Trade Policy & Welfare Effects PDF

TRADE POLICY & WELFARE EFFECTS ECN4812 Copyright © 2023 Pearson Education, Ltd. Learning Objectives Evaluate the costs and benefits of tariffs, their welfare effects, and winners and losers of tariff policies. Discuss what export subsidies and agricultural subsidies are, a...

TRADE POLICY & WELFARE EFFECTS ECN4812 Copyright © 2023 Pearson Education, Ltd. Learning Objectives Evaluate the costs and benefits of tariffs, their welfare effects, and winners and losers of tariff policies. Discuss what export subsidies and agricultural subsidies are, and explain how they affect trade in agriculture in the United States and the European Union. Recognize the effect of voluntary export restraints (VERs) on both importing and exporting countries, and describe how the welfare effects of these VERs compare with tariff and quota policies. Copyright © 2023 Pearson Education, Ltd. Preview Partial equilibrium analysis of tariffs in a single industry: supply, demand, and trade Costs and benefits of tariffs Export subsidies Import quotas Voluntary export restraints Local content requirements Copyright © 2023 Pearson Education, Ltd. Trade Policy Import quota Export quota Tariff Rules of Origin Export Subsidies Non-Tariff Barrier Dumping Sanitary and Phytosanitary measures Technical barrier Sea transport and freight restrictions Copyright © 2023 Pearson Education, Ltd. Types of Tariffs A tariff is a tax levied when a good is imported. A specific tariff is levied as a fixed charge for each unit of imported goods. – For example, $3 per barrel of oil. An ad valorem tariff is levied as a fraction of the value of imported goods. – For example, 25% tariff on the value of imported trucks. Copyright © 2023 Pearson Education, Ltd. Type of tariff: A specific tariff A specific tariff is levied as a fixed charge per unit of imports. local currency per unit of the goods imported – based on weight, number, length, volume or other unit of measurement. Specific duties are often levied on foodstuffs and raw materials – For example, the US government levies a 5.1 cent specific tariff on every wristwatch imported into the US. – Thus, if 1000 watches are imported, the US government collects $51 in tariff revenue. In this case, $51 is collected whether the watch is a $40 Swatch or a $5000 Rolex. Copyright © 2023 Pearson Education, Ltd. Type of tariff: ad valorem tariff An ad valorem tariff is levied as a fixed percentage of the value of the commodity imported. commonly used, calculated as a percentage of the value of the imported goods - for example, 10, 25 or 35 per cent. – depending on the country, either on destination (c.i.f.), or on the value of the goods at the port in the country of origin (f.o.b.). Eg. The US currently levies a 2.5% ad valorem tariff on imported automobiles. – Thus if $100,000 worth of autos are imported, the US government collects $2,500 in tariff revenue. – In this case, $2500 is collected whether two $50,000 BMWs are imported or ten $10,000 Hyundai. Copyright © 2023 Pearson Education, Ltd. Supply, Demand, and Trade in a Single Industry (1 of 4) Consider how a tariff affects a single market, say that of wheat. Suppose that in the absence of trade the price of wheat is higher in Home than it is in Foreign. With trade, wheat will be shipped from Foreign to Home until the price difference is eliminated. Copyright © 2023 Pearson Education, Ltd. Supply, Demand, and Trade in a Single Industry (2 of 4) An import demand curve is the difference between the quantity that Home consumers demand (D) minus the quantity that Home producers supply (S), at each price. The Home import demand curve MD = D − S intercepts the price axis at PA and is downward sloping: – As price increases, the quantity of imports demanded declines. Copyright © 2023 Pearson Education, Ltd. Figure 9.1 Deriving Home’s Import Demand Curve MDH (P H) = DH (PH) – SH (PH) As the price of the good increases Home consumers demand less while Home producers supply more so that the demand for imports declines. Copyright © 2023 Pearson Education, Ltd. Supply, Demand, and Trade in a Single Industry (3 of 4) An export supply curve is the difference between the quantity that Foreign producers supply minus the quantity that Foreign consumers demand, at each price. The Foreign export supply curve XS  = S  − D intersects the price axis at PA and is upward sloping: – As price increases, the quantity of exports supplied rises. Copyright © 2023 Pearson Education, Ltd. Figure 9.2 Deriving Foreign’s Export Supply Curve XS*(P*) = S* (P*)-D*(P*) As the price of the good rises, Foreign producers supply more while Foreign consumers demand less, so that the supply available for export rises. Copyright © 2023 Pearson Education, Ltd. Supply, Demand, and Trade in a Single Industry (4 of 4) In