Download Chapter 7

Chapter 7
Nontariff
Barriers and
Arguments
for Protection
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Topics to be Covered
•
•
•
•
•
•
•
•
•
•
Quota and its Effects
Quota vs. Tariff
Customs valuation practices
Government procurement policies
Technical barriers to trade
Health and safety standards
Intellectual property rights
Export subsidy
Dumping
Valid and Invalid Arguments for Protection
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-2
Quota
• A government imposed limit on the quantity
or value of a good traded between countries
• Example: U.S. imposed an import quota of
no more than 1.25 million tons of sugar
from 1993 to 1994. Quota on milk, cream,
cheese, butter and various products
containing sugar, cotton….etc.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-3
QUOTAS
• The quota is one of the more restrictive
forms of protectionism.
• Quotas limit imports of a good to a
certain number of units on an annual
basis.
• It is considered so extreme they are
banned by the (WTO).
• However, there are different reasons
why they still exist in various forms,
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-4
QUOTAS
1. Not all countries are members of the WTO.
2. New members of the WTO are allowed to
maintain their previously existing quotas for
a specified period of time.
3. Some countries implement quotas in
defiance of WTO rules.
4. Agricultural products have not previously
been covered by WTO standards.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-5
QUOTAS
Number of Import Quotas in the Major Industrialized Countries
Country
Total Number of
Import Quotas
Quotas on
Agricultural
Products
Quotas on
Industrial
Products
United States
7
1
6
Canada
5
4
1
United Kingdom
3
1
2
46
19
27
Germany
4
3
1
Italy
8
3
5
Benelux
5
2
3
27
22
5
France
Japan
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-6
Types of Quotas
• Tariff Rate Quota (TRQ)—allows a certain quantity
of a good into a country at low or zero tariff rate,
but applies higher tariff to quantities exceeding the
quota.
• In Jan 2005, I T law allows countries to impose
quotas to provide temporary protection to aid
locally distressed industries, or when they have
balance of payment problems. Faced with sharply
rising imports of textiles & cloth from China, in
summer 2005 the EU negotiated a three years
agreement with china to limit the growth of
Chinees exports of this product, USA in November
2005 reached similar agreement with China.
7-7
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Quota License
• A license which gives the bearer the right to
import into a country a specific amount of a
good during a specific time period.
• Licenses may be sold or given away.
• The recipients of the licenses may be
domestic or foreign, the welfare impact of
this quota system depends on who get the
licenses and how much was paid to obtained
them.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-8
Welfare Effects of a Quota
(Consider Figure 7.1)
•
•
•
•
•
•
•
•
•
Domestic price effect
Import effect
Consumption effect
Production or Protection effect
Redistribution effect
Consumer surplus effect
Producer surplus effect
Deadweight costs
QUOTA RENT
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-9
Welfare Effects of a Quota
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-10
TABLE 7.1 Welfare Effects of a
Quota Auctions Licenses
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-11
Quota Rent
• Profit that accrues to whoever has the right
to bring imports into the country and sell
these goods in the protected market.
• Who Gets the Quota Rent?
• Government
• Domestic producers or importers
• Foreign producers
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-12
Government Auctions
Licenses
• When the government sells or auctions
quota licenses, the welfare effects are
identical to those of a tariff which raises the
product price by the same amount
(refer to Table 7.1).
• Studies estimate that the U.S. government
loses between $3.7 billion to $6.8 billion
yearly by not holding auctions.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-13
Domestic Firms Get Licenses
• When government gives the quota licenses
to domestic producers or importers, the
latter group effectively gets the quota rent.
• Profits to domestic firms rise by $(a+c)
while government revenue is unaffected
(Refer to Figure 7.1).
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-14
Government Gives Licenses to
Foreigners
• A voluntary export restraint works like an
import quota, except that the quota is
imposed by the exporting country rather
than the importing country.
• However, these restraints are usually
requested by the importing country.
• The profits or rents from this policy are
earned by foreign governments or foreign
producers.
– Foreigners sell a restricted quantity at an
increased price.
.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-15
Voluntary Export Restraint - VER
The most notable example of VERs is when Japan imposed a
VER on its auto exports into the U.S. as a result of American
pressure in the 1980s. The VER subsequently gave the U.S.
auto industry some protection against a flood of foreign
competition.
However, there are ways in which a company can avoid
a VER. For example, the exporting country's company can
always build a manufacturing plant in the country to
which exports would be directed. By doing so, the
company will no longer need to export goods, and should not
be bound by its country's VER.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-16
What are the Welfare Effects of
a VER?
