Trade Barriers in USA Paper
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Select a country of your choice (other than Saudi Arabia) and discuss why the country imposes trade barriers. What is the effect on the economy of the country? (Analyze the effect on the trade balance, employment, and economic growth). What are the arguments for and against trade barriers in your chosen country?
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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 5
Nontariff Trade
Barriers
© 2019 Cengage. All rights reserved.
2
CHAPTER OUTLINE
(1 of 2)
Absolute Import Quota
Tariff-Rate Quota: A Two-Tier Tariff
Export Quotas
Domestic Content Requirements
Subsidies
© 2019 Cengage. All rights reserved.
3
CHAPTER OUTLINE
(2 of 2)
Dumping
Antidumping Regulations
Is Antidumping Law Unfair?
Other Nontariff Trade Barriers
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4
Absolute Import Quota
(1 of 7)
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
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5
Absolute Import Quota
(2 of 7)
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 imported
each year; does not specify from where
product is shipped or who imports
Plagued by accusations of favoritism
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6
Absolute Import Quota
(3 of 7)
Selective quota
Import quota allocated to specific countries
May lead to domestic monopoly of production
and higher prices
Quotas may lead to domestic monopoly of
production and higher prices
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7
Absolute Import Quota
(4 of 7) Figure 5.1
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8
Absolute Import Quota
(5 of 7)
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
© 2019 Cengage. All rights reserved.
9
Absolute Import Quota
(6 of 7)
Quotas versus Tariffs
When demand is growing, an absolute quota
restricts volume of imports by greater amount
than equivalent import tariff
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10
Absolute Import Quota
(7 of 7) Figure 5.2
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11
Tariff-Rate Quota:
A Two-Tier Tariff (1 of 5)
Tariff-rate quota
Two components
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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12
Tariff-Rate Quota:
A Two-Tier Tariff (2 of 5)
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
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13
Tariff-Rate Quota:
A Two-Tier Tariff (3 of 5)
WTO requires members to convert all
NTBs to tariffs; during transition, tariff-rate
quotas permitted
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14
Tariff-Rate Quota:
A Two-Tier Tariff (4 of 5)
Examples of U.S. Tariff-Rate Quotas
Product
Within-Quota
Tariff Rate
Import-Quota
Threshold
Over-Quota Tariff
Rate
Peanuts
$0.935/kg
30,393 tons
187.9% ad valorem
Beef
$0.44/kg
634,621 tons
31.1% ad valorem
Milk
$0.32/L
5.7 million L
$0.885/L
Blue cheese
$0.10/kg
2.6 million kg
$2.60/kg
Source: From U.S. International Trade Commission, Harmonized Tariff Schedule of the United States,
Washington, DC, U.S. Government Printing Office, 2017.
© 2019 Cengage. All rights reserved.
15
Tariff-Rate Quota:
A Two-Tier Tariff (5 of 5)
Sugar tariffs are bittersweet
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 left country;
those that remain pass price on to consumers
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16
Export Quotas
(1 of 2)
Export quotas
Governments enter as form of voluntary export
restraint agreements
Moderates intensity of international competition;
tend to be more costly than tariffs
Identical effect to equivalent import quotas,
except 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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17
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
© 2019 Cengage. All rights reserved.
18
Domestic Content Requirements
(1 of 2)
To limit outsourcing, labor lobbied for
domestic content requirements
Minimum percentage of a goods 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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19
Domestic Content Requirements
(2 of 2)
© 2019 Cengage. All rights reserved.
20
Subsidies
(1 of 4)
Subsidies
May take form of outright cash
disbursements, tax concessions, insurance
arrangements, and subsidized loans
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21
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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22
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
© 2019 Cengage. All rights reserved.
23
Subsidies
(4 of 4)
Export Subsidy (contd)
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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24
Dumping
(1 of 4)
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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25
Dumping
(2 of 4)
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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26
Dumping
(3 of 4)
International Price Discrimination
Producer charges more at home with 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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27
Dumping
(4 of 4) Figure 5.5
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28
Antidumping Regulations
(1 of 6)
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
© 2019 Cengage. All rights reserved.
29
Antidumping Regulations
(2 of 6)
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
© 2019 Cengage. All rights reserved.
30
Antidumping Regulations
(3 of 6)
Foreign market value
Cost-based definition (used when pricebased 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.
© 2019 Cengage. All rights reserved.
31
Antidumping Regulations
(4 of 6)
Whirlpool Agitates for Antidumping Tariffs
on Clothes Washers
93,000 employees, $21 billion in annual sales,
and 70 manufacturing and technology
research centers throughout the world in
2017.
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
© 2019 Cengage. All rights reserved.
32
Antidumping Regulations
(5 of 6)
2016: Whirlpool filed again
2017: U.S. International Trade
Commission approved Whirlpools petition
for safeguard protection
© 2019 Cengage. All rights reserved.
33
Antidumping Regulations
(6 of 6)
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.
© 2019 Cengage. All rights reserved.
34
Is Antidumping Law Unfair?
(1 of 4)
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
© 2019 Cengage. All rights reserved.
35
Is Antidumping Law Unfair?
(2 of 4)
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 punish competitive behavior
U.S. firms selling at home not subject to same rules
© 2019 Cengage. All rights reserved.
36
Is Antidumping Law Unfair?
(3 of 4) Table 5.3
Dumping and Excess Capacity
No Dumping
Dumping
Home sales
100 units @ $300
100 units @ $300
Export sales
0 units @ $300
50 units @ $250
Sales revenue
$30,000
$42,500
Less variable costs of $200 per unit
?20,000
?30,000
$10,000
$12,500
?10,000
?10,000
$0
$2,500
Less total fixed costs of $10,000
Profit
© 2019 Cengage. All rights reserved.
37
Is Antidumping Law Unfair?
(4 of 4)
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
© 2019 Cengage. All rights reserved.
38
Other Nontariff Trade Barriers
(1 of 5)
Government procurement policies: Buy
American
1933, Buy American Act
Requires federal agencies to purchase
materials and products from U.S. suppliers
if prices not unreasonably higher than
foreign
Domestic product, must 50% domestic
component content and be USA
manufactured
© 2019 Cengage. All rights reserved.
39
Other Nontariff Trade Barriers
(2 of 5)
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
© 2019 Cengage. All rights reserved.
40
Other Nontariff Trade Barriers
(3 of 5)
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)
© 2019 Cengage. All rights reserved.
41
Other Nontariff Trade Barriers
(4 of 5)
Europe Has a Cow over Hormone-Treated
U.S. Beef
Ban on hormone-treated meat
© 2019 Cengage. All rights reserved.
42
Other Nontariff Trade Barriers
(5 of 5)
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 Japans
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
© 2019 Cengage. All rights reserved.
43
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Trade barriers
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