IT_Chapter 8. Non-tariff

INTERNATIONAL TRADE
Chapter 9: The Instruments of Trade Policy:

Non-Tariff
Thi Phuong Thao Dam

Faculty of International Business and Economics
UEB - VNU
Preview
• Export subsidy
• Import quota
• Voluntary Export Restraint
• Local content requirement
• Other trade policies
Export subsidy
• Definition: An export subsidy is a payment to firm or individual that ship a

good abroad
• Classification:
• A specific export subsidy is levied as a fixed charge for each unit of
exported goods.
For example, $1 per kg of cheese
• An ad valorem export subsidy is levied as a proportion of the value of
exported goods.
For example, a 25 percent U.S. export subsidies on exported wine
Export subsidy
• An export subsidy raises the price of a good in the

exporting country, making its consumer surplus
decrease (making its consumers worse off) and making
its producer surplus increase (making its producers
better off).
• Also, government revenue will decrease.
Export subsidy
• An export subsidy raises the price of a good in the exporting

country, while lowering it in foreign countries.
• In contrast to a tariff, an export subsidy worsens the terms of
trade by lowering the price of domestic products in world markets
Total national welfare
= Consumer surplus + Producer surplus+
Government revenue
= -(a+b) + (a+b+c) - (b+c+d+e+f+g)
= -(b+d+e+f+g)
=> An export subsidy produces a

negative effect on national welfare.
Export subsidy
• The consumer loss: a+b
• The producer gain: a+b+c
• The government subsidy = b + c + d + e+ f + g
In addition, the terms of trade decreases, because the price of exports falls in
foreign markets to P*s
=> Total national welfare = -(a+b) + (a+b+c) - (b+c+d+e+f+g)
= -(b+d+e+f+g)
Export subsidy
• An export subsidy unambiguously produces a negative effect on
national welfare.
• The term of trade loss e + f +g
• The efficiency loss: b+d
• The export subsidy distorts production and consumption decisions:
producers produce too much and consumers consume too little
compared to the market outcome.
Export subsidy
• The case study: Europe’s Common Agricultural Policy (CAP)
https://www.youtube.com/watch?v=hvlVJUrj8tQ
• The European Union sets high prices for agricultural products and subsidizes
exports to dispose of excess production.
• The subsidized exports reduce world prices of agricultural products.
• The direct cost of this policy for European taxpayers is almost $76 billion.
• But the EU has proposed that farmers receive direct payments independent of
the amount of production to help lower EU prices and reduce production
Ảnh
Import Quota
• An import quota is a restriction on the quantity of a good that may
be imported.
• This restriction is usually enforced by issuing licenses to domestic
firms that import, or in some cases to foreign governments of
exporting countries.
• A binding import quota will push up the price of the import
because the quantity demanded will exceed the quantity supplied by
domestic producers and from imports.
Import Quota
• When a quota instead of a tariff is used to restrict imports, the

government receives no revenue.
- Instead, the revenue from selling imports at high prices goes
to quota license holders: either domestic firms or foreign
governments.
- These extra revenues are called quota rents.
Ảnh
Voluntary Export Restraint
• A voluntary export restraint works like an import quota, except that
the quota is imposed by the exporting country rather than the
importing country.
• However, these restraints are usually requested by the importing
country.
• The profits or rents from this policy are earned by foreign governments
or foreign producers.
• Foreigners sell a restricted quantity at an increased price.
Local content requirement
• A local content requirement is a regulation that requires a specified

fraction of a final good to be produced domestically.
• It may be specified in value terms, by requiring that some minimum
share of the value of a good represent domestic valued added, or in
physical units.
• From the viewpoint of domestic producers of inputs, a local content

requirement provides protection in the same way that an import quota
would.
• From the viewpoint of firms that must buy domestic inputs, however,
the requirement does not place a strict limit on imports, but allows
firms to import more if they also use more domestic parts.
For example: Automobile industry

• The cost of imported parts: $6000
• Suppose that purchasing the same parts domestically cost $10,000
• But that assembly firms are required to use 50% domestic parts
=> The average cost of parts= $8000 = 0.5 x $6000 + 0.5 x $10,000
=> This reflect the final price of the car
• Local content requirement provides neither government revenue (as a

tariff would) nor quota rents.
• Instead the difference between the prices of domestic goods and
imports is averaged into the price of the final good and is passed on to
consumers.
• Allow firms to satisfy their local content requirement by export parts
instead of using parts domestically
• For example, US auto company setting business in Mexico
• Export some parts from Mexico to US, even these parts produced
domestically in the US are cheaper
• Because doing so allow them to use less Mexican content in producing car in
Mexico for Mexico’s market
Other Trade Policies
• Export credit subsidies
- A subsidized loan to exporters
- US Export-Import Bank subsidizes loans to US exporters.
• Government procurement
- Government agencies are obligated to purchase from domestic suppliers, even when
they charge higher prices (or have inferior quality) compared to foreign suppliers.
• Bureaucratic regulations
- Safety, health, quality or customs regulations can act as a form of protection and
trade restriction.
Summary
Summary
• 1. A tariff decreases the world price of the imported good when a

country is “large”, increases the domestic price of the imported good
and reduces the quantity traded.
• 2. A quota does the same.
• 3. An export subsidy decreases the world price of the exported good
when a country is “large”, increases the domestic price of the exported
good and increases the quantity produced.
Summary
• 4. The welfare effect of a tariff, quota and export subsidy can be measured by:
Efficiency loss from consumers and producers
Terms of trade gain or loss
• 5. With import quotas, voluntary export restraints and local content
requirements, the government of the importing country receives no revenue.
• 6. With voluntary export restraints and occasionally import quotas, quota rents
go to foreigners.

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INTERNATIONAL TRADE

Chapter 9: The Instruments of Trade Policy:

Thi Phuong Thao Dam

• Definition: An export subsidy is a payment to firm or individual that ship a

• An export subsidy raises the price of a good in the

• An export subsidy raises the price of a good in the exporting

=> An export subsidy produces a

• When a quota instead of a tariff is used to restrict imports, the

• A local content requirement is a regulation that requires a specified

• From the viewpoint of domestic producers of inputs, a local content

For example: Automobile industry

• Local content requirement provides neither government revenue (as a

• 1. A tariff decreases the world price of the imported good when a

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