19.4 Trade Barriers and Export Subsidies

Why do some industries push for trade barriers?

Because trade can hurt certain domestic industries and workers, so they lobby for protection.

What arguments are often used to support trade barriers?

“Cut imports to prevent unemployment” and “Buy American!” — patriotic and job‑saving appeals.

What is a tariff?

A tax (duty) on imported goods, either on their dollar value or physical quantity.

What is a revenue tariff?

A modest tax on goods not produced domestically (like bananas or coffee) to raise government revenue.

What is a protective tariff?

A tariff designed to shield domestic producers by making imports more expensive and less competitive.

What is an import quota?

A government‑imposed limit on how much of a product can be imported in a given period.

Why are quotas more restrictive than tariffs?

Because once the quota is filled, no more imports are allowed, unlike tariffs where imports can continue.

What is a voluntary export restriction (VER)?

When foreign firms “voluntarily” limit exports to avoid harsher tariffs or quotas.

What are nontariff barriers (NTBs)?

Rules like licensing requirements, strict product standards, or customs delays that make importing harder.

What is an export subsidy?

A government payment to domestic producers so they can sell exports cheaper and attract foreign buyers.

In the smartphone example, what happens with free trade at Pw?

U.S. consumers buy d units, U.S. producers make a units, imports = ad units.

What happens when a tariff raises the price from Pw to Pt?

Consumption falls (d → c), domestic production rises (a → b), imports shrink (ad → bc), government collects tariff revenue

What happens with a quota of bc units?

Same effects as a tariff (higher price, less consumption, more domestic production, fewer imports), but revenue goes to foreign producers instead of the U.S. government.

Overall impact of tariffs and quotas?

They help specific industries but hurt consumers and reduce efficiency, lowering living standards.

In a closed economy (no trade), how is the domestic price and quantity determined?

By the intersection of domestic demand (Dd) and domestic supply (Sd), giving price Pd and quantity q.

What happens when the economy opens to world trade?

The domestic price falls to the lower world price Pw.

At Pw, what do U.S. consumers and producers do?

Consumers buy d units, producers supply a units, and imports equal the gap ad.

What happens if a tariff raises the price from Pw to Pt?

Consumption falls (d → c), domestic production rises (a → b), imports shrink (ad → bc).

Who is hurt and who benefits under a tariff?

Consumers pay more, foreign exporters sell less, domestic producers gain sales, government collects tariff revenue

What does the “yellow area” in the graph represent under a tariff?

The tariff revenue paid by consumers to the government

What happens if instead of a tariff, the U.S. sets an import quota of bc units?

The supply curve shifts to Sd + Q, price rises to Pt, consumption falls to c, domestic production rises to b, imports capped at bc.

What is the key difference between a tariff and a quota?

With a tariff, extra money goes to the U.S. government; with a quota, it goes to foreign producers holding quota rights.

If the quota is set at ad units instead of bc, what happens?

The price stays at Pw, imports equal ad units.

If the quota is greater than zero but less than bc, what happens to price?

Price rises to somewhere between Pw and Pt.

If the government cuts the tariff in half, what happens to domestic producers’ sales?

Their sales decrease.

If the tariff is set equal to Pd – Pw, what happens to the trade deficit?

It decreases to zero.

What happens to consumption when a tariff raises price from Pw to Pt?

Consumption falls from d to c; consumers buy fewer smartphones and pay more per unit.

How are U.S. producers affected by a tariff?

They sell more (a → b) at a higher price (Pt), gaining revenue and lobbying for tariffs.

How are foreign exporters (like China) affected by a tariff?

Imports shrink (ad → bc); they sell fewer phones and lose revenue.

What does the “yellow rectangle” in the tariff diagram represent?

Tariff revenue collected by the U.S. government = (Pt – Pw) × imports (bc)

What is the indirect effect of tariffs on U.S. exports?

China earns fewer dollars, buys fewer U.S. exports, so efficient U.S. export industries shrink.

Why do tariffs reduce efficiency overall?

They expand inefficient industries without comparative advantage and contract efficient ones, lowering world output

What is an import quota?

A government limit on the number of imports allowed (e.g., bc units).

How do quotas affect price, consumption, and production?

Price rises to Pt, consumption falls to c, domestic production rises to b, imports capped at bc.

What is the key difference between tariffs and quotas?

Tariffs generate revenue for the U.S. government; quotas transfer that revenue to foreign producers.

Which outcome is better for U.S. consumers: tariff or quota?

Tariff, because government revenue can be used for public goods or tax cuts, unlike quotas.

What do studies show about the net costs of tariffs and quotas?

Consumer costs far exceed producer/government gains, creating inefficiency and lower living standards.

What extra cost do trade barriers impose beyond economics?

Industries spend huge resources lobbying Congress (rent‑seeking), diverting resources from productive uses.

Although protective tariffs are usually not high enough to stop the importation of foreign goods, they put ______ producers at a competitive disadvantage in domestic markets.

Foreign

Why do nations sometimes agree to voluntary export restrictions?

To avoid more restrictive trade policies

Which of these are nontariff barriers?

• Virtually unattainable standards for imports

• Extremely difficult, complex licensing requirements

• Unnecessary bureaucratic paperwork or policies used to restrict imports

What is the main economic difference between a tariff and a quota?

A tariff generates revenue for the domestic government.

How do trade barriers tend to affect the price, sales, and availability of a product?

Quotas increase the price of imported products.

Tariffs and/or quotas tend to result in ______ for domestic consumers and ______ for the producers of the protected goods in the importing economy.

costs; gains

What is the purpose of a protective tariff?

To shield domestic producers from foreign competition

How do tariffs affect a nation's economy?

• They cause a shift in resources in the wrong direction.

• They promote the expansion of inefficient industries that do not have a comparative advantage.

• They reduce efficiency and the world's real output.

How do import quotas affect sales of a product?

• Sales of domestic goods increase.

• The price of imports increases.

• The price of domestically produced goods rises.

Which statements about tariffs and quotas are true?

• A quota transfers revenue to foreign producers.

• A quota does not generate revenue for the government.

• A tariff generates revenue for the domestic government.

Tariffs end up ______ the output from inefficient industries, while______ the output from efficient industries.

• increasing

• decreasing

According to various studies, how do trade protections, such as tariffs and quotas, tend to affect domestic society?

• Some trade protections increase government revenues.

• The cost to consumers and society exceeds the gains to producers and the government.