are barriers to the free movement of goods and service that seek to distort
the pattern of trade between countries. In recent years, there has been a
long running dispute between the European Union and the USA over bananas,
beef, cashmere and steel.
A variety of
import controls can be introduced:
A tariff is a
tax on imports and is used to restrict imports and raise revenue for the
government. We assume in the diagram below that producers from other
countries can supply the good at a constant price of PW - their
supply curve is perfectly elastic.
demand and domestic supply curves are shown. If the market price is PW
output Q1 is produced by domestic firms and Q2 will be
the demand from home consumers. Because Q2>Q1
imports will come into the economy to satisfy the excess demand.
A tariff is
placed on the value of imports. This raises the price of imports to PW+T
and as a result, domestic demand contracts to Q4 and domestic
supply expands to Q3. Home producers can supply more at the new
higher price. The tariff gives domestic firms a competitive boost. The volume
of imports has reduced.
The effect of
the tariff depends on the price elasticity of demand and the price elasticity
of supply. A tariff will have a greater effect the more elastic the demand
and supply. If the demand is inelastic then the imposition of a tariff will
have little effect on the level of imports.
introduction of tariffs by one country can lead to retaliation responses from
other countries. This retaliation can lead to damaging trade-wars.
of a tariff will impose a cost on society.
After the tariff is imposed the consumers have to pay a higher price
and hence consumer surplus will fall from ABC to ADE. The cost to consumers is therefore EDBC (areas 1+2+3+4).
Part of the cost is redistributed as benefit to other parts of
Firms receive a
higher price and their producer will increase by area 1.
The government receives extra revenue from tariff receipts - area 3
– i.e., Q4 – Q3 ´
However part of
this cost is not recovered. Areas
2 and 4 are a net cost to society. Area
2 represents the extra costs of producing at home rather than importing.
Area 4 represents the loss in consumer surplus as a result of the
decrease in quantity from Q2 to Q4.
The government should weigh up the costs and benefits before
implementing any tariffs.
An import quota
directly reduces the quantity of a product that is imported and indirectly
reduces the amount of money that the export producers receive. The main
beneficiaries of quotas are the domestic producers who face less competition.
This is where the
government completely bans certain imports, e.g., drugs; or exports to
certain countries, e.g., to enemies during a war.
Regulations may be
designed in such a way to exclude imports. For example in Germany lagers had
to pass certain purity tests and in Japan importers must complete so much
paperwork and satisfy so many safety tests that many are put off.
This is where
governments favour domestic producers when purchasing equipment, e.g.,
A voluntary export
restraint is similar to an import quota. With a VER, the exporting country
voluntarily restricts the number of goods that it ships to its trading
partner. Foreign exporters must purchase licences from its government and
then exports its allotted amount. The price they receive for their goods,
minus the cost of the export licence, is their profits
An export subsidy is a
payment to a domestic producer who exports a good abroad. If receiving an
export subsidy, a firm can remain competitive abroad by exporting up to the
foreign price (because the subsidy will cover some of the difference) yet
receive the higher price domestically. The effects of a subsidy are the
opposite of those of a tariff. In the spring of 2001, a trade dispute arose
between Canada and Brazil about trade-distorting export subsidies by the
Canadian Government to its firms when trying to sell aircraft to the United
US imposes heavy tariffs on steel imports (Financial Times 6.3.02
EU promises to lodge swift WTO appeal
(Financial Times 6.3.02Tariff: WTO urges US to lift lamb tariffs
trade row escalates (bbc 19.6.01)
Tariff : The Economy EU boycott call
over US tariffs (bbc 20.7.99)
for US steel makers (bbc 22.6.99)
Tariff and Quota: US, Russia sign steel deal (bbc13.7.99)
Quota: China slams US over textile quota
cut (bbc 7.5.98)
Embargo: UN demands end to Cuba embargo (28.11.01)
Embargo: UN on Sierra Leone embargo (bbc 5.1.01)
Taleban arms embargo in focus (bbc)
Voluntary export restraints: USA and Japan
Analysis: Bush's protectionist tendency (bbc
US protectionism warning (9.6.99)EU launches
steel-dumping probe (14.5.99)