9 Week (Tues-Thurs., 10/1113/2011)
Finish: Chapter 9
Nontariff Barriers (NTBs)
Begin: Chapter 10
Arguments For/Against
Protection
Current Major U.S. Quota
U.S. Sugar Market
P
S
quota
S+
23
14
Pw
D
10.3
12.7 16.9
18.5
Q (bll.
U.S. Sugar Market
Loss in Consumer Surplus:
$1.592 billion per year
Loss per U.S. consumer (300 million):
$5.25 per yr
Producer Surplus per U.S. Grower
(2,308):
$446,577 annually
Side note on other effects: Lifesavers recently closed U.S.
plants and moved to Canada; 90 percent of lifesaver is
Losses
Deadweight Losses
Triangle d consumption inefficiency loss
Triangle b production efficiency loss
Other Losses of Quota
Potential loss of tariff revenue, Cq
Automatically more restrictive in a growing market
which adds to loss of b and d
Corruption or Waste of Resources to obtain import
permit
Growing Market & Tariff
P
S
Pw + t
Pw
D
Qs Qd
Q
Tariff & Growing Market
No Increase in b or d loss
P
S
additional
Pw + t
cost =
Pw
Pw+t
Quota & Growing Market
Begin with following
P
S
quota
S+
Pd
Pd
Pd= Pw
D
Qd
Qd
Quota & Growing Market
Increase in Demand
P
quota
S
S+
Pd
Pd
Pd= Pw
D
D
Quota & Growing Market
HIGHER Pd
P
quota
Pd
Pd
Pd= Pw
D
S
S+
D
Quota & Growing Market
Increase in b and d
P
quota
Pd
Pd
Pd= Pw
D
S
S+
D
Four Other Common NTBs
Voluntary Export Restraint
Domestic Content Requirement
Government Procurement
Product Standards
1. Voluntary Export Restraint
Foreign suppliers convinced to
volunteer to restrain export sales to
U.S. market or face potentially more
restrictive policy
Quota administered by foreigners
Foreign suppliers receive area C -- a
bribe (or a subsidy in the case of
Japanese auto makers.)
2. Domestic Content Requirement
Product sold in a country must have a
specified minimum amount of
domestic product value.
Ex. 66% U.S. made
Barrier to products that do not satisfy
content rule
Unequivocally protectionist
Ex. VW plant in Puebla, Mexico
3. Government Procurement
Governments required to give limited
or total preference to domestic
producers
Sizable since 10% of all sales
Equivalent to quota of zero
Government typically pays higher
costs
Eg. Buy America Act of 1933
Buy U.S. product if Pd < Pw(1+6%)
If depressed area if Pd < Pw(1+12%)
50% of all DOD purchases must be domestic
goods
Eg. Ship American Act
of all U.S. government cargoes (foreign aid,
subsidized grain, etc.) and all military cargoes
At Times Hard to Implement
City government of Greece, New York
(suburb of Rochester, NY) required to
buy American
Bought a John Deere earthmover
priced at $55,000 instead of a
Komatsu that was available at
$40,000
Later discovered that the Deere was
made in Japan and the Komatsu was
made in Illinois.
Product Standards
To protect consumers, national
governments establish safety and
health standards that products must
satisfy.
Legitimate activity of governments
But, often disguised form of
protection.
