ECONOMICS 3150B Lecture 19 November 29, 2005 - PowerPoint PPT Presentation

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ECONOMICS 3150B Lecture 19 November 29, 2005

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Title: ECONOMICS 3150B Lecture 19 November 29, 2005


1
ECONOMICS 3150BLecture 19November 29, 2005
2
There will be no class on Thursday, December 1.
The last class for this term will be next
Tuesday, December 6
3
Trade barriers
  • Tariffs
  • Export subsidies
  • Quotas
  • Local content requirements
  • Preferential procurement
  • Red tape barriers
  • Foreign investment restrictions
  • Contingency protection
  • Countervail
  • Anti-dumping
  • Safeguards
  • Unfair trade

4
Trade Barriers
  • Tariffs
  • Import vs. export
  • Ad valorem vs. specific
  • Commodity classification
  • Base price for applying tariff
  • Import Tariffs protect domestic suppliers
  • Export tariffs
  • Government extracts rents rather than domestic
    producers when domestic price lt world price ? oil
    gas under NEP in Canada
  • Canada receives revenues rather than US Treasury
    case of lumber

5
Trade Barriers
  • Who pays tariff?
  • Terms of trade effects, incidence
  • Small country
  • No market power no terms of trade effects
  • Domestic consumers pay entire tariff
  • Revenues collected by government costs of
    administration of tariff system and collection of
    revenues
  • Income distribution effects, employment effects
  • Large country
  • Market power terms of trade effects
  • Foreign suppliers pay tariff because world price
    lowered by full extent of tariff
  • Decrease in value of imports, but no change in
    volume of imports no change in domestic
    production of goods
  • No income distribution effects other than as a
    result of use of tariff revenues no employment
    effects other than as a result of use of tariff
    revenues

6
Non-Tariff Measures (NTMs)
  • Export subsidies
  • Terms of trade effects
  • Production subsidies
  • Income tax holidays
  • Capital grants
  • Labour subsidies (X per hour) difference
    between labour and direct production subsidies
  • Below market rate export financing (export credit
    subsidy) low interest rate loans for foreign
    customers
  • Government guarantees for receivables enhances
    ability of domestic suppliers to borrow from
    banks at lower rates of interest to finance
    working capital
  • Government needs to raise revenues to pay for
    subsidy incentive effects, administration and
    collection costs
  • Income distribution effects employment effects

7
Non-Tariff Measures (NTMs)
  • Import quotas
  • Small country price taker in world markets
  • Tariff rate can be estimated to produce same
    outcomes as quota that is auctioned
  • Income distribution effects
  • Increase in domestic price ? economic rents
    created
  • Who receives the rent?
  • If licenses for quotas given away, recipients of
    licenses (domestic distributors or foreign
    recipients exporters) obtain rents
  • If licenses auctioned government receives rents
    ? similar to tariff

8
Imports 1Y1 0Y1
P1
S(A)
S(World)
0P1
D(A)
0Y1
1Y1
Y1
9
Quota 2Y1 0Y1
P1
S(A)
TS(A)
2P1
S(World)
0P1
D(A)
0Y1
1Y1
2Y1
3Y1
Y1
3Y1 Quota
10
Non-Tariff Measures (NTMs)
  • Voluntary export restraints (VERs)
  • Quotas on exports imposed by exporting country ?
    effectively a quota given away to foreign
    suppliers
  • Favoured by exporting country as compared to
    tariffs or quotas that are auctioned ? economic
    rents/revenues accrue to exporting firms rather
    than to treasury of importing country
  • More costly to importing country but politically
    appears that exporting country admits to unfair
    trade practice and voluntarily agrees to rectify
    practice ? importing country does not appear to
    act as bully
  • Example of Japanese autos in 1970s and 1980s
    more expensive models with higher profit margins
    exported to US ? enabled Japanese auto producers
    to gain foothold in this segment of market

11
Non-Tariff Measures (NTMs)
  • Local Content Requirements
  • Specified fraction of final good to be produced
    domestically X of sales price Y of total
    units sold domestically (case of autos under the
    Auto Pact Canadian content provisions for
    broadcasting)
  • Under NAFTA what constitutes domestically
    produced good (Mexico, US, Canada) exempt for
    tariffs within North American market most goods
    include some value added from foreign (ex. NA)
    suppliers
  • Comparable to import quota with license given to
    foreign producers of intermediate inputs
  • Employment guarantees
  • Domestic suppliers may have competitive advantage
    but face market obstacles overcoming reputation
    advantage of long-established foreign suppliers
    late entrant needing to overcome learning curve
    advantage of first mover foreign suppliers

12
Non-Tariff Measures (NTMs)
  • Procurement Preferences
  • Preferential price advantage given to domestic
    suppliers government will buy from domestic
    supplier as long as price is no more than X
    greater than that of foreign supplier ? similar
    to tariff
  • Similar to restrictive quota or tariff when
    foreign suppliers prevented from bidding
  • Red Tape Barriers
  • Health and safety standards
  • Customs classifications
  • Harassment potential

13
Non-Tariff Measures (NTMs)
  • Contingency Protection
  • Security of access issue related to FTA
  • Countervailing duties in case of subsidies
    definition of subsidies
  • Anti-dumping predatory, sporadic, persistent
    (price discrimination)
  • Balance of payments, employment safeguards

14
Non-Tariff Measures (NTMs)
  • Countervailing duties
  • Definition of subsidies health care system,
    education, etc.
  • Value of subsidies
  • Terms of trade
  • Costs to domestic industry distinct from
    economic shocks, competition
  • Magnitude of tariff to level playing field
  • Duration of protection

15
Non-Tariff Measures (NTMs)
  • Anti-dumping
  • Distinguish among predatory, sporadic, persistent
  • Does nature of dumping matter?
  • Degree of dumping price differential
  • Costs to domestic industry distinct from
    economic shocks, competition
  • Magnitude of tariff to level playing field
  • Duration of protection

16
Non-Tariff Measures (NTMs)
  • Safeguards
  • Flexible exchange rates as shock absorber
  • Global shock or country-specific shock
  • Herd effect pace of outsourcing accelerates
  • Costs to domestic industry labour adjustment
    policies, unemployemnt insurance, training
    programs
  • Magnitude of tariff
  • Duration of protection
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