Effects of Proposed Quantitative Restrictions on Rice Exporters

7/27/2019 Effects of Proposed Quantitative Restrictions on Rice Exporters

1/8

EFFECTS OF PROPOSED QUANTITATIVE RESTRICTIONS ON RICE EXPORTERS

Pdf 4498453

That does not seem to be generally recognized is that, even in the statuc, perfectly

competitive world, tariffs and import quotas are never equivalent if both countries

pursue restrictive trade practices. It ca also be shown that the form of trade

restrictions used by one country can have a significant implications for the range of

instruments available to its trading partner.

Pdf4504850

Quantitative restrictions on commodity trade will permit a country to influence its

trade and production patterns, despite factor mobility,and without requiring

distortions in both factor and commodity markets. Second, while doing this, to

demonstrate the basic differences in the adjustment processes under these twocommercial policy regimes. Although, in a static framework they are essentially

equivalent, once factor mobility is introduced the distinction between a price and a

quantity restriction becomes important.

Now let the home country place a tariff on its imports with any tariff proceeds being

redistributed in a neutral manner. Imagine, for a moment, capital is immobile. Then,

barring a Metzler Paradox, the domestic relative price of the importable would rise

and the home terms of trade improve. Thus, relative prices would move in opposite

directions in the two countries, and the real return to the factor used relatively

more intensively in the production of the home importable would increase at home

and decline abroad. Conversely for the iteher factor.

Should capitals domestic return tend to rise, the home country will experience a

capital inflow, otherwise a capital outflow. In either event, the force of the resulting

capital movement is toward expanding domestic production of importables,

independent of factor intensities. Foreign production of their exportable

correspondingly contracts. This capital flow will continue as long as the international

differential in rental exists----that is, until either the home country becomes

specialized in the production of the importable, or commodity prices return to their

original levels. Neglecting specialization, the price and rental differential persists

until production changes have eliminated trade in the importable (whence the tariff

becomes redundant). At this point world prices, incomes, and hence, desired

consumption will have returned to their initial levels.

As before, this capital flow continues until returns are equalized. Again, barring

specialization, this occurs when relative prices return to their former levels.

However, unlike the tariff, imports are not eliminated but simply reduced to the


2/8

level established by the quota where then price and return differentials, and hence

the incentive for further capital movements are eliminated.

This demonstrates that quantitative restrictions retain their flexibility in forcing

production adjustments, despite the possibility of capital movements. An import

tariff and quota pair which will be equivalent with capital immobile are no longerequivalent when capital can move. The rigid price differential forced by the tariff

persists as long as trade in the importable exists. With the quota, however, a price

differential exists only to the extent trade is limited by the quota. So any tariff has

as its equivalent the prohibitive quota.

Pdf 4764928

De Janvry and Bieris paper is an example of one of the developments reported in

Judges review. It illustrates how conditional restrictions on an abstract economic

theory structure, which implied two-stage optimizing simplification of parametric

relationships, can permit estimation to proceed with data insufficient for less

restrictive specification. It is a productive principle which should be applied

wherever feasible in quantitative economics if the restrictive conditions do not

reduce significantly the functional utility of the resulting output. Also, the

operational usefulness of this more complete and sophisticated approach has to be

tested in real decision processes against other simpler approximation methods.

PDF 5981199 The International Trade Journal

Among the standard results in the theory of commercial policy are the effect of

tariffs and quotas on domestic prices and on the terms of trade. For a country

possessing monopoly or monopsony power in trade and under perfectly competitive

conditions =, such trade restrictions are normally expected to raise the domestic

relative price of the importable commodity in the tariff-or-quota-imposing country

while at the same time improving that countrys terms of trade. Exceptions to these

results include the familiar Metzler (1949) case, in which a tariff lowers the domestic

relative price of the importable good in the presence of an inelastic foreign import

demand, and the Lerner (1936) case, in which a tariff worsens the terms of trade in

the presence of an inelastic domestic import demand.The importance of these price

effects stems from their implications for the allocational, distributional and welfatre

impact of trade restrictions.

While a tariff normally raises the domestic relative price of the importable

commodity subject to the duty, Metzler (1949) showed that this result may be

reversed if the forieign demand for imports is price inelastic.


3/8

Consider the effects of a specific tariff imposed by a country which

obtains its Imports from a monopolistic foreign supplier. The foreign firm

sells its homogeneous output in both the foreign and domestic markets, and

commodity arbitrage rules out price discrimination across markets.^

In other words, in spite of being the sole producer in the foreign market, the monopolist

faces potential resale between the two markets.

