1. Chapter 8 studied trade policies under perfect competition: A small economy always loses from a tariff, but a large country might benefit if there is a large TOT effect. Quotas have effects similar to tariffs.
2. This chapter studied trade policies with imperfect competition.
a. Under Home monopoly, tariffs and quotas have very different effects. With a tariff, the firm is still unable to exert its market power; a quota allows it to exert monopoly power, by restricting production. There are larger deadweight losses under a quota.
b. Under Foreign monopoly, a tariff has effects similar to the large-country case in Chapter 8 because there is a TOT gain. The incidence of the tariff is partially shifted to the foreign firm. This is an example of a successful strategic trade policy that benefits the domestic economy, but at the expense of the foreign firm.
3. Antidumping duties as an example of a tariff on a Foreign firm. In theory, Home could benefit because of the TOT effect. Under GATT rules, however, the antidumping duty depends upon the difference between the foreign price and the domestic price. So in practice, the Foreign firm has an incentive to raise domestic prices in anticipation of the duty, which makes Home worse off.
4. This chapter concluded by making a theoretical case for an infant industry case, and investigating four examples of it in practice.
In the previous chapter, we discussed the use of import tariffs and quotas under perfect competition and highlighted the difference between the small-country and large-country cases. With perfect competition, a small importing country loses from a tariff (because it cannot affect world prices), but the large importing country can potentially gain from a tariff (because the tariff depresses the world price). Import quotas have effects similar to those of import tariffs under perfect competition, so we often refer to quotas and tariffs as “equivalent.”
We can contrast the results obtained under perfect competition with the results we learned in this chapter, in which we assume imperfect competition—either Home or Foreign monopoly. Under Home monopoly, the effects of a tariff and quota are very different. With a tariff, the Home monopolist can increase its price by the amount of the tariff (as would a competitive industry) but cannot exercise its monopoly power. With an import quota, however, the Home firm is able to charge a higher price than it could with a tariff because it enjoys a “sheltered” market. So the import quota leads to higher costs for Home consumers than the tariff, and these two policies are no longer “equivalent,” as they are under perfect competition.
Under Foreign monopoly, the results are similar to those of the large-country case analyzed in the previous chapter: the tariff leads to a fall in the price received by the Foreign monopolist, so the price paid by Home consumers rises by less than the full amount of the tariff. The tariff is shared between an increase in the Home price and a decrease in the Foreign price, and the Home importer obtains a terms-of-trade gain. For small tariffs, the terms-of-trade gain exceeds the deadweight loss, and the Home country gains from the tariff. So this is a case where the use of a tariff as strategic trade policy can benefit the Home country, but at the expense of the Foreign firm.
A specific example of a tariff applied against a Foreign monopoly occurs when the Foreign firm is a discriminating monopoly and it dumps its output into Home at a lower price than it charges in its own local market. When dumping occurs, the importing country is permitted by WTO rules to respond with a tariff, which is called an antidumping duty. In principle, we might expect Home to gain from the duty because the Foreign firm will lower its price (as occurs for a tariff applied against a Foreign monopolist). But we have argued that the potential for Home gains from the antidumping duty are unlikely to arise because of special features in the way these duties are applied. Instead, the expected outcome from antidumping duties is that Foreign exporters raise prices even when a duty is not applied, leading to Home losses. Because of these losses, the use of antidumping duties as strategic trade policy is not effective.
Another topic discussed in this chapter is the infant industry case for protection. We studied four industries as examples of infant industry protection: solar panels in the United States and China, Harley-Davidson motorcycles in the United States, computers in Brazil, and automobiles in China. Both the United States and China provide various type of subsidies for the production or use of solar panels, and the United States has recently applied antidumping and countervailing duties on these imports from China. The solar panel industry is suffering from overcapacity on a global scale and firms in both countries have gone bankrupt. So the policies applied have not yet led to the long-term profitability of firms in either country. The tariff given to protect Harley-Davidson motorcycles in the United States during the 1980s appears to have been successful because Harley-Davidson survived and has become very profitable. For computers in Brazil, the ban on imports during the 1980s was not successful because the industry was never able to learn enough from the world leaders to reach the same level of efficiency and competitive prices. Finally, automobile production in China has grown rapidly and overtaken production in Europe, but it is still protected by a 25% tariff, so it is too early to judge whether this is a successful case of infant industry protection. In addition, the rapid growth in the domestic income of Chinese consumers has been at least as important as past tariffs to the recent growth in production and sales.
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