Theoretical_Trade_Barrier_Flashcards

Question 1

What is a Voluntary Export Restraint (VER), and how does it affect trade?

Answer 1

A VER is an agreement where an exporting country voluntarily limits the quantity of exports to avoid more restrictive trade barriers from the importing country.

Example: 1981 agreement between Japan and the US to cap car exports at 1.68 million vehicles/year

Question 2

What are the effects of an import quota under perfect competition? (Feenstra & Taylor, Ch. 8)

Answer 2

An import quota reduces imports, raises domestic prices, increases domestic production, and decreases consumption. Quota rents emerge and the welfare effects are similar to tariffs, though distribution differs.

Question 3

How restrictive are non-tariff barriers compared to tariffs?

Answer 3

According to Walters and Blake (1992), non-tariff barriers can be up to 10 times more restrictive than equivalent tariffs, particularly due to their indirect and opaque effects.

Question 4

What would be the impact of a 25% uranium quota on domestic production? (Considine, 2019)

Answer 4

A 25% quota would raise domestic uranium prices by 140% and average prices by 21%, significantly boosting domestic producer revenues.

Question 5

What are the estimated economic effects of a 25% uranium quota on the US economy (2018–2022)? (Considine, 2019)

Answer 5

Domestic mining revenue ↑ by ~$4.4 billion
Nuclear power revenue ↓ by ~$1.2 billion/year
Average electricity prices would increase, causing downstream industry costs to rise

Question 6

What model did Considine use to assess uranium quota impacts?

Answer 6

He used a two-region econometric model (US and Rest of World), based on 1994–2016 data, to simulate how quotas would affect prices, production, and trade flows.

Question 7

What are import quotas?

Answer 7

Import quotas are limits on the quantity of a specific good that can be imported into a country. These are non-tariff trade barriers used to protect domestic industries by directly controlling the volume of imports, regardless of price.

Question 8

What are voluntary export restraints (VERs)?

Answer 8

VERs are self-imposed limits by an exporting country on the quantity of goods exported to a specific country. They are usually established to avoid harsher trade restrictions from the importing country.

Question 9

What are regulations as a non-tariff trade barrier?

Answer 9

Regulations involve safety, health, environmental, or technical standards that must be met for products to enter a country. While not price-based, they can effectively block or limit imports.

Question 10

What is anti-dumping in international trade?

Answer 10

Anti-dumping measures are tariffs or duties imposed on imports believed to be priced below fair market value, typically to protect domestic producers from unfair competition.

Question 11

What is an export subsidy?

Answer 11

An export subsidy is a payment or tax relief granted by the government to domestic producers to make their exports cheaper and more competitive on the global market.

Question 12

What are 5 examples of non-tariff trade barriers?

Answer 12

Import quotas
Voluntary export restraints
Regulations
Anti-dumping measures
Export subsidies

Question 13

What is a quota in international trade?

Answer 13

A quota is a direct quantitative restriction on the amount of a commodity that can be imported or exported.
Example: Import quotas limit the total amount of a product that can be imported into a country.

Question 14

What are quota rents, and how are they distributed?

Answer 14

Quota rents are the economic profits earned when the domestic price exceeds the world price due to an import quota. They can be captured by:

The government (if licenses are auctioned)
Importers (if licenses are given for free)
Distribution can be based on efficiency, political ties, or past performance.

Question 15

How do import quotas and tariffs differ in economic impact?

Answer 15

Quotas restrict quantity; tariffs raise price.
Demand increases lead to higher prices under quotas, more imports under tariffs.
Revenue from tariffs goes to the government; quota rents may go to importers.
Quotas provide certainty in volume; tariffs’ effects depend on market responses.

Question 16

What was the Multifibre Arrangement (MFA)?

Answer 16

The MFA was a trade agreement allowing developed countries to restrict textile and apparel imports from developing countries. It imposed detailed quotas per product and country. It expired on January 1, 2005.

Question 17

What were the impacts of the MFA removal on Chinese exports?

Answer 17

After the MFA expired in 2005:

Tights and pantyhose exports to the EU rose 2,000%
Pullovers and jerseys rose nearly 1,000%
Trousers more than tripled
Exports to the US rose over 40%

Question 18

What happened to export prices after the MFA was removed?

Answer 18

Export prices dropped sharply. For example, China’s prices for previously constrained goods exported to the US dropped by 38% between 2004 and 2005.

Question 19

What is the ‘quality-downgrading’ effect post-MFA?

Answer 19

With quotas gone, lower-priced goods dropped more in price than high-priced ones. Exporters prioritized volume over price, leading to a shift toward lower-quality goods. Under quotas, exporters preferred high-quality goods to maximize profit per unit.

