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Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy1
Session 3B: Protectionism
The Political Economy of Protectionism II
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Other Barriers To Trade
Non-tariff Barriers
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Non-Tariff Barriers 1996
Sawyer, 3rd ed, Pearson
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Import Quota Physical restriction on the quantity of imports during
a specific time period (Table 5.1) Import licenses
Quotas on manufactured goods outlawed by W.T.O
Global quotas
Permit a specified number of goods to beimported each year
Selective quotas
Import quotas allocated to specific countries
May lead to domestic monopoly of production
Accusations of favoritism
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Allocating Quota Licenses
Limited imports; allocation by governments
Issue of import licenses on the basis of historicalshare of the import market
Discriminates against first-time importers
Issue of import quotas on a pro rata basis
Auctioning process
Few nations use auctions, as competitiontransfers revenue effect to the government
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Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy11
Sugar Import Quotas
U.S. sugar industry
Earlier: Subsidies in the form of price supports
1982 sugar price crash
Response
Raise import tariffs to the legal maximum
Nation-by-nation import allocations based on
average sugar exports to the United States Transferred the cost of sugar support from the
taxpayer to the consumer
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Quotas Versus Tariffs During periods of growing demand, an import quota is
a more restrictive trade barrier (Fig 5.2) Tariff increases the domestic price, but does not
limit the number of goods that can be imported
Tariffs allow for some degree of competition
Degree of protection is determined by themarket mechanism
Quota is more restrictive and suppressescompetition
Quota forecloses the market mechanism
W.T.O and tariffication
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Tariff-Rate Quota: A Two-Tier Tariff
Tariff-like and quota-like characteristics A specified number of imports at one tariff rate
Any higher imports face a higher tariff rate
Has three components: (Table 5.2)
Import-quota threshold
A within-quota tariff
An over-quota tariff
Many over-quota tariffs are prohibitively high
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Tariff-Rate Quota .
Techniques for the administering tariff-rate quotas:
License on demand allocation
First-come, first-served
Historical market share
Auctions
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Voluntary Export Quotas Used to restrain trade
Voluntary export restraint agreement (orderlymarketing agreement)
Moderate the intensity of internationalcompetition
Allow less efficient domestic producers toparticipate in world markets
Identical economic effects to equivalent importquotas, except for being implemented by theexporting nation
Conclusion from the viewpoint of the U.S.economy: Voluntary export restraints tend to bemore costly than tariffs
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Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy18
Japanese Auto Restra nts Put Bra es on .S.Motorists Fall in domestic auto sales (1981)
Voluntary restraint pact with the Japan Unpopular with smaller Japanese automakers
Record profits for Japanese auto majors
U.S. consumer paid higher prices
44,000 jobs saved in the U.S.; consumer cost perjob saved being $100,000
By 1985: Japanese companies open plants inthe U.S.; decline in imports coupled with declinein market share for U.S. firms
Japan exported bigger, higher value cars to US
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Domestic Content Requirements Stipulate the minimum percentage of a products total
value to qualify for zero tariff rates Purpose: Limit outsourcing
Pressurizes firms that sell products in the countryto use domestic inputs in production
Often used by developing countries to fosterdomestic automobile production (Table 5.3)
Welfare effects of an Australian contentrequirement on automobiles (Fig 5.3)
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Subsidies
Granted to producers to help improve trade positions
Governmental subsidies assume a variety of forms(Table 5.4)
Outright cash disbursements Tax concessions
Insurance arrangements
Loans at below-market interest rates
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Subsidies.