It is important to note that the same result will be obtained if the

foreign industry is perfectly competitive with decreasing long-run costs

reflecting the existence of pecuniary or technical economies external to the

individual firms hut internal to the industry. While the tariff-induced

decrease in the total demand for tbe foreign industry's product would lower

the foreign price in the short run, the long-run equilibrium foreign price

would be higher than under free trade as contraction of the industryincreases costs for all firms. We may therefore state the following result:

Proposition 1 - A tariff may worsen the tariff-imposing country's terms of

trade in the presence of decreasing costs in tbe foreign

export sector.

It

Kreinin (1970) hasargued that non-equivalence prevails even under perfectly competitive

condiiions if dynamic considerations such as the effects of changes in demand or supply

conditions in the presence of tariffs and quotas-- are included, Rodriguez (1974) also showed

that tariffs and quotas would produce different final equilibria if retaliation is taken intoaccount. Finally, Fishelson and Flatters (1975) compared an optimal quota in the presence of

uncertainty with a tariff yielding the same expected level of imports and concluded that they

would not generally have the same welfare effects.7

Rieber (1986) has extended these results by showing that with a monopolistic importcompeting

sector, an import quota set at or above the free trade level of imports mayparadoxically increase the domestic price of the importable commodity.

leads to some form of collusive agreement among the foreign suppliers thar

can be conveniently approximated by the monopoly assumption.

MarshallLerner conditionFrom Wikipedia, the free encyclopedia

The MarshallLerner condition (afterAlfred Marshall andAbba P. Lerner) has been cited as a technical

reason why a reduction in value of a nation's currency need not immediately improve itsbalance of payments.

[1] The condition states that, for acurrencydevaluation to have a positive impact on trade balance, the sum

ofprice elasticityofexports and imports (in absolute value) must be greater than 1.

As a devaluation of theexchange ratemeans a reduction in the price of exports, quantity demanded for these

will increase. At the same time, price of imports will rise and their quantity demanded will diminish.
http://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Alfred_Marshallhttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition#cite_note-solution-0http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Devaluationhttp://en.wikipedia.org/wiki/Devaluationhttp://en.wikipedia.org/wiki/Trade_balancehttp://en.wikipedia.org/wiki/Price_elasticitieshttp://en.wikipedia.org/wiki/Price_elasticitieshttp://en.wikipedia.org/wiki/Price_elasticitieshttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Absolute_valuehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Abba_P._Lernerhttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition#cite_note-solution-0http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Devaluationhttp://en.wikipedia.org/wiki/Trade_balancehttp://en.wikipedia.org/wiki/Price_elasticitieshttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Absolute_valuehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Alfred_Marshall


4/8

The net effect on the trade balance will depend on price elasticities. If goods exported are elastic to price, their

quantity demanded will increase proportionately more than the decrease in price, and total export revenue will

increase. Similarly, if goods imported are elastic, total import expenditure will decrease. Both will improve the

trade balance.

Empirically, it has been found that goods tend to be inelastic in the short term, as it takes time to change

consuming patterns.{Bahmani-Oskoee & Ratha 2004 } Thus, the MarshallLerner condition is not met, and a

devaluation is likely to worsen the trade balance initially. In the long term, consumers will adjust to the new

prices, and trade balance will improve. This effect is calledJ-curve effect. For example, assume a country is a

net importer of oil and a net producer of ships. Initially, the devaluation immediately increases the price of oil,

and as consumption patterns remain the same in the short term, an increased sum is spent on imported oil,

worsening the deficit on the import side. Meanwhile, it takes some time for the shipbuilder's sales department

to exploit the lower price and secure new contracts. Only the funds acquired from previously agreed contracts,

now devalued by the currency devaluation, are immediately available, again worsening the deficit on the export

side.

Definition of 'Balance Of Payments - BOP'A record of all transactions made between one particular country and all other

countries during a specified period of time. BOP compares the dollar difference of the

amount of exports and imports, including all financial exports and imports. A negative

balance of payments means that more money is flowing out of the country than coming in,and vice versa.

Read more: http://www.investopedia.com/terms/b/bop.asp#ixzz27ntmU6lu

Investopedia explains 'Balance Of Payments - BOP'Balance of payments may be used as an indicator of economic and political stability. For

example, if a country has a consistently positive BOP, this could mean that there is

significant foreign investment within that country. It may also mean that the country does

not export much of its currency.

This is just another economic indicator of a country's relative value and, along with all otherindicators, should be used with caution. The BOP includes the trade balance, foreign

investments and investments by foreigners.