Question 20

Why did the US consider uranium import quotas according to Considine (2019)?

Answer 20

Prices fell 2012–2017
Production dropped 60% by 2017
93.2% of uranium was imported
US production fell from 6.3M lbs (1996) to 2.28M lbs (2017), the lowest since 2005
2018 output was nearly 50% lower than early 2017

Question 21

What is a Voluntary Export Restraint (VER), and how does it affect trade?

Answer 21

A VER is an agreement where an exporting country voluntarily limits the quantity of exports to avoid more restrictive trade barriers from the importing country.
- Similar to an import quota in economic effect
- Quota rent goes to foreign producers, not the importing country’s government
- Example: 1981 agreement between Japan and the US to cap car exports at 1.68 million vehicles/year

Question 22

What are the core readings for understanding non-tariff trade barriers and import quotas?

Answer 22

Feenstra & Taylor, International Economics, Chapters 8 & 10
Salvatore, International Economics, Chapter 9
Considine (2019), The Market Impacts of US Uranium Import Quotas, Resources Policy Vol. 63

Question 23

What are the effects of an import quota under perfect competition? (Feenstra & Taylor, Ch. 8)

Answer 23

An import quota reduces imports, raises domestic prices, increases domestic production, and decreases consumption. Quota rents emerge and the welfare effects are similar to tariffs, though distribution differs.

Question 24

How does a tariff reduction affect welfare in a small country? (Feenstra & Taylor, Ch. 8)

Answer 24

Tariff reduction lowers domestic prices, raises consumer surplus, reduces producer surplus, and can increase or decrease tariff revenue. Overall, it reduces deadweight loss and improves efficiency.

Question 25

What is the effect of export subsidies in agriculture and high-tech industries? (Feenstra & Taylor, Ch. 10)

Answer 25

Export subsidies increase domestic producer prices, encouraging exports. However, they distort markets and reduce national welfare due to inefficient production and losses in consumer surplus.

Question 26

What types of non-tariff barriers are discussed in Salvatore, Ch. 9?

Answer 26

Import quotas, voluntary export restraints, technical and administrative regulations, international cartels, anti-dumping policies, export subsidies, strategic and industrial policies.

Question 27

How restrictive are non-tariff barriers compared to tariffs?

Answer 27

According to Walters and Blake (1992), non-tariff barriers can be up to 10 times more restrictive than equivalent tariffs, particularly due to their indirect and opaque effects.

Question 28

What would be the impact of a 25% uranium quota on domestic production? (Considine, 2019)

Answer 28

A 25% quota would raise domestic uranium prices by 140% and average prices by 21%, significantly boosting domestic producer revenues.

Question 29

What are the estimated economic effects of a 25% uranium quota on the US economy (2018–2022)? (Considine, 2019)

Answer 29

Domestic mining revenue ↑ by ~$4.4 billion Nuclear power revenue ↓ by ~$1.2 billion/year Average electricity prices would increase, causing downstream industry costs to rise

Question 30

What model did Considine use to assess uranium quota impacts?

Answer 30

He used a two-region econometric model (US and Rest of World), based on 1994–2016 data, to simulate how quotas would affect prices, production, and trade flows.

Question 31

What is a real-world example of an import quota?

Answer 31

The U.S. sugar import quota limits the volume of foreign sugar entering the market, protecting domestic producers and keeping prices above world market levels.

Question 32

What is a real-world example of a Voluntary Export Restraint (VER)?

Answer 32

In 1981, Japan agreed to a VER with the US, limiting car exports to 1.68 million units/year to avoid harsher US trade measures.

Question 33

What is a real-world example of regulations acting as a non-tariff barrier?

Answer 33

The EU ban on hormone-treated beef restricts US and Canadian exports on health grounds, despite WTO challenges.

Question 34

What is a real-world example of anti-dumping measures?

Answer 34

In 2023, the US imposed anti-dumping duties on steel imports from Vietnam, citing unfairly low prices and subsidy circumvention.

Question 35

What is a real-world example of an export subsidy?

Answer 35

India provides export subsidies to textile and sugar producers under schemes like MEIS, challenged at the WTO by Australia and Brazil.

Question 36

What is a real-world example of a technical barrier to trade (TBT)?

Answer 36

The EU's REACH regulation on chemical safety acts as a TBT by imposing strict compliance costs on exporters from developing countries.

Question 37

What is a real-world example of a quality upgrading response to quotas?

Answer 37

Under the MFA, Chinese firms exported higher-quality garments to maximize revenue under limited export volumes.

Question 38

What is a real-world example of a country using non-tariff barriers for strategic industry development?

Answer 38

South Korea restricted imports to support strategic sectors like steel and electronics during its 1960s–1980s industrialization.

