The Impact of Liberalizing Import Quotas

Question 1: Impacts of Liberalizing the Import Quotas on Quantity Demanded, Quantities Supplied, Prices, and Trade in both Imports and Exports 

Trade liberalization refers to the act of reducing or removing trade barriers to allow for free exchange of various products and services between diverse countries. It primarily comprises the act of reducing the tariff obstacles, and even some of the non-tariff obstacles including quotas, licensing rules, and many others. Liberalization of import quotas often poses greater effects on the levels of demand, the supply, the pricing levels, as well as the balance of trade (Andriamananjara et.al , 2004). In this case, an import quota is deemed as the limitation with regards to the number of imports supplied to any given country. For instance, a country such as the United States can formulate a policy framework that limits or reduces the quantity of automotive supplied from Japan by up to 20 percent. As much as the quotas tend to reduce the import levels and boost the local suppliers, they often result into high pricing levels, negative impacts in economic welfare, or even retaliation from other nation-states. 

In this paper, the effect of liberalizing import quotas has been demonstrated using the previous U.S.-Japan trade relations on automotive as a case study. In this case, the type of import quota that largely prevailed was the VER (Voluntary export restraints). It was a resultant economic impact that encompassed the United States' imposition of VER on the importation of Japanese cars between 1981 and 1994 (Andriamananjara et.al , 2004). The primary essence of doing saw was to enhance protection of America's automotive industry. The end-result posed massive effects to the United States' car industry and the economy at large. Before getting into an in-depth analysis of this case analysis, it would be integral to illustrate the effects of quotas. 

Illustration and Analysis of the impacts associated with Import Quotas 

B ased on the graphical illustration above, it can be deduced that the variation between S (domestic) + Quota and S (domestic) makes up a quota. Just like what happened in the U.S.-Japan’s case, imposing quotas lead to a definite decline in imports ratio to Q3-Q2. In essence, the domestic suppliers are prompted to make more revenues due to the consequent increase in supply from Q1 to Q2. On the other hand, as the total quantity declines to Q3 from Q4, the consumers are forced to pay higher prices for their respective commodities ( Leamer & Stern, 2017). This is in line with the loss of societal net welfare since the consumer surplus is outweighed by the producer surplus.

There practical example of the U.S.-Japan case study on imposed VER is clearly explained in the analysis above. It substantially increased the cash flow and the domestic prices for a yearly amount of over $8 billion per year. The only challenge is that it reduced the output of car industry by up to 3 to 4 percent ( Weidenbaum, 1984). On the other hand, the welfare cost for the U.S. economy rose to $5 billion. The cost would have been significantly reduced by offering protection in form of decreasing temporary tariff, instead of the binding quotas. In this case, the price response and welfare loss in the United States could have been a bit lower. The inflexible quotas imposed on Japanese automobile imports resulted into a concentrated industry characterized with high prices and restrained outputs ( Leamer & Stern, 2017). The resulting impacts have a low likelihood of being recovered through quality improvements and productivity. The only thing that can prove to be significant is the acceleration of Japanese investment within the U.S. territory.

Question 2: Effects of Banning Imports and Exports on A Country’s Welfare 

There are various effects posed by a Country’s decision to ban its exports and imports. The focus in this segment is based on a situation whereby the Russian Administration levied a ban on export and import of processed and agricultural food to and from the EU (European Union), the U.S., Canada, Australia, and Norway in the year 2014 ( Kutlina-Dimitrova, 2017). The ban emerged as a retaliation in response to previously imposed sanctions by the Western economies. The E.U. countries were affected the most by the previous data that depicted a 73% import forecast ( Boughner, de Gorter, & Sheldon, 2000). The ban poses greater influences on the given country’s welfare.

This segment involves the assessment of the effects posed by imports and exports ban on the welfare of Russia and other affected countries. The evaluation and measurement of subsequent changes to the welfare are ascertained using the EV (Equivalent Valuation) concept. It is a concept that measures the rate at which an average consumer should be compensated at the verge of trying to cope up with the negative trade policies ( Kutlina-Dimitrova, 2017). The ban imposed by Russia on some of the commonly trading countries have been analyzed and summarized as shown in the table below:

Impact of Ban on EV 

Source : CGE Simulation Results.

From the following results, it can be ascertained that Russia was undoubtedly highly affected by the perceived ban. This inference is because the average consumer is supposed to receive an average of $5.8 billion in order to be stable before the restraint. In this case, the disintegration of welfare impacts in this table depicts that the total EV (equivalent variation) losses and gains presented are primarily as a result of trade terms or allocation efficiencies. For Russia, their trade bans led to a whooping allocative efficiency loss of up to 95% ( Kutlina-Dimitrova, 2017). The primary reason for such a terrific decline in Russia’s welfare was due to the forgone tariff revenue. This is because banning imports is a purely quantitative restriction endowed with an insignificant revenue collection.

References

Andriamananjara, S., Dean, J. M., Ferrantino, M. J., Feinberg, R. M., Ludema, R. D., & Tsigas, M. E. (2004). The effects of non-tariff measures on prices, trade, and welfare: CGE implementation of policy-based price comparisons. 

Boughner, D. S., de Gorter, H., & Sheldon, I. M. (2000). The economics of two-tier tariff-rate import quotas in agriculture.  Agricultural and Resource Economics Review ,  29 (1), 58-69. 

Kutlina-Dimitrova, Z. (2017). The economic impact of the Russian import ban: a CGE analysis.  International Economics and Economic Policy ,  14 (4), 537-552. 

Leamer, E. E.,& Stern, R. M. (2017).  Quantitative international economics . Routledge. 

Weidenbaum, M. L. (1984). Quotas on Japanese Autos Play Up the High Cost of Protectionism.  Christian Science Monitor , 13.