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InternationalEconomics

TenthEditionNontariffTradeBarriersandNewProtectionismDominickSalvatoreJohnWiley&Sons,Inc.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.CHAPTER

NINE9InternationalEconomics

Tenth1Inthischapter:IntroductionImportQuotasOtherNontariffBarriersandtheNewProtectionismThePoliticalEconomyofProtectionismStrategicTradeandIndustrialPoliciesHistoryofU.S.CommercialPolicyTheUruguayRound,OutstandingTradeProblemsandtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.Inthischapter:IntroductionSa2IntroductionThoughtariffshavehistoricallybeenthemostimportantformoftraderestriction,therearemanyothertypesoftradebarriers.Astariffswerenegotiateddownduringthepostwarperiod,theimportanceofnon-tariffbarrierswasgreatlyincreased.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.IntroductionThoughtariffshav3ImportQuotasAquotaisadirectquantitativerestrictionontheamountofacommodityallowedtobeimportedorexported.Importquotasareusedtoprotectdomesticindustryandagriculture,and/orforbalanceofpaymentsreasons.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasAquotaisadire4ImportQuotasImportQuotavs.EquivalentImportTariffImportquota:HigherdomesticpricethantariffHigherdomesticproductionthantariffImporttariff:HigherconsumptionthanquotaHigherimportsthanquotaSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.5FIGURE9-1PartialEquilibriumEffectsofanImportQuota.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-1PartialEquilibriumImportQuotasImportQuotavs.EquivalentImportTariffImportquotainvolvesdistributionofimportlicenses,whiletariffdoesnot.Ifnotauctionedbygovernmentincompetitivemarkets,receivingfirmswillreapmonopolyprofits.Allocationdecisionoftenbasedonarbitraryjudgmentsratherthanefficiencyconcerns.Monopolyprofitsleadfirmstolobbyforlicensesinrent-seekingactivities.Thus,importquotasreplacemarketmechanism,resultinginwaste,andpossiblecorruption.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.7ImportQuotasImportQuotavs.EquivalentImportTariffImportquotalimitsimportstospecifiedlevelswithcertainty,whilethetradeeffectofanimporttariffmaybeuncertain.Whenelasticityofdemandandsupplyarenotknown,itisdifficulttoestimatetheimporttariffrequiredtorestrictimportstodesiredlevel.Foreignexporterscannotmaintainexportquantitysimplyadjusttobarrierbyincreasingefficiencyoracceptinglowerprofits,aswithtariffBecauseimportquotaisless“visible,domesticproducerspreferthemovertariffs.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.8ImportQuotasImportQuotavs.EquivalentImportTariffSinceimportquotasaremorerestrictivethanequivalentimporttariffs,societyshouldresistdomesticproducers’effortstousequotasinsteadoftariffs.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.9OtherNontariffBarriersandtheNewProtectionismVoluntaryExportRestraints(VERs)WithVERs,animportingcountryinducesanothernationtoreduceitsexportsvoluntarily,underthreatofhighertraderestrictions.Sometimescalledorderlymarketingarrangements,VERsallowindustrialnationstoappeartosupporttheprincipleoffreetrade.Lesseffectiveinlimitingimportsthanimportquotasbecauseexporterstendtofillthequotawithhigherquality,higherpricedgoodsovertime.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt10OtherNontariffBarriersandtheNewProtectionismTechnical,Administrative,OtherRegulationsHealthandsafetyregulationsmayserveasbarrierstointernationaltradebyraisingthecostsofimportedproducts.Governmentpurchasingrestrictionsmaybebiasedagainstforeigngoods.TheBuyAmericanActof1933Rebatesforindirecttaxesmaybegiventoexportersandimposedonimportersofacommodity.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt11OtherNontariffBarriersandtheNewProtectionismInternationalCartelsOrganizationofsuppliersfromdifferentnationsthatagreestorestrictoutputandexportsofacommoditywiththeaimofmaximizingorincreasingtotalprofits.Forexample,OPEC(theOrganizationofPetroleumExportingCountries)quadrupledthepriceofcrudeoilbetween1973and1974byrestrictingproductionandexports.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt12OtherNontariffBarriersandtheNewProtectionismDumpingTheexportofacommodityatbelowcost,orthesaleofacommodityatalowerpriceabroadthandomestically.Threetypesofdumping:Persistentdumpingisthecontinuoustendencyofadomesticmonopolisttomaximizetotalprofitsbysellingthecommodityatahigherpriceinthedomesticmarket.