International Economics Mordecai E Kreinin Part I International

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International Economics Mordecai E. Kreinin Part I International Trade Relations Copyright © 2002 South-Western/Thomson

International Economics Mordecai E. Kreinin Part I International Trade Relations Copyright © 2002 South-Western/Thomson Learning. All rights reserved.

CHAPTER 5 Nontariff Barriers (NTBs) to Trade 2

CHAPTER 5 Nontariff Barriers (NTBs) to Trade 2

Import Quotas to Protect Domestic Industries n Common in Western Europe after WW II

Import Quotas to Protect Domestic Industries n Common in Western Europe after WW II n Not used for manufactured goods today by developed nations n Prohibited by WTO n Often used for agricultural products n Tariff quotas n Quotas used in all sectors in developing countries 3

Economic Effects of Quotas n Raises domestic price of imported commodity n Percentage increase

Economic Effects of Quotas n Raises domestic price of imported commodity n Percentage increase is implicit tariff equivalent n Tariff equivalent calculated by subtracting foreign from domestic price, dividing result by foreign price 4

Economic Effects of Quotas n Import consumption declines n Consumption and Production of domestic

Economic Effects of Quotas n Import consumption declines n Consumption and Production of domestic substitutes expands n Resources drawn from other (presumably more efficient) industries n No revenue to government n Quota rents n Auctioning import licenses 5

Economic Effects of Quotas n Replaced market mechanism with government decisions n No limit

Economic Effects of Quotas n Replaced market mechanism with government decisions n No limit to differential between domestic and world prices n Rise in domestic demand raises domestic price, leaves admissible imports unchanged n Raises production and consumption costs of protection, forces further misallocation of resources and less desirable consumption patterns n A quota and tariff are equivalent if demand supply are stationary, perfect competition exists in all markets, and government auctions import licenses. 6

FIGURE 5. 1 Domestic Market for Cars in a Small Importing Country C 5

FIGURE 5. 1 Domestic Market for Cars in a Small Importing Country C 5 -77

FIGURE 5. 2 Tariff and Quota When Domestic Demand Rises C 5 -88

FIGURE 5. 2 Tariff and Quota When Domestic Demand Rises C 5 -88

Economic Effects of Quotas n With a reduction in domestic supply, quotas are more

Economic Effects of Quotas n With a reduction in domestic supply, quotas are more harmful to welfare than tariffs. n A reduction in domestic demand results in more harm from tariffs than from quotas. n In case of tariff, price is constant, quantity adjusts. n In case of quota, quantity is constant. price adjusts. 9

Economic Effects of Quotas n Theory of effective protection n Quotas on imported raw

Economic Effects of Quotas n Theory of effective protection n Quotas on imported raw materials raise production costs of final output. n Import duties on raw materials are sometimes rebated, no rebate occurs with quotas. n Monopoly effect n Cumbersome administrative apparatus n Corruptibility of license prices 10

Economic Effects of Quotas n Licenses usually distributed among importers functioning at time control

Economic Effects of Quotas n Licenses usually distributed among importers functioning at time control is imposed n System freezes situation n Incentive for efficiency diminishes n LDCs can least afford inefficiency, but impose quotas anyway n WTO imposed tariffication 11

Voluntary Export Restraints n VERs avoid violating WTO prohibition against import quotas and avoid

Voluntary Export Restraints n VERs avoid violating WTO prohibition against import quotas and avoid retaliation n VERs restrict supply and raise prices in importing country n Importing countries threatened with more restrictive action if they fail to agree n Administered by government or export industries n VERs under WTO phase-out agreement 12

Voluntary Export Restraints n 10% of world trade covered by VERs n Most affected

Voluntary Export Restraints n 10% of world trade covered by VERs n Most affected products: steel, textiles, agriculture and food, electronics, footwear, machine tools n Markets protected by VERs: U. S. , EU, Canada n Exporters limited by VERs: Japan, Korea Taiwan, LDCs 13

Voluntary Export Restraints n Usually discriminate between supply sources. n Violate WTO nondiscriminatory rule

Voluntary Export Restraints n Usually discriminate between supply sources. n Violate WTO nondiscriminatory rule n Have effects similar to quotas n Tend to produce raised prices, provide rents to exporters (exceeding $25 billion annually) 14

Voluntary Export Restraints n Trade barriers ranked in terms of damage to domestic welfare:

Voluntary Export Restraints n Trade barriers ranked in terms of damage to domestic welfare: Tariffs, least harmful n Import quotas, more harmful n VERs, most harmful n n Produce quality upgrading phenomenon n Intended to save domestic jobs threatened by imports n Inefficient—annual cost per job saved greatly exceeds average wage in industry 15

International Commodity Agreements n ICAs designed to stabilize world price of certain commodities (raw

International Commodity Agreements n ICAs designed to stabilize world price of certain commodities (raw materials, agricultural products) or dispose of surpluses n Initiated by producing nations to compensate for low consumer and producer response to price changes, to avoid huge price fluctuations n If a country’s economy is devoted to one or two exports, entire level of economic activity fluctuates with these prices 16

International Commodity Agreements n ICAs involve producing and consuming countries: n export restriction schemes,

International Commodity Agreements n ICAs involve producing and consuming countries: n export restriction schemes, n buffer stocks, n multilateral contracts n Export restriction schemes: employ national quotas for production or export n Buffer stocks: set minimum and maximum stock prices n Multilateral contracts: specify maximum selling price, minimum purchase price for stipulated quantities 17

FIGURE 5. 3 Commodity Price Stabilization Under a Buffer Stock ICA C 5 -18

FIGURE 5. 3 Commodity Price Stabilization Under a Buffer Stock ICA C 5 -18 18

International Commodity Agreements n All ICAs suffer from attempts to fix and maintain price

International Commodity Agreements n All ICAs suffer from attempts to fix and maintain price different from long-run equilibrium n Producers continuously pressure for higher prices, leading to more production, surpluses n ICAs become subsidies paid by consumers paying above-equilibrium prices, encouraging greater production 19

International Commodity Agreements n Declining use in recent years n Other ways must be

International Commodity Agreements n Declining use in recent years n Other ways must be found to combat effects of violent price fluctuations on developing countries n IMF Compensatory financing n Textile industry n WTO administered Multifibre Arrangement (MFA) n n Losers—consumers in industrial countries, producers in LDCs 2005 phase-out 20

International Cartels n Group of corporations in different countries or group of supplying governments

International Cartels n Group of corporations in different countries or group of supplying governments agree to restrict trade n (OPEC) n Cartel power may be restricted by supply increases from outside sources, development of substitutes, reduced consumption n Cartels restrict output, misallocate resources, extract artificially high prices from consumers, can negate government policies n EC rules of competition in industry 21

Local Content Requirements n Specify minimum portion of value of product to be produced

Local Content Requirements n Specify minimum portion of value of product to be produced domestically n Pervasive form of trade control 22

Border Tax Adjustments n An import tax on commodity, rebate on its export, which

Border Tax Adjustments n An import tax on commodity, rebate on its export, which equal or adjust for domestic indirect taxes (excise, value-added) n Direct vs. indirect taxes n U. S. -EU 2000 -2001 trans-Atlantic dispute 23

Dumping n Selling identical product abroad cheaper than domestically n Identical difficult to establish,

Dumping n Selling identical product abroad cheaper than domestically n Identical difficult to establish, due to differences in specifications, packaging, other features n International standards for judging commodity dumping 24

Dumping n Sporadic dumping—disposal of occasional surplus, effects negligible n Predatory dumping—large firm sells

Dumping n Sporadic dumping—disposal of occasional surplus, effects negligible n Predatory dumping—large firm sells low abroad to drive out competition and exploit market, most harmful form of dumping n Persistent dumping—domestic monopolistic supplier consistently sells lower abroad to attract sales from international competitors, harmful to producers in countries receiving dump, but consumers reap price benefit 25

FIGURE 5. 4 A Monopolist Facing Separate Markets C 5 -26 26

FIGURE 5. 4 A Monopolist Facing Separate Markets C 5 -26 26

Dumping n Dumping margin n Anti-dumping import duty Equals dumping margin, offsets dumping n

Dumping n Dumping margin n Anti-dumping import duty Equals dumping margin, offsets dumping n Imposition elaborate, dumping must be proven and injury to competing domestic industry demonstrated n n Voluntary curtailment of exports to avoid duty n Diversionary input dumping 27

Export Subsidies n Government payment to domestic firm for each unit exported n Despite

Export Subsidies n Government payment to domestic firm for each unit exported n Despite WTO prohibitions, export subsidies abound n Deadweight welfare loss n Large countries incur added cost of world price reduction, deteriorated terms of trade n Intended to promote exports, protect employment 28

