1 Lecture 6 Nontariff Barriers Econ 340 Lecture 6: NTBs 2 Outline: Nontariff Barriers • What Are NTBs? • Quotas – Effects Equivalent to Tariffs – Who Gets the Rents • Other NTBs – Tariff-Rate Quotas – Voluntary Export Restraints (VERs) – Variable Levies – Government Procurement Regulations – Customs Procedures – Standards – Unfair Trade Laws – Export taxes • Subsidies Lecture 6: NTBs 3 What Are NTBs? • What Are They? – Any institutional or policy arrangement that interferes with trade, other than tariffs – Term NTB is also used more broadly to include policies that artificially expand trade • e.g., Export subsidy – Sometimes called “Nontariff Measures” (NTMs) • Main Types of NTB – See outline above2 Lecture 6: NTBs 4 Outline: Nontariff Barriers • What Are NTBs? • Quotas – Effects Equivalent to Tariffs – Who Gets the Rents • Other NTBs – Tariff-Rate Quotas – Voluntary Export Restraints (VERs) – Variable Levies – Government Procurement Regulations – Customs Procedures – Standards – Unfair Trade Laws – Export taxes • Subsidies We’ll go through some of these individually Lecture 6: NTBs 5 Outline: Nontariff Barriers • What Are NTBs? • Quotas – Effects Equivalent to Tariffs – Who Gets the Rents • Other NTBs – Tariff-Rate Quotas – Voluntary Export Restraints (VERs) – Variable Levies – Government Procurement Regulations – Customs Procedures – Standards – Unfair Trade Laws – Export taxes • Subsidies Lecture 6: NTBs 6 Quotas • Definition: An import quota is a direct restriction on the quantity of an import – E.g., US might limit the imports of steel to some number of tons per year – Until Jan 1, 2005, US and EU had elaborate import quotas on many textile and apparel products from developing countries – We still have quotas on many agricultural products, e.g., sugar, cheddar cheese, dried milk, etc3 Lecture 6: NTBs 7 Quotas • Effects of a quota – If permitted quantity is above what would be imported anyway, then no effect at all. (True only with perfect competition) – Otherwise, quota creates scarcity and raises price – Quota raises domestic price above world price • For market to clear, domestic price must rise to the point that desired imports equal the quota • See this with supply and demand • First note example of US quota on sugar.. Lecture 6: NTBs 8 http://public.wsu.edu/~hallagan/EconS327/weeks/week5/Sugar/Sugarquota301.html Lecture 6: NTBs 9 Effects of a Quota: Small Country S D PW P Q QS0 QD0 Pa Quota Suppose quota limits imports to this amount4 Lecture 6: NTBs 10 Effects of a Quota: Small Country S D PW P Q QS0 QD0 Pa Quota Suppose quota limits imports to this amount Quota which is less than initial imports Lecture 6: NTBs 11 Effects of a Quota: Small Country S D PW P Q QS0 QD0 Pa Then price must rise until D-S=Quota Quota Lecture 6: NTBs 12 Effects of a Quota: Small Country S D PW P PQ Q QS0 QD0 Pa Quota Thus price is… “Tariff Equivalent”5 Lecture 6: NTBs 13 Effects of a Quota: Small Country S D PW P PQ Tariff Equivalent Q QS0 QS1 QD1 QD0 Pa Quota …and quantities are Lecture 6: NTBs 14 Effects of a Quota: Small Country S D PW P PQ Tariff Equivalent Q QS0 QS1 QD1 QD0 a b c d Pa Effects on Welfare Same as tariff, except c Quota Lecture 6: NTBs 15 Effects of a Quota: Small Country • Results – Suppliers gain area +a – Demanders lose area −(a+b+c+d) – Somebody gets area c, but who? • Area c is called “quota rents” – It is the profit from buying at world price, PW, and selling at higher domestic price, PQ SDPW P PQ Qa b c d6 Lecture 6: NTBs 16 Effects of a Quota: Small Country • Who gets quota rents? • Depends on how quota is administered: – First-come, first-served: Rents go to whoever gets there before quota is exhausted – Sell (or “auction”) import licenses: Rents go to government as revenue from sale of licenses – Give import licenses away to domestic people or firms: those people or firms then get the rents – Give licenses away to foreign firms or governments: foreigners get the rents • Most common is the last: Give away to foreigners in proportion to their historical exports Lecture 6: NTBs 17 Effects of a Quota: Rent Seeking • “Rent Seeking” – Defined as the use of resources in effort to get rents – Examples • Faster (thus more costly) transport to win race to border for 1st-come-1st-served quota • Lobbying legislators to get quota allocations • Inefficient production intended to get market-share-based quota allocations Lecture 6: NTBs 18 Effects of a Quota • Effects of quota compared to tariff – Effects on price and quantity are the same • hence “tariff equivalent” – Effect on welfare is different if quota rents are lost to rent seeking and/or accrue to foreigners: • In that case, importing country loses more from quota than from equivalent tariff • What if country is large? – Picture is also same as for tariff – But if quota rent is lost or goes to foreigners, importing country cannot gain7 Lecture 6: NTBs 19 Effects of Quota: Large Country (if Rent given to foreigners) Domestic Country: • Suppliers gain +a • Demanders lose −(a+b+c+d) • Net effect on country = −(b+c+d) Foreign Country: • License holders gain +(c+e) • (Supplier/Demanders also lose) Summary: S D P Q a b c d e Lecture 6: NTBs 20 Effects of a Quota • Other effects of a quota – Quality upgrading • Limited to a fixed quantity, foreign exporters seek higher value by improving quality – Like a tariff, quota may induce foreign firms to produce here – Unlike a tariff, the quota becomes more restrictive if foreign supply increases or world price drops Lecture 6: NTBs 21 Effects of a Fall in World Price S D PW P PQ Tariff Equivalent Q QS0 QS1 QD1 QD0 Pa Quota PW′ Grows PT′ With Tariff, Domestic Price Would Fall to PT′8 Lecture 6: NTBs 22 Outline: Nontariff Barriers • What Are NTBs? • Quotas – Effects Equivalent to Tariffs – Who Gets the Rents • Other NTBs – Tariff-Rate Quotas – Voluntary Export
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