BRIEF ANSWERS TO STUDY QUESTIONS AT THE END OF CHAPTER 6

(Nontariff Trade Barriers)

1. Nontariff trade barriers include import quotas, voluntary export agreements, subsidies, buy-national
policies, product and safety standards, and content requirements.

2. The revenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured
by domestic or foreign firms.

3. Subsidies include domestic subsidies and export subsidies. Methods used to subsidize producers include
tax concessions, low interest rate loans, and loan guarantees.

4. Voluntary export restraints are market-sharing agreements negotiated by producing and consuming
countries. Because voluntary export quotas are typically administered from the supply side of the market,
the foreign exporter tends to capture the largest share of the quota revenue.

5. While antidumping laws are typically defined in terms of full cost, it may be rational for a firm to sell its
product overseas at losses, provided that prices are sufficiently high to cover marginal cost.

6. Since import quotas directly limit the number of goods that can enter the home nation, they tend to be
more restrictive than import tariffs which may be circumvented by foreign producers absorbing the tariff
as a lower selling price. During periods of rising domestic demand, quotas hold down imports more
effectively than tariffs.

7. Sporadic dumping--firms with temporary inventories sell their products overseas at lower prices than at
home. Predatory dumping--firms cut prices overseas to eliminate competitors. Persistent dumping--in an
effort to maximize profits, firms continuously sell abroad at lower prices than at home.

8. Domestic subsidies avoid the deadweight losses due to the consumption effect.

9. Subsidies are not free goods since they are financed by taxpayer dollars. In return for granting subsidies,
governments often pressure management and labor to adopt measures to lower costs of production so as to
become more competitive.

10. The import quota tends to permit domestic firms and workers to enjoy higher sales, profits, and
employment levels. Consumers tend to face higher prices and expenditure levels. The economy as a
whole faces deadweight losses in production and consumption.

11. The sugar import quota was viewed as a method of increasing the domestic price of sugar, so as to offset
the adverse effects of falling prices for U.S. sugar producers.

12. Under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative
bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are
typically administered from the supply side of the market, the largest share of the revenue effect tends to
be captured by foreign exporters.

13. Same general answer as Question 12. The distribution of the revenue effect tends to accrue to foreign
auto-makers.
14. By contributing to a scarcity of steel in the domestic market, quotas lead to higher steel prices and
production costs for domestic steel-using firms. Such cost increases detract from their international
competitiveness.

15. According to the priced-based definition, dumping occurs whenever a foreign firm sells a product in the
importing country’s market at a price below that for which the product is sold in the firm's home market.
According to the cost-based definition, dumping occurs when foreign merchandise is sold in the domestic
market at "less than fair value" (i.e., price is less than average total cost).

16. a. Qs = 100, Qd = 800, Imports = 700. Consumer surplus = $160,000, producer surplus = $2500.
b. Price rises by $100 and consumer surplus falls by $70,000. Redistribution effect = $20,000,
consumption effect = $10,000, protective effect = $10,000, revenue effect = $30,000. Overall
welfare loss = $50,000.
c. Price remains at the free trade level. Qs = 300, Qd = 800, imports = 500. Total cost of subsidy
= $30,000 of which $20,000 is absorbed by producer surplus and $10,000 is absorbed by higher
domestic production costs. Overall welfare loss = $10,000.

17. a. Ecuador imports 80 computers from Hong Kong.

b. Price rises by $400 and consumer surplus falls by $30,000. Redistribution effect = $6000,
protective effect = $4000, consumption effect = $4000, revenue effect = $16,000. Overall
welfare loss = $24,000.
c. Overall welfare loss = $14,000; of this amount, the revenue effect = $12,000, consumption
effect = $1000, protection effect = $1000.
d. Smaller by $10,000.

18. a. Output = 9, price = $5, profit = $18. Profits on U.K. sales = $14 while profits on Canadian
sales = $4.
b. Price = $7 and profits = $20. Price = $4 and profit = $4. With dumping, total profits rise by $6.

19. A tariff-rate quota attempts to minimize the consumer costs of protectionism by applying a modest within-
quota tariff rate; it also shields home producers from severe import competition with a stiffer over-quota
tariff rate. Of a tariff quota's revenue effect, a portion accrues to the domestic government while the
remainder is captured by domestic importers or foreign exporters as windfall profits.