Download Tariff-Rate Quota

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CHAPTER
5
Nontariff Trade
Barriers
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Chapter Outline
•
•
•
•
•
•
•
•
•
Absolute Import Quota
Tariff-Rate Quota: A Two-Tier Tariff
Export Quotas
Domestic Content Requirements
Subsidies
Dumping
Antidumping Regulations
Is Antidumping Law Unfair?
Other Nontariff Trade Barriers
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Absolute Import Quota
(1 of 6)
• Nontariff trade barriers
– Policies other than tariffs that restrict international
trade
• Absolute quota
– Physical restriction on quantity of goods imported
during a specific time period
– Importation requires import license specifying total
volume of imports allowed
– Applied primarily to manufactured goods
– Outlawed by World Trade Organization
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Absolute Import Quota (2 of 6)
● Import licenses
• Government allocates import licenses to
importers, permitting them to import product only
up to prescribed limit, regardless of market
demand
● Global quota
• Permits specified quantity of goods to be
imported each year but does not specify from
where product is shipped or who is permitted to
import
• Plagued by accusations of favoritism
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Absolute Import Quota (3 of 6)
● Selective quota
• Import quota allocated to specific countries
• Ex.: Country might impose global quota of 30
million apples per year, of which 14 million must
come from U.S., 10 million from Mexico, and 6
million from Canada
• May lead to domestic monopoly of production and
higher prices
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FIGURE
5.1
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Absolute Import Quota (4 of 6)
● Trade and Welfare Effects
• Price increase
• Decrease in consumer surplus
• Redistributive effect (a)
• Deadweight loss (b + d)
– Protective effect (b)
– Consumption effect (d)
• Revenue effect (c)
– Windfall profits, a.k.a. quota rent
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Absolute Import Quota (5 of 6)
● Methods of Allocating Quota Licenses
• Historical share of import market
• Applied in oil and dairy products
• Discriminates against new importers
• Pro rata basis
• U.S. importers receive fraction of their demand, equal
to total quantity demanded collectively by U.S.
importers
• Auctioning of import licenses
• Allocated to highest bidder in competitive market
• Government captures windfall profits
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Absolute Import Quota (6 of 6)
● Quotas Versus Tariffs
• When demand is growing, an absolute quota
restricts volume of imports by greater amount
than equivalent import tariff
• Tariff increases domestic price but cannot limit
number of goods imported
• Tariffs generate more revenue for government
• WTO members agreed to eliminate absolute quotas
and replace them with tariff-rate quotas and eventually
tariffs
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FIGURE
5.2
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Tariff-Rate Quota:
A Two-Tier Tariff (1 of 3)
• Tariff-rate quota
– Two components
• Quota that defines maximum volume of imports and
charges within-quota tariff
• An over-quota tariff
– Allows specified number of goods to be imported
at lower tariff rate (within-quota rate)
– Any imports above this level face higher tariff
rate (the over-quota rate)
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Tariff-Rate Quota:
A Two-Tier Tariff (2 of 3)
● Administration of tariff-rate quotas
• License on demand allocation
• If demand for licenses is less than quota, system
operates on first come, first serve basis
• If demand exceeds quota, import volume requested is
reduced proportionally among all applicants
• Allocation may also be based on historical market
share or auctions
• WTO requires members to convert all NTBs to
tariffs; during transition, tariff-rate quotas
permitted
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TABLE
5.1
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Tariff-Rate Quota:
A Two-Tier Tariff (3 of 3)
● U.S. sugar growers receive government guaranteed
minimum price for sugar, but this attracts imported
sugar
● To prevent imports, U.S. implements tariff-rate
quotas
● U.S. price of sugar almost twice world market price
● Many candy firms that use sugar have moved out of
country
● Those that remain pass price on to consumers
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Export Quotas (1 of 2)
• Export quotas
– Governments enter into market sharing pact in form
of voluntary export restraint agreements; purpose is
to moderate intensity of international competition;
tend to be more costly than tariffs
– Have identical effect to equivalent import quotas,
except being implemented by exporting nation
– In 1980s, 67% of costs to U.S. consumers of these
restraints captured by foreign exporters as profit
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Export Quotas (2 of 2)
● Japanese Auto Restraints Put Brakes on U.S.
