Protection

The most common form of goverment interference is protection,protection is

deliberate policy of helping domestic industries meet import competition.

Tariff is a tax levied on import of goods.It raises the foreign prices of foreign
goods relatives to domestic substitutes.

Non tariff Bariiers:

Countries restrict trade thru non-tariff barriers as well as thru
tariffs,Paradoxically,progress after WW II in reducing tariffs has actually serve
to encourage non-tariff barriers.

However producer interest in protection from foreign competition has remained

strong in almost all countries.

But non-tariff barriers are often favored because they do not violate
internasional agreement

Quota is a legal restriction on the quantily of a good that may be imported.The

quota may be a total ban on imports or a partial restriction.It shifs the supply
curve upward & indirectly raises price

Tariff

Tariff & quota are usually known as ‘commercial policies’.In general these
policies are influenced by political,sociological,and economic considerations

Typey of tariffs

1. Import duty; the tax imposed on an imported commodity.

2. Export duty; a less common tariff : the tax levied on an exported
commodity,Often levied by primary-product exporting contries

In general tax on import or exports can be imposed in 3 forms:

1. Ad valorem duty; tax or duty as fixed % of the value of value of the

commodity imported or exported,inclusive or exclusive of transportation
cost
 2. Specific duty; is specified as a fixed sum of money per physical unit
imported or exported
3. Compound duty; combination 1 and 2,internasional economoy US
imported of japanese car may be required to pay $1,00 + 1% ofthe value
of the car

Partial Equilibrium The Effect of an Import Tariff

CURVE :
ANALISIS
1.
A tariff on imports raises the domestic price of importable.As a result
domestic output of the.Import-competing industry expands while the
domestic consumption of importable contracts
2. Imports fall because the gap between domestic consumption & domestic
Production shrinks.
3. Tariff revenue is collected by government & income is redistributed
from consumers to producers
4. Intially eqb occurs at E,at which P=$25,Assume world price=$10,under
free-trade,domestic P is driven down to the world P of $10 domestic
consumption rises to $150(poin C)
5. Domestic production falls to 30(k).Imports=120=(150-30) see (KC)
6. Suppose a tariff of $5 or 50%,raises the domestic P of imported goods to
$15.This shifting the world supply to Sw,by the amount of the tariff (see
line T)

Line curve diffrent

7. As long as domestic product is a perfect subsitute for foreign

one,domestic producers are also able to charge $15 per output.Thus
domestic P rice to $15 for both foreign&domestic product.The P increase
has some effects,as follow:
8. Consumptio effect (line GC); dom consumers reduce consumption to 125
(point F).reduction of 25 indicated by GC.
9. Production Effect:the higher P makes it profitable for dom producers to
increase output to 45 (J).Thus tariff attracts resources into the protected
product industy.The increase of 15 output illustrated by line KH
10.Trade Effect:tariff causes imports to fall to 80(JF).The reduction in
imports from 120 to 80=the increase in dom production(15)+the decrease
in dom consumption(25).
 11.Revenue Effect: After imposition of the tariff government collects
$400($5x80) (see area JHGF)
12.Redistribution Effect:tariff redistributes income from consumers is sum
area 1,2,3,4,which represent the reduction of consumber surplus
13.Area1 is transferred to producers as additional producer surplus.Area3
corresponds to the tariff revenue collected by the government.The 2
triangles (ara 2&4) are uncounted for the deadweight loss of the tariff

Partial Equilibrium Effect of tariff

Partial eqlbr analysis of a tariff is most appropriate when a small nation imposes
a tariff on imports competing with the output of a small domestic industry.

Tariff will affect neither world prices (because the nation is small) nor the rest
of the economy (because the industry is small)

DX &SX represent Nation 2's D & S curve of commodity X. AT the free trade
price of Px = $1 Nation 2 consumes 70X (AB)

Of which 10X (AC) is produced domestically and 60X (CB) is imported. With a
100 % import tariff on commodity X, Px, rises to $2 for individuals in Nation 2

AT Px $2, Nation 2 consumes 50X (GH) of which 20X (GJ) is produced

domestically and 30X (UH) is imported

Thus, the consumption effect of the tariff is (-)20X (or line BN) the production
effect is 10X (CM

The trade effect equals (-)30X (BN +CM) and the revenue effect is $30 (MJHN)

How Tariff Work

 2 sources of supply: domestic & foreign.

