The Political Economy of Protectionism II: Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy 1

Session 3B: Protectionism
The Political Economy of Protectionism II
Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy

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Other Barriers To Trade
Non-tariff Barriers

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Introduction
 Nontariff trade barriers (NTBs)
 Have been on the rise since the 1960s
 Encompass a variety of measures such as:
 Import quotas
 Voluntary export restraints
 Subsidies
 Domestic content requirements
 Intended to reduce imports and thus benefit
domestic producers

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Non-Tariff Barriers 1996
Sawyer, 3rd ed, Pearson

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Existing Quotas

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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 be
imported each year
 Selective quotas
 Import quotas allocated to specific countries
 May lead to domestic monopoly of production
 Accusations of favoritism

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Trade and Welfare Effects
 Like a tariff, an import quota affects an economy’s
welfare
 The case of cheese, involving the U.S. in trade with
the E.U. (Fig 5.1)
 Redistributive effect, area a ($5)
 Protective effect, area b ($2.50)
 Consumption effect, area d ($2.50)
• Deadweight loss: Protective effect plus
consumption effect
 Revenue effect, area c ($7.50)

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Allocating Quota Licenses
 Limited imports; allocation by governments

 Issue of import licenses on the basis of historical
share 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 competition
transfers 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 the
market mechanism
 Quota is more restrictive and suppresses
competition
 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 (orderly
marketing agreement)
 Moderate the intensity of international
competition
 Allow less efficient domestic producers to
participate in world markets
 Identical economic effects to equivalent import
quotas, except for being implemented by the
exporting nation
 Conclusion from the viewpoint of the U.S.
economy: Voluntary export restraints tend to be
more costly than tariffs

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Japanese Auto Restraints Put Brakes on U.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 per
job saved being $100,000
 By 1985: Japanese companies open plants in
the U.S.; decline in imports coupled with decline
in 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 product’s total

value to qualify for zero tariff rates
 Purpose: Limit outsourcing
 Pressurizes firms that sell products in the country
to use domestic inputs in production
 Often used by developing countries to foster
domestic automobile production (Table 5.3)
 Welfare effects of an Australian content
requirement 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 government
conditions on key matters
 May not be as superior to other commercial
policies

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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 the
international 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 than
domestic buyers; selling below cost
 Forms of Dumping
 Sporadic dumping: Disposal of excess inventories
 Predatory: Temporary price cuts to eliminate
competition
 Persistent: Indefinite dumping to maximize profits

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International Price Discrimination
 A profit-maximizing firm would benefit from

international price discrimination
 Charge a higher price at home, where competition
is weak and demand is less elastic
 Charge a lower price for the same product in
foreign 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 foreign
merchandise is sold at less than fair value (LTFV)
 ITC determines that LTFV imports are causing or
threatening material injury to a U.S. industry
 Margin of dumping: Amount by which the foreign
market 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 preliminary
determination, estimate of margin
 Special tariff imposed immediately, if evidence
is 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 in
favor 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 in
U.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-Dumping
a. WTO allows trade restrictions to counteract
predatory dumping
b. Difficult to determine dumping
c. Trigger-price mechanism to activate trade
restrictions
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 the
form 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
Union’s 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 Barriers
International Cartels
a. Organization of suppliers located in different nations
[or a group of governments] that agrees to restrict
output and export of a commodity
b. Aim: to increase price, maximize profits
c. Outside individual country’s 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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Industrial Policies…..
Session 3-09 Prof Augustine

H H Tan Econ MBA Global
Economy
41

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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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Economic Sanctions…..

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Labor & Environmental Standards

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Labor & Environmental Standards…..

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Session 3B: Protectionism

The Political Economy of Protectionism II

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

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

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

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

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

 Limited imports; allocation by governments

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

 U.S. sugar industry

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

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

 Tariff-like and quota-like characteristics

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

 Techniques for the administering tariff-rate quotas:

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

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

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

 Stipulate the minimum percentage of a product’s total

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

 Granted to producers to help improve trade positions

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

 Domestic subsidy: Granted to producers of import-

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

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

 A form of international price discrimination

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

 A profit-maximizing firm would benefit from

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

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

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

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

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

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

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

 Antidumping law and currency fluctuations

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

 Government procurement policies

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

 Sea transport and freight restrictions

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

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

Sawyer, 3rd ed, Pearson

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

Session 3-09 Prof Augustine

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson

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

Sawyer, 3rd ed, Pearson