equilibrium, import demand = export supply home demand − home supply = foreign supply − foreign demand, SH (PFT) – DH(PFT) = D*(PFT) – S* (PFT) Home demand + foreign demand = home supply + foreign supply DH(PFT) + D* (PFT) = SH(PFT) + S*(PFT) WORLD DEMAND = WORLD SUPPLY Copyright © 2023 Pearson Education, Ltd. Figure 9.3 World Equilibrium The equilibrium world price Home import demand (MD curve) = Foreign export supply (XS curve). Copyright © 2023 Pearson Education, Ltd. Effects of a Tariff (1 of 4) A tariff acts like a transportation cost, making sellers unwilling to ship goods unless the Home price exceeds the Foreign price by the amount of the tariff: PT − t = PT  A tariff makes the price rise in the Home market and fall in the Foreign market. Copyright © 2023 Pearson Education, Ltd. Figure 9.4 Effects of a Tariff A tariff raises the price in Home while lowering the price in Foreign. The volume traded thus declines. Copyright © 2023 Pearson Education, Ltd. Effects of a Tariff (1) Because the price in the Foreign market falls from Pw to PT with a tariff Home producers supply more and Home consumers demand less, so the quantity of imports falls from QW to QT with tariff Copyright © 2023 Pearson Education, Ltd. Effects of a Tariff (2) Because the price in the Home market rises from PW to PT* with tariff Foreign producers supply less, and Foreign consumers demand more, so the quantity of exports falls from QW to QT Copyright © 2023 Pearson Education, Ltd. Effects of a Tariff (4 of 4) The quantity of Home imports demanded = the quantity of Foreign exports supplied when PT − PT  = t The increase in the price in Home can be less than the amount of the tariff. – Part of the effect of the tariff causes the Foreign export price to decline. – But this effect is sometimes very small. Copyright © 2023 Pearson Education, Ltd. Effects of a Tariff in a Small Country When a country is “small,” it has no effect on the foreign (world) price because its demand is an insignificant part of world demand for the good. – The foreign price does not fall, but remains at Pw. – The price in the home market rises by the full amount of the tariff, to PT = Pw + t. Copyright © 2023 Pearson Education, Ltd.  Figure 9.5 A Tariff in a Small Country When a country is small, a tariff it imposes cannot lower the foreign price of the good it imports. As a result, the price of the import rises from PW to PW + t and the quantity of imports demanded falls from D1 − S1 to D2 − S2. Copyright © 2023 Pearson Education, Ltd. Measuring the Amount of Protection (1 of 3) The effective rate of protection measures how much protection a tariff (or other trade policy) provides. – It represents the change in value that firms in an industry add to the production process when trade policy changes, which depends on the change in prices the trade policy causes. Effective rates of protection often differ from tariff rates because tariffs affect sectors other than the protected sector, causing indirect effects on the prices and value- added for the protected sector. Copyright © 2023 Pearson Education, Ltd. Measuring the Amount of Protection (2 of 3) For example, suppose that automobiles sell in world markets for $8,000, and they are made from factors of production worth $6,000. The value added of the production process = $8000 -$6000 = $2000 Suppose that a country puts a 25% tariff on imported autos so that home auto assembly firms can now charge up to $10,000 instead of $8,000. Value added = $10,000 - $6,000 = $4000 Copyright © 2023 Pearson Education, Ltd. Measuring the Amount of Protection (3 of 3) The effective rate of protection for home auto assembly firms is the change in value added: ( $4,000 − $2,000 ) = 100% $2,000 In this case, the effective rate of protection (100%) is greater than the tariff rate (25%) Copyright © 2023 Pearson Education, Ltd. Costs and Benefits of Tariffs A tariff raises the price of a good in the importing country, so it hurts consumers and benefits producers there. In addition, the government gains tariff revenue. How to measure these costs and benefits? Use the concepts of consumer surplus and producer surplus. Copyright © 2023 Pearson Education, Ltd. Consumer and Producer Surplus (1 of 2) Consumer surplus measures the amount that consumers gain from purchases by computing the difference in the price actually paid from the maximum price they would be willing to pay for each unit consumed. – When price increases, the quantity demanded decreases as well as the consumer surplus. Copyright © 2023 Pearson Education, Ltd. Figure 9.6 Deriving Consumer Surplus from the Demand Curve Consumer surplus on each unit sold is the difference between the actual price and what consumers would have been willing to pay. Copyright © 2023 Pearson Education, Ltd. Figure 9.7 Geometry of Consumer Surplus Consumer