CHAPTER 5
NONTARIFF TRADE BARRIERS
CHAPTER OVERVIEW
This chapter considers policies other than tariffs which restrict the volume of international trade. Such policies are
known as nontariff barriers to trade.
The first nontariff barrier considered is the import quota. A quota can be administered on a global basis or on a
selective basis. Special attention is given to the revenue effect of an import quota which may be captured by
domestic importers, foreign exporters, or the domestic government. Also considered is a tariff-rate quota and a
voluntary export quota.
The subsidization of domestic producers is another topic investigated in the chapter. Emphasis is placed on the
differences between a subsidy granted to import-competing producers and a subsidy granted to exporters. It is noted
that a subsidy granted to import-competing producers results in a deadweight welfare loss to the economy of only a
protection effect, not a consumption effect.
Finally, the chapter discusses the nature and operation of international dumping. The reasons for dumping are
examined and also the impact of dumping on a firm’s revenue and profit.
After completing this chapter, students should be able to:
•
Identify the major nontariff barriers to trade.
•
Compare and contrast the effects of import quotas, voluntary export quotas, and tariff-rate quotas.
•
Differentiate between an import subsidy and an export subsidy.
•
Explain how local content requirements affect a firm’s ability to share production with other nations.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
BRIEF ANSWERS TO STUDY QUESTIONS
1.
Domestic subsidies avoid the deadweight losses due to the consumption effect.
2.
Subsidies are not free goods since they are financed by taxpayer dollars. In return for granting subsidies,
governments often pressure management and labor to adopt measures to lower costs of production so as to
become more competitive.
3.
The import quota tends to permit domestic firms and workers to enjoy higher sales, profits, and employment
levels. Consumers tend to face higher prices and expenditure levels. The economy as a whole faces
deadweight losses in production and consumption.
4.
The sugar import quota was viewed as a method of increasing the domestic price of sugar, so as to offset the
adverse effects of falling prices for U.S. sugar producers.
5.
Under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative
bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically
administered from the supply side of the market, the largest share of the revenue effect tends to be captured
by foreign exporters.
6.
Same general answer as Question 5. The distribution of the revenue effect tends to accrue to foreign
auto-makers.
7.
By contributing to a scarcity of steel in the domestic market, quotas lead to higher steel prices and production
costs for domestic steel-using firms. Such cost increases detract from their international competitiveness.
8.
According to the priced-based definition, dumping occurs whenever a foreign firm sells a product in the
importing country’s market at a price below that for which the product is sold in the firm's home market.
According to the cost-based definition, dumping occurs when foreign merchandise is sold in the domestic
market at "less than fair value" (i.e., price is less than average total cost).
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
9.
a.
Qs = 100, Qd = 800, Imports = 700. Consumer surplus = $160,000, producer surplus = $2500.
b.
Price rises by $100 and consumer surplus falls by $70,000. Redistribution effect = $20,000,
consumption effect = $10,000, protective effect = $10,000, revenue effect = $30,000. Overall welfare
loss = $50,000.
c.
Price remains at the free trade level. Qs = 300, Qd = 800, imports = 500. Total cost of subsidy =
$30,000 of which $20,000 is absorbed by producer surplus and $10,000 is absorbed by higher
domestic production costs. Overall welfare loss = $10,000.
10.
Nontariff trade barriers include import quotas, voluntary export agreements, subsidies, buy-national policies,
product and safety standards, and content requirements.
11.
The revenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured by
domestic or foreign firms.
12.
Subsidies include domestic subsidies and export subsidies. Methods used to subsidize producers include tax
concessions, low interest rate loans, and loan guarantees.
13.
Voluntary export restraints are market-sharing agreements negotiated by producing and consuming countries.
Because voluntary export quotas are typically administered from the supply side of the market, the foreign
exporter tends to capture the largest share of the quota revenue.
14.
While antidumping laws are typically defined in terms of full cost, it may be rational for a firm to sell its
product overseas at losses, provided that prices are sufficiently high to cover marginal cost.
15.
Since import quotas directly limit the number of goods that can enter the home nation, they tend to be more
restrictive than import tariffs which may be circumvented by foreign producers absorbing the tariff as a lower
selling price. During periods of rising domestic demand, quotas hold down imports more effectively than
tariffs.
16.
Sporadic dumping--firms with temporary inventories sell their products overseas at lower prices than at home.
Predatory dumping--firms cut prices overseas to eliminate competitors. Persistent dumping--in an effort to
maximize profits, firms continuously sell abroad at lower prices than at home.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
17.
a.
Ecuador imports 80 computers from Hong Kong.
b.
Price rises by $400 and consumer surplus falls by $30,000. Redistribution effect = $6000, protective
effect = $4000, consumption effect = $4000, revenue effect = $16,000. Overall welfare loss =
$24,000.
c.
Overall welfare loss = $14,000; of this amount, the revenue effect = $12,000, consumption effect =
$1000, protection effect = $1000.
d.
18.
Smaller by $10,000.
a. Output = 9, price = $5, profit = $18. Profits on U.K. sales = $14 while profits on Canadian sales = $4.
b. Price = $7 and profits = $20. Price = $4 and profit = $4. With dumping, total profits rise by $6.
19.
A tariff-rate quota attempts to minimize the consumer costs of protectionism by applying a modest within-quota
tariff rate; it also shields home producers from severe import competition with a stiffer over-quota tariff rate.
Of a tariff quota's revenue effect, a portion accrues to the domestic government while the remainder is
captured by domestic importers or foreign exporters as windfall profits.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.