Chapter 5 Summary

LO 5.1 Types of Non-Tariff Barriers

• Countries have increasingly resorted to using non-tariff barriers to provide protection to their producers, as average tariff rates have fallen worldwide.
• Non-tariff barriers – import policies other than a simple tariff – include import quotas, voluntary export restraints (VERs), product standards, domestic content requirements, and government procurement policies.
• The most well-known non-tariff barrier is an import quota, which limits the quantity of imports during a particular period to a level below what would normally occur under free trade.
• Non-tariff barriers other than import quotas and voluntary export restraints – product standards, domestic content requirements, and government procurement policies – provide import protection by raising costs and creating uncertainty regarding the conditions under which imports occur.

LO 5.2 Import Tariffs, Import Quotas and Their Affect on Economic Well-Being

• The effects of an import quota are largely the same as those of an equivalent tariff, presuming the market is competitive.
• Producers in import-competing industries benefit from higher prices and production, while consumers end up worse off, having to pay more and consume a smaller quantity.
• The nation loses economic well-being due to the usual production (protective) and consumption effects, but national economic losses can be greater depending on how the import licences are distributed.
• If the government distributes import licences to domestic firms through resource-using procedures or to foreign firms for free, then some or all of the tariff-equivalent revenue will be lost to the nation, and national economic losses will be greater.
• An import quota gives domestic producers greater protection and more market power than an equivalent tariff in the case of growing demand. Whereas a quota represents a strict quantitative limit on imports, imports can continue under a tariff once consumers are willing to pay higher prices.

LO 5.3 The Terms of Trade Effect of an Import Quota

• If an importing country is large enough so that it is able to influence the price for the imported product, then an import quota can improve the nation’s terms of trade as foreign suppliers accept lower prices.
• If the improvement of the terms of trade is substantial enough, it can more than offset the usual deadweight losses of the production and consumption effects and lead to an improvement in national economic well-being.
• An optimal import quota maximizes the difference between this terms-of-trade effect and the efficiency losses due to the production and consumption effects.
• Even though a large importing country can improve its economic well-being due to the terms of trade effect, a nationally optimal quota still reduces world well-being as global resources are misallocated.
• Foreign exporters lose from not being able to supply a larger quantity even though buyers in the importing country would welcome the additional supplies. Moreover, the exporting country is likely to retaliate, prompting a decline in global trade.

LO 5.4 Effects of an Import Quota and a VER

• A VER is a non-tariff trade barrier in which the importing country effectively forces the exporting country (gets the exporting country to agree) to limit the quantity of exports to the importing country.
• As with other types of import protection, a VER is intended to protect domestic producers that are facing stiff import competition.
• The economic effects of a VER are the same as that of an absolute import quota, except for the distribution of the tariff-equivalent revenue (or quota rent).
• Domestic producers experience an improvement in the economic well-being as their production rises and they receive higher prices.
• Domestic consumers end up worse off economically as they must buy less of the product and pay higher prices.
• The country as a whole loses economic well-being due to the usual deadweight losses from the production and consumption effects as well as the transfer of the tariff-equivalent revenue to the exporting country, which administers the VER.
• The world loses economic well-being as higher-cost supplies are lower-cost imports in the importing country and global consumption is reduced.
• Foreign producers may respond to a VER by beginning production in the importing country and by adjusting the composition of their exports so that the quantity restriction is satisfied, but the value of their exports rises.

LO 5.5 Economic Effects of Other Non-Tariff Barriers

• Countries use various other non-tariff barriers to protect domestic producers from import competition. These include product standards, domestic content requirements, and government procurement mechanisms.
• Product standards, domestic content requirements, and government procurement mechanisms all benefit domestic producers, hurt domestic consumers, and reduce national well-being and world well-being.
• The sources of losses in well-being, nationally and worldwide, are the usual production and consumption effects, along with the resource costs associated with administering product standards, domestic content requirements, and government procurement mechanisms.

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