Topic 5 Non-tariff barriers PDF

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Sample Exam Questions 5: Non-Tariff BarriersQ1. Discuss the major types of Non-Tariff Barriers (NTBs). Explain why NTBs have increased over the last two decades.Although tariffs have historically been the most important form of trade restriction, there are many other types of trade barriers, such as...

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Sample Exam Questions 5: Non-Tariff Barriers Q1. Discuss the major types of Non-Tariff Barriers (NTBs). Explain why NTBs have increased over the last two decades. Although tariffs have historically been the most important form of trade restriction, there are many other types of trade barriers, such as import quotas, voluntary export restraints and anti-dumping actions. As tariffs were negotiated down during the postwar period, the importance of nontariff trade barriers has greatly increased. Types of NTB’s: Import Quota Subsidies Dumping 1. Import Quotas i) Absolute Import quota a. Physical restriction on the quantity of goods that are imported during a specific time period. b. To administer the quota the government allocates an import license, permitting them to import the product only up to a prescribed level regardless of market demand c. Used primarily on manufactured goods ii) Global Quotas Permits a specified quantity of goods to be imported each year without specification from where the product originates nor who is permitted to import. When the specified quota is limited, additional imports of the product are prevented for the remainder of the year Welfare effects of Quota’s - Like a tariff an absolute quota affects a country's welfare. - Suppose the US is a ´small country’ in terms of the world cheese market. - Assume Sus and Dus denotes demand and supply for cheese in the US, Seu represents the supply of the EU. - Under free trade the price of EU cheese and US cheese equal $2.50 per pound. - At this price, US firms produce 1 pound, US consumers purchase 8 pounds and imports from the EU 7 pounds - Suppose US imposes a quota of 3 pounds of cheese. - Sus shifts to the right by the amount of the quota to Sus +q. - The reduction in imports from 7 pounds to 3 pounds and a decrease in quantity demanded from 8 to 6 pounds. - Results in price increase to $5 Decrease in consumer surplus by Redistributive effects (area )(from _____________to ______________) Deadweight losses Protective effects –

Consumption effects Revenue effects (area ) arises from the fact that US consumers must pay an additional $2.50 per pound of cheese imported under the quota, as a result of the quota induced scarcity 2. Subsidies Outright cash disbursements, tax breaks, and subsidized loans Given to producers to improve market position Provide domestic firms a cost advantage (domestic production subsidies) Allows firms sell goods at prices below cost Two types of subsidies: i) Domestic Production Subsidies ii) Export Subsides

i) Domestic Production Subsidies - Granted to producers of import competing goods - Its purpose is to encourage output and employment in the import competing sectors of the economy Figure illustrates both the trade and welfare effects of a production subsidy. The Model S and D for steel in the US depicted by Su.so and Du.so. World Supply is Sw World price of steel is $400, US consumption (Free Trade Equilibrium) NOW Gov introduces a production subsidy for each ton of steel produced Trade Effect: Domestic US supply shifts to the right by the amount of the subsidy Domestic production expands, Imports fall Welfare Effect: Producer Surplus (area a) – subsidy revenue paid to producers for output produced Protective Effect (area b) – From inefficient production (Deadweight loss) Overall production subsidies have less of a welfare impact compared to tariffs Domestic Production Subsidy

Export Subsidy

i) Export Subsidy This is when a government pays a subsidy on exports only Fig shows the effects of a subsidy Sus and Dus are supply and demand for US wheat Assumes that US is a relatively small producer of wheat At world price of $5, US consumers demand 4m bushels , US producers supply 8mn bushels. 4mn bushels exported (Free trade) US gov now offers a subsidy to exporters, price rises to $6, QD falls to 2mn and Qs rises to 10mn. Exports rise to 8mn. Welfare Effects Decrease in consumer surplus area Increase in producer surplus (area Deadweight loss (area

). Gov. pays subsidy for exports )

3. Dumping - International price discrimination - Foreign producers charge lower prices than domestic producers for an identical good (after allowing for transportation costs and tariff duties) - Selling in foreign markets at a price below the cost of production Types of dumping: 1. Sporadic Dumping - Firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home - May be the result of domestic recession or poor planning - Beneficial to importing consumers - Disruptive to import-competing producers -

