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Introduction

Introduction

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Published by: brokolibasili on Dec 11, 2009
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11.12.20091
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Chapter5
Nontariff Trade Barriers
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Introduction
Nontariff trade barriers (NTBs)
 –
Have been on the rise since the 1960s
 –
Encompass a variety of measures such as:
Import quotas
Voluntary export restraints
Subsidies
Domestic content requirements
 –
Intended to reduce imports and thus benefitdomestic producers
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Import Quota
Physical restriction on the quantity of importsduring a specific time period
 –
Import licenses
 –
Quotas on manufactured goods outlawed by W.T.O
 –
Global quotas
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
Before Trade:consumer surplusis area in red.producer surplus isarea in green.
Import Quota Welfare Effects
With Free Trade:consumer surplusincreasessubstantially dueto lower price.producer surplusdecreases to alesser degree.Overall increase inwelfare is b,c,dand area above.
Import Quota Welfare Effects
With Import Quota:
a = redistributive effectb + d = deadweight lossb = protective effectd = consumption effectc = revenue effect
“windfall profit”“quota rent”
portion to foreignexporters and portion todomesticimporters
 
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Allocating Quota Licenses
Limited imports; allocation by governments
 –
Issue of import licenses on the basis ofhistorical share of the import market
Discriminates against first-time importers
 –
Issue of import quotas on a pro rata basis
 –
Auctioning process
Few nations use auctions, as competition transfersrevenue effect(windfall profit) to the government
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Quotas Versus Tariffs
During periods of growing demand, an importquota is a more restrictive trade barrier
 –
Tariff increases the domestic price, but does not limitthe number of goods that can be imported
 –
Tariffs allow for some degree of competition
Degree of protection is determined by the market mechanism
 –
Quota is more restrictive and suppresses competition
Quota forecloses the market mechanism
 –
W.T.O and
tariffication 
Quota Versus Tariff 
initially similar -however if demand increases
o
tariff leads to more imports at the same price
o
quota leads to a higher priceVolume of trade is restricted under quota
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Tariff-Rate Quota: A Two-Tier Tariff
Tariff-like and quota-like characteristics
 –
A specified number of imports at one tariffrate
 –
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
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Tariff-Rate Quota
Continued
Techniques for the administering tariff-ratequotas:
 –
License on demand allocation
 –
First-come, first-served
 –
Historical market share
 –
Auctions
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Export Quotas
Used to restrain trade
 –
Voluntary export restraint agreement (orderlymarketing agreement)
Moderate the intensity of international competition
Allow less efficient domestic producers to participate in worldmarkets
Identical economic effects to equivalent import quotas,except for being implemented by the exporting nation
 –
Conclusion from the viewpoint of the U.S. economy:Voluntary export restraints tend to be more costlythan tariffs
 
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Domestic Content Requirements
Stipulate the minimum percentage of a
product’s total value to qualify for zero
tariff rates
 –
Purpose: Limit outsourcing
 –
Pressurizes firms that sell products in thecountry to use domestic inputs in production
 –
Often used by developing countries to fosterdomestic automobile production
Welfare effects of an Australian contentrequirement on automobiles
Domestic Content -Welfare Effect
consumer surplus beforedomestic contentrequirementscontent requirementsincrease pricesdecreasing consumersurplusincreasing domesticproducer surplusdecreasing total welfaredue to deadweight loss
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Subsidies
Granted to producers to help improvetrade positions
 –
Governmental subsidies assume a variety offorms
Tax concessions
Insurance arrangements
Loans at below-market interest rates
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Subsidies
Continued
Domestic subsidy: Granted to producers ofimport-competing goods
 –
Unlike tariffs and quotas, subsidies do notdistort choices for domestic consumers
 –
Burden financed out of tax revenues
 –
Often in return for accepting governmentconditions on key matters
May not be as superior to other commercialpolicies
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Subsidies
Continued
Export subsidy: Granted to producers of goodsthat are to be exported
 –
Encourage exports by reducing price paid byforeigners
 –
Yields direct effects for the home economy:
Terms-of-trade effect
Export-revenue effect
 –
Consumers in the exporting nation suffer as theinternational terms of trade move against them
 –
Domestic consumers pay higher prices
 –
Tax burden
Domestic Production-Welfare Effect
Free Trade -No Subsidyassuming the domesticmarket is relatively smallin relation to the world freetrade will lower priceconsumer surplussubstantial because of thelower price caused by freetradeproducer surplus is asmall area for the samereason

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