Lesson 5

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LESSON
5 PART 2:
INTERNATIONAL TRADE
POLICY
THE INSTRUMENTS OF TRADE
POLICY
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
Instruments of trade policy
 Tariffs
 Non-tariff barriers
 Import quotas
 Voluntary Export Restraints (VER)
 Export subsidies
 Local content requirements
 Technical, Administrative, and Other Regulations
 International Cartels
 Dumping
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CHAPTER E I G H T
8 Trade Restrictions: Tariffs
Dominick Salvatore
John Wiley & Sons, Inc.
Introduction
 While it is generally accepted that free trade

maximizes world output and benefits all
nations, most nations impose some
restrictions on the free flow of international
trade.
 Trade policies are advocated by special
groups that stand to benefit from trade
restrictions.
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Tariff and Non-tariff barriers

Risk Comparison
INTERNATIONAL
METHODS OF PAYMENT
Standards
Quotas
Licensing
VAT
Excise tax
Duty
by pvnlan 5
Types of tariff barriers
Tariff barriers
Ad valorem tariff Specific tariff Compound tariff
Oct-20 by pvnlan
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Types of non-tariff barriers

Import quotas
Voluntary Export Restraints (VER)

Non-tariff barriers
Export subsidies
Local content requirements
Technical, Administrative, and Other

Regulations
International Cartels
Dumping
Oct-20 by pvnlan
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Introduction
 Import vs. export tariffs

 An import tariff is a tax or duty levied on
imported commodities.
 This is the most common form of tariff.
 An export tariff is a tax on exported

commodities.
 Prohibited by the U.S. Constitution, but
occasionally practiced in developing countries
to generate government revenue.
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Introduction

 Ad valorem tariff
 A fixed percentage on the value of the
traded commodity.
 For example, 25% tariff on the value of
imported trucks.
Introduction

 Specific tariff
 A fixed sum per physical unit of a traded
commodity.
 For example, $3 per barrel of oil
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Introduction

 Specific tariff
 A compound tariff
 A combination of an ad valorem and
specific tariff.
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Introduction
 Tariffs have been sharply reduced since

World War II.
 Tariffs average 5 percent or less on industrial

products in developed nations, but are much
higher in developing nations.
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Resulting Effects of Tariff

Sdom
Ddom & Sdom show the domestic de
mand and supply for a good.
If the world price is Pw,
and there is free trade,
Pw+ T domestic firms produce Qs,
domestic consumption is Qd
Pw and the difference is imported.
Ddom
A tariff can stimulate domestic
production and restrict imports:
Qs Qs' Qd' Qd Quantity
At a domestic price Pw + T,
where T is the size of the tariff,
quantity of domestic demand falls to Qd',
quantity of domestic supply rises to Qs' and imports fall.
4 International Trade13
Policy - 4.2 Trade
Barriers: Tariffs,
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Economic of Tariffs:
 Consumption effect
 Domestic consumers reduce their consumption.
=> Reduction in domestic consumption
 Production effect
 Higher prices make it profitable for domestic
producers to increase their output
=> Expansion of domestic production
 Thus the tariff attracts resources into the
protected industry from other sectors of the
economy.
© Palmatier
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Economic of Tariffs:
 Trade effect
 The tariff causes imports to fall.
=> Decline in imports
 Revenue effect
 After the imposition of the tariff, the government
collects a certain amount of money.
© Palmatier
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 Redistribution effect
 Tariff redistributes income -
 From domestic consumers (who pay higher
price for the commodity) to domestic
producers (who receive the higher price)
 From nation’s abundant factor (producing
exports) to the scarce factor (producing
imports).
 This leads to inefficiencies, or protection
costs (deadweight losses).
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 Stolper-Samuelson Theorem
 An increase in the relative price of a
commodity (for example, as the result of a
tariff) raises the return of the factor used
intensively in production of the commodity.
 Thus, the real return to the nation’s scarce
factor of production will rise with the
imposition of a tariff.
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Case Study 8-1 Average Tariff on

Nonagricultural Products in Major Developed
Countries
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Case Study 8-2 Average Tariffs on

Nonagricultural Products in Some Major
Developing Countries
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CHAPTER N I N E
9 Nontariff Trade Barriers
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Introduction
 Though tariffs have historically been the most

important form of trade restriction, there are
many other types of trade barriers.
 As tariffs were negotiated down during the
postwar period, the importance of non-tariff
barriers was greatly increased.
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Types of non-tariff barriers

