Chapter 5: Nontariff Trade Barriers Note: Please mention the chapter before you

Chapter 5: Nontariff Trade Barriers
Note: Please mention the chapter before your response/comments.
Question: Rather than generating tax revenue as do tariffs, subsidies require tax revenue. Therefore, they are not an effective protective device for the home economy. Do you agree?
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CHAPTER 5
This chapter considers policies other than tariffs that restrict international trade. Referred to as nontariff trade barriers (NTBs), such measures have been on the rise since the 1960s and have become the most widely discussed topics at recent rounds of international trade negotiations. Although tariffs have come down in recent decades, nontariff trade barriers have multiplied. This is not surprising. After all, the political forces that give rise to high tariffs do not disappear once tariffs are brought down. Instead, they tend to seek protection through other channels. Nontariff trade barriers encompass a variety of measures. Some have unimportant trade consequences; labeling and packaging requirements can restrict trade but generally only marginally. Other NTBs have significantly affected trade patterns; examples include abso-lute import quotas, tariff-rate quotas, voluntary export restraints, subsidies, and domestic content requirements.
Absolute Import Quota
The best-known nontariff barrier is the import quota, which limits the total quantity of goods that may enter a country within a given time period. There are two types of import quotas: absolute quota and tariff-rate quota. Both place restrictions on imported goods and are enforced by the department of U.S. Customs and Border Protection at ports of entry throughout the United States. An absolute quota is a physical restriction on the quantity of goods that can be imported
during a specific time period, normally a year; the quota generally limits imports to a level below what would occur under free trade conditions. An absolute quota might state that no more than 1 million kilograms of cheese or 20 million kilograms of wheat can be imported during some specific time period. Imports in excess of a specified quota may be held for the opening of the next quota period by placing them in a bonded warehouse or a foreign trade zone, or they may be exported or destroyed under supervision of the government’s customs department. To administer the quota, the government allocates import licenses to importers, permitting them to import the product only up to a prescribed limit regardless of market demand. One way to limit imports is through a global quota. This technique permits a specified
number of goods to be imported each year, but it does not specify from where the product is shipped or who is permitted to import. When the specified amount has been imported (the quota is filled), additional imports of the product are prevented for the remainder of the year. However, the global quota becomes unwieldy because of the rush of both domestic
importers and foreign exporters to get their goods shipped into the country before the quota is filled. Those who import early in the year get their goods; those who import late in the year may not. Global quotas are plagued by accusations of favoritism against merchants fortunate enough to be the first to capture a large portion of the business. To avoid the problems of a global quota system, import quotas have usually been allo-cated to specific countries; this type of quota is known as a selective quota. A country might impose a global quota of 30 million apples per year, of which 14 million must come from the United States, 10 million from Mexico, and 6 million from Canada. Customs offi-cials in the importing nation monitor the quantity of a particular good that enters the country from each source; once the quota for that source has been filled, no more goods are permitted to be imported. Another feature of quotas is that their use may lead to a domestic monopoly of produc-tion and higher prices. Because a domestic firm realizes that foreign producers cannot surpass their quotas, it may raise its prices. Tariffs do not necessarily lead to monopoly power because no limit is established on the amount of goods that can be imported into the nation. Following World War II, absolute quotas were a popular form of protectionism as
countries sought to strictly limit the quantity of imports. However, as the world moved toward trade liberalization in the 1960s and 1970s, absolute quotas were removed from international
trade in manufactured goods. By the 1990s, absolute
quotas were phased out of trade in agricultural goods and replaced by tariff-rate quotas. As we will learn, not only is a tariff-rate quota a less restrictive trade barrier than an absolute quota, but it is easier to negotiate reductions in tariff rates than increases in absolute quotas.
trade and Welfare effects
Like a tariff, an absolute quota affects an economy’s welfare. Figure 5.1 represents the case of cheese, involving U.S. trade with the European Union (EU). Suppose the United States is a “small” country in terms of the world cheese market. Assume that
S andD denote the U.S. U.S. supply and demand schedules for cheese in the United States. The S EU represents the supply
schedule of the EU. Under free trade, the price of EU cheese and U.S. cheese equals $2.50 per pound. At this price, U.S. firms produce 1 pound, U.S. consumers purchase 8 pounds, and imports from the EU total 7 pounds. Suppose that the United States limits its cheese imports to a fixed quantity of 3 pounds
by imposing an import quota. Above the free trade price, the total U.S. supply of cheese now equals U.S. production plus the quota. In Figure 5.1, this is illustrated by a shift in the supply curve from U.S.
S to S U.S.1Q. The reduction in imports from 7 pounds to 3 pounds raises the equilibrium price to $5.00; this leads to an increase in the quantity supplied by U.S. firms from 1 pound to 3 pounds and a decrease in the U.S. quantity demanded from 8 pounds to 6 pounds.
Quotas versus tariffs
Previous analysis suggests that the revenue effect of absolute quotas differs from that of import tariffs. These two commercial policies can also differ in the impact they have on the volume of trade. The following example illustrates how, during periods of growing demand, an absolute quota restricts the volume of imports by a greater amount than does an equiva-lent import tariff. Figure 5.2 represents a hypothetical trade situation for the United States in autos. The U.S. supply and demand schedules for autos are given by U.S.0
S and D , and J0S represents U.S.0
the Japanese auto supply schedule. Suppose the U.S. government has the option of levying a tariff or a quota on auto imports to protect U.S. companies from foreign competition.

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