Sanna-Randaccio LECTURE 22 : NON TARIFF BARRIERS

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1 Sanna-Randaccio LECTURE : NON TARIFF BARRIERS IMPORT QUOTA DEF Partial euilibrium effects Import uota versus tariff (perfect competition) Import uota versus tariff (monopoly) Tariffication in the Uruguay Round STRATEGIC COMMERCIAL POLICIES

2 IMPORT QUOTA It is a uantitative restriction imposed by the State on imports of a specific good per unit of time (e.g. tons of raw sugar, number of cars per year). Direct restriction on uantity. Generally the government issues import licences (national importers or foreign governments) Welfare comparisons with an euivalent tariff rate (d leading to the same level of import) in the small country case.

3 See Gandolfo (04) p. 3

4 Perfect Competition

5 Welfare comparisons with an euivalent tariff in perfect competition (the small country case) Same price increase Difference: with a tariff the government collects fiscal revenue while with an import uota these gains go to the licence holders. Incentive for corruption. If the State is successful in selling import licences by auction, in such a way that entries are eual to the fiscal revenue which could be obtained with an euivalent tariff, the two measures will have the same welfare effect. The uota gives certainty on the level of import. To calculate the euivalent tariff it is necessary to know exactly the characteristics of the demand and supply curves. An import uota represents a stronger form of protection. For instance the effects of a demand increases are uite different. The import uota replaces the market mechanism instead of simply altering it as in the tariff case.

6 Welfare comparisons with an euivalent tariff in monopoly (the small country case) Let us consider the case of the government of a small country considering whether to apply a uota or an euivalent tariff in presence of a domestic monopolist in the import competing sector. The effects of a (euivalent) tariff and a uota in the absence of perfect competition. may be rather different In free trade: The internal price cannot be higher than p w. It is as if the monopolist were facing a perfectly elastic demand defined at p w It will produces a uantity such as MC= p w The results are exactly what would have happen if the domestic industry would have been perfectly competitive. Pro-competitive effect of international trade. See Krugman, Obstfeld, Melitz 0, Appendice 9 p.56

7

8

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10 TARIFF Given a specific tariff d the maximum price which the monopolist may charge is p w + d and it will produce the uantity at which p w + d QUOTA The monopolist is confronted with a downward sloping demand curve. The demand for the monopolist is D-uota (residual demand) The monopolist maximize profits eualizing MR and MC, where MR is defined with respect to the residual demand. A uantitative restriction leads to a higher price and a lower volume of production in the domestic market. It grants to the national industry an absolute protection: independently from the internal price imports cannot rise above the set uota. In the case where producers enjoy monopoly power tariffs should be preferred to uotas. On the contary increasingly protectionist measures consist of NTBs including uotas.

11 COMMERCIAL POLICIES IN DEVELOPED COUNTRIES The new theories of international trade provide new arguments against international trade. Laura Tyson (99): Who is bashing whom? Analysis of international competition in high technology sectors among EU, US and Japan such as the case of aeronautics (BOEING versus AIRBUS) and in the semiconductor industry. Most economists agree that industrial policy should be introduced to compensate for a pre-existing market failure. In the case of commercial policy the main market failures addressed are : TECHNOLOGY AND EXTERNALITIES IMPERFECT COMPETION AND STARTEGIC COMMERCIAL POLICY

12 IMPERFECT COMPETITION AND STRATEGIC COMMERCIAL POLICY According to Brander and Spencer (985) the absence of perfect competition represents a market failure which may justify public intervention. In the case of oligopolistic markets where firms earn extra-profits (higher than profits in other industries with investments with the same risk level) the government can use commercial policy to change the distribution of profits between national and foreign firms in favour of the domestic producers (profit shifting). They show that an export subsidy granted to national firms may increases their profits of an amount larger than the subsidy. This measure may thus turn to be welfare enhancing for the country imposing the subsidy. However while the welfare of the country granting the export subsidy increases the welfare of the other country falls.

13 Model in Gandolfo (from p. 53) There are two countries (I and II) and two firms ( and ) each located in one of the countries. Firms compete as Cournot oligopolists. Firms produce only for exporting and compete in a third market. The government decides first, setting the subsidy level. Then firms chooses the profit maximizing level of production. The inverse demand function in the export market is: p = p() = + ' p = dp / d < 0 Country I grants an export subsidy to the domestic firm (firm ). s commercial policy variable.

14 ) ( ) ( max s c p + = π ) ( ) ( max c p = π 0 ' ' = + + = s c p p π 0 ' ' = + = c p p π 0 < π 0 < π CPO CPO CSO CPO

15 d > 0 ds d < 0 ds d + d ds > ds 0 dπ > 0 ds dπ < 0 ds

16 Brander and Spencer (985) prove that an unilateral export subsidy to domestic firms may increase their profits of an amount larger than the subsidy and conseuently find that this policy may lead to higher welfare for the country. G( s) = π s dg d d ' d d = π s = p s ds ds ds ds ds where d π ' d d = and p + < 0 ds ds ds Starting from a situation in which s=0 a rise in s leads to a welfare increase for the country subsidizing exports The subsidy increases the profits of the domestic firm while leading to a fall in the foreign firm profits (profit shifting policy)

17 a c + b s

18 BRANDER and SPENCER (985) Proposition : An (unilateral) increase in the domestic subsidy: (i) lowers the world price of the good; (ii) increases domestic profit; and (iii) reduces foreign profit (profit shifting). Proposition : The domestic country has a unilateral incentive to offer an export subsidy to the domestic firm. If both countries impose subsidies Proposition 4 The noncooperative Nash subsidy euilibrium is chracterized by positive production subsidies in both exporting countries. Proposition 5 At the noncooperative Nash subsidy euilibrium joint welfare of the producing nations would rise if subsidy levels were reduced. Thus we have again a prisoner s dilemma case.

19 THE MODEL: A TWO-STAGE NON-COOPERATIVE GAME GOVERNMENTS DECIDE SIMULTANEOUSLY THE LEVEL OF EXPORT SUBSIDY Decision variable: subsidies FIRMS DECIDE SIMULTANEOUSLY THE LEVEL OF SALES (COURNOT) Decision variable: SALES (OUTPUT) The game is solved by backward induction and the solution is a subgame perfect euilibrium.

20 THE DISCIPLINE ON SUBSIDY IN THE WTO Non actionable subsidies: (i) Assistence for research activities conducted by firms directly or through contract to higher eductation or research establishments. (ii) Assistance to disadvantage regions within a country. (iii) Assistance to promote adaptation of existing facilities to new environmental reuirements imposed by law resulting in greater constraints and financial burden on firms (limited to 0% of the cost of adaptation). Prohibited: (i) Subsidies which are contingent upon export performance (ii) Subsidies contingent upon the use of domestic product over imported products.

21 The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO s disputesettlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty ( countervailing duty ) on subsidized imports that are found to be hurting domestic producers. Vedere: countervailing measures) (Trade Topics: Subsidies and

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