The Economics of Trade Restrictions

Tariffs, Quotas and Voluntary Export Restraints Import Quota A numerical limit a government imposes on the quantity of a good that can be imported into the country. Non-Tariff Barriers ways that a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products. Tariff A tax imposed by a government on imports.

U.S. Tariff Rates: 1890 to the Present 10% –––––––– U.S. Average Tariff Rate –––––––– (Duties collected as a share of dutiable imports) 4.5% 20% 30% 40% 50% 60%

S Quantity (automobiles) Q d1 S Domestic PwPw T UV Q1Q1 Price D Domestic P w + t Q2Q2 Q d2 Trade Restrictions: Impact of a Tariff. Initial imports Tariff = t Imports after tariff Consider a tariff on autos imports. Without a tariff, the world price of autos is P w. At P w consumers in the U.S. purchase Q 1 units … Q d1 from U.S. producers and … Q 1 – Q d1 from foreign producers. A tariff t makes it more costly for Americans to purchase autos from abroad. U.S. prices rise to P w + t and purchases fall from Q 1 to Q 2. U.S. purchases from domestic producers rise from Q d1 to Q d2 … imports fall to Q 2 – Q d2. Producers gain area S … the tariff generates T tax revenues for the government… areas U & V are deadweight losses from reduction in allocative efficiency.

S Quantity (peanuts) Q d1 S Domestic PwPw T UV Q1Q1 Price D Domestic P2P2 Q2Q2 Q d2 Trade Restrictions: Impact of a Quota Initial imports Import quota: Q 2 – Q d2 Consider a quota on peanuts. Without trade restraints, P w (the world price of peanuts) would be the domestic price. At P w U.S. consumers would purchase Q 1 … A quota of Q 2 – Q d2 imports pushes the U.S. price up to P 2. While total U.S. purchases fall (from Q 1 to Q 2 ), those from U.S. producers rise (from Q d1 to Q d2 ) and … imports fall to Q 2 – Q d2. U.S. producers gain area S. Area T goes to foreign producers with permits to import into the U.S. Q d1 from U.S. producers and … Q 1 – Q d1 imported from abroad. U & V are deadweight losses. Note: The government derives no additional revenue from quotas.

S Quantity (peanuts) Q d1 S Domestic PwPw T UV Q1Q1 Price D Domestic P2P2 Q2Q2 Q d2 Trade Restriction Impacts Initial imports Import quota: Q 2 – Q d2 S Quantity (automobiles) Q d1 S Domestic PwPw T UV Q1Q1 Price D Domestic P w + t Q2Q2 Q d2 Initial imports Tariff = t Imports after tariff

The Sugar Trade between Brazil and the United States NoTrade: Brazil $12 and 30 tons US $24 and 80 tons WithTrade: Brazil $16 and 25 tons exports 15 tons US $16 and 87 tons imports 15 tons

Why do Nations Adopt Trade Restrictions? 1.Saves Domestic Employment 2.: a. Saves jobs in protected industries b. Costs jobs in more competitive industries due to higher input prices. c. when an industry is protected, the economy as a whole loses the benefits of playing to its comparative advantage.

Practical Application: In 2002, the Bush administration imposed tariffs of up to 25% on imported steel products. This action a.reduced the supply of steel in the domestic market and led to higher steel prices. b.increased U.S. employment because it saved jobs in the steel industry. c. reduced employment in the U.S. steel container industry because the higher steel prices made it more difficult for them to compete with foreign rivals.

Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive Product Cost to Consumers per Year for Each Job Saved Rice Natural gas Gasoline Paper Beef, pork, and poultry Cosmetics Radio and television sets $51,233,000 27,987,000 6,329,000 3,813,000 1,933,000 1,778, ,000

The High Cost of Preserving US Jobs with Tariffs and Quotas ProductNumber of Jobs Saved Cost to Consumers per Year for Each Job Saved Benzenoid chemicals Luggage Softwood lumber Dairy products Frozen orange juice Ball bearings Machine tools Women's handbags Canned tuna , , $1,376,435 1,285,078 1,044, , , , , , ,640

Cost to U.S. Consumers of Saving a Job through Protectionism Industry Protected with Import Tariffs or Quotas Annual Cost per Job Saved Sugar Polyethylene resins Dairy products Frozen concentrated orange juice Ball bearings Machine tools Women’s handbags $826, , , , , , ,000 Glassware247,000 Textiles199,000 Rubber footwear168,000 Women’s non-athletic footwear139,000

Why do Nations Adopt Trade Restrictions? 2. Infant Industries argument a. Protect developing industries while growing b. Difficult to tell when they are adult.

Brazil 2. Infant Computer Industries 1970s a.Brazil largely barred imports of computer products for several decades b. This policy guaranteed increased sales for Brazilian computers. c. by the mid-1980s, due to lack of international competition, Brazil had a backward and out-of-date industry d. Brazil’s computer industry never competed effectively on world markets

Why do Nations Adopt Trade Restrictions? 3. Prevents Dumping: a. The sale of goods abroad at a price below cost b. Allows foreign firms to achieve economies of scale. c. Foreign firms may want to gain entry to another market. Sell below cost to gain sales.

Why do Nations Adopt Trade Restrictions? 4. Saves the Environment a. globalization could also destroy enough of the planet’s basic biological and physical systems that prospects for life itself will be radically compromised (race to the bottom) or b. with the appropriate safeguards in place, the environmental impacts of trade can be minimized. In some cases, trade may even bring environmental benefits.

Why do Nations Adopt Trade Restrictions? 5. Unsafe Consumer Products 1.a. Imported goods may not be produced under same safety guidelines as American goods. b. Examples:. 1) Mattel toys with lead paint from China 2) Japan refused to import US wheat due to GMO concerns 3) Baby formula and drywall from China

Why do Nations Adopt Trade Restrictions? 6. National Security/Interest a. countries should not depend too heavily on other countries for supplies of certain key products, such as oil, b. or supply technologies that might have national security applications.

In 1948 the United States and Europe set up the General Agreement on Tariffs and Trade (GATT) to reduce tariffs and revive international trade after World War II A series trade rounds took place, in which countries agreed to reduce tariffs from the very high levels of the 1930s. Later, trade in services and in products incorporating intellectual property, such as software programs and movies, grew in importance. Efforts to Reduce Trade Restrictions 1. GATT / WTO

U.S. Tariff Rates (again) 10% –––––––– U.S. Average Tariff Rate –––––––– (Duties collected as a share of dutiable imports) 20% 30% 40% 50% 60% GATT (1948)

In January 1995, GATT was replaced by the World Trade Organization (WTO). World Trade Organization (WTO) An international organization that oversees international trade agreements. Efforts to Reduce Trade Restrictions 1.cont. GATT / WTO

Opposition to the World Trade Organization Globalization The process of countries becoming more open to foreign trade and investment. 1. Some opponents are specifically against the globalization process. 2. Others want to erect trade barriers to protect domestic firms from foreign competition. 3. Some believe the WTO favors the interests of the high-income countries at the expense of the low-income countries.

a. In some, participants allow each other’s imports without tariffs or quotas (NAFTA) b. In some, participants have a common external trade policy as well as free trade within the group. c. In some, in addition to a common market, monetary and fiscal policies are coordinated. (EU). Efforts to Reduce Trade Restrictions 2. Regional Trading Agreements

Some Regional Trade Agreements

True or False

1.A total ban on imports from another country is a quota. 2.A tariff is a restriction on the quantity of a product that can enter a country. 3.The complete prohibition of trade in a particular commodity with a particular nation is called an embargo 4.The prices and availabilities of goods and services should be lower with free trade than with restricted trade 5.One of the protectionist arguments is that trade restrictions should be imposed to ensure national security 6.The sale of a product in a foreign market at a price below cost is called dumping 7.Negotiations under the General Agreement on Tariffs and Trade have resulted in lower tariffs between nations.