Domestic subsidy: Granted to producers of import-competing goods (Figure 5.4)
Unlike tariffs and quotas, subsidies do not distort
choices for domestic consumers Burden financed out of tax revenues
Often in return for accepting governmentconditions on key matters
May not be as superior to other commercialpolicies
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Session 3-09 Prof Augustine H H Tan Econ MBA Global Economy25
Subsidies. Export subsidy: Granted to producers of goods that
are to be sold overseas (Fig 5.4) Encourage exports by reducing price paid by
foreigners
Yields direct effects for the home economy:
Terms-of-trade effect Export-revenue effect
Consumers in the exporting nation suffer as theinternational terms of trade move against them
Domestic consumers pay higher prices
Tax burden
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Dumping
A form of international price discrimination
Charging foreign buyers lower prices thandomestic buyers; selling below cost
Forms of Dumping
Sporadic dumping: Disposal of excess inventories
Predatory: Temporary price cuts to eliminatecompetition
Persistent: Indefinite dumping to maximize profits
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International Price Discrimination
A profit-maximizing firm would benefit frominternational price discrimination
Charge a higher price at home, where competitionis weak and demand is less elastic
Charge a lower price for the same product inforeign markets to meet competition
Demand and cost conditions example
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Antidumping Regulations
Under U.S. law, antidumping duty is levied when
Commerce Department determines foreignmerchandise is sold at less than fair value (LTFV)
ITC determines that LTFV imports are causing orthreatening material injury to a U.S. industry
Margin of dumping: Amount by which the foreignmarket value exceeds the U.S. price
Priced-based definition
Cost-based definition
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Antidumping Regulations Process
Complaint from an import-competing industry Evidence of dumping; supporting data
Commerce Department conducts preliminarydetermination, estimate of margin
Special tariff imposed immediately, if evidenceis found
Final determination, estimate of margin
Rebate, if ruling is against dumping
ITC determines material injury
Rebate, if ruling is against dumping
Imposition of permanent tariff if both bodies rule infavor of the dumping petition
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Antidumping Regulations.. Smith Corona - Hollow victories
1980: Japanese typewriters Product evolution by Brother Industries (Japan)
to circumvent ruling
1990: Assembling of typewriters in U.S. itself
1991: Japanese word processors
Ruling ineffective as these were assembled inU.S.
Components not sourced from Japan
Washington apple producers
Canadian government impose duties (Table 5.5)
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Is Antidumping Law Unfair? Supporters: Ensures level playing field by offsetting
artificial sources of competitive advantage Critics: Consumers of the protected good and the
wider economy typically lose more
Average variable cost as yardstick for dumping? (Table
5.6) Economists: Fair value should be based on
average variable cost rather than average total cost
Antidumping law is unfair as it uses average total
cost
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Anti-Dumpinga. WTO allows trade restrictions to counteract
predatory dumpingb. Difficult to determine dumping
c. Trigger-price mechanism to activate traderestrictions
d. Used as protectionist weapon: threats of anti-dumping measures
e. Examples: 1981-1994
US 618
EU 490
Canada 537
Australia 690
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Is Antidumping Law Unfair?..
Antidumping law and currency fluctuations
Antidumping law does not account for fluctuations
Does the antidumping law redress unfairness or
create it?
Are antidumping duties overused?
Disturbing trend of backdoor protectionism
For U.S. producers, it is easier to obtain relief in theform of antidumping duties
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Other Non-tariff Trade Barriers Government procurement policies
Buy-national policies: Barrier to free trade
Social regulations
To correct undesirable side effects that relate to
health, safety, and environment
Corporate average fuel economy standards(CAFE) - U.S. energy conservation policy
Hormones in beef production - European
Unions ban on hormone-treated meat
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Other Non-tariff Trade Barriers..
Sea transport and freight restrictions
Restrictive practices at Japanese ports
Delays and costs of loading/unloading
U.S. decision to bar Japanese ships from U.S. ports
Agreement to liberalize port services in Japan
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Other Non-Tariff BarriersInternational Cartels
a. Organization of suppliers located in different nations[or a group of governments] that agrees to restrictoutput and export of a commodity
b. Aim: to increase price, maximize profits
c. Outside individual countrys control/jurisdiction
d. E.g. OPEC, IATA
e. Free riders: non-member suppliers
f. Success: if good substitutes not freely available
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Other Non-tariff Trade Barriers..
Sawyer, 3rd ed, Pearson
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Industrial Policies..
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Other Non-tariff Trade Barriers..
Sawyer, 3rd ed, Pearson
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Government Procurement..
Sawyer, 3rd ed, Pearson
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Corruption & International Trade
Sawyer, 3rd ed, Pearson
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Corruption Index 2006
Sawyer, 3rd ed, Pearson
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Economic Sanctions
Sawyer, 3rd ed, Pearson
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Economic Sanctions..
Sawyer, 3rd ed, Pearson
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Labor & Environmental Standards
Sawyer, 3rd ed, Pearson
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Labor & Environmental Standards
Sawyer, 3rd ed, Pearson
Labor & Environmental Standards
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Sawyer, 3rd ed, Pearson
Labor & Environmental Standards
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Sawyer, 3rd ed, Pearson
Labor & Environmental Standards
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Sawyer, 3rd ed, Pearson
Labor & Environmental Standards
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Sawyer, 3rd ed, Pearson
Labor & Environmental Standards..
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Sawyer, 3rd ed, Pearson