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt13OtherNontariffBarriersandtheNewProtectionismDumpingTheexportofacommodityatbelowcost,orthesaleofacommodityatalowerpriceabroadthandomestically.Threetypesofdumping:PersistentdumpingPredatorydumpingisthetemporarysaleofacommodityatbelowcostoralowerpriceabroadtodriveforeignproducersoutofbusiness.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt14OtherNontariffBarriersandtheNewProtectionismDumpingTheexportofacommodityatbelowcost,orthesaleofacommodityatalowerpriceabroadthandomestically.Threetypesofdumping:PersistentdumpingPredatorydumpingSporadicdumpingistheoccasionalsaleofacommodityatbelowcostorlowerpriceabroadtounloadsurplusofthecommoditywithoutreducingdomesticprices.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt15OtherNontariffBarriersandtheNewProtectionismExportSubsidiesThegrantingoftaxrelieftoexportersorsubsidizedloanstoforeignbuyerstostimulateanation’sexports.Canberegardedasaformofdumping.Exportsubsidiesareillegalbyinternationalagreement,butoftenusedindisguisedform.Example:Export-ImportBankU.S.governmentagencythatextendssubsidizedloanstoforeignerstofinanceU.S.exports.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt16FIGURE9-2PartialEquilibriumEffectofanExportSubsidy.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-2PartialEquilibriumThePoliticalEconomyofProtectionismFallaciousArgumentsforProtectionTraderestrictionsareneededtoprotectdomesticlaboragainstcheapforeignlabor.Evenifdomesticwagesarehigherthanwagesabroad,domesticlaborcostscanstillbeloweriftheproductivityoflaborissufficientlyhigherdomesticallythanabroad.Mutuallybeneficialtradecouldbebasedoncomparativeadvantage,withcheaplabornationspecializinginlabor-intensivecommodities.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ThePoliticalEconomyofProte18ThePoliticalEconomyofProtectionismFallaciousArgumentsforProtectionScientifictariffsareneededsothatdomesticproducerscancompete.Ascientifictariffraisesthepriceofimportstothedomesticprice.Thiswouldeliminatepricedifferencesandtradeinallcommoditiessubjecttosuch“scientific”tariffs.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ThePoliticalEconomyofProte19ThePoliticalEconomyofProtectionismQuestionableArgumentsforProtectionProtectionisneededto:Reducedomesticunemployment,andTocureadeficitinthenation’sbalanceofpaymentsProtectionwouldleadtosubstitutionofimportswithdomesticproduction.Thesearebeggar-thy-neighborargumentsforprotectionbecausetheycomeattheexpenseofothernations.Othernationsretaliate;allnationsloseintheend.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ThePoliticalEconomyofProte20AQualifiedArgumentforProtectionInfant-industryArgumentTemporarytradeprotectionisjustifiedtoestablishandprotectadomesticindustryduringits“infancy”untilitcanmeetforeigncompetition,achieveeconomiesofscale,andreflectthenation’scomparativeadvantage.Tobevalid,thereturninthegrown-upindustrymustbehighenoughtooffsetthehigherpricespaidbydomesticconsumersofthecommodityduringinfancy.ThePoliticalEconomyofProtectionismSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.AQualifiedArgumentforProte21AQualifiedArgumentforProtectionInfant-industryArgumentRequiresseveralqualificationswhich,together,takeawaymostofitssignificance:Morejustifiedfordevelopingnationsthanindustrialnations.Maybedifficulttoidentifywhichindustryqualifiesforprotection,which,oncegiven,isdifficulttoremove.Whattradeprotectioncando,anequivalentproductionsubsidytotheinfantindustrycandobetter.ThePoliticalEconomyofProtectionismSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.AQualifiedArgumentforProte22StrategicTradeandIndustrialPoliciesAccordingtothestrategictradepolicyargument,anationcancreateacomparativeadvantageinindustriesdeemedcrucialtofuturegrowthinthenation.Nationmayusetemporarytradeprotection,subsidies,taxbenefitsandcooperativegovernment-industryprograms.Similartoinfant-industryargumentindevelopingnations.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.StrategicTradeandIndustrial23StrategicTradeandIndustrialPoliciesSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ConcernsDifficulttopickwinnersanddeviseappropriatepoliciestonurturethem.Effortslargelyneutralizedwhenleadingnationsundertakestrategictradepoliciesatthesametime.Retaliationinothermarketsmayeliminateanygains.StrategicTradeandIndustrial24HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1930–Smoot-HawleyTariffActRaisedaverageimportdutiesto59%