Import quotas
Voluntary Export Restraints (VER)

Non-tariff barriers
Export subsidies
Technical, Administrative, and Other

Regulations
Dumping
Oct-20 by pvnlan
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Import Quotas
A quota is a direct quantitative restriction

on the amount of a commodity allowed to
be imported or exported.
Import quotas are used to protect

domestic industry and agriculture, and/or
for balance of payments reasons.
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TABLE 5.1 Examples of U.S. import quotas*
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distributed with a certain product or service or otherwise on a password‐protected website for classroom use
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Tariff-Rate Quota: A Two-Tier

Tariff
 Two-tier tariff
 A quota that defines the maximum volume of
imports
 And charges the within-quota tariff
 Any imports above this level face a higher
tariff rate
 Over-quota tariff
© 2011 Cengage Learning. All

Rights Reserved. May not be 25
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TABLE 5.2 Examples of U.S. tariff-rate quotas
Product Within-Quota Import-Quota Over-Quota

Tariff Rate Threshold Tariff Rate
Peanuts 9.35 cents/kg 30,393 tons 187.9 percent ad
Beef 4.4 cents/kg 634,621 tons valorem
Milk 3.2 cents/L 5.7 million L 31.1 percent ad
Blue cheese 10 cents/kg 2.6 million kg valorem
Cotton 4.4 cents/kg 2.1 million kg 88.5 cents/L
$2.60/kg
36 cents/kg
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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password‐protected website for classroom use
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Import Quota vs. Equivalent Import Tariff
 Import quota involves distribution of import

licenses, while tariff does not.
 If not auctioned by government in competitive
markets, receiving firms will reap monopoly
profits.
 Allocation decision often based on arbitrary
judgments rather than efficiency concerns.
 Monopoly profits lead firms to lobby for licenses
in rent-seeking activities.
 Thus, import quotas replace market mechanism ,
resulting in waste, and possible corruption.
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 Import quota limits imports to specified levels

with certainty, while the trade effect of an
import tariff may be uncertain.
 When elasticity of demand and supply are not
known, it is difficult to estimate the import tariff
required to restrict imports to desired level.
 Foreign exporters cannot maintain export
quantity simply adjust to barrier by increasing
efficiency or accepting lower profits, as with
tariff
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 Because import quota is less “visible, domestic

producers prefer them over tariffs.
 Since import quotas are more restrictive than
equivalent import tariffs, society should resist
domestic producers’ efforts to use quotas
instead of tariffs.
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Voluntary Export Restraints (VERs)

(Export Quotas)
An importing country
induces another
nation to reduce its
exports voluntarily,
under threat of higher
trade restrictions.
(market sharing pact)

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Case study:
A Voluntary Export Restraint in
Practice : Japanese Autos
 Rather than
act
unilaterally
and risk
creating a
trade war, the
U.S.
government
asked the
Japanese
government
to limit its
exports.
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Voluntary Export Restraints (VERs)
To allow industrial nations to appear to

support the principle of free trade.
To moderate the intensity of international

competition
Tend to be more costly than tariffs
Less effective in limiting imports than

import quotas because exporters tend to fill
the quota with higher quality, higher priced
goods over time.
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Study: three major U.S. voluntary

export restraint agreements of the
1980s
67% of the costs to
Automobiles, steel,
American consumers -
and textiles and
captured by foreign
apparel
exporters as profit

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Case study:
A Voluntary Export Restraint in
Practice : Japanese Autos
 U.S. buyers, living in a large country with low gasoline taxes,
preferred much larger cars than Europeans and Japanese, and,
by and large, foreign frms had chosen not to challenge the
United States in the large-car market.
 In 1979, however, sharp oil price increases and temporary
gasoline shortages caused the U.S. market to shift abruptly
toward smaller cars.
 Japanese producers, whose costs had been falling relative to
their U.S. competitors in any case, moved in to fill the new
demand.
 As the Japanese market share soared and U.S. output fell, strong
political forces in the United States demanded protection for the
U.S. industry.
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Subsidies
 Subsidies
 Outright cash disbursements, tax concessions,
insurance arrangements, and loans at below-
market interest rates
 From the government for producers
 To help improve their market position
 Provide domestic firms a cost advantage
 Market products at prices lower than warranted
by their actual cost or profit considerations

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Subsidies
Domestic
• Granted to producers of import-
production competing goods
subsidy
• Granted to producers of goods that