Product StandardsEnsure
Safety
Japanese ban on aluminum
bats
Japanese ban on foreign skis
French forklift trucks must have
brake pedal on left, 60 volt
battery for safety reasons
(German on right, 50 volt
battery)
Product Standards --Protect
Health
French ban on beef from cattle raised
in high altitudes (excluded Swiss and
German beef)
U.S. ban import of tomatoes under a
certain diameter (affected all vineripened Mexican tomatoes)
German ban on non-fizzy mineral water
(argued fizz killed bacteria; German
producers specialize in fizzy kind)
German ban on adulterated beer
Belgium required import of margarine in
cubes, not sticks or round balls
Recent Product Standards Case
Growth Hormones
EU ban on meat from livestock treated with
growth hormones
90% of U.S. beef production treated with growth
hormones; also used in every major meatproducing nation outside of Europe
No scientific evidence exists to show
that growth hormones do any harm at
the doses employed
The three main hormones used make up only a
fraction of what people ingest when they eat other
foods or what the human body produces by itself
All international bodies have ruled against EU (WTO) or ruled
the growth hormone use in beef production safe (WHO,
UNFAO, and even scientific bodies within the EU
NTBs
Growing form of protection
Restrict quantity, raise cost of entering a
market, or generate uncertainty
Have deadweight losses that potentially
exceed those of more transparent tariffs
Chapter 10
Arguments For/Against
Protection
Arguments For & Against
Protection
1. Revenue
A.
Actually efficient fiscal policy for poor nation)
2. National Defense
3. Domestic Employment
A.
B.
C.
D.
Alters mix of employment
Problems if protected product used as input
Problem with Exchange Rate Effect
Costly
4. Infant (or Special) Industry
A.
B.
C.
Traditional Argument
Scale economies
Externality
5. Foreigners Cheat/Playing Field Not Level
Other Reasons for Protection
1. Trade Law Exceptions
A. Escape Guard
B. Offset Unfair Trade Practices
A.
B.
Antidumping
Countervailing Duty
2. Politicians Seek Protection
A. Avoid sharp income distribution
effects
B. Special Interest Argument
1. National Defense
LEGITIMATE CONCERN
A country must have access to certain key products
to maintain the national defense.
IN ADDITION
Imports and supply lines may be disrupted during
war.
HENCE
Use tariff to encourage home production.
Amid Tension, China Blocks Vital Exports to
Japan
The New York Times (9/22/2010)
Chinese customs officials are halting
shipments to Japan of so-called rare
earth elements, preventing them from
being loading ships aboard at Chinese
ports.
Didymium oxide is a rare earth mineral
used in delicate electronicsproducts like
hybrid cars, wind turbines and guided
missiles.
BUT, is Tariff the Appropriate
Policy?
Is Home Production Necessary?
What type of conflict is expected?
Local, regional, or global different impact supply lines
What is likely length of conflict and amount needed?
Can the essential product be produced or stockpiled?
If so, use peacetime imports used to build the stockpiles.
If necessary, use specificity rule:
Best to use a subsidy to build or maintain national
production capabilities.
Avoids additional consumption loss of tariff
As budget item, subject to review
Specificity Rule
If the government has an objective, it should
attempt to attain it at the lowest cost
That is, minimize the amount of economic
inefficiency created reduce b and d.
Generally this means: identify the specific
problem or objective clearly, then use a policy to
attack the problem directly.
Decision: Domestic Capacity Desirable
Price
Sd
Pd
Pw
Decision: Domestic Capacity Desirable
Apply Tariff
Price
Sd
Pd
Pw+tariff
Pd
Pw
Decision: Domestic Capacity Desirable
Successful at What Cost?
Price
Sd
Pd
Pw+tariff
Pd
Pw
Domestic Subsidy: Pd=Pd + s
Price
S
Pd
+s
Pd
Pw
Domestic Subsidy: Pd=Pd + s
Price
S
Pd
+s
Pd
Pw
Domestic Subsidy: Pd=Pd + s
Price
S
Pd
a
Pd
Pw
b
Domestic Subsidy: Pd=Pd + s
Price
S
deadweight
loss
Pd
Normative Effects
Government:
(a+b)
- (s x Qs) = -
Producers Gain:
= + a
NATION WELFARE
-b
SUBSIDY -b
=
versus TARIFF
2. Domestic Employment
EFFECTIVENESS SEEMS EVIDENT
No doubt, trade protection preserves jobs in
protected industry
MODERN MERCANTILISM ARGUMENT
New Modern manifestation of Mercantilism
Trade is zero sum game
Ones loss is others gain
Imports are a loss, exports a gain
Our jobs versus their jobs
Impact on Domestic
Employment
A. Mix of jobs altered temporarily
In long-run, protection has no impact on the
aggregate number of jobs.