Read more: http://www.investopedia.com/terms/b/bop.asp#ixzz27nu9gEBt
http://en.wikipedia.org/wiki/J_curve#Balance_of_trade_modelhttp://www.investopedia.com/terms/b/bop.asp#ixzz27ntmU6luhttp://www.investopedia.com/terms/b/bop.asp#ixzz27nu9gEBthttp://en.wikipedia.org/wiki/J_curve#Balance_of_trade_modelhttp://www.investopedia.com/terms/b/bop.asp#ixzz27ntmU6luhttp://www.investopedia.com/terms/b/bop.asp#ixzz27nu9gEBt


5/8

Thus, an import quota always

produces a Lerner-type effect against the quota-imposing country, and we

may therefore state the following result:H

Proposition 2 - In thepresenceof a foreign monopoly,an Importquoraor

a VER will always worsen the quota-imposing country's

terms of trade. Where a tariff would increase the foreignprice of the importable good hecause of decreasing costs in

the foreign industry, the equivalent quota would increase

it even more.

Proposition 2 - In thepresenceof a foreign monopoly,an Importquoraora VER will always worsen the quota-imposing country's

terms of trade. Where a tariff would increase the foreign

price of the importable good hecause of decreasing costs in

the foreign industry, the equivalent quota would increase

it even more.

It is worth observing that while a tariff may improve or worsen thedomestic country's terms of trade if the foreign industry is perfectly

competitive, a quota will have the same tiiect as the tariff in that case. Thus,

while a quota may increase the foreign price of the importable commodity,

this will occur if and only if a tariff would also increase it and to the same

extent as the tariff would mcrease it.

H

Ono (1984) discusses a case in which a foreign monopolist is part of an oligopoly in the

domestic economy. Unlike a tariff, a quota or a VER would then facilitate tacit collusive

solutions between the foreign monopolist and the domestic firms. Harris (1985) argues that a

VER may induce price leadership behavior by domestic firms. In both mtxlels, the decline inconsumer welfare under a quota is greater than under a tariff because of the quota (or

VER)-induced lessening of competition. A similar result was also obtained by Itoh and Ono

(1982) using a Stackelberg duopoly model in which a domestic monopolist confronts a foreign

price discriminating monopolist.

9This assumption may also be justified by the presence of anti-dumping regulations in ihe

domestic country,10

The reader is reminded that Figure 111 cannot be used to analyze the effects of a quota with

different MC curves since the import quota itself would have to be adjusted to the

corresponding post-tariff equilibrium level.

One remaining issue is the allocation of the scarcity rent produced by

the quota. In his analysis of the effects of an import quota, Shibata (1968)

assumed that the foreign monopolist sells all its output in the domestic

market and then showed that the monopolist would extract all the scarcityrent, that is, the foreign price would increasepari passu with the domestic

price. The implicit tariff rate associated with the quota is zero in chis case,

regardless of the value of the equivalent explicit tariff.

Proposition 3 - In the presence of non-discriminating foreign monopoly,

the scarcity rent produced by an import quota or a VER,

which an equivalent tariff would generate as revenue for

the domestic government, will not necessarily be entirely

captured by the foreign exporter.


6/8

This result runs counter to the conventional wisdom which holds that

the scarcity rent "may accrue to [the foreignl exporters, when the latter can

collude but [domestic] importers cannot." The reason that this may not

happen is that if potential resale across markets and/or anti-dumping

regulations in the domestic market prevent the foreign monopolist fromprice discriminating, an increase in price above the profit maximizing level

Pf' would raise the revenue from the sale of the quota in the domesticmarket but not enough to compensate for the reduction in sales revenues in

the foreign market.

Pdf 7512928

How important are quantitative restrictions? There is a little doubt that one of the Uruguay Rounds successes was to

contribute to a general reduction in their use as a trade policy instrument, in particular by industrial countries.

However, in spite of efforts toward the tariffication of agricultural QRs and the planned phasing out of Multi Fiber

Agreement (MFA) quotas in textile and clothing, they are still widespread. Tariff-quotas are still important in

agriculture (Hathaway and Ingco, 1996). In textiles and clothing, although industrial countries are formally on

schedule in meeting their obligations under the Uruguay Round, the selective elimination of QRs on categories that

account for a small share of textile trade means that, of the 35 percent elimination of QR incidence that should

logically have been completed by January 1998 under the planned phasing-out of the MFA, only 1 percent had

actually been achieved in the US at that date (see Finger and Schuknecht, 1999, for details). Also, many of the

special actions allowed under the General Agreement on Tariffs and Trade (GATT) authorize the use of QRs (e.g.

safeguards and balance of payment measures).Voluntarily Export Restraint (VER) agreements, a form of QR, have

also been negotiated under the threat of antidumping measures, as was the case in March 1999 between the US and

Brazil. Thus, notwithstanding commendable efforts to get rid of QRs, their prevalence simply cannot be overlooked.