surplus is equal to the area under the demand curve and above the price. Copyright © 2023 Pearson Education, Ltd. Consumer and Producer Surplus (2 of 2) Producer surplus measures the amount that producers gain from sales by computing the difference in the price received from the minimum price at which they would be willing to sell. – When price increases, the quantity supplied increases as well as the producer surplus. Copyright © 2023 Pearson Education, Ltd. Figure 9.8 Geometry of Producer Surplus Producer surplus is equal to the area above the supply curve and below the price. Copyright © 2023 Pearson Education, Ltd. Trade Policy Effects: PRICE & WELFARE EFFECTS SMALL COUNTRY: –Welfare Effects of a Tariff: LARGE COUNTRY: –TARIFF –QUOTA IMPORTING –SUBSIDY & EXPORTING COUNTRY Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of a Tariff: Small Country Small market that faces PFT Imposed tariff ↑ dom. P by the full value of tariff t = PIMT – PFT D S Effects on consumer: Worse off –(A+B+C+D) ↑ dom. P both imported good and dom. Substitute ↓CS Effects on producer: PIMT A Producer better off (+A) B C D PFT ↑P, ↑output , ↑employment Effect on government: Government receives tariff revenue (+C) SFT SIMT DIMT DFT National welfare: -B-D - consumption loss, - production efficiency loss ( deadweight losses) Thus, tariff reduces national welfare- in the case a small country Copyright © 2023 Pearson Education, Ltd. Price Effects of a Tariff: Large Country Case Suppose Mexico, the importing country in free trade, imposes a specific tariff on imports of wheat. As a tax on imports the tariff will inhibit the flow of wheat across the border. It will now cost more to move the product from the US into Mexico. As a result : (S↓P↑) – the supply of wheat to the Mexican market will fall – inducing an increase in the price of wheat. Since wheat is homogeneous and the market is perfectly competitive the price of all wheat sold in Mexico ↑. – The higher price will reduce Mexico's import demand. →Lead to shift back supply to the US market. Since Mexico is assumed to be a "large" importer – the supply shifted back to the US market will be enough to induce a reduction in the US price. – The lower price will reduce US export supply. Copyright © 2023 Pearson Education, Ltd.  a country that is a large importer is said to have "monopsony" power in trade. Mexican price of wheat ↑(PFT →PMT) ↓ import demand PM A XSUS US price ↓(PFT to PUST) PMT PFT T ↓ its export supply The difference PUS T MDM between price = T PUSA Or: PMT = PUST + T QT QFT PMT – PUST = T a country with monopsony power can reduce its demand for imports (by setting a tariff) to lower the price its pays for the imported product. Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of a Tariff: Large Country Importing Exporting country country P D S S PIMT A B C D a b c d PFT E F G H e f g h PEXT D Q SEXT SIMT DIMT DEXT Quantity of import and export Tariff = PIMT-PEXT Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of a Tariff: Large Country (on importing country) Effects on consumer: Importing Suffer a reduction in welfare country The increase in dom. P of both imported good & P dom. substitute D – reduces the CS –(A+B+C+D) S Effects on producer: PIMT Increase in producer welfare A B C D PFT The increase of the price ---increase PS (+A) E F G H PEXT Also increase the output, employment and profit Effect on government: Q Receives tariff revenue (+C+G) SIMT DIMT National welfare: +G-(B+D) CS: -(A+B+C+D) Increase national welfare Copyright © 2023 Pearson Education, Ltd. Welfare Effects of a Tariff: Large Country(exporting country) Effects on consumer: Increase in well-being Exporting ↓dom. Price country ↑ CS in the market (+e) S Effects on producer: PIMT Decrease in well-being b c d a PFT ↓dom. Price; ↓output, ↓employment, f g h ↓profit e PEXT ↓PS -(e+f+g+h) D Effect on government: DEXT SEXT No effect National welfare: ↓national welfare -(f+g+h) Copyright © 2023 Pearson Education, Ltd. Summary: Measuring the Costs and Benefits of Tariffs (1 of 4) A tariff raises the price in the importing country: – consumer surplus decreases (consumers worse off) – producer surplus increases (producers better off). – the government collects tariff revenue equal to the tariff rate times the quantity of imports with the tariff. ( ) t QT = PT − PT  ( D2 − S2 ) Change in welfare due to the tariff is e − (b + d ). Copyright © 2023 Pearson Education, Ltd.  