Non-Tariff Trade Barriers

Question 1

What examples are there of non-tariff trade barriers?

Answer 1

• Import quotas
• Voluntary export restraints
• Regulations
• Anti-dumping
• Export subsidy

Question 2

Why have non-tariff barriers increased?

Answer 2

• WTO introduced different barriers in order to reduce tariffs
• Tariffs have decreased over time as many countries are now members of the WTO

Question 3

What is a quota? and different types

Answer 3

• A quota is a direct quantitative restriction on the amount of a commodity allowed to be imported or exported

• Import quota
• Export quota inc voluntary export restraints

Question 4

What is an import quota?

Answer 4

Quantitative restriction imposed by an importer country on imports

Question 5

What is an export quota?

Answer 5

Quantitative restriction imposed by a export country e.g. china had a rare metal so restricted the exports of that metal

Question 6

Explain the import quota graph

Answer 6

• Quota of 40 units increases domestic price so supply increases and demand falls
• Allows importers to buy at the lower world price and then sell at the quota price which generates a profit

Question 7

What is the role of a quota rent?

Answer 7

The role of quota rents is similar to the role of tariff

revenue if the government gets the quota rent

Question 8

What are different forms of quota rent distribution?

Answer 8

• Auction the import licenses in a competitive market. Government gets the revenue
• Government decides the importers and provides the import licenses freely. The importers reap the revenue”.

Question 9

What are the issues with the distribution of quota rent?

Answer 9

• What are the criteria to select the importers? Efficiency? Connection to governemnt?
-can lead to bribery in getting a license leading to no welfare gain

Question 10

What are the overall welfare effects of an import quota?

Answer 10

• Producer surplus increase and consumer surplus fall (higher price and less consumption)
• Quota rent is a gain
• Overall net effect is a deadweight loss

Question 11

What are the main differences between an import quota and a tariff?

Answer 11

• The impacts of a market change
• Quota rent vs tariff revenue
• Trade effects

Question 12

Explain the impact of market change difference of tariff and quota

Answer 12

For a demand shift:
• For a tariff, domestic price and production stays the same but imports increase
• For a quota, there is an increase in the domestic price and production while the import quantity remains the same (shifts up to a new price)

Question 13

Explain the Quota rent vs tariff revenue difference of tariff and quota

Answer 13

• Tariff revenue is the revenue of the government

* but quota rent can be distributed differently

Question 14

Explain the Trade effects difference of tariff and quota

Answer 14

• Import quota limits imports to the specified level with
certainty
• Trade effect of an import tariff may be uncertain (shape or elasticity of demand and supply)

Question 15

What is an example of an import quota?

Answer 15

The Multifibre Arrangement (MFA)

Question 16

Explain The Multifibre Arrangement (MFA)

Answer 16

1) The MFA allowed industrial countries to restrict imports of textile and apparel products from developing counties.
2) very detailed and specified the amount of each product that each developing country could sell to the countries inc US, Canada and Europe.
3) expired on January 1 2005.

Question 17

What were the impacts of removing the MFA?

Answer 17

• Growth in export from China e.g. jerseys by 1000% and other countries
- Exports to US in 2005 rose by more than 40%.
• Drop in export price e.g. china by nearly 40%
• quality downgrading

Question 18

What is quality downgrading in relation to removing thee MFA?

Answer 18

• low priced goods had larger price drops than high-priced goods so
• likely demand shift to the low-priced goods, suggesting a “quality-downgrading”
• or when US applying the quota, there is a “quality-upgrading” effect.
• Given the quantity restriction, exporting firms would have an incentive to export high-priced goods.

Question 19

What are voluntary export restraints?

Answer 19

A voluntary export restraint exists when the
exporting nation voluntarily restricts its exports to
a numerical limit

Question 20

Explain a voluntary export restraint

Answer 20

• Generally done to reduce the likelihood of the importing country imposing some other form of
barrier to trade
• Welfare effects similar to import quota but quota rent instead goes to foreign producer- as they raise their price due to the set amount to the import countries price level

Question 21

What is an example of a voluntary export restraint?