3.1 Non-cooperative FTA

When two countries form an FTA, their ability to keep external trade barriers at unequal levels creates opportunities

for arbitrage, as goods originating from the rest of the world can be imported into the low-protection country and

then re-exported to its more protectionist partner, undermining the effectiveness of the latters external protection.

Because of this, FTAs are generally riddled with rules of origin are crucial because, in their absence, unlimited

quantities of imports could be brought in from the rest of the world for arbitrage purposes (see Krueger, 1993, and

Cadot et.al., 1999). By contrast, when external protection takes the form of quantitative restrictions, rules of origin

are less crucial, because the quantities of foreign goods available for arbitrage are, in any case, limited. Because

such rules introduce significant complications into the analysis without modifying the main results, we relegate theiranalysis to the appendix.. page 265

Pdf 7696935

Measuring the protective effects of tariffs


7/8

Nominal protection measures the price-raising effects of tariff and/or other trade interventions. These effects are

relevant to the consideration of consumption effects. If tariffs are the only form of intervention, the effective

protective effects of tariffs depends upon the net influence on value-added of the price-raosing effects of nominal

tariffs on final output and on intermediate inputs In the presence of both tariff and non-tariff restrictions

comprehensive information on the total price-raising effects of all trade interventions is ideally required.

Methodology

Estimating tariff equivalents is essentially an exercise in establishing the extent to which a quota inflates the price of

a given commodity above the price that would prevail in its absence. In Burundi, as in most other economies, QRs

are not the only instrument which may create a divergence between domestic prices and world prices, therefore er

had to extricate the price effects of the quota from the price effects of other distortions. There are s several ways in

which this can be done namely direct price comparisons, border price comparisons and border price-final price

comparisons.

The method of direct price comparisons involves comparing the price which prevails in the quota restricted situation

with the price of an identical commodity in an unrestricted control. In cases where this method has been used,Hong Kong is opften taken as a free trade control. This approach does have certain merits. In principle it can be

applied to identical products and one can rely on prices at which trade actually takes place. For our purposes,

however, there were disadvantages. First of all, it is difficult to identify a sample of products of identical quality for

Burundi and a suitable control. Second, the choice of control is problematic. Ideally, it should be a country where

supply conditions, in particular the structure of retailing, are similar to Burundi. Third., even if one where content to

use Hong Kong as a control on the assumption that only competitive margins are being earned in retailing there, one

needs to make allowance for possible differences in freight costs from a given source to Hong Kong and Burundi.

Pdf7696935

Implication of the Results

Although the quantitative restricyions may have protective effects in Burundi it would seem that foreign exchange

rationing is the primary objective. It would appear that import licenses are administratively distributed on the basis

of histprocal rights and priority requirements. There would appear to be considerab;e uncertainty associated with

their use. The price raising effects are not obvious to traders or consumerswhere the restricted commodities are

inputs this is likely to have a deleterious effect on investment. Moreover, in so far as the distribution of licenses

alters from one year to the next this tendency wil be exacerbated. Evnen in the absence of such uncertainty average

price effects of this order of magnitude are likely to impose significant costs on consumers of the restricted

commodities. It may of course be argued that these costs are matched in wholebor in part by offsetting benefits, such

as higher domestic output. Even if this were so,the same objective could probably be achieved t a lower cost via

other instruments.

In the case of Burundi it is likely in addition that the structure of protection varies through time; quantitative

restrictions on imports are being used as an instrument o foreign exchange rationing rather than an instrument of

protection.


8/8

Pdf 19204786

U.S. Trade Representative RobPortman announced he is filing a

World Trade Organization case against

Turkey to try to force the lifting of its

unfair restrictions on US. rice imports.

Turkey's import restrictions for U.S.

rice appear to be inconsistent with severalof its WTO obligations, said Portman,

who announced the filing during a House

Agriculture Committee hearing in

Washington Nov. 2.

"American rice farmers deserve fair

access to Turkey's market," theAmbassador said. "Right now, American

riee exports are being unfairly restricted.We have raised this issue with the govemment

of Turkey on several occasions, but

our concerns have not been addressed."

Portman said Turkey requires a

license to import rice, and it permits the

importation of a limited amount of rice

at reduced duty rates only if importers

also purchase significant quantities of

domestic rice - in some cases, more than

three times the quantity to be imported,

he said.

Pdf22768339

Conclusions

Tariff rate import quotas cover a substantial amount of agricultural imports and are of a major policy concern for

developing countries both as exporters facing import quotas in developed countries and as an import barrier for

developing countries themselves.

Effects of Proposed Quantitative Restrictions on Rice Exporters

Documents

Transcript of Effects of Proposed Quantitative Restrictions on Rice Exporters