Economics of International Trade Assignment Sample
2. What is an import quota?
a) Clearly illustrate and examine the partial equilibrium effects of an import quota
Government in different countries establishes import quotas on the amount of a particular product or good, which can be transported into a nation. With the hep of this system, governments keep imported goods from overlapping domestic market of the country, which seem to be generally cheaper due to reduced manufacturing costs elsewhere (Szepanski, 2020). Protectionism standards are typically referred to as government services that establish quotas. Authorities can also implement these regulations if they are worried about the price or quality of products imported from some of the other jurisdictions. Governments are in charge of establishing quotas in order to preserve home industries. Implementing quotas that restrict the distribution of specific items will lead their costs to increase, as per the efficient market hypothesis (Islam et al. 2019). This is represented in the figure below:
On the other hand, the partial equilibrium approach balances supply and demand inside one or even more systems, allowing values to settle at natural market equilibrium. In contrast to linear equations for goods, price levels become spontaneous by using this technique (Härtel and Korpås, 2021). The model suggests that there have been three types of businesses in the economy, which really are unsatisfactory replacements for each other in terms of market value. The home product, subject imports, as well as non-subject imports are indicated by the subscripts d, s, and n respectively.
Imports that are directly impacted by the decision in import tariffs are considered as subject imports, while all the other imports are considered non-subject imports. If the United States granted duty-free access to Pashminas, which are produced from Bhutan, for illustration, Bhutanese Pashminas would have been the subject foreign variation, whereas Pashminas from India would not. Consumers switch between three variants at a steady rate since they are all substandard alternatives. It really is an important part of the model since it depicts how sensitive consumers seem to be to pricing fluctuations between the three varieties (Hallren and Riker, 2017).
Considering that, an import quota is placed underneath the threshold of free trade in imported goods. If importing is reduced, then it will automatically reduce demand on the home economy; thus, raising consumer prices. Moreover, local price will increase to the point when trade volume and corresponding values of the allocation in the new equilibrium (Soon et al. 2019). In case of an import tariff, it certainly restricts a certain on the number of goods that are imported into a country. For illustration, the United States may set a quota of a million Japanese automobile shipments every year. Quota system will benefit domestic producers by reducing imports. However, they will increase customer costs, decrease financial wellbeing, and may result in reaction by other governments imposing tariffs on their goods. Quotas will reduce foreign investors’ transactions, but they may raise costs and make purchases increasingly profitable (Hillen, 2019).
Import quotas thus have a pricing influence, a protection or productivity effect, a spending effect, an effect of economic implications, and a balance of trade effect, among other things. Some of them can be investigated using partial equilibrium analysis, while others are investigated using a general equilibrium system (Mutambara, 2019). These impacts are almost exclusively been studied under partial adjustment settings. As a condition of the restriction, buyers of the commodity within the importing country have a lower unemployment rate. The proportion of consumer and producer surplus in the marketplace is reduced as the domestic producers of both imported raw materials and local replacements increases (Gereffi et al. 2021).
Considering the example of the textile industry, the industry is somewhat dropping in relation to the size of overall manufacturing exports. This appears to represent the textile industry’s “standardised” or “fixed” characteristics in comparison to other industrial industries including manufacturing. Just as in the case under the earlier General Agreement on Tariffs and Trade (GATT) framework, the World Trade Organisation (WTO) has concentrated on textile manufacturing as a component of its debate of economic difficulties in developing countries (dos Reis et al. 2021). Under the terms of the contract, WTO members agreed to eliminate quotas by assimilating the industry into GATT standards. China has been the single greatest supplier of textile materials in Asia, according to facts, followed by Korea, India, and Japan.
The degree of price fluctuations in the constrained and unrestricted countries and the exporting country’s proportion of each market, determine whether the exporter country benefits or loses from quota liberation (Viphindrartin and Bawono, 2021). If the exporter’s desire in the constrained market is very flexible, the reduction of the import quota might benefit the exporters by raising the amount of shipments. If the exporter’s quota is relatively small compared to its production capabilities, and it retails a small fraction of its goods in limited markets, then the quota elimination will benefit the exporters by increasing market pricing compared to the prior average price (Viphindrartin and Bawono, 2021).
