Trade Policies of Importing Countries



AGEC 4023 Week 5 Lecture Notes Trade Policies of Importing Countries

Despite the gains from free trade, importing countries usually use trade barriers as their trade policies which make prices in their countries higher than world prices.

Major Types of Import Barriers

Some main types of trade barriers include:

a. Import Tariff (import tax): This can be a fixed amount per unit or a fixed percentage of the imported good’s price (ad valorem tariff) that are levied on imports when they cross the borders.

b. Import Quota: This restricts the quantity of a product that can enter the importing country. These quotas may be fixed (e.g. Ghana can ship only X tons of cocoa US), or export firms may be required to have an import license before its allowed to ship the product into the importing country. Import licenses usually have a value if product prices are higher than world prices and how they are distributed (auctioned to higher bidder, sold for a fixed price, given to importing firms, or distributed to gov’t agencies) can affect welfare effects.

c. Tariff-rate Quota: Is a combination of import quota and import tariff in which a fixed quantity of imports is allowed at a preferential tariff and all imports over that quota are subject to a higher duty. This policy gives exporting countries access to the importing country’s market but domestic price in the importing country can still be above the world price plus the preferential tariff.

d. Fixed Agric Prices in Importing Countries: Some import policies also keep some agric prices fixed in the importing countries. One of such policies is where the gov’t can control imports through state trading by importing at world prices but sell at the fixed domestic price. Another is a variable levy policy where the tariff is the difference between the fixed domestic price and the world price.

Reasons for Trade Barriers

While trade barrier policies generally reduce the overall welfare of consumers and producers, governments still impose them because they want to redistribute welfare among consumers, producers and the government. Some of the key reasons are:

1. Fiscal Policy: Governments may rely on import tariffs and other income from trade barriers as revenue for gov’t budget. Its easier to collect duty on imported goods as a revenue than from income tax.

2. National Security: Countries may also impose trade barrier policy on certain products especially food as a protection from international competition for security reasons.

3. Self-sufficiency: Gov’t wishing for self-sufficiency in food believe that domestic producers must not be driven out business by foreign competition

4. Infant industry Argument: Another argument for trade barriers is to protect newly established businesses during a critical early period of their development,

5. Protection from Import Competition: Businesses and farmers feel they must be protected from import competition and gov’ts usually tow their line because of their organized.

6. Large Importing Country: The only legitimate economic reason for import barrier policy is when the importing country is too large that it can use its market power to extract welfare form the rest of the world – i.e. as a large country, if it restricts imports world price will fall.

Impacts or Welfare Effects of Import Policies

The welfare effects of trade barriers are measured from the losses or gains to consumers, producers and governments from the policies.

Assumptions: Assumptions made in the welfare impact analyses from trade barrier policies are:

- Country being analyzed is a small country – i.e. the country could not markedly influence world supply and demand.

- There are zero transport cost,

- There are perfect competition

Effective supply and demand curves are used in the analyses. The effective supply and demand curves represent international and domestic suppliers and demanders.

1. Welfare effect from Import Tariff: In either specific tariff or percentage of product’s value (ad valorem tariff) and under perfect competition there will be a disparity between the exporter’s and importer’s price because there are no resources that are consumed (transportation) to justify the price disparity or difference. In a small importing country and under perfect competition its perfectly elastic supply curve added to that of world gives it an effective supply curve of PwSe (Graph 1).

Graph 1. Importing Country with Free Trade Graph 2. Effects of an Import Tariff

The small importing country will produce Qp, consume Qc and imports Qc – Qp at the price of Pd which equals world price of Pw. If the country imposes a specific tariff of t per unit, domestic price rises to Pw + t and thus affects domestic production and consumption patterns (Graph 2) but does not change world price of Pw as the added domestic production and lower domestic consumption do not have any significant influence on world market. The new effective supply curve for the importing country is Pw + t Se. With high prices domestic producers increase production from Qp to Qp’, and consumers decrease consumption from Qc to Qc’, imports will fall from Qc’ to Qp’.

Graph 2 shows the effects of the tariff to producers, consumers and the government.

- Domestic Producers: Gain because they a higher price of Pw + t from Pw. They also increase output from Qp to Qp’. Producers surplus increases by the area ABED.

- Domestic Government: Receives tariffs from imports and this translates to a revenue of BCGE. This revenue benefits the domestic economy to fund for government services and expenditure.

- Domestic Consumers: Are the losers. They suffers an increase in price for the product Pw from Pw + t and this reduces their consumption from Qc to Qc’. The loss in consumer surplus is ACHD which is greater than the surplus gained by the government and producers combined.

- Overall Domestic Country: The overall country’s welfare loss is BFE and CHG. BFE is the production loss as it measures inefficiencies caused by increase in production from Qp to Qp’ by domestic producers. The high tariff encourages domestic producers whose opportunity or marginal cost of Pw + t is above that of the efficient international producers of Pw. CHG is the consumption loss as it measures inefficiencies caused by reduced consumption from Qc to Qc’ by domestic consumers. The high tariff of Pw + t discourages domestic consumption as it is higher than world’s price of Pw.

2.

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Pd=Pw + t

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