Lecture 9 Import Tariffs and Quotas under Imperfect Competition Tariffs and Quotas with Home Monopoly

U.S. Imports of Heavyweight Motorcycles

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U.S. Imports of Heavyweight Motorcycles

Future Gain in Producer Surplus. To evaluate the future gains in producer surplus, we can examine the stock market value of the firm around the time that the tariff was removed. By this calculation, the future gain in producer surplus from tariff protection to Harley-Davidson ($131 million) exceeds the deadweight loss of the tariff.

The Brazilian computer Industry

There are many cases in which infant industry protection has not been successful. One well-known case involves the computer industry in Brazil.

Computer Prices in the United States and Brazil, 1982–1992

  • The effective price of computer in the U.S. and Brazil fell very rapidly due to technological improvements, but the drop in the U.S. price exceeded that of the Brazilian price.

  • The difference between the two prices is a measure of the technology gap between Brazil and the U.S. in the production of personal computers.

Consumer and Producer Surplus

The effects of the government ban on imports of personal computers into Brazil.

Other Losses

The higher prices in Brazil imposed costs on Brazilian industries that relied on computers in manufacturing, as well as on individual users, and they became increasingly dissatisfied with the government’s policy.

Shanghai Tie-Up Drives Profits for GM

  • One in four GM cars is now made in China. Even those cars made in Detroit were partly designed in Shanghai. In exchange for a deal to sell Chinese minicommercial vehicles in India, GM agreed to give up the 50-50 ownership of its leading mainland joint venture, Shanghai General Motors. Without China, GM probably cannot be saved at all, which is a remarkable reversal from a decade ago, when the Chinese auto industry was just getting on its feet and desperately needed GM investment.

Protecting the Automobile Industry in China

  • In 2009 China overtook the U.S. as the largest automobile market in the world. Strong competition among foreign firms located in China, local producers, and import sales have resulted in new models and falling prices.

Production in China

  • Beginning in the early 1980s, China permitted a number of joint ventures between foreign firms and local Chinese partners.

  • Various regulations, combined with high tariff duties, helped at least some of the new joint ventures achieve success.

  • For the tariffs and quotas used in China to be justified as infant industry protection, they should lead to a large enough drop in future costs so that the protection is no longer needed.

Thanks to Detroit, China Is Poised to Lead

  • Volkswagen and other carmakers used to prosper by sending outdated factory equipment to China to produce older models no longer salable in the West.

  • Competition has become so fierce that Honda is about to introduce its latest version of the Civic in China only several months after it went on sale in Europe, Japan and the United States.

  • American and European carmakers are introducing their best technology to their plants in China, and not only to compete against one another. They also face rapidly growing competition in the Chinese market from purely local companies.

Problems with the Infant Industry Argument for protection in LDC’s

    • Timing is important. It is not always good to try to move today into the industries that will have a comparative advantage in the future.

      • Example: In the 1980s South Korea became an exporter of automobiles, whereas in the 1960s its capital and skilled labor were still very scarce.

    • The implementation of policy is important in the success

      • Example: Pakistan and India have protected their heavy manufacturing sectors for decades and have recently begun to develop significant exports of light manufactures like textiles.


Reciprocal Dumping

  • If there is a case to be made for infant industry protection, whereby an increase in the import price allows a firm to survive, then the reverse should also be true: a decrease in the import prices might lead a firm to shut down.

  • This would be an example of “predatory dumping,” whereby a foreign exporter would lower its prices in anticipation of driving rivals in the domestic country out of business.

  • Dumping can be a natural occurrence under imperfect competition as oligopolists enter each other’s markets. This is can be demonstrated using the “reciprocal dumping” of Brander and Krugman.

The Case of Domestic Production Externality

  • Suppose firms in an industry generate knowledge that other firms can also use without paying for it.

  • In high-tech industries firms face appropriability problems.

    • Example: In electronics, it is common for firms to “reverse engineer” their rivals’ designs.

  • The Case for Government Support of High-Technology Industries

    • Subsidize the activity with externalities, not all activities in an industry.

    • For instance, R&D (as opposed to manufacturing) should be subsidized.

  • Production externalities and tariffs

    • A tariff may raise welfare if there is a marginal social benefit to production of a good that is not captured by producer surplus measures.

  • There is no cure all-prescription for all trade policy problems in a second –best world

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