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effective price of computing power fell rapidly in the United States between 1982 and
1988. Brazil, however, did not achieve the same low prices as the United States during
Consumer and Producer Surplus The effect of the tariff protection on Brazilian welfare
is presented in Table 9-3. The calculations show that computer prices in Brazil were
nearly twice as high as those in the United States in 1984. In the same year, the $29
accounted for as the industry never produced without the tariff in place.
Other Losses The losses due to the protection of the Brazilian computer industry weigh
heavily on both producers using computers for production and individual users. The
Protecting the Automobile Industry in China
Before its accession to the WTO on December 1, 2001, China protected many of its
industries, including the automobile industry, with high tariffs and strict quotas. Tariffs
on automobiles fell from 260% in the early 1980s to 25% by the middle of 2006, and in
Production in China The production of automobiles in China began with a joint venture
between American Motors Corporation and a local Beijing firm in 1983. Subsequently,
other partnerships between foreign firms, Germany’s Volkswagen and France’s Peugeot,
and local Chinese partners followed in Shanghai and Guangzhou, respectively. As a
Cost to Consumers The high tariffs imposed by the Chinese government approximately
doubled the import prices, which severely restricted the amount of foreign cars sold in
China. Automobile imports ranged from a high of 222,000 cars in 1993 to a low of
27,500 in 1998. However, although tariffs increased the import prices, the quotas also
affected domestic production, particularly when the firm enjoyed market power, as in the
Foreign Production in China Foreign auto firms have entered the Chinese market,
challenging the Shanghai Volkswagen monopoly. General Motors opened plants in 2009
and has become a leading producer of autos in China. Its success was illustrated by being
able to offset much of the losses it experienced in the American market during that year.
Ford and other auto makers from Europe and America have joined the effort to enter this
Infant-Industry Protection? Justification for infant-industry protection requires that
average costs fall enough to be able to drop the protection and still compete in the global
Nevertheless, it is noteworthy that technology transfer is occurring through the purchase
of foreign companies and through foreign partnerships. Remember, this is an important
And second, it should also be pointed out that the high demand in China for autos is a
significant variable in allowing China to become the world’s largest auto maker.
Consumer demand from income growth is a significant driving force for auto makers to
H E A D L I N E S
China Is Trying to Buy a Car Industry
Driven by consumer demand for quality autos and the perception that Chinese auto
makers lack the experience to produce high-quality vehicles, foreign brands have come to
control the Chinese market. Some 70% of the Chinese market is controlled by foreign
brands such as Volkswagen Buick and Hyundai. The Chinese have countered by
struggling to obtain the necessary know-how in order to regain market share. Their
6 Conclusions
We examined the effect of trade barriers, such as tariffs and quotas under imperfect
competition, on the welfare of the importing country in this chapter.
With a tariff, a Home monopolist is able to increase its domestic price by the amount of
the tariff, just as perfectly competitive firms do, but the Home monopolist loses its
By contrast, the impact of an import quota on the Home prices and quantity is different
from that of a tariff under imperfect competition with a domestic monopoly. To begin
with, the price paid by consumers is higher under an import quota than a tariff because
the Home monopoly is “sheltered” from foreign competition, which allows the firm to
We also found that a Foreign monopolist facing a fixed tariff will absorb a portion of the
tariff in order to prevent a large decrease in the quantity exported. As a result, the full
amount of the tariff does not pass through to the import price and the Foreign
monopolists will face a fall in the price they receive, while Home consumers benefit by
receiving a price that is less than the full amount of the tariff. The tariff is therefore
shared between Foreign monopolists and Home consumers, resulting in an increase in the
terms of trade for Home. Hence, by imposing a tariff under conditions in which the
We also analyzed examples of Foreign monopolies, specifically the case of the
discriminating monopolist. When a discriminating monopolist charges lower prices in
Foreign markets, it is called dumping. Although import quotas are prohibited under WTO
guidelines, an importing country is allowed to levy an antidumping duty against a
Foreign exporter when the exporting firm is found to be dumping products. More
specifically, the Foreign firm is dumping if it charges a lower price in the export market
The final topic discussed in this chapter involved the infant-industry case. Four case
studies were offered as examples of infant-industry protection. We studied the use of
tariffs and quotas to protect an infant industry. By raising the import price today of
potential competitors, domestic firms may be provided with enough time to reduce their
cost of production and become competitive at world prices such that they no longer
require government assistance in the future. The four examples presented in the chapter
analyzed whether infant-industry protection is warranted. It may have succeeded in
TEACHING TIPS
Tip 1: Antidumping Data Project
The World Bank has collected an extensive database of antidumping cases called the
Global Antidumping Database (GAD). Ask your students to visit it
(http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,conten
tMDK:20741720~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html).
Through the “Raw Data Files,” ask students to download the file GAD-USA.xls
(http://econ.worldbank.org/external/default/main?menuPK=469451&pagePK=64257101
&piPK=64257029&q=GAD-USA%2Exls&theSitePK=469382), which documents all
antidumping investigations by the United States from 1980 to 2015. One good way to
have students utilize these data is to investigate trends in the countries where cases have
been initiated over the years. Which country has the United States brought the most cases
against in recent years and since 1980? Students should notice that in recent years, there
has been a large increase in cases filed against China.
Tip 2: Debate on Infant-Industry Protection
Four cases of infant-industry protection were discussed in this chapter. The Chinese
automobile industry was one such case. At the time this text was written, the success or
Tip 3: Economic Performance and Protectionism
Ask students to find and read articles regarding protectionism during the global recession,
which began in late 2007, and discuss their findings. One especially worthwhile article is
“Antidumping, Safeguards, and Protectionism During the Crisis: Two New Insights from
Tip 4: GATT Articles and Dispute Settlement Data
Antidumping disputes arise when one government member believes that another member
government has violated a WTO agreement(s). Then an official dispute begins with the
aggrieved country first submitting a “request for consultation.”
Once at the dispute case’s page, identify the key complaints made by the affected party
by referring to the violated agreements cited. Students can do this by clicking on the
article numbers cited under “Key Facts.” The alleged violations will relate to the
antidumping Article VI of GATT.
IN-CLASS PROBLEMS
1. Explain why the removal of an import quota by a small country where there is only
one producer leads to a greater gain for consumers than a similar country where firms
operate under perfect competition.
Answer: Under imperfect competition, an import quota allows the monopoly to retain
2. What is the effect on welfare when a foreign exporter dumps a product in the U.S.
market?
Answer: Due to the terms-of-trade gain from the lower import price, consumers are
3. Suppose the commerce department in a small importing country recently found that
