Unit 3 PowerPoint: International Economics

BBA 4351, International Economics 1

Course Learning Outcomes for Unit III Upon completion of this unit, students should be able to:

3. Analyze the effects of trade restrictions on the economy. 3.1 Describe the major nontariff barriers to trade.

4. Examine various trade policies for both developing and advanced nations.

4.1 Summarize the history of trade protection in the United States.

Course/Unit Learning Outcomes

Learning Activity

3.1 Unit III Lesson Chapter 5 Unit III PowerPoint Presentation

4.1 Unit III Lesson Chapter 6 Unit III PowerPoint Presentation

Reading Assignment Chapter 5: Nontariff Trade Barriers Chapter 6: Trade Regulations and Industrial Policies

Unit Lesson Previously, you reviewed various trade barriers using tariffs. You learned that tariffs are the taxes imposed on imported goods or services, and tariffs protect industries and businesses in the importing countries. In Chapters 5 and 6 of your course textbook, you will learn about other types of trade barriers that do not use tariffs as a tool such as nontariff trade barriers. This unit lesson will provide further interesting perspectives on the topics of import quota, dumping, and antidumping regulations. Nontariff Trade Barriers Chapter 5 introduces a variety of nontariff trade barriers such as the ones listed below:

 absolute import quota,

 tariff-rate quota: a two-tier tariff,

 export quotas,

 domestic content requirements,

 subsidies,

 dumping, and

 antidumping regulation (Carbaugh, 2017).

UNIT III STUDY GUIDE

Nontariff Trade Barriers and Trade Regulations

BBA 4351, International Economics 2

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Import quotas regulate the number of goods or services imported into a country during a specified period of time. Normally, an import quota is set below the level of imports under free trade. There are two types of import quotas: absolute import quotas and tariff-rate quotas. Absolute import quotas control the number of imports to a certain level during a specified period of time. This is generally administered on a first- come, first-serve basis, which is why most absolute import quotas are filled immediately after the opening of the quota period. Unlike import quotas that control the quantity of imported goods only, tariff-rate quotas regulate the number of goods and services to be imported at a reduced tariff rate during the specified quota period. In the United States, most quotas are administered by the U.S. Customs Services. There are ongoing debates as to which one works better in terms of protecting domestic producers and/or domestic consumers—quotas or tariffs. There are pros and cons for each method. Under both tariffs and quotas, consumers are worse off because domestic prices will go up; however, producers will be able to receive higher prices. The first advantage of a quota is more certain and precise while the outcome of a tariff is uncertain. The second advantage of a quota is the flexibility. It could be easily amended and fixed from a policy perspective. Quotas, however, are susceptible to corruption because the decision makers charged with it tend to be exposed to bribery. Given that, a tariff is much more preferable.

Sometimes, a country would like to export its products at a price below the going market price in the foreign market. A product is said to be dumped when the price of goods in the foreign market exceeds the price of exported goods. There are two main causes of dumping. First, producers are trying to compete with producers in the foreign countries. If agricultural firms in the United States find a way to export their agricultural products (e.g., beef, pork) to South Korea at a price below the going price in South Korea, firms will then be able to stay competitive. Second, producers are trying to drive foreign competitors out of business so they can gain the market share of the foreign market. Think about what types of positive economic outcomes would be generated by dumping. The good news is that people in importing countries would be able to purchase imported goods or services at lower dumping prices. Buying cheap imported products provides domestic producers with incentives to compete on the quality of their products, which in turn would benefit domestic buyers. As a result, they would definitely improve the social welfare via an increase in consumer surplus. In addition companies and countries can utilize dumping as a strategy for promoting sales, to sell their inventory products that might have perished in their storages. For example, if shoe manufacturers have 1.6 million extra shoes in inventory that they could not sell in the United States, they will be better off selling some of the products from their inventories in foreign countries. The negative effects are that domestic industries in the importing countries would be unable to compete with products being dumped. Such industries may suffer a decline in revenue and jobs. In addition, from a producer’s perspective, it is difficult to manage trade dumping because operating involves a high cost of production and transportation, and low sales prices simply cannot keep up with it.

Shipping preparation of papayas grown in Mexico (U.S. Food and Drug Administration, 2011)

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There are three different types of dumping: predatory dumping, sporadic dumping, and cyclical dumping. Predatory dumping (or intermittent dumping) represents an export of goods in overseas markets at a lower market price than the home market price. Sporadic dumping is occasional, while predatory dumping is permanent. Note that sporadic dumping only occurs under exceptional or unforeseen circumstances where there are plenty of unsold stocks of the commodity. In that case, producers sell those stocks at a substantially lower price in the foreign country. Cyclical dumping occurs when a foreign firm disposes excess inventories on the international market. It usually occurs in times of recession when governments do not impose any protection. As previously discussed, dumping is viewed unfavorably in the global markets. Countries are worse off by importing goods being dumped by foreign countries or companies. A country is likely to impose an antidumping duty on foreign products that are believed to exceed the going market price in the domestic market. To protect domestic markets, industries, and businesses, many countries are adopting this tool. However, governments will only be able to take those regulatory actions when there is explicit evidence that dumping is hurting their industries and businesses. The General Agreement on Tariffs and Trade (GATT) 1994 specifies numerous basic principles that could be applied in trade between World Trade Organization (WTO) members. Most importantly, Article VI of GATT 1994, which is the Anti-Dumping Agreement, authorizes the imposition of specific antidumping tariffs on imports from a particular country or company in cases where dumping appears to harm a domestic industry (Carbaugh, 2017). As a result, when an individual firm or a trade association files antidumping petitions, they are assumed to act on behalf of an industry. An Example of Dumping You will be able to find numerous news articles (New York Times, CNN, etc.) that cover the topic of dumping and/or anti-dumping policies in a section of business or economy. Here, to promote students’ understanding about dumping and anti-dumping policies, I will provide two examples of how this tool of international trade has been practiced globally and historically. First, let’s take the example of companies from a foreign country practicing dumping in the United States. Samsung and LG are well known global manufacturers. They have been selling their washers in many developed countries, including the United States at substantially lower market value. Subsequently, the U.S. Department of Commerce has established antidumping margins of approximately 53% and 32% each (Wolf, 2016). This in turn, affected sales revenue of Korean manufacturers who are operating their laundry businesses in the United States. Here, the situation where both manufacturers charge substantially lower prices for selling laundry machines in the United States is considered dumping, and the actions taken by the U.S. Department of Commerce is considered an anti- dumping policy. Second, North American Free Trade Agreement (NAFTA) has been promoting the international trades between the United States and Mexico, which is good from the perspective of comparative advantage. Both countries are better off when each country is engaged in producing specific types of goods or services that one can produce better and more efficiently and trading them with goods produced by another country. However, it has also been the case that Mexico has become the victim of a dumping strategy practiced by the U.S. steelmakers. The U.S. steelmakers have been known to sell their products in Mexico at a market price substantially lower than the going domestic prices (“Mexico Accuses,” 1994). This is another good example of dumping. In response to this, the Mexican Commerce Department has proposed the imposition of tariffs on U.S. steel imports, which is a good example of anti-dumping strategy and/or policy.

A stack of shoeboxes ready for shipment (regan76, 2011)

BBA 4351, International Economics 4

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References