Summary: Costs and Benefits of a Tariff for the Importing Country part (rectangle c) represents some For a “large” country, of the loss in consumer surplus. whose imports and exports affect world prices, the welfare effect of a tariff is ambiguous. The triangles b and d represent the efficiency loss The tariff distorts production and rectangle e represents consumption decisions: producers the terms of trade gain. produce too much and consumers consume too little. The tariff lowers the Foreign price, allowing Home to buy its imports cheaper. The costs and benefits to different groups can be represented as sums of the five areas a, b, c, d, and e. Copyright © 2023 Pearson Education, Ltd. Summary:Net Welfare Effects of a Tariff The colored triangles represent efficiency losses, while the rectangle represents a terms of trade gain. Copyright © 2023 Pearson Education, Ltd. Tariff and retaliation (Trade War) Tariffs can lead trading partners to retaliate with their own tariffs, thus hurting exporters in the country that first adopted the tariff. Tariffs can be hard to remove and large tariffs may induce producers to engage in wasteful activities to avoid paying tariffs. – E.g. Ford and Subaru install (then later remove) seats in vans and pickups trucks to avoid U.S. tariff on imports of light commercial trucks. Copyright © 2023 Pearson Education, Ltd. Winners and Losers of the Trump Trade War (1 of 3) Looking at the timeline of average tariffs imposed by the Trump administration 2018–2019: – Some tariffs on specific goods (solar panels, washing machines, steel, and aluminum) were imposed on a large set of exporting countries. – Some tariffs were targeted at specific countries (mostly China but also the European Union later on) and covered many different goods. – By 2019, over 66% of Chinese exports to the United States were hit by the tariffs shown in Figure 9-11. Copyright © 2023 Pearson Education, Ltd.  Figure 9.11 Average Tariffs on U.S. Imports Over the 2018–2019 period, the Trump administration drastically increased tariffs targeted both at specific goods as well as specific trading partners. Source: 2019 update of Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal, “The Return to Protectionism,” The Quarterly Journal of Economics 135, no. 1 (February 1, 2020), pp. 1–55. Copyright © 2023 Pearson Education, Ltd. Winners and Losers of the Trump Trade War (2 of 3) How have those tariff increases affected the prices of goods consumed in the United States? Any terms-of-trade gains were negligible—foreign exporters did not lower their prices to absorb hardly any of the tariffs. Almost the entire brunt of the tariffs has been borne by U.S. consumers and firms buying intermediate goods. The higher import prices due to the tariffs represented a substantial annual cost increase of $300-900 for U.S. households. Copyright © 2023 Pearson Education, Ltd.  Figure 9.12 Annual Cost of Higher Prices by Household Income The higher prices for imported goods due to the new tariffs represented a substantial annual cost increase for U.S. households. Source: Kirill Borusyak and Xavier Jaravel, “The Distributional Effects of Trade: Theory Copyright © 2023 Pearson Education, Ltd. and Evidence from the United States,” SSRN Scholarly Paper, October 6, 2018. Winners and Losers of the Trump Trade War (3 of 3) The new tariffs imposed by the United States inevitably led to retaliation by its trading partners. Looking at the progression of those retaliatory tariffs (averaged over the set of targeted goods) over time: – China responded with higher tariffs on par with the higher tariffs imposed by the United States. – Major steel and aluminum exporters to the United States responded with tariffs on various U.S. imports. – All those retaliatory tariffs overwhelmingly targeted agricultural products. The Chinese tariffs covered virtually all U.S. agricultural exports. Copyright © 2023 Pearson Education, Ltd.  Figure 9.13 Average Retaliatory Tariffs on U.S. Exports All of the United States’ major trading partners responded to the tariffs on their exports with tariffs of their own targeting U.S. exports. Source: 2019 update of Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal, “The Return to Protectionism,” The Quarterly Journal of Economics 135, no. 1 (February 1, 2020), pp. 1–55. Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Import Quota (1 of 2) An import quota is a restriction on the quantity of a good that may be imported. This restriction is usually enforced by issuing licenses or quota rights. A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by Home producers and from imports. Copyright © 2023 Pearson Education, Ltd. Import Quota (2 of 2) When a quota is used to restrict imports, the government receives no revenue. – Instead, the revenue from selling imports at high prices goes to quota license holders. – These extra revenues are called quota rents. Copyright © 2023 Pearson Education, Ltd.  