Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import Protection: Non-Tariffs Barriers Import Quota Perfect Competition import quota

Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Import Protection: Non-Tariffs Barriers

• Import Quota Perfect Competition import quota Equivalence to the tariffs Import Quota under Monopoly It causes more deadweight loss compared to the

tariffs

• Voluntary Export Restraints Exporter can control for the export quantity, and

catch the “rent”.


Import-Related Domestic Policy

• Direct import policy are restricted by the GATT/WTO.

• Instead, countries appeal to domestic policies: Industrial policies: production subsidy, cash

subsidy, tax reductions, R&D funding.

Government procurement Regional Special Supports

Bureaucratic regulations


Import-related Industrial Policy


Import-related Industrial Policy


Welfare Analysis

• More production, but same consumption.

• This causes import decrease.

• Consumer Surplus unchanged

• Producer Surplus up=a

• Gov Revenue=-(a+b)

• DWL=-b

• DWL under tariffs= -(b+d)


Bureaucratic regulations

• Technical Requirement Measurement: feet or meter Transportation Regulations: LHS (HK,UK,JP, AUS)

or RHS Safety Regulation: Tire, Glass, Toy Health Regulations:

Agreement on the Application of Sanitary and Phytosanltary Measures.

Label and Package Regulation: rule of origin, contents.


Other Non-Tariffs-Barriers

• Specific customs procedure requirement

• Local Domestic Contents

• Import Monopoly Behavior

• Foreign Exchange Rate Manipulation and Foreign Currency Control


Contingent Protection

• Anti-dumping duties

• Anti-export-subsidy duties


Anti-Dumping Duties

• Market Structure: Foreign Monopoly• No domestic firm• No foreign consumers• Home imposes anti-dumping duty t• Home Gov Revenue=c• Home Consumer Surplus=-(b+d)• If c>b+d, then home get welfare improve due

to the anti-dumping tax; otherwise, it is a loss.• Because c can be decomposed into a+b; then

home gains provided that a-d>0


Anti-Dumping Duties


Anti-Dumping Duties


World Welfare Change

• Importer’s change= a-d

• Exporter’s production change Price gain-cost soar=b-c=-a Production shrinks=Px*(Qx’-Qx)=e

• Total welfare change =home +foreign=a-d+ (-a-e)

• = -(d+e)

• world Deadweight Loss


Anti Export Subsidy Duties

• Japan US


• Now, US imposes an anti export subsidy duty. Such money equals a part of the amount paid from the Japan Government but has effects on the U.S. market.

• Then, the new equilibrium point is A, export to the U.S. is still X0.

• US Loss=triangle_acd

• Japan Gain=Rectangle_abcd


Analysis of the Welfare Change


Production Subsidy

• All subsidies other than export subsidy

• Without production subsidy, free trade price is pw, and export X1.

• With production subsidy, Government subsidizes s to each unit produced.

• Supply shifts rightward due to the cost decrease by s.

• But consumer still faces the same price since firms don’t need to increase price, they already get support from the government

• Producer surplus=a+b+C

• Government expenditure: a+b+c+d

• DWL=d

• It is better than the export subsidy: DWL=b+d


Production Subsidy


Export Subsidy for Small Country


Price Floor for Exporting Industries

• Price floor is not a trade policy, but it would foster or discourage trade when the government uses such a policy on exporting industries.

• Government always guarantees a price floor to the exporting industries.

• Accordingly, the export is guaranteed(=X1) regardless of the world price fluctuation.





• Welfare change:

• Producers gain=a+b+c

• Consumers loss=a+b

• Government Expenditure=b+c+d

• DWL=b+d

• Different from the export subsidy though they look similar from the diagram.

• Under export subsidy, the subsidy for each unit of exporting good is a constant; but it is flexible under price floor scheme.


Price Support for Import-Competing Industries

• Government provide a high fixed price for commodities in some import sectors.

• This could change the trade pattern!

• Example: European Agricultural Commodities.

• Government pays subsidy for the price gap.

• Products are sold at the guaranteed price in the domestic market, but sold at the world price in the foreign market.

• The gap is subsidized by the government.


Price Support for Import-Competing Industries


Trade Sanctions

• Two types:

• Export Embargos

• Import Sanctions

• Example: the Helms-Burton Act:the Iran/Libya Sanctions Act


Export Embargos

• US imposes sanction to Cuba, but Russia still export products to Cuba.

• This will affect the export supply curve in Cuba.

• It would be steeper due to the falling foreign supply.

• Sn: Supply curve for a non-executed country

• Se: Supply curve for an executed country


Export Embargos


Welfare Analysis for Export Embargos

• Without trade sanction, the gains from trade for the USA=a; the gains from trade for Russia=b;

• With trade sanction, the supply curve is shifted up.

• In Cuba, the new quantities supplied is 15 since Russia exports more to Cuba, but consumers in Cuba has to pay more at a higher price.

• Cuba’s Loss=c+d due to the consumer loss

• U.S.’s Loss=a

• Russia’s Gain=c

• World Net loss=a+d


Import Embargos

• US imposes sanction to Iran, but Japan still import products from Iran.

• This will affect the import demand curve in Iran.

• How does it change?

• It would be steeper due to the falling foreign demand.

• Dn: Demand curve for a non-executed country

• De: Demand curve for an executed country


Welfare Analysis for Import Embargos


Welfare Analysis for Import Boycott

• Without trade sanction, the gains from trade for the USA=a; the gains from trade for Japan=b;

• With trade sanction, the demand curve is steeper.

• In Iran, the new quantities demanded is 15 since Japan imports more from Iran, but producers in Iran now earn less for each quantity supplied.

• Iran’s Loss=c+d due to the producers loss

• U.S.’s Loss=a

• Japan’s Gain=c

• World Net loss=a+d


Evaluate Trade Sanction

• Which one is worse? The sanctioned or the killer?

• Depends

• If the sanctioned has low export supply elasticity or import demand elasticity, then it will get hurt dramatically due to the trade sanction; otherwise, it would not.

• Now consider a case that the sanctioned has a high export supply elasticity

• But the killer faces different import demand elasticity


Elastic & Inelastic Import Demand Curves


Elastic & Inelastic Import Demand Curves

• In case (a), the two countries didn’t get much hurt from the trade sanction since both of them have high elasticities.

• In case (b), the killer got much hurt from its sanction. Its loss=a >the counterpart’s loss=c+d


What factors affect the sanction’s effect?

• Trade openness: the smaller openness level, the less importance of international trade, the higher the elasticity is.

• Characteristics of the importing products: luxury or necessity?

• Duration of the Sanction: the longer the sanction, the smaller the impact is.

• Sanction Coverage: the more the countries’ participation, the larger the impact is.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Import Protection: Non-Tariffs Barriers Import Quota Perfect Competition import quota

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