TABLE 7.2 Welfare Effects of a Voluntary
Export Restraint
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-17
Equivalence or Nonequivalence
of Tariffs and Quotas
• They are similar in their effects on prices,
output, and imports.
• Tariff revenue goes to government, while
quota rent depends on who gets the license.
• With tariff, the domestic monopolist can
only charge the world price plus tariff; with
quota, the monopolist can charge higher
price and produce less.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-18
Equivalence or Nonequivalence
of Tariffs and Quotas (cont.)
• With a tariff, an increase in demand will be
met by a rise in imports; with a quota, no
new imports are allowed in.
• Quotas are more difficult to administer
because of the problem of how to give away
licenses and the likelihood of graft and
corruption.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-19
Other NTBs
•
•
•
•
•
•
Customs valuation practices
Government procurement policies
Technical barriers to trade
Health and safety standards
Intellectual property
Export subsidy
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-20
Customs Valuation Practices
• Countries wanting to raise government
revenue may instruct customs officials to
raise estimates of the value of imports via:
freight and insurance cost
fees for processing paper work
assembly charges
other taxes
• WTO Article VII requires the use of a
transactions basis (invoices) to value
imports.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-21
Government Procurement
Policies
• “Buy American” policy—requires U.S.
government agencies to purchase American
products unless the domestic price is more
than 12% higher than the foreign price.
• Effect: This policy raises the cost to
government of providing public services,
thus redistributing income from taxpayers
to domestic producers.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-22
Technical Barriers to Trade
• Technical regulations or standards may be
imposed to protect the environment, insure
consumer safety, promote national security,
and guarantee product quality.
• WTO requires that such standards do not
create unnecessary and discriminatory
barriers to trade.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-23
Health and Safety Standards
• Technical Barriers to Trade
– Technical barriers refer to a country’s
national standards for safety, health, and
product labeling
– They can distort international trade
– Exported goods may have to meet different
labeling and technical standards
– Differences in the degree of regulation can
affect services
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-24
Health and Safety Standards
• If the intent of the regulations is an
expression of national preference and the
adverse effects on foreign competitors are
just a by-product of this, it is difficult to
complain to the WTO
• If the regulations are intended to protect
an industry, countries can complain to the
WTO or threaten retaliation
• Intervention by the WTO in these disputes
has not generally been successful
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-25
Health and Safety Standards
• These government standards help protect
the health and safety of citizens.
• Examples: EU ban on U.S. beef containing
growth hormones; Japanese ban on U.S.
beef due to mad cow disease.
• Such standards also serve as an effective
mechanism for protecting domestic firms
from foreign competition.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-26
Intellectual Property Rights
• Intellectual property—the innovative or
creative ideas of inventors, artists, or
authors.
• Laws which protect intellectual property
include:
– Patent
– Copyright
– Trademark
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-27
Problems with Intellectual
Property Rights Protection
• Varying degrees of law enforcement in
different countries
• Growing trade in counterfeit goods
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-28
Export Subsidy
• A direct or indirect payment by a country’s government
to one or more of its export industries. An export
subsidy can also be specific or ad valorem
– A specific subsidy is a payment per unit exported.
- An ad valorem subsidy is a payment as a proportion
of the value exported.
• An export subsidy raises the price of a good in the
exporting country, decreasing its consumer surplus
(making its consumers worse off) and increasing its
producer surplus (making its producers better off).
• Also, government revenue will decrease.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-29
Effects of Export Subsidy
• Forms of export subsidies include:
– They can be explicit as in direct payments of
money to an industry
– They can be indirect as reduced taxes, lower
utility rates, or a lower level of business
regulation
• Subsidy leads to a greater output of
exportables than would otherwise occur.
• Resources are drawn away from importcompeting sectors.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-30
Countervailing Duty
* Consumers lose as they pay more taxes to
finance the export subsidy.
* Internal prices of exportables rise.
• A tariff imposed by an importing country
designed to offset the export subsidy and
resulting low prices charged by exporters.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-31
Local Content Requirement
• A local content requirement is a
regulation that requires a specified fraction
of a final good to be produced domestically.
• It may be specified in value terms, by
requiring that some minimum share of the
value of a good represent domestic valued
added, or in physical units.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
8-32
7-32
Local Content Requirement
(cont.)
• From the viewpoint of domestic producers of
inputs, a local content requirement provides
protection in the same way that an import
quota would.
