Question

Please answer the two following parts to a question from International Economics 10th edition.

Explain how trade can suffer in the absence of protection for intellectual property rights.

How does the revenue effect of an import quota differ from the revenue effect of a tariff? Please give an explanation.

Answer 1

Q.1) Explain how trade can suffer in the absence of protection for intellectual property rights.

Ans.

   International piracy of intellectual property rights has emerged as one of the most important foreign policy issues for many industrialized countries, particularly the United States. U.S. companies have suffered greatly from the lack of rigorous and uniform international standards for intellectual property rights. The absence of intellectual property laws in developing countries costs U.S. firms one dollar for every three dollars of revenue gained from exported products, Opportunities and Challenges for Pharmaceutical Innovation 3 (1996), while inadequate international enforcement of existing laws is estimated to cost U.S. industry up to $80 billion per year. Report of the United States Trade Representative's Intergovernmental Policy Advisory Committee (IGPAC) to the Congress of the United States on the Agreements Reached in the Uruguay Round of Multilateral Trade Negotiations 22 (1994).

The scope of intellectual property rights granted, and the degree to which those laws are enforced, reflect what a nation considers to be its best interest. The level of protection in industrialized countries is generally high, whereas intellectual property protection in the developing world varies widely, with many products excluded from protection altogether. Although the United States extends patent protection to seeds and plants, for example, the intellectual property laws of many developing countries explicitly or implicitly exclude most agricultural inventions. Until recently Brazil denied protection for pharmaceutical products on the grounds that private property rights for pharmaceuticals would make the products prohibitively expensive and would create technological dependency. The enthusiasm with which intellectual property rights are enforced by developing country governments varies even more than the level and scope of protection.

the globalization of the world economy, developing countries are finding that maintaining competitiveness is a critical factor in development. Economists in the industrialized and developing world alike agree that the ability to develop and commercialize applied knowledge -- the end products of research and development -- is the main source of a country's economic growth. The lack of intellectual property protection in developing countries has generated a hostile environment for foreign and domestic investment that has hampered the economic growth potential of those countries.

The problem is compounded by the fact that piracy is easier than ever before. Today's high technology products, such as computer software and hardware, biotechnology, and pharmaceuticals, are extraordinarily information-intensive. It is the information contained in the innovation that is valuable, and digitized information can be copied with the touch of a button. (In contrast, when the value of an innovation is determined by its physical structure, and not by the cost of R&D, the marginal cost of copying is much higher.) Computer software, for example, is expensive to develop but easy to copy. In the pharmaceutical industry, the discovery process is extraordinarily resource-intensive, but once an effective drug is on the market, the compound is comparatively easy to synthesize. A copyist does not even need to invest much energy or creativity in figuring out how to copy a product, because U.S. law requires that the producer of the product reveal to the world how to make and use the product in exchange for receiving a patent.

Q.2) How does the revenue effect of an import quota differ from the revenue effect of a tariff?

Ans.

There are various methods of protection. Most important methods of protection are tariff and quotas. A tariff is a tax on imports. It is normally imposed by the government on the imports of a particular commodity. On the other hand, quota is a quantity limit. It restricts imports of commodities physically. It speci­fies the maximum amount that can be imported during a given time period. These Iwo curves intersect each other at point N. And the price that is determined is known as the autarkic price or pre-trade price (P_T). If trade is free, the international price that would pre­vail is assumed to be P_W. At the international price P_W, a country produces OA but consumes OB and the country, therefore, imports AB.

1. Effects of Tariff:

Now, if a country imposes a tariff = t per unit on its import, immediately the price of the product will rise to P_t by the amount of tariff. This increase in price has the following effects. Since the tariff raises the price, con­sumers buy less. Now the consumption de­clines from OB to OC. This is called consump­tion effect of tariff. The second effect is the out­put effect or protective effect. Tariff raises domes­tic output from OA to OE, this is because higher price induces producers to produce more. The third effect is the import-reducing effect.

As tariff is imposed or tariff rate is in­creased, import declines from AB to EC. The fourth effect is the revenue effect earned by the government. The government revenue is the volume of import multiplied by the tariff i.e., the area A’B’UR. It is a transfer from consum­ers to government. However, if a tariff equal to T were imposed price would have increased to P_T. Consequently, imports would drop to zero. Such a situation is called prohibitive tariff.

2. Effects of Quota:

Quotas are similar to tariff. In fact, they can be represented by the same diagram. The main difference is that quotas restrict quantity while tariff works through prices. Thus, quota is a quantitative limit through imports.

If an import quota of EC amount is imposed then price would rise to P_t because the total supply (domestic output plus im­ports) equals total demand at that price. As a result of this quota, domestic production, con­sumption, and imports would be the same as those of the tariffs.

Thus, the output effect, con­sumption effect and import restrictive effect of tariff and quotas are exactly the same. The only difference is the area of revenue. We have al­ready seen that tariff raises revenue for the government while quotas generate no govern­ment revenue.

All the benefits of quotas go to the producers and to the lucky importers who manage to get the scarce and valuable import permits. In such a situation, quotas differ from tariff. However, if import licences are auc­tioned off to the importers then government would earn revenue from the auction. Under these circumstances, quotas and tariff are equivalent.