesscr. th* fdoliti Trade 0rga*iz*iien iwr$) riumping seliini; a pr*duct ahroed fr:r iess ih** +ir*rged in th* home market *r fcr less than :he e**t *i producticn

Urr,rguey itc'.tncl the {inal mui:il*-- erel trade fi eg*ti3i;.)t1 under GATT; rhis '!984

agrFemeni cut tafiss. lormed the lVarld 1r*de Grganizatiun 1\#TOi, end wifl eve*t;":ally eliminate quat*s

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