 Domestic supply (DS) slope upward (ouput increases with output)

Foreign supply (FS) is ‘infinitely elastic with the world price (P1)

 Up to a domestic output (Q1) domestic suppliers are the cheaper source,

but at any higher output, they lose their comparative advantage (CA)
because of increasing cost, so that the constant- cost FS is cheaper.
  The market supply is denoted ‘abc’, ab segment comes from DS over the
range of of its CA. bc segment comes from world supply curve.

 In eqlb the domestic industry supplies (Qf) and the remaining demand is
satisfied from the world market.

 Panel II: a tariff raises the cost of FS to P2, FS continue to receive P1,
however, the tariff collected on each unit importsd = P2-P1

 Up to an output Q2, DS is cheaper than FS. Market supply curve “def”

consists of a domestic segment (de), and FS = ef

Quantitative Restriction: Quota

A quota is the most important non-tariff trade barrier. It is a direct quantitative

restriction on the amount of a commodity allowed to be imported (import quota)
or exported (export quota)

import quotas can be used to protect domestic agriculture, and /or for balance of
payments reasons

CURVE

1. Dx &Sx of comm X. Px= $1 import quota of 30X (OH) would result in

Py consumpt of 50X (GH) of which 20X (GJ) is produced domestically.

2. If the Government auctioned of import licenses to the highest bidder in a

comparative market, the revenue effect would be $30
3. (JHNM) as with 100% import tariff $1 to $2

4. With a shift in Dx to D’x & and M quota of 30X (J’H’).

5. Consumption would rise from 50X to 55X (G’H),of which 25X(G’J) are
produced domestically, domes product at 20X (GJ) dom consump rise to
65X (GK) & M to 45X (JK)
Comparison: Import Quota vs Import Tariff

Look at the last figure: The shift of Dx to D’x, points to one of several
important differences between import quota import tariff.

1st: With a given import quota, an increase in demand will result in a higher
domestic price greater domestic production than with import tariff.

On the other hand, with a given import tariff, an increase in demand will leave
the domestic price & domestic production unchanged but will result in higher
consumption import than with import quota

Since adjustment to any shift in Dx or Sx occurs in the domestic price with an

import quota but in the quantity of imports with a tariff, an import quota
completely replaces the market mechanism rather rather than simply altering it
(as import tariff does)

2nd: Import quota & import tariff is that the quota involves the distribution of
import licenses.

If the government not auction off these licenses in a competitive market, firms
that receive the licenses will reap monopoly profits.

Comparison: Import Quota vs Import Tariff

Thus import quotas not only replace the market mechanism but also result
in waste from the point of view of the economy as a whole & contain the
seeds of corruption.

Finally, import quota limits imports to the specified level with certainty, while
the trade effect of an import tariff may be uncertain.

The reason is, the shape of elasticity of Dx, & Sx is often not known,
making it difficult to estimate the import tariff required to restrict imports to a
desired level.

Furthermore, foreign exporters may absorb all or part of the tariff by

increasing their efficiency of operation or by accepting lower profits.
As a result, the actual reduction in imports may be less than anticipated.
Exporters cannot do this with an import quota since the quantity of imports
allowed into the nation quota is less *visible* that domestic producers
strongly prefer import quota to import-tariffs.

Other Non tariff Barriers (NTBs)

 voluntary Export Restraints: the most important NTBs. These refer to the
case where an importing country induces another nation to reduce its
exports of a commodity "voluntarily" under the threat of higher all-round
trade restrictions, when these exports threaten an entire domestic
industry. It less effective in limiting imports than import quotas.

 Technical, Administration,other regulations: These include safety

regulations for automobile & electrical equipment, health regulation &
packaging of imported good products &labeling requirement showing
origin & contents.

 International cartel: Is an organization of suppliers of a commodity

located in different nations (or group of governments) that agree to
restrict output & exports of the commodity with the aim of maximizing or
increasing profits. The most notorious cartels is OPEC, & IATA (inter air
Transport association) It can be successful if there are only a few
international suppliers of an essential commodity, but each of suppliers
has an incentive to “cheat”.

 Dumping: is the export of a commodity at below cost or at least the sale

of a commodity at a lower price abroad than domestically (1) Persistent
dumping:selling at a higher price in domestic market than internationally:
(2) Predatory dumping: is temporary sale of a commodity at below cost or
at a lower priceabroad in order to drive foreign producers out of business,
to acquire monopoly power.