Impact on Domestic
Employment
B. What if protected product is input like
steel?
price
Sd
home
Psteel at
Impact on Domestic
Employment
A. What if protected product is input like
steel?
price
Sd
Sd
Import-Competing Firms that Use Input
Price
Sd
Sd
Pd
Pw
Home Export Firms that Use Input
Price
Sd
Sd
Pw
Pd
Pw
Impact on Domestic
Employment
C. What if reduction in major imported
product like steel impacts exchange rate?
Tariff on Steel
Higher Price of Imported Steel
Cut purchases of imported steel
Supply fewer $s to foreign exchange
mkt
DOLLAR STRENGTHENS
Impact of Stronger Dollar
Price of exports
Pus =
$60 =
$45 =
Price of imports
Pus =
$32 =
$18 =
Puk x E($/)
30 x (2 $/)
30 x (1.5 $/)
Puk x E($/)
12 x (2 $/)
12 x (1.5 $/)
Effect of Stronger Dollar
on Import-Competing Firms
Price
Sd
Pd
Pw
Pd
Pw
Effect of Stronger Dollar on Export
Firms
Price
Sd
Pd
Pd
Pw
Pw
Impact on Domestic
Employment
D. Costly policy for Consumers
Next table illustrates costs of saving jobs
United States
Cost per job saved
European Union
Cost per job saved
= $169,000 per job
saved
Appropriate Policy?
If industry needs assistance, use
specificity rule:
grant a domestic subsidy
Avoids additional consumption loss of tariff
As budget item, subject to review
3a. Infant (or Special) Industry
Traditional Argument: infant needs protection
initially
Profit
+
net revenues
0
losses
-
Is argument valid?
Only valid if capital markets are not available for
borrowing during start-up period.
May be a case for protection in poor countries
Capital markets are underdeveloped or
absent
Historically, infants continue to need protection
in essence, they never grow up and become
competitive since the cold shower effect is
dampened by protection.
3b. Infant (or Special) Industry
Existence of spillovers not captured by industry
P
S
effect
Other Societal Benefits
Knowledge
workers
Output
in LDCs demonstration
Value of
New
Trained
If correct diagnosis, then appropriate policy is a subsidy
3c. Infant (or Special) Industry
Existence of scale economies for a company
Boeing
First one producing wins the market
have
P
BUT BOEING may
true cost
advantage
p
AC (Airbus)
D
Problem With This Case
Hard to identify in practice not
widely applicable
AND, if you can, appropriate policy:
grant a domestic subsidy
Avoids additional consumption loss of tariff
As budget item, subject to review
Other Reasons Why We Observe
Tariffs
World Trade Law Permits Use
to counter unfair trade practices
to provide a respite for domestic producers
Politicians supply protection
To avoid sharp income distribution effects
To get re-elected (special interest model)
4. Trade Law Exceptions
Escape Clause
WTO permits respite to become
competitive
Idea is to reinvest area a
HISTORICALLY
No instance of being successful (even
Harley Davidson diversified)
Steel--Sold off stock/moved into other
sector
4. Trade Law Exceptions
Unfair Trade
WTO emphasizes efficient and fair trade
Antisubsidy
Antidumping
Yet how to define is not clear.
Not evident how to respond.
Predictably abused by governments.
U.S. Antidumping is so notorious that filing is all you
need to do to get a favorable ruling.
5. Politicians Seek Protection
BOTH have empirical support
Politicians concerned about sharp changes in
income distribution
Special interest model:
Politicians need to get re-elected and require
campaign contributions
Small group of domestic producers easy to organize
and get to contribute
Protection may impose small cost on large group
hard to mobilize, but large gain to producers