MBASess3BProtectII-09

8/14/2019 MBASess3BProtectII-09

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Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy1

Session 3B: Protectionism

The Political Economy of Protectionism II


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Other Barriers To Trade

Non-tariff Barriers


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Non-Tariff Barriers 1996

Sawyer, 3rd ed, Pearson


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Import Quota Physical restriction on the quantity of imports during

a specific time period (Table 5.1) Import licenses

Quotas on manufactured goods outlawed by W.T.O

Global quotas

Permit a specified number of goods to beimported each year

Selective quotas

Import quotas allocated to specific countries

May lead to domestic monopoly of production

Accusations of favoritism


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Allocating Quota Licenses

Limited imports; allocation by governments

Issue of import licenses on the basis of historicalshare 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 competitiontransfers revenue effect to the government


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Sugar Import Quotas

U.S. sugar industry

Earlier: Subsidies in the form of price supports

1982 sugar price crash

Response

Raise import tariffs to the legal maximum

Nation-by-nation import allocations based on

average sugar exports to the United States Transferred the cost of sugar support from the

taxpayer to the consumer


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Quotas Versus Tariffs During periods of growing demand, an import quota is

a more restrictive trade barrier (Fig 5.2) Tariff increases the domestic price, but does not

limit the number of goods that can be imported

Tariffs allow for some degree of competition

Degree of protection is determined by themarket mechanism

Quota is more restrictive and suppressescompetition

Quota forecloses the market mechanism

W.T.O and tariffication


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Tariff-Rate Quota: A Two-Tier Tariff

Tariff-like and quota-like characteristics A specified number of imports at one tariff rate

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 .

Techniques for the administering tariff-rate quotas:

License on demand allocation

First-come, first-served

Historical market share

Auctions


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Voluntary Export Quotas Used to restrain trade

Voluntary export restraint agreement (orderlymarketing agreement)

Moderate the intensity of internationalcompetition

Allow less efficient domestic producers toparticipate in world markets

Identical economic effects to equivalent importquotas, except for being implemented by theexporting nation

Conclusion from the viewpoint of the U.S.economy: Voluntary export restraints tend to bemore costly than tariffs


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Japanese Auto Restra nts Put Bra es on .S.Motorists Fall in domestic auto sales (1981)

Voluntary restraint pact with the Japan Unpopular with smaller Japanese automakers

Record profits for Japanese auto majors

U.S. consumer paid higher prices

44,000 jobs saved in the U.S.; consumer cost perjob saved being $100,000

By 1985: Japanese companies open plants inthe U.S.; decline in imports coupled with declinein market share for U.S. firms

Japan exported bigger, higher value cars to US


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Domestic Content Requirements Stipulate the minimum percentage of a products total

value to qualify for zero tariff rates Purpose: Limit outsourcing

Pressurizes firms that sell products in the countryto use domestic inputs in production

Often used by developing countries to fosterdomestic automobile production (Table 5.3)

Welfare effects of an Australian contentrequirement on automobiles (Fig 5.3)


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Subsidies

Granted to producers to help improve trade positions

Governmental subsidies assume a variety of forms(Table 5.4)

Outright cash disbursements Tax concessions

Insurance arrangements

Loans at below-market interest rates


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Subsidies.

Domestic subsidy: Granted to producers of import-competing goods (Figure 5.4)

Unlike tariffs and quotas, subsidies do not distort

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. Export subsidy: Granted to producers of goods that

are to be sold overseas (Fig 5.4) Encourage exports by reducing price paid by

foreigners

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


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Dumping

A form of international price discrimination

Charging foreign buyers lower prices thandomestic buyers; selling below cost

Forms of Dumping

Sporadic dumping: Disposal of excess inventories

Predatory: Temporary price cuts to eliminatecompetition

Persistent: Indefinite dumping to maximize profits


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International Price Discrimination

A profit-maximizing firm would benefit frominternational price discrimination

Charge a higher price at home, where competitionis weak and demand is less elastic

Charge a lower price for the same product inforeign markets to meet competition

Demand and cost conditions example


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Antidumping Regulations

Under U.S. law, antidumping duty is levied when

Commerce Department determines foreignmerchandise is sold at less than fair value (LTFV)

ITC determines that LTFV imports are causing orthreatening material injury to a U.S. industry

Margin of dumping: Amount by which the foreignmarket value exceeds the U.S. price

Priced-based definition

Cost-based definition


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Antidumping Regulations Process

Complaint from an import-competing industry Evidence of dumping; supporting data

Commerce Department conducts preliminarydetermination, estimate of margin

Special tariff imposed immediately, if evidenceis found

Final determination, estimate of margin

Rebate, if ruling is against dumping

ITC determines material injury

Rebate, if ruling is against dumping

Imposition of permanent tariff if both bodies rule infavor of the dumping petition


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Antidumping Regulations.. Smith Corona - Hollow victories

1980: Japanese typewriters Product evolution by Brother Industries (Japan)

to circumvent ruling

1990: Assembling of typewriters in U.S. itself

1991: Japanese word processors

Ruling ineffective as these were assembled inU.S.

Components not sourced from Japan

Washington apple producers

Canadian government impose duties (Table 5.5)


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Is Antidumping Law Unfair? Supporters: Ensures level playing field by offsetting

artificial sources of competitive advantage Critics: Consumers of the protected good and the

wider economy typically lose more

Average variable cost as yardstick for dumping? (Table

5.6) Economists: Fair value should be based on

average variable cost rather than average total cost

Antidumping law is unfair as it uses average total

cost


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Anti-Dumpinga. WTO allows trade restrictions to counteract

predatory dumpingb. Difficult to determine dumping

c. Trigger-price mechanism to activate traderestrictions

d. Used as protectionist weapon: threats of anti-dumping measures

e. Examples: 1981-1994

US 618

EU 490

Canada 537

Australia 690


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Is Antidumping Law Unfair?..

Antidumping law and currency fluctuations

Antidumping law does not account for fluctuations

Does the antidumping law redress unfairness or

create it?

Are antidumping duties overused?

Disturbing trend of backdoor protectionism

For U.S. producers, it is easier to obtain relief in theform of antidumping duties


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Other Non-tariff Trade Barriers Government procurement policies

Buy-national policies: Barrier to free trade

Social regulations

To correct undesirable side effects that relate to

health, safety, and environment

Corporate average fuel economy standards(CAFE) - U.S. energy conservation policy

Hormones in beef production - European

Unions ban on hormone-treated meat


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Other Non-tariff Trade Barriers..

Sea transport and freight restrictions

Restrictive practices at Japanese ports

Delays and costs of loading/unloading

U.S. decision to bar Japanese ships from U.S. ports

Agreement to liberalize port services in Japan


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Other Non-Tariff BarriersInternational Cartels

a. Organization of suppliers located in different nations[or a group of governments] that agrees to restrictoutput and export of a commodity

b. Aim: to increase price, maximize profits

c. Outside individual countrys control/jurisdiction

d. E.g. OPEC, IATA

e. Free riders: non-member suppliers

f. Success: if good substitutes not freely available


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Session 3-09 Prof AugustineH H Tan Econ MBA GlobalEconomy

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Industrial Policies..


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Government Procurement..



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Corruption & International Trade



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Corruption Index 2006



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Economic Sanctions



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Economic Sanctions..



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Labor & Environmental Standards



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Labor & Environmental Standards..


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MBASess3BProtectII-09

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