Other National Policies Affecting Trade

University of Dhaka Department of Finance International Trade and Finance “Other National Policies Affecting Trade” Course Teacher: Md. Rabiul Islam

IMPORT QUOTA  Import

quotas are limitations on the quantity of goods that can be imported into the country during a specified period of time.  An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time(for instance 1 year). Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.

Reasons for Import Quotas? Governments choose import quotas for the following reasons: • To protect further increases in import spending to improve balance of payments; and • To gain government officials greater administrative flexibility and power.

Quota vs Tariff with competition  Tariffs

and Quotas are quantative restrictions both serve the purpose of controlling the number of foreign products that can enter the domestic market.

Quota vs Tariff with competition     

There are a few reasons why tariffs are a more attractive option than import quotas which are as follows: Tariffs Generate Revenue for the Government. Import Quotas Can Lead to Administrative Corruption. Import Quotas Are More Likely to Cause Smuggling. However, Import Quotas have the protective effect on the importcompeting industries. Quotas are more protective of the domestic industry because they limit the extent of import competition to a fixed maximum quantity. In contrast, tariffs simply raise the price, but do not limit the degree of competition or trade volume to any particular level.

Quota vs Tariff with competition  Graphical p P

representation: Sd

Sd +Q

US market for bicycles

Quota b d

220 200

Domestic price with quota

c

World Price

D D O so s1 D1 Do Quota

Q

Quota vs tariff with monopoly power  Domestic

monopoly increases cost of imports under more than tariff.

 The

quota can harm the nation more than a tariff by giving monopoly power to foreign exporters.

Ways to Allocate Import Licenses 

The quota license to import is a license to buy the product from foreign suppliers at the world price and resell these units at the domestic price .

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Here are the main ways to allocate import licenses:

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• The government allocates the licenses for free to importers using a rule or process that involves (almost) no resource costs.

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• The government auctions off the licenses to the highest bidders.

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• The government allocates the licenses to importers through application and selection procedures that require the use of substantial resources.

Import Discrimination  There

are import discriminations made by developed countries by imposing import barriers like tax/tariffs, quotas etc.  For instance, EC have done import discriminations by allowing free trade between the member countries while restricting imports from other countries.

Trade Creation and Trade Diversion  Trade

Diversion: Trade diversion means that a free trade away from a more efficient supplier outside FTA, towards a less efficient supplier within FTA.  In some cases, trade diversion reduces a country’s national welfare.

Trade Creation and Trade Diversion  Trade

Creation: Trade creation means that a Free Trade area which creates trade.  As a result, supply occurs from a more efficient producer/supplier of the product.  In all cases, trade creation raises a country’s national welfare.

Export Barriers *Trade barriers are generally defined as government laws, regulations, policy, or practices that either protect domestic products from foreign competition or artificially stimulate exports of particular domestic products. *The most common foreign trade barriers are government-imposed measures and policies that restrict, prevent, or impede the international exchange of goods and services. These are as follows:

Export Barriers 

Strategic: International agreements limit trade in, and the transfer of, certain types of goods and information e.g. goods associated with weapons of mass destruction, arms and torture.

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Tariffs: A tariff is a tax placed on a specific good or set of goods exported from or imported to a country, creating an economic barrier to trade. Subsidies: To subsidize an industry or company refers to, in this instance, a governmental providing supplemental financial support to manipulate the price below market value.

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Subsidies are generally used for failing industries that need a boost in domestic spending. Subsidizing encourages greater demand for a good or service because of the slashed price.

Export Subsidies and Countervailing Duties Export Subsidies: An export subsidy refers to a payment of cash or a form of financial assistance paid to private sector business to encourage exports.  Subsidies

can be regarded as a form of protectionism or trade barriers by making domestic goods and services artificially competitive against imports.

Export Subsidies and Countervailing Duties  Countervailing

Duties: A tariff levied against imports that are subsidized by the exporting country’s government designed to offset (countervail) the effect of subsidy.

 Countervailing

duties are duties imposed under WTO Rules to neutralize the negative effects of other duties. They are imposed when a foreign country subsidizes its exports, hurting domestic producers in the importing country.

Dumping Dumping refers to any kind of predatory pricing. Dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production.  Predatory Dumping- It occurs when the firm discriminates in favour of some foreign buyers temporarily with the purpose of eliminating some competitors and of later raising the price of after the competition is over.  Persistent Dumping- It goes indefinitely. 

Retaliation against Dumping 

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On the demand of the import-competing firms, the government of importing countries often impose antidumping tariffs to protect dumping by the foreign suppliers. There is no question that international trade cannot proceed without any limitations or restrictions. Every country has its own specific concerns related to their domestic industries and economic well-being, therefore, there will always be a need for some degree of protectionism. International Anti-dumping code signed by most parties to GATT in 1967.