CHAPTER 9NONTARIFF BARRIERS TO IMPORTSObjectives of the ChapterThis chapter notes the numerous other ways to restrict foreign trade without using a tariff. Nontariff barriers (NTBs) have gained importance since World War II as a result of continuous multilateral negotiations to cut tariffs. Many of these barriers reduce imports to a fixed amount by either setting an import quota or coercing the exporting country to limit its exported quantity. Other barriers restrict the quantity of imports through discrimination by quality or content.Import tariffs, import quotas, and voluntary export restraints (VERs) all have the same effects on the home country’s producers and consumers:the producers win and the consumers lose. The major difference in economic impact comes in who receives the profits from higher-priced imports. In the case of a tariff, the government collects the revenue in the form of the import tax. In the case of a quota, the government may auction rights to import the limited quota amount (in which case the quota looks just like a tariff), or the government may use some alternative form of license distribution such as favoritism (in which case the cronies who receive the licenses get the windfall). With a VER, the windfall goes to the agents in the exporting country who get the privilege of selling expensive imports to the country. After studying Chapter 9 you should know1. the rationale behind imposing nontariff trade barriers.2. the import quota and reasons for using it.3. how a tariff and a quota can be equivalent.4. the ways to allocate import licenses.5. the comparisons between import quotas and VERs.6. other costs that arise from erecting import barriers, such as foreign retaliation.Important ConceptsDomestic content requirements: Directs that a product made or assembled in a country must have acertain amount of “domestic value,” in the form of local factors ofproduction that are used in (or locally made components that are partof) the finished product.Fixed favoritism: A way of allocating import licenses in which the government simplyassigns fixed shares to firms, often based on the shares of importsthe firms had before the quota was imposed.Import license: A legal right to import goods subject to quotas or other nontariffbarriers. Import licenses can be allocated by governments usingcompetitive auction, fixed favoritism, or resource-using applicationprocedures.Import quota: A limit on total quantity of imports allowed into a country each year.Import quotas are the most common nontariff trade barrier.MFN: Most favored nation status. An agreement between two nations tolevy tariffs on each other at rates as low as those levied on any othercountry. If one of these nations reduces tariffs on a third country, allof that nation’s MFN partne rs must also receive that lower tariff rate. Section 301: Part of the U.S. Trade Act of 1974. It gives the President power toimpose import barriers against goods from a country using “unfairtrade practices” to limit imports from the U.S. and other countr ies. VERs: Voluntary export restraints. Nontariff barriers to trade that areequivalent to quotas. Exporting countries are coerced by theimporting country into allocating a limited quota of exports. VERsare not legislated and can be imposed with or without formalinternational negotiations. International trade in textiles and clothingis subject to numerous VERs.Warm-up QuestionsTrue or False? Explain.1. T / F Quotas give government officials greater administrative flexibility than tariffs do.2. T / F As long as quota licenses are auctioned, the welfare effects of a quota are equivalent tothe welfare effects of a tariff.3. T / F If a government has a small tax base, it might prefer tariffs to quotas.4. T / F A VER is worse than a quota for the country that imposes it.5. T / F There is very little that is voluntary about a Voluntary Export Restraint.Multiple Choice1. Which of the following is most correct?A. Import quotas usually create monopoly rents.B. A quota system is more efficient than a tariff system.C. An import quota is more suitable for emergency application by government officials than acomparable tariff.D. Under competitive conditions, an import quota allows import-competing producers to reapmore profits than a tariff.2. Quotas are often preferred to tariffs becauseA. quotas are a richer source of government revenues.B. tariff changes are strictly controlled by international trade agreements.C. quotas do not hinder competition in the domestic market.D. quotas create a less fertile environment for corrupt government officials.3. Under a VER regime, the tariff equivalent revenue accrues to theA. importing-country government.B. importing-country consumers.C. exporting country.D. import-competing industries.4. A domestic monopolist facing import competitionA. prefers a tariff to its equivalent quota.B. prefers a quota to its equivalent tariff.C. is indifferent between a tariff and an equivalent quota.D. loves free trade.5. Which is the most efficient method of allocating import licenses?A. Competitive auctions.B. Fixed favoritism toward domestic importers.C. Resource-using application procedures.D. Fixed favoritism toward foreign exporters.Problems1. Leinster bakers have petitioned their government officials for protection against competitionfrom imported Saxon bread. You have been hired by the government to discuss the optionsavailable. The Minister of Trade wants to know about the ease of implementation and the welfare effects of the following:a. An import quota of 40 million loaves.b. A VER of 40 million loaves.2.In response to information received from a “mole” (spy) in Leinster’s Ministry of Trade, the Prime Minister of Saxony wants a retaliatory reduction in imports of telephones. He is especially interested in tariffs and quotas. Keep in mind that Saxony is a “small country” in the following: a. Illustrate how a tariff and a quota can have equivalent effects on the price and quantity ofimported telephones.b. Describe two different ways that the quota licenses can be allocated, and explain who wouldget the quota rents in each case.3.The Bureau of National Statistics in Leinster has calculated that Gross Domestic Product is, in real terms, 200 million telephones. (We don’t yet have a currency, so all values must bemeasured in units of goods.) Using your answers from Problem 1 in Chapter 8, calculate a Harry G. Johnson figure for the cost to Leinster of protecting its domestic bread market.4. The diagram below depicts an import quota of 100,000 cameras imposed by a small country. The quota raises the domestic price from the free trade level of $100 to a level of $150.Figure 9.4(thousands)P r i c e (d o l l a r s p e r c a m e r a )Using the information in this diagram, quantify the following:a. The revenue gained by the government by auctioning import licenses at $50 per camera.b. The value of the increase in producer surplus associated with the imposition of the quota.c. The value of the decrease in consumer surplus associated with the imposition of the quota.d. The net effect of the quota on the country’s welfare.5. You are given the following data comparing the effects of free trade, a U.S. import quota, and aVoluntary Export Restraint on the American market for compact discs (CDs):a. Quantify the welfare gains for the United States from the import quota and from the VER,both relative to free trade. Which of the two import-reducing policies is better for the UnitedStates?b. Quantify the welfare gains for countries that export CDs to the United States resulting fromthe import quota and the VER, both relative to free trade. Which of the two trade-reducingpolicies is better for those exporting countries?Discussion Topics1. Do you think replacing all import quotas with Voluntary Export Restraints would improve orworsen relations between the United States and other countries?2. Some people think that the United States’ “free trade” stance is hypocritical. Do you agree withthem?。