9__Week

Introduction to International Economics

• Overview by Assist. Prof. Dr. Hande Hakan

• Significance and scope of international economics introduced.

Quantity Restrictions

• Topics Covered: New Protectionism, Outline, Subsidies, Import and Export Taxes

Import Quotas

Definition

• Government restrictions on the volume of goods to be imported (physical quantity or value).

• Example: Importing 100 units of foreign automobiles, with a value cap of $1,000,000.

Purpose

• Protect domestic industry and agriculture.

• Prevent balance of payments deficits.

Application

• Specific periods for limitations on imports.

• Quotas can accompany customs duties.

• Common in underdeveloped countries.

Types of Import Quotas

1. Global Quotas

   • Impose limits based on total import volumes without specifying countries.

   • Can lead to market inefficiencies.

2. Allocated Quotas

   • Distributed among firms based on criteria (e.g., production capacity).

   • Import licenses granted per quota share.

3. Tariff Quotas

   • Quotas in place for set periods but allow imports beyond with higher tariffs.

Economic Effects of Import Quotas

Positive Effects

• Higher Prices for Consumers: Reduced competition results in inflated prices.

• Domestic Industry Protection: Limits foreign competition, potentially enhancing domestic profits.

Negative Effects

• Inefficiency and Resource Misallocation: Reduced competition may deter innovation within domestic industries.

• Retaliation and Trade Wars: Can provoke countermeasures from affected countries, escalating trade tensions.

• Reduced Variety and Quality: Limited imports decrease product selection and may lower quality due to lack of competition.

• Impact on Global Trade: Broad use of quotas may disrupt international trade dynamics.

Customs Tariffs vs. Quotas

• Tariffs: Taxes on imports raising their prices, generating revenue for the government.

• Quotas: Limits on quantity, creating economic rent and potential corruption but no direct revenue for government.

• Tariffs allow market adjustments; quotas lead to strict limitations, potentially causing shortages.

Import Bans

Definition

• Complete prohibition of specific goods from entering a country.

Reasons

1. Save foreign currency by banning luxury items.

2. Protect domestic industries from foreign competition.

3. Reduce external deficits.

4. Address non-economic issues (e.g., public health).

Foreign Exchange Control

• Often used with import quotas to stabilize currency and control capital outflow.

• Objectives include:

  • Stabilizing national currency.

  • Protecting foreign exchange reserves.

  • Managing trade deficits.

Multiple Exchange Rate System

• Different rates applied to varying product groups, enhancing foreign exchange revenues.

• Can result in inefficiencies and competition issues.

New Protectionism

Voluntary Export Restrictions

• Used for labor-intensive goods; less effective than quotas due to varied exporter strategies.

Health, Safety, and Environmental Standards

• Serve as invisible barriers with added costs due to regulations.

Subsidies

Export Subsidies

• Defined as financial aid to enhance export capabilities and price competitiveness.

Domestic Economic Effects

• Increase export unit prices, decreasing domestic sales while promoting exports; may elicit countervailing duties from importing countries.

Examples

• EU's Airbus subsidies; Japanese high-tech industry support.

Domestic Market Subsidies

• Aimed at making local products competitive against imports; can divert public funds resulting in inefficiencies.

Import and Export Taxes

Differential Duties on Imports: Variable Levy

• Example: EU Common Agricultural Policy utilizes variable levies to stabilize domestic prices against international fluctuations.

Export Duties

• Imposed on specific exports, aiming to regulate supply, boost treasury income, and encourage domestic processing.

Trade Impact of Export Taxes

• Influences global prices; high elasticity of substitutes must be considered.

Export Embargoes

• Politically driven complete trade bans, useful for exerting pressure on specific countries (e.g., US embargoes against Cuba).

Export Monopolies and Dumping

Definition of Dumping

• The act of selling goods abroad at lower prices than domestic prices, aiming to gain market share.

Types of Dumping

1. Sporadic: Occasional excess stock liquidation.

2. Predatory: Intentionally destroy competition.

3. Persistent: Long-term strategy for profit maximization.

International Price Differentiation & Government Policies

• Anti-dumping duties can be enforced against unfair pricing.

Cartels

• Agreements among firms to control markets through restricted production and pricing.

• Difficult to counteract due to jurisdictional limitations.