Motorists
• U.S. & Japan agreed to limit Japanese exports for 3
years beginning in 1981; purpose to help U.S. auto
industry
• But large Japanese car makers largely unaffected;
increased prices & earned record profits
• In 1984, U.S. consumer paid extra $660 per
Japanese auto and $1,300 per U.S. auto
• 44,000 U.S. jobs saved at cost of $100,000/job
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Domestic Content
Requirements
• To limit outsourcing, labor lobbied for domestic
content requirements
– Minimum percentage of a good’s value must be
produced locally to qualify for zero tariff rates
– Pressure domestic/foreign firms to use domestic
inputs/workers
– Can result in higher input and product prices and
loss of competitiveness
– Subsidized by domestic consumers
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FIGURE
5.3
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TABLE
5.3
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Subsidies (1 of 4)
• Subsidies
– May take form of outright cash disbursements,
tax breaks, insurance arrangements, and
subsidized loans
– Are given to producers to improve market
position
– Provide domestic firms cost advantage (domestic
production subsidies)
– Allow firms to sell goods at prices below cost
(export subsides)
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Subsidies (2 of 4)
● Domestic Production Subsidy
• Results in
• Higher output
• Redistributive effects – increase in producer surplus
for more efficient producers
• Deadweight loss - protective effect
• Lower welfare losses than a tariff/quota
• Financed by taxpayers
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Subsidies (3 of 4)
● Export Subsidy
• Whereas domestic production subsidy is granted
to producers of import-competing goods, an
export subsidy goes to producers of goods to be
sold overseas
• For both, net price received by producer equals price
paid by purchaser plus subsidy, and subsidy revenue
redistributed in form of producer surplus
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Subsidies (4 of 4)
● Export Subsidy
• Higher output and prices for exporters
• Higher exports; lower domestic consumption
• Domestic producers gain at expense of domestic
consumers and taxpayers
• Decrease in consumer surplus
• Increase in producer surplus
• Taxpayers bear cost of export subsidy
• Deadweight losses (welfare)
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FIGURE
5.4
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Dumping (1 of 3)
• Dumping
– A form of international price discrimination
– Occurs when foreign buyers are charged lower
prices than domestic buyers for identical product
– Also, selling in foreign markets at a price below
cost of production
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Dumping (2 of 3)
● Forms of Dumping
• Sporadic Dumping
• A firm disposes of excess inventories in foreign
markets by selling at price below domestic price
• Predatory Dumping
• Producer temporarily reduces price charged abroad to
drive foreign competitors out of business
• Persistent Dumping
• Goes on indefinitely; to maximize economic profits, a
producer may consistently sell abroad at lower price
than at home
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Dumping (3 of 3)
● International Price Discrimination
• Producer charges more at home, where there is
less competition, and more overseas to compete
• Submarkets’ demand conditions must differ
• Different demand elasticities (home/foreign)
• Firm must be able to separate submarkets
• Prevent arbitrage (resale of goods at higher price)
• Markets – easier to separate internationally
• High transportation costs
• Trade restrictions
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FIGURE
5.5
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Antidumping Regulations
(1 of 5)
• Antidumping duty
– Levied when
• U.S. Department of Commerce determines foreign
merchandise being sold at less than fair value (LTFV);
and
• U.S. International Trade Commission (ITC)
determines that LTFV imports are causing or
threatening material injury to domestic industry
– Anti-dumping duties imposed in addition to the
normal tariff
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Antidumping Regulations (2 of 5)
● Margin of dumping
• Amount by which foreign market value exceeds
U.S. price
● Foreign market value – two definitions
• Priced-based definition
• Dumping occurs when foreign firm sells good at price
in U.S. below home price
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Antidumping Regulations (3 of 5)
● Foreign market value
• Cost-based definition (used when price-based
definition cannot be applied)
• Cost of manufacturing merchandise + general
expenses (at least 10% of cost of manufacturing) +
profit on home-market sales (at least 8% of
manufacturing cost + general expense) + packaging
merchandise for shipment to U.S.
