Solution Manual for International Economics 17th Edition

Solution Manual for International Economics 17th

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 Instructor’s Manual
CHAPTER 5

NONTARIFF TRADE BARRIERS

CHAPTER OVERVIEW

This chapter considers policies other than tariffs which restrict the volume of international trade. Such
policies are known as nontariff barriers to trade and include such practices as import quotas, orderly
marketing agreements, domestic content requirements, subsidies, antidumping regulations, discriminatory
government procurement practices, social regulations, and sea transport and freight restrictions.

The first nontariff barrier considered is the absolute import quota. A quota can be administered on a global
basis or on a selective basis. Import licenses, global quotas, and selective quotas are discussed. It is noted
that quotas and tariffs have many of the same economic effects; however, quotas tend to be more restrictive.
Special attention is given to the revenue effect of an import quota, which may be captured by domestic
importers, foreign exporters, or the domestic government.

The two components of the tariff-rate quota are discussed as well as the requirement that WTO convert all
NTBs to tariffs. The text gives the example of the impact of sugar tariffs on U.S. domestic consumers. Export
quotas and domestic content requirements frame the international trade picture.

The subsidization of domestic producers is another topic investigated in the chapter. Emphasis is placed on
the differences between a subsidy granted to import-competing producers and a subsidy granted to
exporters. It is noted that a subsidy granted to import-competing producers results in a deadweight welfare
loss to the economy of only a protection effect, not a consumption effect.

The chapter discusses the nature and operation of international dumping. The reasons for dumping are
examined as are the impact of dumping on a firm’s revenue and profit. Antidumping regulations are
described along with two related cases involving Whirlpool and Vaughan Bassett Furniture Company.

The chapter concludes by naming other nontariff barriers such as the 1933 Buy American Act, social
regulations, CAFÉ Standards, and sea transport and freight regulations.

After completing this chapter, students should be able to:

• Identify the major nontariff barriers to trade.
• Compare and contrast the effects of import quotas, voluntary export quotas, and tariff-rate quotas.
• Differentiate between an import subsidy and an export subsidy.
• Explain how local content requirements affect a firm’s ability to share production with other nations.

BRIEF ANSWERS TO STUDY QUESTIONS

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.
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 Instructor’s Manual

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 variable 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. . Persistent dumping--in an effort to maximize profits, firms continuously sell abroad at lower
prices than at home. Predatory dumping--firms cut prices overseas to eliminate competitors.

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,
© 2018 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.
Solution Manual for International Economics 17th Edition

Instructor’s Manual
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.

© 2018 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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