An Analysis of Import Expansion Policies

By Dinopoulos, Elias; Kreinin, Mordechai E. | Economic Inquiry, January 1990 | Go to article overview

An Analysis of Import Expansion Policies


Dinopoulos, Elias, Kreinin, Mordechai E., Economic Inquiry


AN ANALYSIS OF IMPORT EXPANSION POLICIES

1. INTRODUCTION

Policy makers appear to display unlimited ingenuity in devising new and ever more complex measures to influence international trade. No sooner did the profession come to understand the economics of trade-restricting devices, such as tariffs, quotas and voluntary export restraints (VERs) (the discirminatory nature of VERs has been recently noted and analyzed in Dinopoulos and Kreinin [1988; 1989]), then a new policy instrument was introduced, christened by Bhagwati [1987] as Voluntary Import Expansion (VIE).

In several recent instances the United States insisted that Japan "voluntarily" expand its import of certain products, such as semiconductors or beef, from the United States. While the VER restricts the volume of trade below free-market equilibrium, the VIE would expand the volume of trade beyond the equilibrium level. But both policies depart from free-trade equilibrium, and both are discriminatory in nature. A VER that limits Japanese auto exports to the U.S. favors European suppliers who are excluded from the restriction: their thems of trade improve and/or their volume of export expands. A VIE that forces the Japanese to import a minimum amount of semiconductors from the United States excludes European suppliers. A similar VIE on beef imports would discriminate against Australian and Argentinian suppliers. It constitutes a form of "export protectionism" (Bhagwati and Irwin [1987]).

How might a government administer a VIE? In the case of semiconductor imports by Japan, the possibilities are: a subsidy by the Japanese government on imports from the U.S., or an "instruction" to the large chip-using companies in Japan to purchase more American chips. (1) Alternatively, the Japanese government may buy U.S. chips for its own use, or it may favor American suppliers in awarding contracts.

In the Fall of 1987 certain Japanese steel companies agreed (under MITI pressure) to expand purchases of American coal, even though it costs $A7 per ton more than Australian coal. And in January 1988 (1) an instance of a VIE in the construction sector came to light. Japan had been under American pressure to permit U.S. construction companies to bid on large Japanese public works projects, like the Kansai airport near Osaka and the Tokyo-Bay bridge. Such projects can amount to $70 billion in the next decade. In response, the Japanese government proposed to permit joint foreign-Japanese companies to bid on these projects, and give American companies preferential treatment in forming such partnership.

This paper analyzes the economic effects of a VIE and, whenever appropriate, compares it to an export subsidy. Whereas the export subsidy is an instrument used by the exporting country, the VIE is a policy instrument employed by the importing country.

Section II presents a comparison between the two instruments within a two-country general equilibrium framework when the offer curves are elastic. Section III addresses the question of the optimum VIE and compares it to the optimum tariff. Section IV analyzes the case when the offer curve of the VIE-administering country is enelastic. Another key distinction between a VIE and an export subsidy is that the former is discriminatory between different trading partners while the latter is not. Section IV incorporates this feature by recasting the analysis in a three-country general equilibrium framework. Section V states the conclusions of the paper.

II. VIEW VERSUS EXPORT SUBSIDY: A TWO-COUNTRY ANALYSIS

(WITH ELASTIC OFFER CURVES)

In coventional trade geometry, an export subsidy (assumed, as usual, to be financed by a lump-sum tax) is shown by an outward shift (namely, an increase) of the offer curve of the subsidizing country. By contrast, a graphical representation of a VIE is more complex, and is displayed in Figure 1. …

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