International Economics Part International trade relations Lecture 2 Why nations trade Lecture 3 The commodity composition of trade Lecture 4 Protection of domestic industries: the tariff Lecture 5 NTBs to trade Lecture 6 International Mobility of Productive Factors Feb.15,2011~Jun.10,2011

International Economics Lecture 5 - Nontariff Barriers (NTBs) to Trade Feb.15,2011~Jun.10,2011

Syllabus Import Quotas Voluntary Export Restraints (VERs) International Commodity Agreements International Cartels Local Content Requirement Border Tax Adjustments Dumping Export Subsidies NTBs versus Tariffs Strategic Trade Policy? Summary

1.Import Quotas How Common Are Import Quotas? Economic Effects of Quotas [Tariff and Quota Performance with Demand and Supply Shifts]

Economic Effects of Quotas Quota effects: because quota makes the commodity scarce, it raises the goods price in the importing country in a way similar to a tariff. The percentage increase in price is the tariff equivalent of a quota.

Figure 5-1 domestic market for cars in a small importing country

[Tariff and Quota Performance with Demand and Supply Shifts] Figure 5-2 a tariff and a quota when domestic demand rises More welfare loss Monopoly effect

2. Voluntary Export Restraints (VERs) A voluntary export restraint (VER) is an export quota administered by the exporting country It is also known as a voluntary restraint agreement (VRA). VERs are imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions.

A VER is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country. A VER is always more costly to the importing country than a tariff that limits imports by the same amount. A VER produces a loss for the importing country.

3.International Commodity Agreements An international commodity agreement is an accord between the producing and consuming countries of a commodity to stabilize its price or otherwise interfere with market forces. ICAs involve both the producing and the consuming countries They take one of three forms Export restriction schemes 2010 coca agreement Buffer stocks 1995 nature rubber agreement Multilateral contracts MFA

Figure 5-3 commodity price stabilization under a buffer stock ICA

4.International Cartels An international cartel is a group of corporation located in different countries or a group of governments that agree to restrict trade in a commodity. It includes only supplies. OPEC is a cartel of the oil exporting countries.

5.Local Content Requirement A Local Content Requirement is a regulation that requires that some specified fraction of a final good be produced domestically. Local content laws have been widely used by developing countries trying to shift their manufacturing base from assembly back into intermediate goods.

Border Tax Adjustments consist of a tax on import of a commodity, and a rebate on its export, which equal the domestic indirect taxes. 6.Border Tax Adjustments

Price discrimination as tactics of firms Price discrimination: charging different customers different prices. Dumping is the most common form of that tactics: charge a lower price for exported goods than it does for the same goods sold at home market. Terms of dumping: the industry must be imperfectly competitive markets must be segmented 7.Dumping Economics of Dumping The purpose of dumping is to maximize the firms profit

P,c MC Df Dh MR Ph Pf Qd Q monopoly Dumping Leads to larger exports Maximum Q at Mc=Pf EXPORT Dumping

A payment by the government to a firm or individual that ships a good abroad –When the government offers an export subsidy, shippers will export the good up to the point where the domestic price exceeds the foreign price by the amount of the subsidy. It can be either specific or ad valorem 8.Export Subsidies

Effects of an Export Subsidy S D P Q PSPS PS*PS* PWPW a c d e f g Exports Subsidy b

Non-tariff barriers are more harmful to the national economy than tariffs. 9.NTBs versus Tariffs

Strategic trade policy consists of government taxes or subsidies designed to increase the global market share of the countrys own oligopolistic firms, so as to increase their oligopoly profit at the expense of foreign firms. Brander and Spencer: in some industries, there are only a few firms in effective competition. so firms will make excess returns 10.Strategic Trade Policy?

.the Brander-Spencer analysis: an example suppose Ø two firms from different countries Ø both are capable of making 150-seat aircraft Ø each firm can make only a yes/no decision Ø Boeing get a small head start 21

Table 5-1 Two-Firm Competition Airbus Boeing Produce Dont produce Produce 22 Dont produce 100 0

Table 5-2 Effects of a Subsidy to Airbus Airbus Boeing Produce Dont produce Produce

.problems with the Brander-Spencer analysis make use of the policy would Ø Require more information Ø Risk foreign retaliation Ø The domestic politics of trade and industrial policy would prevent use of such subtle analytical tools

Table 5-3 Two-Firm Competition: an Alternative Case Airbus Boeing Produce Dont produce Produce 25

Table 5-4 Effects of a Subsidy to Airbus Airbus Boeing Produce Dont produce Produce 26

11.Summary Tariffs and import quotas have many effects in common. Quotas do not automatically provide revenue. Additional differences between a tariff and a quota emerge when supply and demand curves shift. Under most conditions quotas are more costly to society than are tariffs. VERs have become a widely used instrument for managing trade. They are generally more harmful to society than are tariffs or import quotas with licenses. International commodity agreements have not succeeded in stabilizing world prices of primary products.

The success of international cartels in influencing prices depends on the availability of substitutes and alternative sources of supply. Nontariff barriers are widespread, and their economic effects are extremely difficult to calculate. Arguments supporting strategic trade policy are intuitively appealing, but implementation of such policies is riddled with many practical problems. Free trade is the preferred policy.

Suggested Further Reading R. Baldwin, "Are Economists' Traditional Trade Views Still Valid," Journal of Economic Literature, June 1982, pp James A. Brander and Barbara J. Spencer, "International R&D Rivalry and Industrial Strategy," Review of Economic Studies, 50, 1983, pp Don P. Clark, "Are Poorer Developing Countries the Targets of U.S. Protectionist Actions? " Economic Development and Cultural Change, October 1998, pp