The Economics of
Trade Restrictions
Tariffs, Quotas and
Voluntary Export Restraints
Tariff A tax imposed by a government on
imports.
Import Quota A numerical limit a government
imposes on the quantity of a good that can be
imported into the country.
Non-Tariff Barriers ways that a nation can
draw up rules, regulations, inspections, and
paperwork to make it more costly or difficult to
import products.
U.S. Tariff Rates: 1890 to the Present
–––––––– U.S. Average Tariff Rate ––––––––
(Duties collected as a share of dutiable imports)
60%
50%
40%
30%
20%
4.5%
10%
1890
1910
1930
1950
1970
1990
2006
Trade Restrictions: Impact of a Tariff.
• Consider a tariff on autos imports.
• Without a tariff, the world price
of autos is Pw. At Pw consumers
in the U.S. purchase Q1 units …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 from foreign producers.
• A tariff t makes it more costly for
Americans to purchase autos from
abroad. U.S. prices rise to Pw+ t
and purchases fall from Q1 to Q2. Pw+ t
• U.S. purchases from domestic
producers rise from Qd1 to Qd2 …
imports fall to Q2 – Qd2.
Pw
Imports after tariff
S
U
T
V
Initial imports
• Producers gain area S … the
tariff generates T tax revenues for
the government…
areas
U & V are deadweight losses from
reduction in allocative efficiency.
Tariff = t
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Trade Restrictions: Impact of a Quota
• Consider a quota on peanuts.
• Without trade restraints, Pw (the
world price of peanuts) would be
the domestic price. At Pw U.S.
consumers would purchase Q1 …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 imported from abroad.
• A quota of Q2 – Qd2 imports
pushes the U.S. price up to P2.
• While total U.S. purchases fall
(from Q1 to Q2), those from U.S.
producers rise (from Qd1 to Qd2)
and … imports fall to Q2 – Qd2.
Import quota:
Q2 – Qd2
P2
Pw
S
U
T
V
Initial imports
• U.S. producers gain area S. Area
T goes to foreign producers with
permits to import into the U.S.
•U & V are deadweight losses.
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
Note: The government derives no
additional revenue from quotas.
Trade Restriction Impacts
Price
Price
SDomestic
SDomestic
Import quota:
Imports after tariff
Pw
Q2 – Qd2
P2
Pw+ t
S
U
T V
Tariff = t
Pw
S
U
T
V
Initial imports
Initial imports
DDomestic
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
The Sugar Trade between Brazil and the United States
NoTrade:
WithTrade:
Brazil $12 and 30 tons
Brazil $16 and 25 tons exports 15 tons
US
US
$24 and 80 tons
$16 and 87 tons imports 15 tons
Why do Nations Adopt Trade Restrictions?
1.Saves Domestic Employment
2.:
a. Saves jobs in protected industries
b. Costs jobs in more competitive industries due
to higher input prices.
c. when an industry is protected, the economy
as a whole loses the benefits of playing to its
comparative advantage.
Practical Application:
In 2002, the Bush administration imposed
tariffs of up to 25% on imported steel
products. This action
a.reduced the supply of steel in the domestic
market and led to higher steel prices.
b. increased U.S. employment because it saved
jobs in the steel industry.
c. reduced employment in the U.S. steel
container industry because the higher steel
prices made it more difficult for them to
compete with foreign rivals.
Preserving Japanese Jobs with Tariffs and
Quotas Is Also Expensive
Product
Rice
Natural gas
Gasoline
Paper
Beef, pork, and poultry
Cosmetics
Radio and television sets
Cost to Consumers per
Year for Each Job Saved
$51,233,000
27,987,000
6,329,000
3,813,000
1,933,000
1,778,000
915,000
The High Cost of Preserving US
Jobs with Tariffs and Quotas
Product
Benzenoid chemicals
Luggage
Softwood lumber
Dairy products
Frozen orange juice
Ball bearings
Machine tools
Women's handbags
Canned tuna
Number of Jobs Saved
216
226
605
2,378
609
146
1,556
773
390
Cost to Consumers per Year
for Each Job Saved
$1,376,435
1,285,078
1,044,271
685,323
635,103
603,368
479,452
263,535
257,640
Cost to U.S. Consumers of Saving a Job through Protectionism
Industry Protected with Import Tariffs or
Quotas
Sugar
Polyethylene resins
Dairy products
Frozen concentrated orange juice
Ball bearings
Machine tools
Women’s handbags
Annual Cost per
Job Saved
$826,000
812,000
685,000
635,000
603,000
479,000
263,000
Glassware
247,000
Textiles
199,000
Rubber footwear
168,000
Women’s non-athletic footwear
139,000
Why do Nations Adopt Trade Restrictions?
