33.2 Methods of Protection Flashcards
What is a tariff?
A tariff, also called an import duty, is a tax on imported goods. For example, consider a Canadian firm that wants to import cotton T-shirts from India at $5 per shirt. If the Canadian government levies a 20 percent tariff on imported cotton shirts, the Canadian firm pays $5 to the Indian exporter plus $1 (20 percent of $5) in import duties to the Canada Revenue Agency.
Who takes on the deadweight loss imposed by a tariff?
A tariff imposes a deadweight loss for the importing country.
What are the two ways domestic consumers lose on imposed Tariffs?
First, they consume less of the product because its price rises, and second, they pay a higher price for the amount they do consume.
Where does the extra spending from \tariffs end up?
This extra spending ends up in two places: The extra that is paid on all units produced at home goes to domestic producers, and the extra that is paid on units still imported goes to the government as tariff revenue.
What is the overall effect of a tariff
A tariff imposes costs on domestic consumers, generates benefits for domestic producers, and generates revenue for the government. But the overall net effect is negative; a tariff generates a deadweight loss for the economy.
What is an import quota?
import quota
A restriction on the quantity of a foreign product that may be imported in a given time period.
What are the effects of an import quota?
An import quota drives up the domestic price and imposes a deadweight loss on the importing country.
What imposes larger deadweight loss? tariffs or import quotas?
Import quotas impose larger deadweight losses on the importing country than do tariffs that lead to the same level of imports.
What is Dumping?
The practice of selling a product at a lower price in the export market than in the domestic market for reasons unrelated to differences in costs of servicing the two markets.
Dumping is a form of price discrimination studied in the theory of firms with price-setting power
Dumping, if it lasts indefinitely, can be a gift to the receiving country. Its consumers get goods from abroad at lower prices than they otherwise would.
Several features of the antidumping system that is now in place in many countries make it highly protectionist…
First, any price discrimination between national markets is classified as dumping and is subject to penalties. Thus, prices in the producer’s domestic market become, in effect, minimum prices below which no sales can be made in foreign markets, whatever the nature of demand in the domestic and foreign markets.
Second, many countries’ laws calculate the “margin of dumping” as the difference between the price that is charged in that country’s market and the foreign producer’s average cost. Thus, when there is a global slump in some industry so that the profit-maximizing price for all producers is below average cost, foreign producers can be convicted of dumping. This gives domestic producers enormous protection whenever the market price falls temporarily below average cost.
Third, law in the United States (but not in all other countries) places the onus of proof on the accused. Facing a charge of dumping, a foreign producer must prove that the charge is unfounded.
Fourth, U.S. antidumping duties are imposed with no time limit, so they often persist long after foreign firms have altered the prices that gave rise to them.
What is a countervailing duty?
A tariff imposed by one country is designed to offset the effects of specific subsidies provided by foreign governments.
Example of a countervailing duty (Germen machine tools)
if the German government provided subsidies to its firms that produce and export machine tools, the Canadian government might respond by imposing a countervailing duty—a tariff—on the imports of German machine tools designed to “level the playing field” between German and Canadian firms in that industry.
How can countervailing dutys be used?
Countervailing duties can be used to offset the effects of foreign export subsidies, but often they are nothing more than thinly disguised protection.