Answer 21

Before 1981-Japan exported a lot leading to 1/5 fall in car production and job loss
• so VER agreed but Japan increased price

Question 22

Explain the regulations barrier to trade?

Answer 22

• Regulations may serve as barriers to international trade by raising the costs of imported products through safety or health requirements
• or Gov purchasing restrictions must be biased against foreign goods e.g.Buy American Act of 1933

Question 23

What is the brexit context of regulations?

Answer 23

UK gov doesn’t want to stick by EU regulations of trade as it could impact their ability to trade with other countries

Question 24

When does dumping exist?

Answer 24

It exists when the price in the foreign
market
• is lower than the price in the domestic country; or
• is lower than the costs of production

Question 25

Why does dumping occur?

Answer 25

* Profit-seeking, e.g. persistent dumping * or a strategy to acquire monopoly power and raise the price in the future, e.g. predatory dumping (achieve market share and drive out competition)

Question 26

Is dumping profitable and why?

Answer 26

* Dumping is profitable for exporters despite the price being lower than average cost because marginal costs are still less than the exporting price * Dumping is not profitable for domestic firms as they will make a loss

Question 27

What is the outcome of dumping?

Answer 27

Because of low prices, domestic products cannot compete with the dumping products

Question 28

What is the process of enacting anti-dumping regulations?

Answer 28

* A country that suspects dumping will start anti-dumping investigations by checking the difference between the exporters AC and their domestic price * Any evidence can cause a duty to be imposed

Question 29

What does the anti-dumping (countervailing) duty allow in the US?

Answer 29

US international trade law allows for the imposition of a tariff (duty) just sufficient to raise the domestic price to either the foreign price or the average costs of production. (find example )

Question 30

What are export subsidies?

Answer 30

Export subsidies are the direct payments, or the granting of tax relief to exporters, or subsidized loans to foreign buyers to stimulate a nation’s exports.

Question 31

What are two examples of export subsidies?

Answer 31

* Export subsidies in agriculture. e.g. Common Agricultural Policy (CAP)-per unit support * Export subsidies in High-tech industries. e.g. aircraft industries in both Europe and US

Question 32

Explain the per-unit export subsidy graph?

Answer 32

* Takes the view of exporting country so prices above equilibrium * e..g export price is 70 but you get 80 * Higher price means more exports

Question 33

What is the net welfare effect of a per unit export subsidy

Answer 33

• Consumer surplus falls with higher price -(A+B) • Producer surplus increases-higher price + (A+B+C) • Government revenue: falls because of subsidy -(B+C+D) • Overall welfare: falls with deadweight loss -(B+D) hence why economists advocate free trade

Question 34

Why are export subsidies banned by the WTO?

Answer 34

* Potential to distort competition * If firm has AC above the price in free trade they will exist the market but subsidy allows them to export and stay in the market * Could promote inefficient business

Question 35

What diagram can be used to show the strategic use of export subsidy?

Answer 35

Payoff matrix between only two major players ina n industry e.g. boeing and airbus

Question 36

What is the payoff matrix outcome (nash equilibrium) without an export subsidy?

Answer 36

* If Boeing produces, then the best strategy for airbus is not to produce and vice versa * so nash equilibrium for both firms is (produce, not produce) and (not produce, produce) * who that produces benefits

Question 37

If one business (airbus) gets an export subsidy, how does the payoff matrix change?

Answer 37

* If Boeing produces, the best strategy for Airbus is to produce as the subsidy exceeds the loss * If boeing does produce, airbus should * If airbus produces, boeing should not as no subsidy to cover loss * If airbus doesn't produce, boeing should (Not produce , Produce) is the Nash equilibrium for Boeing and Airbus * Airbus now produces and Boeing does not produce. Airbus now gains

Question 38

What are the welfare effects of an export subsidy for strategic use?

Answer 38

* Export subsidy can be beneficial to the society welfare as extra profits are bigger than welfare and airbus earns more profit in int. markets (similar to tariff in large country)- * but this affect can also be negative depending in the size of the subsidy or if other firm has a cost advantage