11.12.

2009

Introduction
• Nontariff trade barriers (NTBs)
Chapter 5 – Have been on the rise since the 1960s
– Encompass a variety of measures such as:

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• Import quotas
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• Voluntary export restraints

Nontariff Trade Barriers • Subsidies
• Domestic content requirements
– Intended to reduce imports and thus benefit
domestic producers

Import Quota Import Quota Welfare Effects

• Physical restriction on the quantity of imports Before Trade:
during a specific time period (Table 5.1) consumer surplus
– Import licenses is area in red.
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– Quotas on manufactured goods outlawed by W.T.O producer surplus is

– Global quotas area in green.
• Permit a specified number of goods to be imported each year
– Selective quotas
• Import quotas allocated to specific countries
– Import licenses can be sold at auctions
– Accusations of favoritism

Import Quota Welfare Effects Import Quota Welfare Effects

With Free Trade: With Import Quota:
consumer surplus a = redistributive effect
increases b + d = deadweight loss
substantially due b = protective effect
to lower price. d = consumption effect
producer surplus c = revenue effect
decreases to a “windfall profit”
lesser degree. “quota rent”
portion to foreign
Overall increase in exporters and portion to
welfare is b,c,d domestic importers
and area above.

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Allocating Quota Licenses Quotas Versus Tariffs

• Limited imports; allocation by governments • During periods of growing demand, an import
– Issue of import licenses on the basis of quota is a more restrictive trade barrier
historical share of the import market – Tariff increases the domestic price, but does not limit
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the number of goods that can be imported
• Discriminates against first-time importers
– Tariffs allow for some degree of competition
– Issue of import quotas on a pro rata basis • Degree of protection is determined by the market mechanism
– Auctioning process – Quota is more restrictive and suppresses competition
• Few nations use auctions, as competition transfers • Quota forecloses the market mechanism
revenue effect (windfall profit) to the government – W.T.O and tariffication

Quota Versus Tariff Tariff-Rate Quota: A Two-Tier Tariff

initially similar - however if demand increases
o tariff leads to more imports at the same price • Tariff-like and quota-like characteristics
o quota leads to a higher price – A specified number of imports at one tariff
Volume of trade is restricted under quota rate
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– Any higher imports face a higher tariff rate

– Has three components: (Table 5.2)
• Import-quota threshold
• A within-quota tariff
• An over-quota tariff
– Many over-quota tariffs are prohibitively high

Tariff-Rate Quota Export Quotas

Continued

• Techniques for the administering tariff-rate • Used to restrain trade

quotas: – Voluntary export restraint agreement (orderly
marketing agreement)
– License on demand allocation
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• Moderate the intensity of international competition

– First-come, first-served • Allow less efficient domestic producers to participate in world
markets
– Historical market share • Identical economic effects to equivalent import quotas,
– Auctions except for being implemented by the exporting nation
– Conclusion from the viewpoint of the U.S. economy:
Voluntary export restraints tend to be more costly
than tariffs

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Domestic Content Requirements Domestic Content - Welfare Effect

consumer surplus before
• Stipulate the minimum percentage of a
domestic content
product’s total value to qualify for zero requirements
tariff rates
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content requirements
– Purpose: Limit outsourcing increase prices
– Pressurizes firms that sell products in the decreasing consumer
country to use domestic inputs in production surplus
– Often used by developing countries to foster
increasing domestic
domestic automobile production producer surplus
• Welfare effects of an Australian content
requirement on automobiles decreasing total welfare
due to deadweight loss

Subsidies Subsidies
Continued

• Granted to producers to help improve • Domestic subsidy: Granted to producers of

trade positions import-competing goods
– Governmental subsidies assume a variety of – Unlike tariffs and quotas, subsidies do not
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forms distort choices for domestic consumers

• Tax concessions – Burden financed out of tax revenues
• Insurance arrangements – Often in return for accepting government
• Loans at below-market interest rates conditions on key matters
• May not be as superior to other commercial
policies

Subsidies
Continued Domestic Production-Welfare Effect
• Export subsidy: Granted to producers of goods Free Trade - No Subsidy
that are to be exported assuming the domestic
– Encourage exports by reducing price paid by market is relatively small
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foreigners in relation to the world free

– Yields direct effects for the home economy: trade will lower price
• Terms-of-trade effect
consumer surplus
• Export-revenue effect
substantial because of the
– Consumers in the exporting nation suffer as the
lower price caused by free
international terms of trade move against them
trade
– Domestic consumers pay higher prices
– Tax burden producer surplus is a
small area for the same
reason

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Domestic Production Subsidy-Welfare Export Subsidy – Welfare Effects

Domestic Production Subsidy Free Trade - No Subsidy
increases domestic supply
assuming the domestic
but price does not change market is relatively small
producer surplus increases
in relation to the world,
due to greater sales free trade will raise the
this increase was partially price in this case
redistributed consumer
surplus consumer surplus is
and partially protective relatively limited because
effect/deadweight loss of higher price associated
result: subsidies do not with free trade
decrease welfare as much as producer surplus is a large
tariffs or quotas area for the same reason

Export Subsidy – Welfare Effects Dumping

With Export Subsidy
• A form of international price discrimination
export subsidy raised the – Charging foreign buyers lower prices than
price domestic buyers; selling below cost
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consumer surplus is • Forms of Dumping

decreased further
because of higher price – Sporadic dumping: Disposal of excess
inventories
producer surplus
increases for same reason – Predatory: Temporary price cuts to eliminate
competition
cost to taxpayers
– Persistent: Indefinite dumping to maximize
deadweight loss of welfare profits
to society

International Price Discrimination Maximizing Profits - One Price

• A profit-maximizing firm would benefit from
international price discrimination
– Charge a higher price at home, where
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competition is weak and demand is less

elastic
– Charge a lower price for the same product in
foreign markets to meet competition
– Demand and cost conditions example (Figure 5.5) the firm maximizes profits by producing at a
quantity where MC = MR
charging price of $500 in each market

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Price Discrimination to Maximize Profits
production where MC = MR in each market
result is a higher price where demand is inelastic
and a lower price where demand is elastic
Fairness of Antidumping Laws
1) Average Variable Cost: Current definition of
dumping implies any price below average total
cost indicates dumping; however lower price
still above average variable cost would not
necessarily imply dumping
2) Exchange Rates: An increase in the exchange
rate value of the dollar would lower prices on
imports even if there without product dumping.
3) Overuse: Antidumping actions may be used
as protectionism or as retaliation to genuine
allegations from other countries.
11.12.2009
Antidumping Regulations
antidumping duties levied when
1) Department of Commerce determines foreign good is
sold for less than fair value and
2) International Trade Commission determines imports
are causing or threaten material injury
margin of dumping – amount by which foreign
value exceeds home price
1) price-based definition – import sold in the home for
price below foreign price
2) cost-based definition – absence of price-based
Commerce Department uses (1) manufacturing cost;
(2) general expenses; (3) home profits; (4) cost of
packaging for shipment
Other Nontariff Trade Barriers
o Government Procurement Policies: National
and local governments buy many goods but
many have buy-national policies giving
preference to domestic over foreign goods.
o Social Regulations: Governments attempt to
correct health and environmental side effects
of trade; examples: fuel economy standards
and limits on hormone-treated meats
o Sea Transport & Freight Regulations: Nations
can use highly restrictive practices on
unloading cargo to serve as a barrier to trade.