Question

Why does a quota generate a larger loss to the importing country than a tariff that restricts imports to the same quantity?

(b) Some U.S. politicians claim that China’s trade policies are unfair to the United States, and that a large tariff should be placed on Chinese imports to protect U.S. workers and industries. Why might such a policy sound better than it actually is in practice? What are the dangers of imposing large taxes on Chinese imports?

Answer 1

A. Import Quotas

Both tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease welfare of domestic consumers, increase welfare of domestic producers and cause deadweight loss.

Tariff raises revenue for the government, import quota may not.

Import quota generates surplus for firms that get the licence to import. For a firm that gets a licence to import, profit per unit equals domestic price (at which imported good is sold) minus world price (at which good is bought) minus any other costs. Total profit equals profit per unit times quantity sold.
Government may charge fees for import licence. If the government sets the import licence fee equal to difference between domestic price and world price, the import quota works exactly like a tariff. The entire profit of the firm with an
import licence is paid to the government. Thus government revenue is the same under such an import quota and a tariff. Also, consumer surplus and producer surplus are the same under such an import quota and a tariff.

In practice, when a country uses import quotas it rarely sells import licences.

US has pressured Japan to voluntarily limit sale of Japanese cars in the US. Then Japanese government allocated the import licences among Japanese firms.

Surplus (profit) from the licences went to those firms.
This kind of import quota is strictly worse from US point of view than a tariff. The tariff unlike this import quota raises revenue for the government.

B. Trade barriers, such as tariffs, have been demonstrated to cause more economic harm than benefit; they raise prices and reduce availability of goods and services, thus resulting, on net, in lower income, reduced employment, and lower economic output.

Generally, tariffs result in consumers paying more for goods than they would have otherwise in order to prop up industries at home. Though tariffs may afford some short-term protection for domestic industries that produce the goods subject to tariffs by shielding competition, they do so at the expense of others in the economy, including consumers and other industries.

As consumers spend more on goods on which the duty is imposed, they have less to spend on other goods—so, one industry is propped up to the disadvantage of all others. This results in a less efficient allocation of resources, which can then result in slower economic growth. Tariffs also tend to be regressive in nature, burdening lower-income consumers the most.

Trade between China and the United States — which reached $598 billion in 2015— has generated large economic benefits for Americans. Manufacturing many goods in China, whether sneakers or smartphones, has kept their prices lower than they would be if made here. That’s been a boon to American consumers, especially those with less money.

But more and more, economists are also recognizing a downside to free trade. Competition from China and other low-wage emerging economies has severely hurt some American workers. One study figures that the United States lost at least two million jobs between 1999 and 2011 because of Chinese imports. To many people, Mr. Trump’s solution may seem to make sense: Restrict those imports, save jobs and support American business.

But if there were a 45 percent tariff on Chinese goods, at least part of that would probably be passed onto consumers in the form of higher prices. Americans would end up buying fewer Chinese things, and fewer things from anywhere else.

Shrinking sales of Chinese products would generally hurt American businesses and workers. A product labeled “Made in China” is not necessarily 100 percent Chinese, since many goods are assembled in China with parts from the United States and elsewhere. Sluggish purchases of these so-called Chinese products would reduce the sales of their American components, too.

For this reason and others, quite a lot of the money spent on Chinese goods actually ends up in the wallets of Americans. A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers.

In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States.

It seems likely that such a tariff would burden American consumers while doing little to create jobs for them. Gary Clyde Hufbauer and Sean Lowry at the Peterson Institute for International Economics, studying the impact of a 35 percent tariffimposed on Chinese tire imports by Washington in 2009, found that American consumers had to spend an extra $1.1 billion on tires, while the tariff protected no more than 1,200 jobs. About $900,000 for every job saved, in other words.

Also on 8th November, 2018 China's trade surplus with the United States ballooned to a record USD 35.6 billion, official data showed, as exports across the Pacific remained strong despite a raft of US tariffs while imports shrank.

China's exports to the US rose 9.8 per cent for November on-year, while imports for the month fell 25 per cent on-year, the data from China's customs administration showed. American farmers have been hit particularly hard by the trade tensions.