CHAPTER 7 - CHAPTER 7: NONTARIFF BARRIERS AND ARGUMENTS FOR...

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CHAPTER 7: NONTARIFF BARRIERS AND ARGUMENTS FOR PROTECTION Non-tariff barriers to international trade include quotas, subsidies, health and safety standards and government procurement policies. QUOTAS Government-imposed limits on the quantity or value of traded goods. Example . The United States government limits imports of sugar to no more than 1.25 million tons in a particular year. There are quotas on milk, cream, butter, margarine, peanuts. Effect on Domestic Prices Because quotas restrict foreign competition they tend to raise domestic price and thus imports fall. Embargoes: A type of quotas that entirely eliminates trade Quotas are viewed as being more restrictive than tariffs. Perhaps, this is why quotas on imports of manufactured products have been outlawed by GATT (WTO). Exceptions are allowed with agricultural products. Countries can impose quotas indirectly by obtaining agreements from exporting countries to “voluntarily” limit exports. Those agreements are called voluntary exports restraints (VER) Quotas are allocated on the basis of licenses . The recipient may be foreign or domestic. The national welfare impact of this quota system depends in part on who gets the licenses and how much was paid to obtain them. Effects of Imposing a Quota on Trade Let S m = domestic supply of motorcycles D m = domestic demand curve ρ w = $1000 (world prices is assumed to equal $1000) Under Free Trade: Assume
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Consumption = 50,000 (Q 2 ) Domestic production = 10,000 (Q 1 ) Total free trade imports = 40,000 = (Q 2 – Q 1 ) After Imposition of a Quota Assume Quota = limit/ reduction of imports= 20,000 motorcycles. ρ after quota = $1,500 (usually derived after constructing the S Domestic + Quota curve) Consumption = 44,000 (Q 4 ) Domestic production = 24,000 (Q 3 ) Imports after quota = 2 0, 000 = The quota = Q 4 –Q 3 Graph Algebraic Example on driving prices after quota quotas Suppose Demand Q = 350 -5P Domestic Supply Q = 50 + 10P a . Derive the autarky price . 350 -5P = 50 + 10P Autarky P = $50 b . Suppose P FT = $12 . Derive the quantity demanded and domestically quantity supplied under free trade ? How much are the imports? Quantity demanded Q 2 = 350 – 5*$12 = 290 units under free trade. Quantity supplied Q 1 = 50 + 10*$12= 170 units under free trade. Imports = 290 – 170 = 120 units under free trade. c. Suppose the quota = 30 units. Derive the price after quota (P quota ). Set Demand = [Domestic supply] + quota 350 - 5P = [50 + 10P ] + 30 Pquota = (350 - 50 – 30)/ 15 = 270/15 = $18. d.. Calculate the quota rent = imports * (P quota - P FT )= 30*(18-12) = $180. . e. Welfare effects of the quota? Welfare Analysis of this quota
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CS = -a – b – c – d Areas c = ? (who gets the quota rent?) PS = + a Deadweight loss of quota = -b –d (deadweight is a loss to humanity. It does not include area c because this area goes to either domestic or foreign sources, and thus is not wasted). National welfare change = -
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CHAPTER 7 - CHAPTER 7: NONTARIFF BARRIERS AND ARGUMENTS FOR...

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