Export subsidy are to be sold overseas
• Net price received by the producer =

Subsidy price paid by the purchaser + subsidy

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Export Subsidies
 The granting of tax relief to exporters or

subsidized loans to foreign buyers to stimulate
a nation’s exports.
 Can be regarded as a form of dumping.
 Export subsidies are illegal by international
agreement, but often used in disguised form.
 Example: Export-Import Bank
 U.S. government agency that extends subsidized
loans to foreigners to finance U.S. exports.
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Export Subsidies
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FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.
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Case study: Europe's Common

Agricultural Policy (CAP)
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 The support price is set not only above the world
price that would prevail in its absence but also
above the price that would equate demand and
supply even without imports.
 To export the resulting surplus, an export subsidy
is paid that offsets the difference between
European and world prices. The subsidized exports
themselves tend to depress the world price,
increasing the required subsidy.
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 Cost-beneft analysis would clearly show that the
combined costs to European consumers and
taxpayers exceed the benefits to producers.
 Despite the considerable net costs of the CAP to
European consumers and taxpayers, the political
strength of farmers in the EU has been so strong
that the program has been difcult to rein in.
 One source of pressure has come from the United
States and other food-exporting nations, which
complain that Europe's export subsidies drive
down the price of their own exports.
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Welfare effects of export subsidy

 Higher output and price
 Higher exports; Lower domestic consumption
 Domestic producers gain at the expense of the
domestic consumer and taxpayer
 Taxpayer - bears the cost of export subsidy
 Deadweight loss of welfare

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Welfare effects of domestic

production subsidy
 Higher output
 Subsidy revenue – some redistributed to the
more efficient producers - producer surplus
 Deadweight loss
 Protective effect
 Lower welfare loss than a tariff or a quota
 Direct cost of the subsidy
 Financed out of tax revenues paid by the public

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Let's compare the effects of these two trade

restrictions on the welfare of the society:
= dead weight loss
(a) Tariff (b) Production subsidy
Sdom Sdom
Price
Price
Sdom+ s
Sw + t
P’
Sw
P P Sw
Ddom Ddom
Qs Qsd’ Qd Quantity Qs Qsd’ Qd Quantity
4 International Trade46
Policy - 4.2 Trade
Barriers: Tariffs,
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 A local content requirement is a regulation that
requires that some specified fraction of a final good
be produced domestically
 From the point of view of the domestic producers
of parts, a local content regulation provides
protection in the same way an import quota does.
 From the point of view of the firm that must buy
locally, however, the effects are somewhat
different.
 Local content does not place a strict limit on
imports. It allows firms to import more, provided
that they also buy more domestically.
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Technical, Administrative, Other Regulations
 Health and safety regulations may serve as barriers

to international trade by raising the costs of
imported products.
 Government purchasing restrictions may be biased
against foreign goods.
 The Buy American Act of 1933
 Rebates for indirect taxes may be given to exporters
and imposed on importers of a commodity.
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Standards
(technical, medical, health & safety, etc.)
http://bizlive.vn/hang-hoa/trung-quoc-thiet-lap-tieu-
chuan-nhap-khau-xuat-khau-gao-viet-giam-manh-
2553504.html
Oct-20 by pvnlan
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Other Nontariff Trade Barriers

 Government procurement policies
 Buy-national policies
 1933, Buy American Act
 Federal agencies
 Purchase materials and products from U.S. suppliers
 If their prices are not “unreasonably” higher than
those of foreign competitors
 Domestic product
 At least 50% domestic component content
 Manufactured in the United States

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 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.
These preferences are
 Waived if the U.S.-produced good is not available in
sufficient quantities or is not of satisfactory quality

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 Barrier to free trade
 Higher cost for government projects
 Deadweight welfare losses
 Protective and consumption effects

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 Organization of suppliers from different

nations that agrees to restrict output and
exports of a commodity with the aim of
maximizing or increasing total profits.
 For example, OPEC (the Organization of
Petroleum Exporting Countries) quadrupled
the price of crude oil between 1973 and 1974
by restricting production and exports.
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Dumping
 The export of a commodity at below cost, or

the sale of a commodity at a lower price
abroad than domestically.
 Three types of dumping:
1. Persistent dumping is the continuous tendency of
a domestic monopolist to maximize total profits
by selling the commodity at a higher price in the
domestic market.
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Dumping

1. Persistent dumping
2. Predatory dumping is the temporary sale of a
commodity at below cost or a lower price abroad
to drive foreign producers out of business.
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Dumping