2. Predatory dumping A firm temporarily reduce prices charged abroad to drive foreign competitors out of business Aims to reach a monopoly position Charges new higher prices – to offset any losses occurred during cutthroat pricing Prevents the entry of potential competitors Home governments - concerned Retaliate with antidumping duties

3. Persistent dumping - Goes on indefinitely - A producer may consistently sell abroad at lower prices than at home

Q2. Show, using illustrations, the welfare effect of import quotas. How does this differ from that of a tariff? Import quota Import Tariff

Quota: more restrictive, limits quantity Tariff: increases price, cannot limit quantity, allows competition and is a form of revenue generation for government. Welfare effect of a Quota:

Welfare effect of a Tariff:

Q3. Illustrate and explain the impact of a production subsidy (for home producers) on a nation’s welfare. Granted to producers of import competing goods Its purpose is to encourage output and employment in the import competing sectors of the economy A government subsidy granted to import-competing producers leads to increased domestic production and reduced imports. The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect). A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. However, it entails a deadweight welfare loss to the home country in the form of the protective effect on the consumption effect. The Model S and D for steel in the US depicted by Su.so and Du.so. World Supply is Sw World price of steel is $400, US consumption (Free Trade Equilibrium) NOW Gov introduces a production subsidy for each ton of steel produced Trade Effect: Domestic US supply shifts to the right by the amount of the subsidy Domestic production expands, Imports fall

Welfare Effect: Producer Surplus (area a) – subsidy revenue paid to producers for output produced Protective Effect (area b) – From inefficient production (Deadweight loss) Overall production subsidies have less of a welfare impact compared to tariffs Domestic Production Subsidy

Welfare effect of subsidy:

* Lower welfare loss than in case of tariff or quota. - direct cost of subsidy paid by tax payer Q4. Discuss, using illustrations, the impact of an export subsidy (earned by home producers that export) on national welfare. Export subsidies are direct payments (or the granting of tax relief and subsidized loans) to the nation’s exporters or potential exporters and/or low interest loans to foreign buyers to stimulate the nation’s exports. Although export subsidies are illegal by international agreement, many nations provide them in disguised and not-so-disguised forms. Countervailing Duties are often imposed on imports to offset export subsidies by foreign governments. Net price = Price paid by consumer + Subsidy Domestic producers gain at expense of the tax payer, decreasing CS and increasing PS.

Q5. Briefly discuss the types and use of anti-dumping regulations. Are they a good idea? Why or why not. Trade barriers may also result from dumping and export subsidies. Dumping is the export of a commodity at below cost or at a lower than the commodity is sold domestically. Dumping is classified as persistent, predatory and sporadic. Persistent dumping, or international price discrimination, refers to the continuous sale of the commodity at a higher price in the domestic market (which is, to some extent, insulated from foreign competition by transportation costs and trade barriers) than internationally (where it must meet the competition of foreign producers). The incentive for persistent dumping is the higher profits it provides to domestic producers. Predatory dumping is the temporary sale of a commodity at below cost or at a lower price abroad that at home in order to drive foreign producers out of business, after which prices are raised to maximize profits. Sporadic dumping is the occasional sale f a commodity at below cost or at lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices. The use of anti-dumping regulation: Trade restrictions to counteract predatory dumping are justified to protect domestic industries from unfair competition from abroad. These restrictions usually take the form of anti-dumping duties to offset price differentials. Since it is often difficult to determine the type of dumping, however, domestic producers invariably demand protection against any form of dumping. By so doing, they discourage imports (the “harassment thesis”) and increase their own production and profits (rents). Over the past four decades, Japan was accused of dumping steel and television sets in the US, and European nations and the EU persistently dump agricultural commodities arising from their farm support programs. When dumping is proved, the violating nation or firm often chooses to raise its price rather than face antidumping duties. Only eight countries had antidumping laws in 1980 compared with over 100 (including many developing countries) in 2010.

Another issue with dumping is that if markets are not kept separate, there may be a resale issue. While most believe that dumping laws/regulation is unfair, it is a part of protectionism which protects the interest of domestic consumers, producers and jobs. Type of Dumping Dumping Sporadic Predatory Persistent

Description International price discrimination - Selling below production cost dispose of excess by selling abroad at lower price than at home (minor) Decrease price temporarily abroad to drive out competitors (Theoretical) price discrimination, different price on different market...