by1932.SpurredinternationalretaliationHistoryofU.S.CommercialPol25HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1934–TradeAgreementsActAuthorizedthepresidenttonegotiatemutualtariffreductionsbyasmuchas5%.Reductionswerebasedontheprincipleofmostfavorednation.Themostfavorednationprincipleextendstoalltradingpartnersanyreciprocaltariffreductionnegotiatedwithanytradingpartner.Forexample,anegotiatedreductionwithCanadawouldextendtoMexicoifithadmostfavorednationstatus.HistoryofU.S.CommercialPol26HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1947–TheGeneralAgreementonTariffsandTrade(GATT)Designedtopromoteexpandedinternationaltradethroughmultilateralnegotiations.GATTrestedonthreebasicprinciples:NondiscriminationEliminationofnontariffbarriersConsultationamongnationsinsolvingtradedisputesHistoryofU.S.CommercialPol27HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1950s–MovementsawayfromfreetradePeril-pointprovisionspreventedthepresidentfromnegotiatingtariffreductionsthatwouldseriouslydamageadomesticindustry.Escapeclauseallowedanydomesticindustryclaiminginjuryfromimportstopetitionfortariffreduction.Nationalsecurityclausepreventedtariffreductionswhentheywouldhurtindustriesimportantfornationaldefense.HistoryofU.S.CommercialPol28HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1962–TradeExpansionActAuthorizedthepresidenttonegotiateacrosstheboardtariffreductionsofupto50%.IntroducedTradeAdjustmentAssistance(TAA)toworkersdisplacedbyinternationaltrade.AllowedthepassageoftheKennedyRoundnegotiationoftheGATT.HistoryofU.S.CommercialPol29HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1974–TradeReformActAuthorizedthepresidenttonegotiatetariffreductionsofupto60%