2. Infant Industries argument
a. Protect developing industries while growing
b. Difficult to tell when they are adult.
Brazil
2. Infant Computer Industries 1970s
a. Brazil largely barred imports of
computer products for several decades
b. This policy guaranteed increased sales
for Brazilian computers.
c. by the mid-1980s, due to lack of international competition,
Brazil had a backward and out-of-date industry
d. Brazil’s computer industry never competed effectively on
world markets
Why do Nations Adopt Trade Restrictions?
3. Prevents Dumping:
a. The sale of goods abroad at a price
below cost
b. Allows foreign firms to achieve
economies of scale.
c. Foreign firms may want to gain entry
to another market. Sell below cost to
gain sales.
Why do Nations Adopt Trade Restrictions?
4. Saves the Environment
a. globalization could also destroy enough of the planet’s
basic biological and physical systems that prospects for
life itself will be radically compromised
(race to the bottom)
or
b. with the appropriate safeguards in place, the
environmental impacts of trade can be minimized. In
some cases, trade may even bring environmental
benefits.
Why do Nations Adopt Trade Restrictions?
5. Unsafe Consumer Products
1.
a. Imported goods may not be produced under same
safety guidelines as American goods.
b. Examples:.
1) Mattel toys with lead paint from China
2) Japan refused to import US wheat due to
GMO concerns
3) Baby formula and drywall from China
Why do Nations Adopt Trade Restrictions?
6. National Security/Interest
a. countries should not depend too heavily on
other countries for supplies of certain key
products, such as oil,
b. or supply technologies that might have
national security applications.
Efforts to Reduce Trade Restrictions
1. GATT / WTO
In 1948 the United States and Europe set up the
General Agreement on Tariffs and Trade (GATT) to
reduce tariffs and revive international trade after World
War II
A series trade rounds took place, in which countries
agreed to reduce tariffs from the very high levels of the
1930s.
Later, trade in services and in products incorporating
intellectual property, such as software programs and
movies, grew in importance.
U.S. Tariff Rates (again)
–––––––– U.S. Average Tariff Rate ––––––––
(Duties collected as a share of dutiable imports)
60%
50%
40%
30%
20%
10%
1890
GATT (1948)
1910
1930
1950
1970
1990
2006
Efforts to Reduce Trade Restrictions
1.cont. GATT / WTO
In January 1995, GATT was replaced by the World Trade
Organization (WTO).
World Trade Organization (WTO) An international
organization that oversees international trade agreements.
Opposition to the World Trade Organization
1. Some opponents are specifically against the
globalization process.
2. Others want to erect trade barriers to
protect domestic firms from foreign competition.
3. Some believe the WTO favors the interests
of the high-income countries at the expense of
the low-income countries.
Globalization The process of countries becoming
more open to foreign trade and investment.
Efforts to Reduce Trade Restrictions
2. Regional Trading Agreements
a. In some, participants allow each other’s
imports without tariffs or quotas (NAFTA)
b. In some, participants have a common external
trade policy as well as free trade within the
group.
c. In some, in addition to a common market,
monetary and fiscal policies are coordinated. (EU)
.
Some Regional Trade Agreements
Some Regional Trade Agreements
True or False
1.
A total ban on imports from another country is a quota.
2.
A tariff is a restriction on the quantity of a product that
can enter a country.
3.
The complete prohibition of trade in a particular
commodity with a particular nation is called an embargo
4.
The prices and availabilities of goods and services
should be lower with free trade than with restricted trade
5.
One of the protectionist arguments is that trade
restrictions should be imposed to ensure national security
6.
The sale of a product in a foreign market at a price
below cost is called dumping
7.
Negotiations under the General Agreement on Tariffs
and Trade have resulted in lower tariffs between nations.