Question 39

What is a real-world example of a quota rent captured by private firms?

Answer 39

US peanut import licenses were given to domestic firms, allowing them to resell imports at a markup and capture the quota rent.

Question 40

What is an import quota?

Answer 40

An import quota is a direct restriction on the quantity of a specific good that can be imported into a country during a set period. It raises domestic prices by limiting supply. Analysis: Quotas protect domestic industries from foreign competition but distort market equilibrium, leading to inefficiency and potential welfare losses compared to free trade.

Question 41

How do import quotas affect prices, supply, and welfare?

Answer 41

Import quotas reduce imports and raise domestic prices. Domestic supply increases, but consumer welfare declines due to higher prices and reduced choices. Analysis: Deadweight loss arises from: 1. Consumption distortion – fewer units are consumed at higher prices. 2. Production inefficiency – domestic producers may be less efficient but are protected, leading to resource misallocation.

Question 42

What is a quota rent, and who captures it?

Answer 42

Quota rent is the economic surplus that results when domestic prices rise above world prices due to quotas: (Domestic Price - World Price) x Import Quantity. Analysis: If licenses are auctioned, the government captures this value (like a tariff). If licenses are free, importers or foreign firms (under VERs) capture the rents, raising concerns about fairness and efficiency.

Question 43

How do tariffs and quotas compare in welfare outcomes?

Answer 43

Both reduce imports and raise domestic prices. Tariffs generate government revenue, reducing net welfare loss. Quotas may lead to private capture of rents, increasing distortion. Analysis: Deadweight loss is present in both, but greater under quotas if rents are not captured efficiently. Elastic demand or supply conditions exacerbate the welfare losses.

Question 44

Why do consumers lose under quotas, and how big is the welfare loss?

Answer 44

Consumers face higher prices and reduced availability. Their consumer surplus shrinks significantly. Analysis: The more elastic the demand, the greater the decline in consumption and the larger the deadweight loss. The loss is especially severe if quota rents are not recycled into the economy (e.g., via government revenue).

Question 45

Who gains under import quotas, and why?

Answer 45

Domestic producers benefit from higher prices and sales. License holders gain if import rights are freely allocated. Analysis: Gains are concentrated among a small group (producers, importers), while losses are spread across many consumers. This imbalance creates strong lobbying for protection, despite overall welfare losses.

Question 46

How do import quotas impact efficiency compared to free trade?

Answer 46

Import quotas disrupt efficient allocation of resources. High-cost domestic producers may stay in the market while more efficient foreign producers are excluded. Analysis: Total surplus (consumer + producer) is lower than under free trade. Quotas reduce incentives for innovation and efficiency in the protected industry.

Question 47

What are the long-term risks of using import quotas?

Answer 47

Over time, domestic industries may become complacent and lose competitiveness. Countries relying on quotas may face retaliatory trade measures or WTO disputes. Analysis: Quotas can entrench inefficiencies and provoke trade wars. They should be used cautiously and often come with high economic and diplomatic costs.

Question 48

How does the elasticity of demand and supply affect the welfare impact of quotas?

Answer 48

More elastic demand means larger reductions in quantity demanded when prices rise, leading to greater consumer welfare loss. More elastic supply results in a larger increase in domestic production and more inefficiency. Analysis: Elastic markets suffer greater deadweight loss from quotas.

Question 49

What happens if domestic demand increases under a quota?

Answer 49

The domestic price increases further, as the quantity of imports is fixed. Domestic production rises, but consumers face even higher prices and welfare losses. Analysis: Quotas don't adjust to demand changes, making them more distortionary during demand surges.

Question 50

What happens if world prices fall under a quota system?

Answer 50

Domestic prices remain high because the quota limits access to cheaper imports. Importers/license holders gain more rents. Analysis: Quotas insulate domestic markets from beneficial global price changes, reducing allocative efficiency.

Question 51

Why might a government prefer quotas over tariffs?

Answer 51

Quotas allow precise control over quantities and are visible tools for supporting specific industries. Governments may use them to reward allies through license allocations. Analysis: Quotas serve both economic and political objectives, often at the cost of efficiency.

Question 52

Why are quotas often criticized in international trade negotiations?

Answer 52

They are less transparent, prone to favoritism, and may violate WTO rules. Analysis: Quotas are considered more distortive and politically motivated than tariffs, often leading to disputes and retaliation.

Question 53

How do import quotas influence innovation and productivity?

Answer 53

In the short term, domestic firms expand output. In the long run, protection reduces competitive pressure, leading to less innovation and lower productivity. Analysis: Quotas can delay necessary reforms and weaken industrial dynamism.

Question 54

What is a welfare-maximizing alternative to quotas?