Export Subsidies n Importing country gains in terms of trade n Other exporting countries

Export Subsidies n Importing country gains in terms of trade n Other exporting countries lose in terms of trade n Labor and capital harmed in importing country’s competing industries n Countervailing duty to offset subsidy n Disputes over forms of unreasonable trade restriction 29

Export Subsidies n Below-market interest rates n Direct resources to favored export industries n

Export Subsidies n Below-market interest rates n Direct resources to favored export industries n Transfer income from exporting to importing country n Two-thirds of such loans are made by industrial countries to LDCs n OECD minimum interest rate for export credit 30

Export Subsidies n Mixed credit programs n Research and development aid n WTO subsidies

Export Subsidies n Mixed credit programs n Research and development aid n WTO subsidies code 31

NTBs vs. Tariffs n More harmful to national economy n VERs more harmful than

NTBs vs. Tariffs n More harmful to national economy n VERs more harmful than import quotas n NTBs displace market mechanism n Less harmful to national economy n Tariffs only distort market mechanism n Transparent n More easily negotiable n Hidden devices n Difficult to negotiate 32

Strategic Trade Policy? n In perfectly competitive environment, government trade intervention justified by n

Strategic Trade Policy? n In perfectly competitive environment, government trade intervention justified by n Imposition of optimum tariff to improve terms of n Infant industry protection when direct subsidy infeasible n Possible offset to domestic distortion when domestic measures unavailable 33

Strategic Trade Policy? n Oligopolistic markets lead to arguments for strategic trade policy n

Strategic Trade Policy? n Oligopolistic markets lead to arguments for strategic trade policy n Government measures increasing global market share of country’s oligopolistic firms to increase profit at expense of foreign firms n Boeing and Airbus subsidy case n American and Japanese firms protection case 34

Strategic Trade Policy? n Problems n Governments lack information Resource transfer and subsequent loss

Strategic Trade Policy? n Problems n Governments lack information Resource transfer and subsequent loss in other industry n Competition eliminates rents; subsidy costs to government or protection costs to consumers may exceed rent gains n Inducement to enter industry, lower efficiency, higher average cost n Retaliation may nullify gain n 35

Summary n Some NTBs, common in recent years, more harmful than tariffs n Import

Summary n Some NTBs, common in recent years, more harmful than tariffs n Import quotas and VERs limit quantity, raise prices, produce quality upgrading n Import licenses n VERS discriminatory, scheduled for phase-out n VERs intended to save jobs, but cost per job saved is usually multiple of average industry wage n ICAs apply to primary commodities and textiles n Buffer stock n MFA 36

Summary n International Cartels n OPEC n Minimum Local Content n Border Tax Adjustment

Summary n International Cartels n OPEC n Minimum Local Content n Border Tax Adjustment n Dumping n Export subsidies n More harmful than tariffs, NTBs widespread, effects difficult to measure n Oligopolistic markets offer theoretical argument for government intervention in trade 37

Important Concepts n Nontariff barriers (NTBS) n Local content requirement n Import quotas n

Important Concepts n Nontariff barriers (NTBS) n Local content requirement n Import quotas n Indirect taxes n Quota rents n Border tax adjustment n Auctioning import licenses n Value-added tax (VAT) n Equivalence of a tariff and a quota n Dumping n Sporadic dumping 38

Important Concepts n Primary and secondary boycotts (FN 3) n Voluntary export restraints (VERs)

Important Concepts n Primary and secondary boycotts (FN 3) n Voluntary export restraints (VERs) n Predatory dumping n Persistent (long-run) dumping n Dumping margin n Quality upgrading n Antidumping duty n Cost per job saved n Export subsidy n International Commodity Agreements (ICAs) n Countervailing duties n Strategic trade policy 39

Important Concepts n Buffer stocks n Compensatory financing n Organization of Petroleum Exporting Countries

Important Concepts n Buffer stocks n Compensatory financing n Organization of Petroleum Exporting Countries (OPEC) n Monopoly rents n Multifibre Agreement n Tariff Equivalent of (MFA) NTBs n International cartel 40

FIGURE 5. 5 A Monopolist Under A Tariff and a Quota C 5 -41

FIGURE 5. 5 A Monopolist Under A Tariff and a Quota C 5 -41 41