andtheeliminationoftariffsbelow5%.ContributedtopassageoftheTokyoRoundnegotiationsoftheGATT.HistoryofU.S.CommercialPol30HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1984–TheTradeandTariffActAuthorizedthepresidenttonegotiateinternationalagreementsfortheprotectionofintellectualpropertyrights.ExtendedtheGeneralizedSystemofPreferences(GSP),asystembywhichdevelopingnationexportsaregrantedpreferentialaccesstoUSmarkets.ProvidedauthorityfornegotiationsleadingtofreetradewithIsrael.HistoryofU.S.CommercialPol31HistoryofU.S.CommercialPolicySalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.1988–TheOmnibusTradeand CompetitivenessActRequiredtheU.S.SpecialTradeRepresentativetosetarigorousschedulefornegotiatingreductionsintradebarrierswithcountriesmaintaininghighbarrierstoU.S.exports.HistoryofU.S.CommercialPol32FIGURE9-3U.S.AverageTariffRatesonDutiableImports,1900-2000.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-3U.S.AverageTariffTheUruguayRound,OutstandingTradeProblems,andtheDohaRoundTheUruguayRoundGATT’seighthroundofnegotiations,with123countriesparticipating.BeganinSeptember1986withcompletionscheduledforDecember1990.DisagreementsbetweenUnitedStatesandEuropeanUnion,onreducingagriculturalsubsidies,delayedconclusionforthreeyears.AgreementtookeffectinJuly,1995.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRound,Outstanding34TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundTheUruguayRoundAimsoftheUruguayRound:Establishrulesformonitoringprotectionismandreversingthetrend.Bringservices,agricultureandforeigninvestmentsintonegotiations.Negotiateinternationalrulesforprotectionofintellectualpropertyrights.EnsuremoretimelydecisionandcompliancewithGATTrulingsondisputesettlements.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRound,Outstanding35TheUruguayRoundMajorProvisionsofUruguayAccord:TariffsTariffsonindustrialproductstobecutfromanaverageof4.7%toanaverageof3%.Theshareofgoodwithzerotariffstoincreasefrom20-22%to40-45%.Tariffsremovedonpharmaceuticals,constructionsequipment,medicalequipment,paperproducts,andsteel.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR36TheUruguayRoundMajorProvisionsofUruguayAccord:QuotasQuotasonagriculturalproductsweretobereplacedwithlessrestrictivetariffsby1999Quotasontextilesweretobereplacedwithlessrestrictivetariffsby2004TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR37TheUruguayRoundMajorProvisionsofUruguayAccord:AntidumpingTougherandquickerresolutionofdisputesresultingfromantidumpinglaws,butnotabanontheiruse.SubsidiesThevolumeofsubsidizedagriculturalproductswastobereducedby21percent,withgovernmentsubsidiesforindustrialresearchlimitedto50%oftheappliedresearchcost.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR38TheUruguayRoundMajorProvisionsofUruguayAccord:SafeguardsCountriesbarredfromimplementinghealthandsafetystandardsthatarenotbasedonscientificresearch.Temporarytariffsallowedtoprotectdomesticindustriesfromtemporaryimportssurges.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR39TheUruguayRoundMajorProvisionsofUruguayAccord:IntellectualpropertyTwenty-yearprotectionofpatents,trademarks,andcopyrights.A10yearphase-inperiodforpatentsoverpharmaceuticalsindevelopingcountries.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR40TheUruguayRoundMajorProvisionsofUruguayAccord:ServicesUnitedStatesfailedtogainaccesstomarketsinJapan,Koreaandmanydevelopingnationsforbanksandsecurityfirms.UnitedStatesdidnotsucceedinhavingFranceandtheEuropeanUnionliftrestrictionsonshowingAmericanfilmsandTVprogramsinEurope.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR41TheUruguayRoundMajorProvisionsofUruguayAccord:OtherIndustryProvisionsUnitedStatesandEuropeagreedtotalksonlimitinggovernmentsubsidiestocivilaircraftmakers,openingupdistancetelephonemarket,andlimitingEuropeansteelsubsidies.UnitedStatesexpressedintentiontonegotiateopeningJapanesecomputerchipmarket.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR42TheUruguayRoundMajorProvisionsofUruguayAccord:Trade-RelatedInvestmentMeasuresPhasedoutrequirementthatforeigninvestorsbuysupplieslocallyorexportasmuchastheyimport.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR43TheUruguayRoundMajorProvisionsofUruguayAccord:WorldTradeOrganization(WTO)EstablishedtheWTOinplaceoftheGATTSecretariat,withauthorityinindustrialandagriculturalproductsandservices.Tradedisputestobesettledbyvoteoftwo-thirdsorthree-quartersofnationsratherthanunanimously.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.TheUruguayRoundTheUruguayR44OutstandingTradeProblemsTradedisputesbetweentheUnitedStatesandtheEuropeanUnion.EUsubsidiestoAirbusEUbanonUSexportsofhormone-raisedbeefandgeneticallymodifiedfoodHighsubsidiesandtariffsonagriculturalproducts,andfrequentlyabusedantidumpinglaws.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OutstandingTradeProblemsThe45OutstandingTradeProblemsTendencyforworldtodivideintothreemajortradeblocs:EuropeanUnion(EU)NorthAmericanFreeTradeArea(NAFTA)AsianBlocCallbysomedevelopednationsforlaborandenvironmentalstandards,toensure“l(fā)evelingofworkingconditions”andavoid“socialdumping”TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OutstandingTradeProblemsThe46DohaRoundLaunchedinNovember,2001,inDoha,Qatar.Agendaincluded:Furtherliberalizationofproductionandtradeinagriculture,industrialproducts,andservices.Furthertighteningofantidumpingregulations,investmentandcompetitionpolicies.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.DohaRoundTheUruguayRound,O47DohaRoundDevelopingnationsreluctanttomakeconcessionsbecauseoffeelingthatUruguayRoundfailedtodeliveronpromises.DevelopingnationsinsistedonmakingDohaRoundatrue“developmentround”.Intendedtoconcludebyendof2004,allbutcollapsedin2006overdisagreementsoveragriculturalsubsidiesbetweendevelopedanddevelopingnations.Asofbeginningof2009,stillnotconcluded.TheUruguayRound,OutstandingTradeProblems,andtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.DohaRoundTheUruguayRound,O48AppendixtoChapter9MaximizationoftheInternationalCartel’sTotalProfitsInternationalPriceDiscriminationATariffvs.aSubsidytoAchieveaDomestic GoalSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.AppendixtoChapter9Maximizat49FIGURE9-4MaximizationoftheInternationalCartel’sTotalProfits.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-4MaximizationoftheFIGURE9-5InternationalPriceDiscrimination.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-5InternationalPriceFIGURE9-6ATariffvs.aSubsidytoAchieveaDomesticGoal.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-6ATariffvs.aSubsInternationalEconomics

