CHAPTER 8
NONTARIFF BARRIERS
TO IMPORTS AND
PUSHING EXPORTS
Import quotas
The import quota specifies that only a
certain physical amount of the good will
be allowed into the country during the
time period, usually one year.
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Import quotas



Reasons of using a quota:
Ensures that the quantity of imports is
strictly limited.
Gives government officials greater power.
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Quota versus tariff for a small
country
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Quota versus tariff for a small
country
For a competitive market, the effects of a
quota on price, quantities, and well-being
are the same as those of an equivalent
tariff, with one possible exception.
 The import quota is worse than the tariff
in two cases:



If quota licenses are allocated through resource-using
application and selection procedures.
If a dominant domestic firm can use the quota to assert
its monopoly pricing power.
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Quota vs. tariff for a large country
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Quota vs. tariff for a large country


If the quota licenses can be distributed with minimal
resource costs, then the effect on net national wellbeing of the import quota is the gain of area e less the
loss of area b+d. If the exporters are passive, then a
large country can gain net national well-being by
imposing an import quota, and there is an optimal quota
that maximizes the gain in national well-being.
An optimal quota are the same as those for the optimal
tariff. The quota hurts the foreign country, and the
foreign country may choose to retaliate. Even if the
foreign country does not retaliate, the quota causes
worldwide inefficiency.
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Methods of import-license
distribution






Import-license auction
The government gets (almost all of) area c, in the
form of auction revenues.
Fixed favoritism
In this case the importers lucky enough to receive
the import licenses will get area c.
Resource-using application
With resource-using procedures, some or all of area
c is turned into a loss to society by wasting
productive resources.
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Voluntary Export Restraints
 A voluntary export restraint (VER) is an export
quota administered by the exporting country.

It is also known as a voluntary restraint agreement (VRA).
 VERs is a barrier in which the importing country
government coerces the foreign exporting country to
agree “voluntarily” to restrict its exports to this
country. The export restraint usually requires that
foreign exporting firms act like a cartel, restricting
sales and raising prices.
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Voluntary Export Restraints
 A VER is exactly like an import quota where the
licenses are assigned to foreign governments and is
therefore very costly to the importing country.
 A VER is always more costly to the importing country
than a tariff that limits imports by the same amount.
 A VER produces a loss for the importing country.
Vs. import quota, VER causes a loss of area c.
Vs. free trade, the net loss is b+c+d from VER.
 For many products foreign producers can adjust the
mix of varieties or models of the product that they
export, while remaining within the overall quantitative
limit.
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DUMPING
Selling exports at a price that
is “too low,” a price below
“normal value” or “fair
market value.”
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DUMPING
Either
 The export price is lower than the price
charged for comparable domestic sales
in the home market of the exporter.
Or
 The export price is lower than the full
unit cost (including a profit margin).
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Types of dumping
Predatory dumping occurs when a firm
temporarily charges a low price in the
foreign export market, with the purpose of
driving its foreign competitors out of
business.
 Cyclical dumping occurs during an
industry downturn in demand, with sales
at prices that cover average variable cost
but are below average total cost.

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Types of dumping


Seasonal dumping unloads excess inventories,
especially on products that are perishable or
going out of fashion.
Persistent dumping is international price
discrimination, with the exporting firm facing a
less elastic demand curve in the home market,
and having some way to limit or prevent reimport back into its home market.
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Persistent dumping
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Persistent dumping
Dumping can occur only if
three conditions are met:
Imperfectly
competitive industry
Different demand elasticity in
different market Ed <Ef
Segmented markets
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What should the importing country
think of dumping ?


Predatory dumping is potentially the most
troubling to the importing country. If the
exporter succeeds, it will raise prices in the
future, and the importing country can be
harmed. But predatory dumping probably is
rare.
The importing country could also have
concerns about cyclical dumping. If used
aggressively, it can export unemployment.
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Export subsidy
An export subsidy is really a negative
export tax or a payment to a firm by the
government when a unit of the good is
exported, attempts to increase the flow
of trade of a country.
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Export subsidy (small country)
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The effect of export subsidy on
export country
An export subsidy expands exports and
production of the subsidized product.
 An export subsidy lowers the price paid
by foreign buyers, relative to the price
that local consumers pay for the product.
 The export subsidy reduces the net
national well-being of the exporting
country.

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Export subsidy (large country)
Price, P
S
PS
Subsidy P
W
P*S
a
c
b
e
d
f
g
= producer gain
(a + b + c)
= consumer loss (a + b)
= cost of
government subsidy
(b + c + d + e + f + g)
D
Quantity, Q
Exports
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Export subsidy (large country)
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Export subsidy
 For
a large exporting country an
export subsidy causes a decline in its
international terms of trade.
 For both a small and a large country,
an export subsidy results in net
national loss as well as a loss for the
whole world.
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Switching an importable product into an
exportable product
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Countervailing Duties
A tariff used to offset the price or cost
advantage created by the subsidy to
foreign exports.
 If the exporting country is large, the
importing country overall is better off, but
the import-competing industry is harmed.
The importing country government is
permitted to impose a countervailing duty.

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



Under export subsidy, the net importing country gain from the
exporting country subsidy is w+y+z.
Vs. the export subsidy and no countervailing duty, the importing
country is worse off for imposing the countervailing duty (w+z), but
good for the whole world (the deadweight loss of excessive trade x
is eliminated).
Free trade and the combination of the export subsidy and
countervailing duty. The well-being of importing country is higher
than it would be with free trade, because the exporting government
is now effectively paying its taxes (area y).
Because export subsidies are bad for the world as a whole, and
retaliating against them is good for the world as whole, WTO rules
are wise to allow importing countries to impose countervailing
duties.
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Strategic export subsidies
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Strategic export subsidies
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Strategic export subsidies
Strategic trade policy---government policy
helps its own firm’s strategy to win the
game and claim the prize.
 The subsidy might be a good thing for the
exporting country.
 The case for giving the subsidy is fragile,
depending on too many conditions to be a
reliable policy.

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Questions

What are import quotas? Why do some
governments use them instead of just
using tariffs to restrict imports by the
same amounts? Is it because quotas
bring a bigger national gain than tariffs?
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Questions

What are voluntary export restraint
agreements? Why do some governments
force foreign exporters into them instead
of just using quotas or tariffs to restrict
imports by the same amounts? Is it
because VERs bring the importing
country a bigger national gain than
quotas or tariffs?
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Questions

For a small country, consider a quota and an equivalent
tariff that permit the same initial level of imports. The
market is competitive, and the government uses fixed
favoritism to allocate the quota permit, with no
resources expended in the process. There is now an
increase in domestic demand (the domestic demand
curve Dd shifts to the right). If the tariff rate is
unchanged, and if the quota quantity is unchanged, are
the two still equivalent? Show this using a graph. Be
sure to discuss the effects on domestic price,
production quantity, and consumption quantity, on
import quantity, and on producer surplus, consumer
surplus, deadweight losses, and government revenue
or its equivalent for the quota.
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Questions

Consider the export subsidy shown in
Figure 10.3. Assuming that the export
subsidy remains $20, what are the effects
of a decline in the world price from $100
to $90? Show the effects using a graph
and explain them.
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