1. Persistent dumping
2. Predatory dumping
3. Sporadic dumping is the occasional sale of a
commodity at below cost or lower price abroad
to unload surplus of the commodity without
reducing domestic prices.
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Swimming upstream: the case of

Vietnamese catfish
 Vietnamese catfish
 Comparative advantage
 Vietnam’s Mekong Delta and cheap labor
 Half-million Vietnamese earn income from the
catfish trade
 20% of the frozen catfish-fillet market in U.S.
 Lower prices

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Vietnamese catfish
 Catfish farmers in Mississippi
 Trade war: product labeling, antidumping tariffs
 Persuade the U.S. government to close the catfish
market to Vietnamese farmers
 Out of 2,000 types of catfish, only the American-born
family could be called “catfish”
 Disinformation campaign - Vietnamese catfish
 “slippery catfish wannabe”
 “probably not even sporting real whiskers”
 “floating around in Third World rivers nibbling on
who knows what”

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Vietnamese catfish
 Catfish farmers in Mississippi
 Antidumping case against Vietnamese catfish
 U.S. Department of Commerce
 Did not have strong evidence that the imported
fish were being sold in America more cheaply
than in Vietnam, or below their cost of
production
 Declared Vietnam a “nonmarket” economy
 Dumping tariffs: 37-64% (permanent)

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Vietnamese catfish
 This nonmarket designation
 Should not have been used
 Because the U.S. government was encouraging
Vietnam to become a market economy

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EFFECTS OF ALTERNATIVE TRADE

POLICIES
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EFFECTS OF ALTERNATIVE TRADE

POLICIES
 The effects of the major instuments of trade policy can be
usefully summarized by Table 8- 1, which compares the effect
of four major kinds of trade policy on the welfare of
consumers, producers, the goverment, and the nation as a
whole.
 This table does not look like an advertisement for
interventionist trade policy. All four trade policies benefit
producers and hurt consumers. The effects of the policies on
economic welfare are at best ambiguous; two of the policies
definitely hurt the nation as a whole, while tariffs and import
quotas are potentially benefcial only for large countries that can
drive down world prices.
 Why, then, do governments so often act to limit imports or
promote exports?
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Case Study 8-5 Rising Tariff Rates with

Degree of Domestic Processing
FIGURE 8-4 Pre- and Post-Uruguay Round Cascading Tariff

Structure in Industrial Countries.
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18/10/2020

Instruments of trade policy

8 Trade Restrictions: Tariffs

 While it is generally accepted that free trade

Tariff and Non-tariff barriers

Types of tariff barriers

Ad valorem tariff Specific tariff Compound tariff

Types of non-tariff barriers

Voluntary Export Restraints (VER)

Local content requirements

Technical, Administrative, and Other

 Import vs. export tariffs

 An export tariff is a tax on exported

 Import vs. export tariffs

 Import vs. export tariffs

 Import vs. export tariffs

 Tariffs have been sharply reduced since

 Tariffs average 5 percent or less on industrial

Resulting Effects of Tariff

Resulting Effects of Tariff

Resulting Effects of Tariff

Resulting Effects of Tariff

Resulting Effects of Tariff

Case Study 8-1 Average Tariff on

Case Study 8-2 Average Tariffs on

9 Nontariff Trade Barriers

 Though tariffs have historically been the most

Types of non-tariff barriers

Voluntary Export Restraints (VER)

Local content requirements

Technical, Administrative, and Other

A quota is a direct quantitative restriction

Import quotas are used to protect

TABLE 5.1 Examples of U.S. import quotas*

Tariff-Rate Quota: A Two-Tier

© 2011 Cengage Learning. All

TABLE 5.2 Examples of U.S. tariff-rate quotas

Product Within-Quota Import-Quota Over-Quota

Import Quota vs. Equivalent Import Tariff

 Import quota involves distribution of import

Import Quota vs. Equivalent Import Tariff

 Import quota limits imports to specified levels

Import Quota vs. Equivalent Import Tariff

 Because import quota is less “visible, domestic

Voluntary Export Restraints (VERs)

© 2011 Cengage Learning. All

Voluntary Export Restraints (VERs)

To allow industrial nations to appear to

To moderate the intensity of international

Tend to be more costly than tariffs

Less effective in limiting imports than

Study: three major U.S. voluntary

© 2011 Cengage Learning. All

© 2011 Cengage Learning. All

• Granted to producers of goods that

• Net price received by the producer =

© 2011 Cengage Learning. All

 The granting of tax relief to exporters or

FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.