Price Effects of a Quota: Large Country Case Suppose Mexico impose a binding import quota on wheat XS’US Supply of wheat to Mexico market ↓ PMA Cause excess demand for XSUS wheat in the market This will lead to Mexican price PM Q of wheat ↑(PFT →PMQ) PFT T ↓ import demand PUSQ ↑ domestic supply MDM The restricted wheat supply to Mexico will shift back to US PUSA market – Cause ↓US price; Qq QFT – ↓ its export supply Copyright © 2023 Pearson Education, Ltd. Example: An Import Quota in Practice: U.S. Sugar (1 of 4) Imports of sugar into the United States limited and quota rights passed out to foreign governments. Price of sugar in the United States has remained well above world prices. U.S. consumers are hurt by more than U.S. producers benefit; foreigners earn quota rents. – Overall effect on national welfare negative. Copyright © 2023 Pearson Education, Ltd. An Import Quota in Practice: U.S. Sugar (2 of 4) Under NAFTA, Mexico’s sugar exports were slowly exempted from the quota restrictions and the U.S. sugar price premium decreased to its lowest level in over 25 years. U.S. sugar producers complained, and the U.S. Commerce Department sharply reduced Mexican sugar imports. – Imposed a 64% anti-dumping tariff and then negotiated a suspension of the tariff in return for lower exports. Copyright © 2023 Pearson Education, Ltd. An Import Quota in Practice: U.S. Sugar (3 of 4) With access to the world sugar market successfully impeded, U.S. sugar prices have substantially risen again. – In 2015, that price was almost double the world price. For 2014, the sugar quota is estimated to: – cost consumers 3.5 billion ($11 per person or $30 for a typical household) – generate producer surplus losses for food producers who use refined sugar as an ingredient) of $909 million – for a total cost estimate of $4.4 billion – benefit sugar producers $3.9 billion (mostly to refiners) Copyright © 2023 Pearson Education, Ltd. An Import Quota in Practice: U.S. Sugar (4 of 4) Eliminating the sugar quota, by reducing the price of sugar in the United States, would generate 17,000– 20,000 new jobs in producing foods containing sugar. – Far more than the 500–2,000 jobs that might be lost in the sugar industry. – Would turn the United States from a net importer to a net exporter of sugar-containing foods. The sugar producers are better lobbyists than the sugar- containing food sector so this protection has been extended. Copyright © 2023 Pearson Education, Ltd. Figure 9.15 U.S. and World Raw Sugar Prices, 1989–2019 Source: U.S. Department of Agriculture. Copyright © 2023 Pearson Education, Ltd.  Figure 9.16 Effects of the U.S. Import Quota on Sugar The higher price The quota level Q raises associated with the quota the price of sugar in the induces an increase in United States above the U.S. sugar production world price (from PW to PQ ). (from S1 to S 2 ) a reduction in U.S. sugar consumption (from D1 to D 2 ). Copyright © 2023 Pearson Education, Ltd. Export Subsidy (1 of 3) An export subsidy can also be specific or ad valorem: – A specific subsidy is a payment per unit exported. – An ad valorem subsidy is a payment as a proportion of the value exported. An export subsidy raises the price in the exporting country, decreasing its consumer surplus (consumers worse off) and increasing its producer surplus (producers better off). Copyright © 2023 Pearson Education, Ltd. Welfare Effects of an Export Subsidy: Large Country---effects on exporting country (US) Subsidy to encourage the flow of wheat across border It will cost less to move the product from US to Mexico. Supply of wheat to Mexican market will rise lead to decrease in price of wheat Both country are large –Thus price in both countries will ↓ The lower price increase Mexico’s import demand Copyright © 2023 Pearson Education, Ltd. Welfare Effects of an Export Subsidy: Large Country---effects on exporting country (US) The higher wheat supply to Mexico will reduce supply in the US market –Increase the price in US The higher price in US will increase US supply PUS = Pmex + S subsidy XS US (PUS) = MD Mex (Pmex) The US wants to export at its new higher price must be equal to the amount Mexico wants to import at its new lower price Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of an Export Subsidy: Large Country---effects on exporting country (US) When a large country D S implements an export subsidy PEXS Cause ↑ domestic P a b c d PFT e f g h (exporting country) PIMS ↓ price of ROW (importing country) Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of an Export Subsidy: Large Country---effects on exporting country (US) Suppose after subsidy, the Price in importing country ↓ (PIM) Price in exporting country ↑ (PEX) S= PEXs-PIMs D S Effects on consumer: Decrease in well-being Increase in their dom. Price lowers the amount of CS = –(a+b) PEXS a b c Effects on producer: PFT d Increase in well-being e f g h PIMS Increase P ↑ PS= + (a+b+c) Effects on government: Govt. must pay subsidy to exporters -(b+c+d+f+g+h) National Welfare ↓ - (b + d + f + g + h) Copyright © 2023 Pearson Education, Ltd.  