This can be easily shown with the help of a diagram before the import quota situation and after imposing the import quota.
Without trading, the country’s equilibrium current value will be the cost that equals domestic producers and consumers at P, and production at Q. Nevertheless, the world price, at P1, is expected to be cheaper than the cost in a non-trading nation. The world supply contour will be completely elastic at the international prices, P1, if the nation is allowed up to free commerce from the rest of the world (Economics Online, 2019). P1 is the new equilibrium value, and Q1 is the quantity. In terms of protecting the domestic production, the import quota is supposedly imposed in between Q2 and Q3.
As reflected above, the quota causes a relative scarcity, increasing the price to P2 and lowering total production to Q4. The quantity of product imported reaches the quota limit. This increase in price encourages local enterprises that are less competitive to boost their production.
When the import restriction is eliminated, the value in the formerly restricted price collapses, according to the partial equilibrium model. However, the important assumption indicates that the total impact of quota expulsion on the real worth of exports to earlier restricted as well as unrestricted markets is imprecise (Chilosi and Federico, 2021). Regardless of how large the reduction in price or boost is comparative to increases and decreases, respectively.
Therefore, from the above illustration and analysis, it can be stated that import quotes does not have that much of a positive impact over the economy as it stated to restrict the entire nation and its trading. The policy’s major focus is on inventory level. If domestic manufacturers do not raise supply to compensate for lower imports, demand in the domestic market is reduced. As an outcome, the price will increase (Amiti et al. 2019). Tariff barriers are at least a source of income for the national government. However, quotas, on the other hand, hike costs by restricting trade while generating no revenue for the government. Tariff barriers are less stringent than quotas. Businesses could always import additional goods under a tariff if they have been ready to spend more money.
Furthermore, the partial equilibrium simulation analysis emphasises the importance of policy impact on import prices (Kuang and Xiang, 2019). From such a standpoint, the importance of trade-related institutional mechanisms in studying trade indices should indeed be given serious consideration. Additional study in this direction should concentrate on including dynamic aspects of production businesses’ expenditure action in relation to development in the world trade system.
b) Compare the effects of an import quota to the effects of an equivalent import tariff
In terms of international trading, often the government intervenes to protect the domestic industries from steep competition from the international market. In this context, the government introduces the concept of import quota and tariff. An import quota can be referred to as a type of trade restriction, which is responsible for setting a physical limit on the good quantity that can be imported by a particular country in a given period of time (Parc and Messerlin, 2021). Quotas are specifically implemented in order to help the domestic suppliers to flourish and sustain in the market. Through import quotes, quantities can be restricted from surplus import and opportunity for domestic suppliers to grow in the market is created. Import tariff can be stated as a tax levied by the governments on the imported product value including insurance and freight. Tariffs are often used as a tool by the government for increasing the prices of foreign products for the customers (Himics et al. 2020). The government to encourage export and reduce import introduces both methods of tariff and quotas. However, both the concepts and their effects are different to a certain extent influencing the interests of the consumers, suppliers and others.
Through the above diagram, a comparison of the effects of quotas and tariffs can be represented in terms of the demand-supply approach and partial equilibrium. SD in the figure represents the demand-supply curve while DD is representing the demand curve (Economics discussion, 2022). These two curves are specifically intersecting each other at point N and the price at point N is determined as pre-trade price or autarkic price, represented as PT in the above figure (Economics discussion, 2022). In case of free trade in the country, the international price that would prevail is assumed to be PW. At the point when the prices would rest upon PW, a country would produce products of OA level; however, the consumer consumes OB. The difference between production and consumption level would be imported, from A to B as per the representation through the above figure (Economics discussion, 2022).