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Antidumping Regulations (4 of 5)
● Whirlpool Agitates for Antidumping Tariffs on Clothes
Washers
• In 2011, Whirlpool filed anti-dumping and antisubsidy petitions against Samsung & LG, which it
contended were selling in U.S. at prices
substantially less than fair value
• In 2013, U.S. & ITC ruled that Samsung and LG’s
pricing was illegal
• Anti-dumping and anti-subsidy import tariffs imposed
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Antidumping Regulations (5 of 5)
● Vaughan-Bassett Furniture Company: Furniture
Dumping from China
• Vaughan-Bassett Furniture and other U.S. furniture
manufactures (over opposition of many U.S. furniture retailers)
filed antidumping complaint against China
• In 2005, U.S. government imposed dumping duties of on most
Chinese furniture shipped to U.S.
• Resulted in decrease in Chinese furniture sold in U.S.
• However, imports from Vietnam, Indonesia, and other countries
filled vacuum
• Returned Vaughan-Bassett Furniture to profitability; is now
largest wood bedroom manufacturer in U.S.
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Is Antidumping Law Unfair?
(1 of 3)
• Antidumping laws
– Supporters claim such laws needed to ensure
level playing field by offsetting artificial sources
of competitive advantage
– Critics note that although protected industries
gain, consumers lose more and economy as
whole therefore suffers net loss
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Is Antidumping Law Unfair? (2 of 3)
● Should Average Variable Cost be the Yardstick for
Defining Dumping?
• Economists argue that fair value should be based on
average variable cost rather than average total cost,
especially when domestic economy experiences
temporary downturns in demand
• Under competitive conditions, firms price goods at
average variable cost
• Antidumping laws therefore punish firms that behave in
manner typical in competitive markets
• U.S. firms selling at home not subject to same rules
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TABLE
5.3
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Is Antidumping Law Unfair? (3 of 3)
● Should Antidumping Law Reflect Currency
Fluctuations?
• Fluctuations in exchange rate can cause a foreign
producer to “dump,” according to legal definition
● Are Antidumping Duties Overused?
• Now, nations small and large bring antidumping
cases, leading to retaliation
• In many cases where imports were determined to be
dumped, they would not have been questioned under
the same countries’ antitrust laws
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Other Nontariff Trade
Barriers (1 of 4)
• Government procurement policies
– Buy-national policies
– 1933, Buy American Act
• Requires federal agencies to purchase
materials and products from U.S. suppliers if
their prices are not “unreasonably” higher than
those of foreign competitors
• To qualify as “domestic product,” must have at
least 50% domestic component content and be
manufactured in U.S.
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Other Nontariff Trade Barriers (2 of 4)
● Government procurement policies (cont.)
• 1933, Buy American Act
• U.S. suppliers of civilian agencies –
preferences over foreign firms
– 6-12% preference margin
– 50% preference margin for Department of Defense
» Preferences waived if U.S.-produced good is not
available in sufficient quantities or is not of
satisfactory quality
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Other Nontariff Trade Barriers (3 of 4)
● Social Regulations
• Correct a variety of undesirable side effects
markets ignore
• Health, safety, and the environment
● CAFÉ Standards
• Corporate average fuel economy standards
– Passenger cars: 37.8 miles per gallon (2016)
– Light trucks: 28.8 miles per gallon (2016)
● Europe Has a Cow over Hormone-Treated U.S. Beef
• Ban on hormone-treated meat
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Other Nontariff Trade Barriers (4 of 4)
● Sea transport and freight regulations
• U.S. shipping companies serving Japanese ports
complained of highly restrictive system of port
services
• Required to clear every detail of visits with Japan’s
stevedore-company association
• Dockworkers available only 18 hours a day or less
• Made U.S. goods more expensive in Japan
• In 1997, U.S. and Japan, on brink of trade war,
reached agreement to liberalize port services in
Japan
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