TenthEditionNontariffTradeBarriersandNewProtectionismDominickSalvatoreJohnWiley&Sons,Inc.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.CHAPTER

NINE9InternationalEconomics

Tenth53Inthischapter:IntroductionImportQuotasOtherNontariffBarriersandtheNewProtectionismThePoliticalEconomyofProtectionismStrategicTradeandIndustrialPoliciesHistoryofU.S.CommercialPolicyTheUruguayRound,OutstandingTradeProblemsandtheDohaRoundSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.Inthischapter:IntroductionSa54IntroductionThoughtariffshavehistoricallybeenthemostimportantformoftraderestriction,therearemanyothertypesoftradebarriers.Astariffswerenegotiateddownduringthepostwarperiod,theimportanceofnon-tariffbarrierswasgreatlyincreased.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.IntroductionThoughtariffshav55ImportQuotasAquotaisadirectquantitativerestrictionontheamountofacommodityallowedtobeimportedorexported.Importquotasareusedtoprotectdomesticindustryandagriculture,and/orforbalanceofpaymentsreasons.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasAquotaisadire56ImportQuotasImportQuotavs.EquivalentImportTariffImportquota:HigherdomesticpricethantariffHigherdomesticproductionthantariffImporttariff:HigherconsumptionthanquotaHigherimportsthanquotaSalvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.57FIGURE9-1PartialEquilibriumEffectsofanImportQuota.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.FIGURE9-1PartialEquilibriumImportQuotasImportQuotavs.EquivalentImportTariffImportquotainvolvesdistributionofimportlicenses,whiletariffdoesnot.Ifnotauctionedbygovernmentincompetitivemarkets,receivingfirmswillreapmonopolyprofits.Allocationdecisionoftenbasedonarbitraryjudgmentsratherthanefficiencyconcerns.Monopolyprofitsleadfirmstolobbyforlicensesinrent-seekingactivities.Thus,importquotasreplacemarketmechanism,resultinginwaste,andpossiblecorruption.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.59ImportQuotasImportQuotavs.EquivalentImportTariffImportquotalimitsimportstospecifiedlevelswithcertainty,whilethetradeeffectofanimporttariffmaybeuncertain.Whenelasticityofdemandandsupplyarenotknown,itisdifficulttoestimatetheimporttariffrequiredtorestrictimportstodesiredlevel.Foreignexporterscannotmaintainexportquantitysimplyadjusttobarrierbyincreasingefficiencyoracceptinglowerprofits,aswithtariffBecauseimportquotaisless“visible,domesticproducerspreferthemovertariffs.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.60ImportQuotasImportQuotavs.EquivalentImportTariffSinceimportquotasaremorerestrictivethanequivalentimporttariffs,societyshouldresistdomesticproducers’effortstousequotasinsteadoftariffs.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.ImportQuotasImportQuotavs.61OtherNontariffBarriersandtheNewProtectionismVoluntaryExportRestraints(VERs)WithVERs,animportingcountryinducesanothernationtoreduceitsexportsvoluntarily,underthreatofhighertraderestrictions.Sometimescalledorderlymarketingarrangements,VERsallowindustrialnationstoappeartosupporttheprincipleoffreetrade.Lesseffectiveinlimitingimportsthanimportquotasbecauseexporterstendtofillthequotawithhigherquality,higherpricedgoodsovertime.Salvatore:InternationalEconomics,10thEdition?2010JohnWiley&Sons,Inc.OtherNontariffBarriersandt62OtherNontariffBarriersandtheNewProtectionismTechnical,Administrative,OtherRegulationsHealthandsafetyregulationsmayserveasbarrierstointernationaltradebyraisingthecostsofimportedproducts.Governmentpurchasingrestrictionsmaybebiasedagainstforeigngoods.TheBuyAmericanActof1933Rebatesfor

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