From the above figure, it can be analysed that if a country imposes a tariff = T, the process of the products would increase to PT, due to the amount of tariff (Economics discussion, 2022). The increase in product prices has certain effects and one of the major effects of tariffs is that the prices of the products get increased. Due to tariff imposition and its following effect on the increase in process, consumers’ inclination towards purchasing that significant product reduces extensively and the consumption declines from OB to OC (Economics discussion, 2022). Consumers often look for certain products, which are affordable and cheap. Thus, with the increase in product prices, a huge amount of customers would shift from purchasing foreign products. This can be called the consumption effect due to tariffs imposed by the governments (Amiti et al. 2019).
Another effect of tariffs is an increase in domestic production, which is called the protective effect or output effect. With higher prices of certain products, the domestic manufacturer is induced to produce more such products in order to sell them in the market at affordable prices than the imported products. Thus, the production capability of the country rises from OA to OE and the living standard from prosperous operations in the market can be enhanced (Economics discussion, 2022). On the other hand, the third effect of tariffs is reduction in import quantity. With increased prices of products, the consumption of products in the market would specifically decline, which would result in lower sales of imported products. Thus, the import declines from AB to EC (Economics discussion, 2022). Additionally, the fourth effect of the tariff is the revenue effect, which is earned by the government. Revenue of the government can be determined by multiplying the quantity of products imported into the country by the tariff imposed on them, which is represented as A’B’UR (Economics discussion, 2022). It can be technically stated as a transfer from consumers to the government. However, if the tariff increases excessively by T, imposed prices would have increased to PT (Economics discussion, 2022). Thus, the import would drop to zero, the imports can be extensively restricted, and this situation is called prohibitive tariff. However, quotas are somewhat different from tariffs and thus have different effects on tariffs. Additionally, there are certain similarities as well between tariffs and quotas.
Quotas are to restrict the quantity whereas tariff works through prices. Quotas work directly on minimising imports whereas tariffs work indirectly in reducing imports. Furthermore, on the aspect of revenue streams, quotas are distinctively different from tariffs. Through tariffs, the government can generate revenue whereas, through quotas, no revenues can be generated for the benefit of the government (Hillen, 2019). The producers enjoy all the benefits of the quotes and importers, who manage to acquire scarce and valuable import permits. However, in other terms, if the import licenses were auctioned off to the importers, then the government would be able to earn revenues from the auction. In this manner, both tariffs and quotas would be equivalent (Rodrik, 2018). Furthermore, through quotas, the import volume is maintained at the same level even during the times when demand for a certain product rises. It occurs significantly due to the application of quotas.
Quotas have the ability to make the supply curve of imported goods from eclectic to completely inelastic. Due to the restriction on imported products, the elasticity of the supply curve gets hampered and thus, imports cannot be increased. However, in case of tariffs, it permits imports to rise at times of increased demand, especially when the demand for imports becomes inelastic (Nagurney et al. 2019). Therefore, it can be stated that in comparison to the tariffs when it leads to an increase in foreign exchange spending, quotas lead to greater foreign exchange savings. Furthermore, the outcome of the imported products can be ascertained with the use of quotas, whereas the outcome of tariffs from the imported products is unclear and uncertain. This specifically happens because due to the imposition of quota, the volume of imported products remains unchanged whereas the case differs in terms of tariffs. On the other hand, quotas are more flexible in nature in comparison to tariffs. Imposition and removal of quotas through instruments of commercial policy are much more flexible and easy than tariffs, which can enhance the processes of product supply (Nagurney et al. 2019). The measures of tariffs are relatively permanent in nature and rapidly build powerful interests, which makes it more difficult to remove.
Quotas have the capability to distort international trade more than that of tariffs due to its more arbitrary and vigorous effects (Nagurney et al. 2019). Furthermore, in terms of corruption, quotas can increase corruption in the country through auctions. Often, officials are notified to be charged for the allocation of import licenses, which increases the chances for bribery, which is unlikely to happen with the tariffs. Thus, the government needs to observe which would work best for that specific country and thereby accordingly needs to enforce by considering their relative advantages and disadvantages.
References
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