• From the viewpoint of firms that must buy
domestic inputs, however, the requirement
does not place a strict limit on imports, but
allows firms to import more if they also use
more domestic parts.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
8-33
7-33
Local Content Requirement
(cont.)
• Local content requirement provides neither
government revenue (as a tariff would) nor
quota rents.
• Instead the difference between the prices of
domestic goods and imports is averaged into
the price of the final good and is passed on
to consumers.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
8-34
7-34
Local Content Requirement - Instead of placing a
quota on the number of goods that can be imported,
the government can require that a certain percentage
of a good be made domestically. The restriction can
be a percentage of the good itself, or a percentage of
the value of the good. For example, a restriction on
the import of computers might say that 25% of the
pieces used to make the computer are made
domestically, or can say that 15% of the value of the
good must come from domestically produced
components
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-35
CORRUPTION AND
INTERNATIONAL TRADE
• For this discussion, corruption will mean the use
of public office for private gain as it relates to
international trade
• The passing of money from the private sector
into the hands of some government employee
• Facilitation payments are common practice and
have little impact on trade
• Bribes can influence a government employee to
do something illegal
• This may involve tariffs or quotas
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-36
CORRUPTION AND
INTERNATIONAL TRADE
• High tariffs and quotas tend to induce bribes
• Lacking a profit motive, government officials
may be bribed to purchase higher priced or
lower quality products that they would not
have otherwise purchased
• Bribes are generally illegal in the country
they are made
• Developed countries have also moved to
make it illegal to bribe foreign officials with
35 countries committed to the principle
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-37
ECONOMIC SANCTIONS
• Sanctions frequently involve both
international economics and international
finance
• Economic sanctions are a government's
deliberate withdrawal of normal trade or
financial relationships in order to achieve
foreign policy goals
• As the private sector would not withdraw
from a profitable economic relationship, it
takes the coercive power of a government to
accomplish this
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-38
ECONOMIC SANCTIONS
• The government imposing the sanction is
the called the sender and the country
that is the object of the sanction is the
target
• The concept is that the cost of the
sanction will induce the target to change
its policies
• It is necessary to distinguish between
actual sanctions and the threat of
sanctions, which may be as effective as
actual sanctions
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-39
ECONOMIC SANCTIONS
• Sanctions can take on many forms
• Sanctions does not usually end all trade
between countries, sanctions may be
imposed on only the part of the trade that is
important to the target country
• Sanctions may involve a suspension of
imports or a suspension of exports
• Sanctions may be imposed on FDI
• Sanctions may include movements of
portfolio capital
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-40
ECONOMIC SANCTIONS
• Sanctions are attractive because they occupy the
middle ground between simple complaints and
outright warfare
• However, sanctions usually fail to change a target
country’s behavior
• Sanctions may be too weak a response
• Given globalization, sanctions may not be
effective
• Sanctions may invoke support for the target
country from their population and allies
• Costs imposed on the sender’s population may
weaken domestic support
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-41
ECONOMIC SANCTIONS
• Some sanctions have domestic
political goals and the effect on the
target country is less important
• Economic sanctions have become
common in the world economy
• They are now an official part of world
trade and will continue to be used as
a foreign policy tool
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-42
Dumping
• Selling a product in a foreign country at
a price lower than the price charged by
the same firm in its home market or at a
price below costs of production.
• How would the U.S. be affected by
dumping? (Refer to Figure 8.2 Dumping)
– Effect on U.S. consumers
– Effect on U.S. producers
– Net welfare effect
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-43
FIGURE 8.2 Dumping
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-44
Types of Dumping
• Sporadic dumping is the occasional sale of
a product by a firm in a foreign market at a
price below that sold in its domestic market.
• Predatory Dumping dumping aimed at
driving foreign competitors out of the
market so that the market can be
monopolized.
• Persistent dumping is the sale of a
product by a firm in a foreign market at a
price below that sold in its domestic market
over an extended period of time
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-45
Under What Situations Can
Dumping Occur?
1. Foreign producers have market power in
both domestic and foreign markets so that
they can practice international price
discrimination.
–
International price discrimination refers to
selling the same product in two different
countries at two different prices.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-46
Dumping Situations (cont.)
2. Dumping could occur if a foreign firm
receives a production or export subsidy
from its government.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-47
Antidumping Law
• If a U.S. industry can show injury from
dumping, it can have a special tariff imposed
on the dumped imports called the dumping
margin.
• The dumping margin is the difference
between the market price of a product and
its fair market value.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-48
Injury Test
• Injury Test—an investigation to determine
whether unfair foreign trade practices have
caused or threatens to cause harm to a
domestic industry.
