International Economics Woraphon Yamaka Chapter 5: Nontariff Trade Barriers Modified form International Economics 9th Edition by Robert J. Carbaugh

There are many types of non-tariff barriers Import quotas Tariff-rate quota (Mix between Tariff and quota Orderly marketing agreements Domestic content requirements Subsidies Dumping

1) Import quotas Types of non-tariff barriers Quotas are a restriction on the quantity of a good that may be imported in any one period (usually below free-trade levels) Global quotas restrict the total quantity of an import, regardless of origin Selective quotas restrict the quantity of a good coming from a particular country Carbaugh, Chap. 6

Import quota: trade & welfare effects (small country) Types of non-tariff barriers Import quota: trade & welfare effects (small country) 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 & welfare effects (small country)       This change affects the nation’s welfare in a various ways (when use quota) Quata revenue effect (area c) The U.S. government may collect the quota’s rent from the importing companies. (Sells import licenses to U.S. grocers )There is no welfare loss redistributive effect (area a) is a transfer of income from consumers to producers. There is no welfare loss 3) protective effect (area b) inefficient use of resources There is welfare loss 4) Consumption effect (area d) the reduction of domestic consumption. There is welfare loss Country can not collect the tax form foreign Consumption effect + protective effect is called “dead weight loss” a real cost to society, not a transfer to other sectors of the economy.

Welfare Effects of an Import Tariff   Importing Country Consumer Surplus - (a + b + c + d) Producer Surplus + a Quota Rents + c National Welfare - b - d Carbaugh, Chap. 5

2) Tariff-rate quota (Mix between Tariff and quota Types of non-tariff barriers 2) Tariff-rate quota (Mix between Tariff and quota The tariff-rate quota is a two-tiered tariff A specified number of goods (up to the quota limit) may be imported at one (lower) tariff rate, while imports in excess of the quota face a higher tariff rate Carbaugh, Chap. 6

Tariff-rate quota: trade & welfare effects Types of non-tariff barriers Tariff-rate quota: trade & welfare effects The tariff-rate quota appears to differ little from the import quota discussed earlier in this chapter. The distinction is that under an import quota it is legally impossible to import more than a specified amount. However, under a tariff-rate quota, imports can exceed this specified amount, but a higher, over-quota tariff is applied on the excess.

3) Orderly marketing agreements Types of non-tariff barriers 3) Orderly marketing agreements Besides implementing import quotas, countries have used export quotas to restrain trade. When doing so, they typically negotiate a market sharing pact known as a voluntary export restraint agreement, also known as an orderly marketing agreement. Market sharing pact signed by trading partners Intended to moderate the intensity of international competition in order to protect less efficient domestic producers Recent trade negotiations have restricted the use of these agreements Ask their domestic firm to restrict their export and sell their product in the domestic market. This will decrease the foreign market share and thereby further import reduction.

Effects of a voluntary export quota Types of non-tariff barriers Effects of a voluntary export quota Voluntary export quotas tend to have identical economic effects to equivalent import quotas, except for being implemented by the exporting nation. Thus, the revenue effect of an export quota is captured by the foreign exporting company. (Sells export licenses to exporting firm) We now focus only the exporting nation

Effects of a voluntary export quota Before Trade : E CS : AEB PS : AEC P Sd B   D I J H K   G F L Restricted Export   E A   C Dd Q 1 2 5 8 10  

Summary KHFL = Producer loss KDGL = Consumer gain Sd B D I J H   K G F Restricted Export L   E A C Dd Q 1 2 5 8 10 Summary KHFL = Producer loss KDGL = Consumer gain IJFG = revenues effect (loss foreign consumption but generate income for government : sell export license) : quota rent DIG = Consumption Effect ( gain) JHF = DWL : Production Effect

4) Domestic content requirements Types of non-tariff barriers 4) Domestic content requirements It is the rules that require a certain percentage of a product’s total value should be produced domestically The effect of content requirements is to pressure both domestic and foreign firms that sell products in the home country to use domestic inputs (workers or captials) in the production of those products The demand for domestic inputs thus increases, contributing to higher input prices. Often has the effect of forcing lower-priced imports to include higher-cost domestic components or be assembled in a higher-cost domestic market Carbaugh, Chap. 6

Domestic content: trade & welfare effects Types of non-tariff barriers Domestic content: trade & welfare effects      

Domestic content: trade & welfare effects Welfare Effects of a Domestic content Consumer Surplus -a-b Deadweight loss = b Producer Surplus a Carbaugh, Chap. 5

5) Subsidies export Types of non-tariff barriers Domestic subsidy Payments made to import-competing producers to raise the price they receive above the market price Export subsidy Payments and incentives offered to export producers intended to raise the volume of exports Carbaugh, Chap. 6

Domestic Subsidy: trade & welfare effects Types of non-tariff barriers Domestic Subsidy: trade & welfare effects When subsidy is implemented, $25 is subsidized, domestic production expands from 2 to 7 million tons, and imports fall from 12 to 7 million tons. These changes represent the subsidy’s trade effect. Area (a) is redistribution effect and Area (b) is subsidy’s trade effect

Export Subsidies: trade & welfare effects Before Trade : E CS : AEP PS : PEB P Sd A F G P’w   s j h i Pw   C D   E P B Dd Q   Q3 Q1 Q Q2 Q4 area (h) = DWL (consumption effect loss) area (j) = government subsidies (loss)+PS(gain) area (i) = redistributive effect (Producer produce with inefficiency production)  

6) Dumping Types of non-tariff barriers The practice of selling a product at a lower price in export markets than at home (or exporting at prices below production cost) Sporadic dumping - to clear unwanted inventories or cope with excess supply (short run) Predatory dumping - to undermine(destroy) foreign competitors (long run) Persistent dumping - reaping greater profits by engaging in price discrimination Carbaugh, Chap. 6

6) Dumping 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.

Other NTBs Types of non-tariff barriers Government procurement policies Governments favor domestic suppliers over foreign ones in the procurement of materials and products. This is evidenced by the fact that the ratio of imports to total purchases in the public sector is much smaller than in the private sector. Social regulations (health, environmental and safety rules can also restrict trade) attempts to correct a variety of undesirable side effects in an economy that relate to health, safety, and the environment—effects that markets, left to themselves, often ignore. Sea transport and freight restrictions highly restrictive system of port services