Welfare Effects of an Export Subsidy: Large Country---effects on importing country (Mexico) Effects on consumer: P Increase in well being D S ↓in dom. P ↑CS = + (E+F + G) Effects on producer: Decrease in well being ↓ in their product of dom. Market; PEXs C PFT A B D ↓PS = - (E + F) H E F G Effect on govt: PIMS No effects National welfare: an export subsidy implemented by a "large" exporting country in a perfectly SIMS competitive market will raise national DIMS Q welfare in the importing country. (+ G) Copyright © 2023 Pearson Education, Ltd. Summary: Effects of an Export Subsidy An export subsidy raises prices in the exporting country while lowering them in the importing country. Copyright © 2023 Pearson Education, Ltd. Summary: Export Subsidy (3 of 3) An export subsidy damages national welfare. The triangles b and d represent the efficiency loss. – The export subsidy distorts production and consumption decisions: producers produce too much and consumers consume too little compared to the market outcome. The area b + c + d + f + g represents the cost of the subsidy paid by the government. – The terms of trade decrease, because the price of exports falls. Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Voluntary Export Restraint A voluntary export restraint works like an import quota, except that the quota is imposed by the exporting country rather than the importing country. These restraints are usually requested by the importing country. The profits or rents from this policy are earned by foreign governments or foreign producers. – Foreigners sell a restricted quantity at an increased price. Copyright © 2023 Pearson Education, Ltd. A Voluntary Export Restraint in Practice (1 of 2) In 1979, sharp oil price increases caused the U.S. market to shift abruptly toward smaller cars. Japanese producers moved in to fill the increased demand faster than U.S. auto companies could come out with smaller, more fuel-efficient models. As the Japanese market share soared and U.S. output fell, strong political forces in the United States demanded protection. Rather than act unilaterally and risk creating a trade war, the U.S. government asked the Japanese government to limit its exports. Copyright © 2023 Pearson Education, Ltd. A Voluntary Export Restraint in Practice (2 of 2) The Japanese, fearing unilateral U.S. protectionist measures if they did not do so, agreed to limit their sales. – The first agreement, in 1981, limited Japanese exports to the United States to 1.68 million automobiles. – A revision raised that total to 1.85 million in 1984. – In 1985, the agreement was allowed to lapse. The price of Japanese cars in the United States rose, with the rent captured by Japanese firms. The total costs to the United States are estimated to have been $3.2 billion in 1984. Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Local Content Requirement (1 of 5) A local content requirement (also called rules of origin) is a regulation that requires a specified fraction of a final good to be produced domestically. It may be specified in value terms, by requiring that some minimum share of the value of a good represent home value added, or in physical units. Copyright © 2023 Pearson Education, Ltd. Local Content Requirement (2 of 5) From the viewpoint of domestic producers of inputs, a local content requirement provides protection in the same way that an import quota would. From the viewpoint of firms that must buy home inputs, however, the requirement does not place a strict limit on imports, but allows firms to import more if they also use more home parts. Copyright © 2023 Pearson Education, Ltd. Local Content Requirement (3 of 5) Local content requirement provides neither government revenue (as a tariff would) nor quota rents. Instead, the difference between the prices of home goods and imports is averaged into the price of the final good and is passed on to consumers. Copyright © 2023 Pearson Education, Ltd. Local Content Requirement (4 of 5) In 2020, the United States-Mexico-Canada Agreement (USMCA) increased the regional content requirements for vehicles from 62.5 (with NAFTA) to 75%. – Any car or truck exported within North America must contain at least 75% of its content produced within the region. An additional requirement stipulates that 45% of the content must be made by workers earning at least $16 an hour, which effectively excludes most of auto parts made in Mexico, where most wages are below that level. – Intended to impose additional restrictions on vehicles assembled in Mexico for sale in the U.S. market. Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Other Trade Policies Export credit subsidies – A subsidized loan to exporters – U.S. Export-Import Bank subsidizes loans to U.S. exporters. Government procurement – Government agencies are obligated to purchase from home suppliers, even when they charge higher prices (or have inferior quality) compared to foreign suppliers. Bureaucratic regulations (red tape) – Safety, health, quality, or customs regulations can act as a form of protection and trade restriction. Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Technical Barriers to Trade (TBT) A technical barrier to trade (TBT) is any regulation, standard or procedure that could make exporting goods to another country more difficult. TBTs are often greater obstacles to exporters than tariffs (import fees). Trade restrictive effect arising from the application of technical regulations or standards such as testing requirements, labeling requirements, packaging requirements, marketing standards, certification requirements, origin marking requirements, health and safety regulations, and sanitary and phytosanitary regulations. Copyright © 2023 Pearson Education, Ltd.  That’s because India, the world’s biggest seller of the Asian India lifts ban diet staple, has banned exports after on onion extended Monsoon downpours delayed exports as harvests and supplies shrivelled prices plunge Nov 21 — The Ministry of Domestic Trade and Consumer Affairs (KPDNHEP) said that a hike in the price of onions from India cannot be avoided due to reduced import as a result of the monsoon and flood disasters in the republic. Copyright © 2023 Pearson Education, Ltd. Export Restriction Copyright © 2023 Pearson Education, Ltd. Non-Tariff: Sanitary and Phytosanitary measures An agreement on how governments can apply food safety and animal and plant health measures (sanitary and phytosanitary or SPS measures) sets out the basic rules in the WTO. ensure that your country’s consumers are being supplied with food that is safe to eat It allows countries to set their own standards. But it also says regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health. And they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. Copyright © 2023 Pearson Education, Ltd.  Sanitary and phytosanitary measure Definitions (by WTO) Sanitary = health in general (sometimes animal health) Phytosanitary = plant health Sanitary and phytosanitary (SPS) = food safety and animal and plant health Over 10,000 food safety, plant and animal health requirements have been notified, and a growing number of countries are actively providing the information Among the concerns discussed were actual or proposed measures on honey containing pollen from genetically modified plants, cadmium residues in cocoa and chocolate, avian influenza, mad cow disease, ractopamine (a feed additive to produce lean meat) and “novel” foods. Copyright © 2023 Pearson Education, Ltd. Sanitary and Phytosanitary Copyright © 2023 Pearson Education, Ltd. The Effects of Trade Policy: A Summary For each trade policy, the price rises in the Home country adopting the policy. – Home producers supply more and gain. – Home consumers demand less and lose. The world price falls when Home is a “large” country that affects world prices. Tariffs generate government revenue; export subsidies drain it; import quotas do not affect government revenue. All these trade policies create production and consumption distortions. Copyright © 2023 Pearson Education, Ltd. Table 9.1 Effects of Alternative Trade Policies Policy Tariff Export Import Quota Voluntary Subsidy Export Restraint Producer Increases Increases Increases Increases surplus Consumer Falls Falls Falls Falls surplus Government Increases Falls No change No change revenue (government (rents to license (rents to spending rises) holders) foreigners) Overall national Ambiguous Falls Ambiguous Falls welfare (falls for small (falls for small country) country) Copyright © 2023 Pearson Education, Ltd. Summary (1 of 2) 1. A tariff increases the home price and the quantity supplied and reduces the quantity demanded and the quantity traded; also decreases the world price when the country is “large.” 2. A quota does the same; an export subsidy does the same. 3. Tariffs generate government revenue; export subsidies drain it; import quotas are revenue neutral. Copyright © 2023 Pearson Education, Ltd. Summary (2 of 2) 4. The welfare effect of a tariff, quota, or export subsidy can be measured by – efficiency loss from consumption and production distortions. – terms of trade gain or loss. 5. With import quotas, voluntary export restraints, and local content requirements, the government of the importing country receives no revenue. 6. With voluntary export restraints and occasionally import quotas, quota rents go to foreigners. Copyright © 2023 Pearson Education, Ltd. International Trade: Theory and Policy Twelfth Edition, Global Edition Chapter 9 The Instruments of Trade Policy Copyright © 2023 Pearson Education, Ltd. Copyright © 2023 Pearson Education, Ltd.