ch07 Import Tariffs and Quotas Under Perfect Competition - Spring 2025 (2)

Chapter Overview

  • Course: ECON 335: International Economy

  • Topic: Import Tariffs and Quotas Under Perfect Competition

  • Semester: Spring 2025

Introduction to Trade Policies

  • Tariff Example:

    • Announced by President Barack Obama on September 11, 2009, a 35% tariff on Chinese tire imports.

    • Expired on September 27, 2012.

  • Trade Policy Definition:

    • Government actions aimed at influencing international trade volumes.

  • Rationale for Trade Policy:

    • Gains from trade are unevenly distributed, leading industries and unions to pursue policies that limit losses or enhance gains.

  • Types of Trade Policies:

    • Import tariffs (taxes on imports)

    • Import quotas (quantity restrictions on imports)

    • Export subsidies

Examination of Trade Policies

  • Focus: Effects of tariffs and quotas in perfectly competitive industries.

  • Tariffs:

    • Most commonly used trade policy; examined in detail.

  • Import Quotas:

    • Definition: Limits on the quantity of a good imported from foreign countries.

Historical Context of the World Trade Organization (WTO)

  • Post-WWII Discussions:

    • Allied countries aimed to address trade barriers and exchange rate instability.

  • 1947 Establishment:

    • General Agreement on Tariffs and Trade (GATT) was formed to minimize trade barriers.

    • Key Provisions of GATT:

      • Equal tariff extension to all WTO member nations.

      • Tariffs can counter unfair practices like dumping.

      • Limitation on restrictiveness of import volumes.

      • Requirement to declare export subsidies.

      • Conditional tariff increases allowed.

      • Allowance for regional trade agreements, such as free-trade areas and customs unions.

Key Provisions of GATT

  • Article I: Most-Favored-Nation (MFN) Treatment

  • Article VI: Anti-Dumping and Countervailing Duties

  • Article XI: Elimination of Quantitative Restrictions

  • Article XVI: Subsidies

  • Article XIX: Emergency Actions on Imports

  • Article XXIV: Regulations on territory and customs unions/free-trade areas

Consumer and Producer Surplus Analysis

  • Figure 7-1: Explains consumer surplus as the difference between the price consumers are willing to pay and the actual market price.

  • Consumer surplus is demonstrated graphically as the area under the demand curve and above the price.

Trade Dynamics

  • Figure 7-2: Depicts the impact of trade on domestic demand, supply, and consumer surplus relative to world price.

    • No-trade equilibrium vs. trade at world price leading to imports.

    • Gains from trade visualized through changes in consumer surplus and welfare.

Tariff Effects for Small Countries

  • Figure 7-4: Illustrates the impact of tariff application on prices and quantities.

    • Price increment leads to shifts in supply and demand.

  • Welfare Implications:

    • Tariffs decrease consumer surplus while increasing producer surplus and generating government revenue.

    • Calculation of deadweight loss associated with tariffs.

Why Tariffs are Commonly Applied

  • Revenue Generation:

    • Especially vital for developing countries reliant on tariffs as a source of government revenue

  • Political Dimensions:

    • Concentrated benefits to specific firms/industries versus dispersed costs to consumers.

Import Quota System

  • Post-2005 Context:

    • Abolishment of Multifibre Arrangement (MFA) which restricted textile and apparel imports.

  • Quota Examples:

    • EU banana import quotas favoring former colonies over Latin America.

    • U.S. sugar import quotas still in place.

Import Quota Mechanisms

  • Price Impact:

    • Comparison of price changes and quantities under quotas.

  • Market Allocation:

    • Various allocation methods of quota rents, including:

      • Allocating to home firms.

      • Rent-seeking behavior.

      • Government auctions.

      • Voluntary export restraints (VER).

Quantifying Costs of Import Quotas

  • Evaluating annual costs in terms of deadweight losses and quota rents via historical data.

Multifibre Arrangement (MFA) Aftermath

  • Impact of Expiration:

    • Rapid growth in Chinese textile and apparel exports post-MFA.

  • Welfare Loss:

    • Costs incurred by the U.S. due to non-auctioning of quota licenses leading to significant quota rent exports.

  • Market Shifts:

    • Increase in demand for lower-priced items post-MFA as prices for textiles fell.