• Complaint is simultaneously filed with:
– Department of Commerce (DOC) which
investigates whether dumping actually occurred
– International Trade Commission (ITC) which
investigates the question of injury
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-49
U.S. Antidumping Cases: 1980–2006
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-50
Arguments for free & Protection
Argument for free trade are
1- F T leads to the most economic utilisation of the
productive resources because of specialisation.
2- Under F T, division of labor occurs on an
international scale leading to greater specialisation,
efficiency and economy in production.
3- Because of competition under F T, inefficient
producers will improve their efficiency or quit.
4- F T enables consumer to obtain goods from the
cheapest source.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-51
Arguments for free & Protection
• There are a number of arguments put
forward in favor of protection, some of
these argument are very valid while others
not.
• Infant Industry Argument, the argument
advanced by Alexander Hamilton, Fredrick
list & others assumed that new industries
having a potential comparative advantage
may not get started in a country unless its
given a temporary protection against
foreign competition.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-52
Arguments for free & Protection
•
•
•
•
•
Diversification argument.
Improve Balance of payments argument.
Anti- Dumping argument.
Employment argument.
Keeping money at home argument.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-53
Valid Arguments
•
•
•
•
•
•
•
Government revenue
Income redistribution
Non-economic goals (national defense)
Infant industry
Domestic distortions
Environmental protection
Strategic trade policies
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-54
Government Revenue Argument
• Reasons for using tariffs as revenuegenerators:
foreigners may pay the tariff
tariffs are easy to collect
• Refer to Table 7.3
• Tariffs are an important source of revenue
in developing countries.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-55
TABLE 7.3 Tariff and
Trade Taxes as a
Percentage of
Government Revenue
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-56
TABLE 7.3 Tariff and
Trade Taxes as a
Percentage of
Government Revenue
(cont.)
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-57
Income Redistribution Argument
• Trade policy can be used to redistribute
income from one sector of society to
another:
from consumers to producers
from one industry to another
from the rich to the poor
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-58
Problems with National Defense
Argument
• This argument is over-used.
• Defense needs may be better served by
allowing or expanding imports rather than
restricting them.
• A better policy for meeting defense needs is
through a domestic production subsidy with
free trade.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-59
Effects of a Domestic Production
Subsidy
• Shifts the domestic supply down by the
amount of the subsidy.
• Domestic producers gain.
• Taxpayers pay for the subsidy.
• Cost to society is a production deadweight
cost.
• With the subsidy and free trade, goods
sell at the world price, so there is no
consumption deadweight cost (as
compared to a tariff).
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-60
FIGURE 7.2 Welfare Effects of a
Domestic Production Subsidy
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-61
Infant Industry Argument
• Argument that new industries may need
temporary protection until they have
mastered the production and marketing
techniques necessary to be competitive in
the world market
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-62
Problems with the Infant
Industry Argument
• The argument presumes that the protected
industry will grow up and mature.
• It assumes that the government is capable
of picking winners than the private sector is.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-63
Domestic Distortions
• Take, for example, an agricultural price
support program (Refer to Figure 7.3).
• Effects of price support:
– Guaranteed higher price (above equilibrium)
– Excess supply of the product
• With free trade:
– Importers buy the good at lower world price
and sell at the higher support price
– Cost of the farm program increase
– A second distortionary policy, i.e., protection,
becomes necessary
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-64
FIGURE 7.3 Price Supports and
Tariffs
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-65
Pollution Havens Hypothesis
• This argues that developing or poor
countries with lax environmental standards
will attract foreign firms that want to escape
environmental standards in their home
countries.
• Discuss Global Insights 7.1
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-66
Strategic Trade Policy
• The strategic use of trade policy (e.g., tariff
or quota) to increase domestic welfare
• Consider two examples:
– Brazil and IBM (foreign monopoly)
– Strategic game by two monopolies, Airbus and
Boeing
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-67
FIGURE 7.4 Trade Policy and
Foreign Monopoly
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-68
TABLE 7.4 The Effects of a
Hypothetical Strategic Trade Policy
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-69
Limitations of Strategic Trade
Policy
• Types of situations where strategic trade
policy should be applied are very
specialized and depend on assumptions of
firm behavior.
• Even if firm behavior is known, other
assumptions may still be violated.
• Gains from strategic policy may depend on
the reaction of foreign governments.
• Strategic policy may be a “second-best”
policy.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
7-70