Answer 54

Tariffs and tariff-rate quotas (TRQs) are better. TRQs combine a low tariff for initial imports and a higher rate for excess. Analysis: These tools preserve market signals and generate government revenue, minimizing deadweight loss.

Question 55

How do quotas affect income distribution within a country?

Answer 55

They raise prices, disproportionately hurting low-income consumers. Producers and license holders benefit most. Analysis: Quotas are regressive and worsen inequality by transferring income from consumers to protected interests.

Question 56

What is the role of political economy in sustaining import quotas?

Answer 56

Small producer groups are well-organized and lobby effectively, while dispersed consumers do not. Analysis: The collective action problem means that inefficient quotas persist due to unequal political power.

Question 57

What is an import quota?

Answer 57

An import quota is a government-imposed limit on the quantity of a specific good that can be imported into a country during a given time period.

Question 58

True or False: Import quotas can lead to higher prices for consumers.

Answer 58

True

Question 59

Fill in the blank: Import quotas are often used to protect ________ from foreign competition.

Answer 59

domestic producers

Question 60

How do import quotas affect the supply of goods in a domestic market?

Answer 60

Import quotas reduce the supply of goods, which can lead to an increase in prices.

Question 61

What is the primary goal of implementing import quotas?

Answer 61

The primary goal is to protect domestic industries and jobs from foreign competition.

Question 62

Multiple Choice: Which of the following is a potential negative impact of import quotas on consumers? A) Increased variety of products B) Higher prices C) Increased competition D) None of the above

Answer 62

B) Higher prices

Question 63

True or False: Import quotas can lead to a decrease in domestic production.

Answer 63

False

Question 64

What is one way import quotas can benefit domestic producers?

Answer 64

By limiting foreign competition, domestic producers may experience increased sales and market share.

Question 65

Fill in the blank: An import quota is typically enforced by ________ on the quantity of imports.

Answer 65

legal restrictions

Question 66

What is a likely consequence for exporters when an importing country imposes quotas?

Answer 66

Exporters may face reduced market access and potential loss of sales.

Question 67

Multiple Choice: Which sector is most likely to be protected by import quotas? A) Technology B) Agriculture C) Service Industry D) None of the above

Answer 67

B) Agriculture

Question 68

True or False: Import quotas can create black markets for restricted goods.

Answer 68

True

Question 69

What economic theory often supports the use of import quotas?

Answer 69

Protectionism

Question 70

Fill in the blank: Import quotas can lead to ________ in the long run if domestic industries do not innovate.

Answer 70

stagnation

Question 71

How might import quotas impact international relations?

Answer 71

They can lead to trade tensions and retaliatory measures from affected countries.

Question 72

What is consumer surplus, and how is it affected by import quotas?

Answer 72

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Under import quotas: - Domestic prices rise due to restricted supply - Consumer surplus falls as buyers pay more and buy less - The loss is represented by a large triangle under the demand curve between the old and new prices Easy takeaway: Consumers lose both value per unit and quantity of goods they can buy.

Question 73

What is producer surplus, and how is it affected by import quotas?

Answer 73

Producer surplus is the difference between the price producers receive and their minimum acceptable price (cost of production). Under import quotas: - Domestic prices increase - Producers sell more at a higher price - Producer surplus increases, shown as an expanding area under the price line and above the supply curve Easy takeaway: Producers gain from quotas because they face less competition and higher prices.

Question 74

What is deadweight loss in the context of import quotas?

Answer 74

Deadweight loss (DWL) is the lost total surplus — value that disappears from the economy due to inefficiency. Under quotas, DWL has two parts: 1. Production distortion – domestic firms produce more inefficiently 2. Consumption distortion – consumers buy less than under free trade Visual: Two small triangles between demand and supply curves, one for production, one for consumption.

Question 75

Why do quotas lead to more deadweight loss than tariffs (in some cases)?

Answer 75

Tariffs generate government revenue, partially offsetting DWL. Quotas may give that rent to private importers or foreign firms. Easy takeaway: Unless licenses are auctioned, quotas waste more economic surplus than tariffs.

Question 76

How can the method of quota license allocation affect welfare outcomes?

Answer 76

- Auctioned licenses → Revenue to government → Lower net DWL - Free licenses → Private importers gain quota rent → Public loses value - Foreign firms gain under VERs → Wealth leaves the country Easy takeaway: The management of quotas decides the extent of welfare gain or loss.

Question 77

What are the key takeaways for consumer and producer welfare under quotas?

Answer 77

- Consumers lose: pay more, consume less - Producers gain: sell more at higher prices - Importers/license holders may gain - Overall society loses: deadweight loss + rent inequality Exam insight: Contrast CS and PS, then identify who captures or loses quota rents.