Imports and Import Controls
The meaning of imports and varieties of import controls imposed from a Maltese/American perspective
An import is a good or service brought into one country from another. When a country imports, money is exiting from their country, resulting negatively in the balance of trade.
Countries are most likely to import goods that domestic industries cannot produce efficient and cheap. Many countries have to import oil because they cannot produce it domestically or cannot produce high enough to meet demand. Imports is most important for small industrials and developing countries rather than big and developed countries such as the United States. Since small countries like Malta have limited resources, they cannot produce all the goods they need so they lie on imports.
Malta’s most imported goods are fuel and raw material. Approximately 25% of Malta’s imports consists of consumer goods and 75% consists of industrial supplies, production, fuel and capital goods. Malta produces almost all its electricity from oil, importing 100% of it.
The main import partners of Malta are Germany, Italy, France, China and the United Kingdom.
Factors that influence import demand are relative prices and economic conditions in Malta. Relative prices are prices of goods produced in abroad in relation to similar products produced in Malta, taking into account the exchange rate of the domestic currency. Economic conditions is the income effect.
If the price of imports increase or the price of domestic goods decrease, relative prices will increase. The result of an increase in relative price is a decrease in imports.
If the price of the local product increase because of an increase in production cost or profit, and the imported substitute product remains the same, the foreign product will be more competitive and people may prefer to import it rather than buy it locally.
A depreciation or a devaluation of the domestic currency leads to a decrease in the volume of imports, as this would increase the domestic prices of imported goods and services. Conversely, an appreciation of the currency would increase imports.
If the domestic currency appreciates, it will make imports cheaper and make domestic products less competitive and therefore imports increase.
The domestic currency of Malta is the Euro(€). The depreciation of the Euro won’t have any effect on imports from other countries of the EU with the Euro currency. However, imports from the UK or Asia will be effected since they use different currencies and are important suppliers for Malta.
When the Maltese economy grows, imports increase because an increase in production induce increase in imports, especially if this happens in industrial production needing machines and industrial supplies. Imports will also increase because of another reason. When the economy is doing well, income increase and therefore people consume more which leads to an increase in the imports of consumer products. The change in the economy is calculated by the GDP.
Other factors that affect imports other than relative prices and economic conditions are government policies regarding tariffs and import controls. Another factor is taste. If the public spread the word that a product not produced in Malta is good, the demand for this product will increase. Publicity in favour of a foreign product will increase imports.
Depreciation of domestic currency will have different effects in terms of value and volume. When the domestic currency depreciates, when the demand for imports is inelastic, the volume of imports will decrease but the value of imports will increase. Goods such as food, fuel and industrial supplies are likely to be imports inelastic. When the demand for imports is elastic, the volume of imports will decrease and so will the value of imports. Import of toys are said to be elastic. Most imports in Malta are price inelastic as they are used for production and therefore a depreciation is likely to decrease the volume of imports and increase their value.
Import controls are also known as trade barriers. Trade barriers can take various forms such as tariffs, subsidies to local producers, quotas and other barriers.
Tariffs are taxes or duties imposed on an imported good by a government e.g. Malta imposes a tax on the imports of chocolates. Subsidy is when a government country supports local producers so they can compete. Quotas is when a country have a limit on how much they can import. Other barriers such as health requirements, environmental requirements, labelling requirements, and standards requirements e.g. a country only imports if the bottle has a certain language.
Tariffs have four effects. These are protection effect, consumption effect, trade effect and government revenue effects. The protection effect is the help given to the local producers to start producing the products because of an increase in the price of the imported good. The consumption effect relates to the reduction in domestic demand for the product on which the tariff is imposed, arising from the increase in the price of that product. The trade effect is the combination of the consumption and protection effects, which results in a lower volume of imports. The revenue effect arises because a tariff is a tax collected by the government.
Example, imagine there are no import controls. Consumers like it but suppliers are not able to compete. The €2 price is the international price, the price which it can be purchased from abroad. All the 1500 units demanded will be imported. The government impose a tariff of €1, therefore now it costs €3 and local producers will start producing. Demand fell to 1300 units and local suppliers will start producing at point B (900 units) because some of them can start producing. Now, 900 units are produced locally and 400 units are imported. The product is now more expensive resulting in a lower demand. This will impact the consumption effect with -200 units. Protection effect is +900 units. Trade effect is the protection and consumption effect together, which is +1100 units. Before we used to import 1500 units but now we are importing 400 units. The revenue effect is €400 (€1 per unit of imported output). If the tariff was of €2, the imported good will be sold at €4. Here all the imports will be eliminated since the imported good and local good are priced the same. When the tariff eliminates all the imports, it is called prohibitive tariff and the government won’t receive any tariff revenues.
Protection effect occurs only if local producers can compete with international prices. If people will still buy the imported good imposed with the tariff, the consumption function is not affected but will result in a decrease in welfare. With a given import tariff, an increase in demand will leave the domestic price and domestic production unchanged but will result in higher consumption and imports. Trade effect of an import tariff may be uncertain. The reason for this is because it is difficult to estimate the import tariff required to restrict imports to a desired level.
Subsidy is when local producers are assisted to be possible for them to compete. This will not affect the price, it will only help local producers by producing cheaper. The characteristic of a subsidy is that it will have no negative effect on consumption and will have protection effect when the product can be produced locally. Once subsidies are in place it is very difficult to remove them. However, this will result in an increase in costs to the government instead of yielding income.
A quota is the most important nontariff trade barrier. It is a direct quantitative restriction on the amount of a commodity allowed to be imported. Quotas is when the supply is fixed. The government imposes a limit on the amount of units that can be imported. Sometimes some imports are banned. This means that their product is not allowed to enter in the country. Since the amount is limited, this may lead to excess demand which results in high domestic prices compared to international prices. If even the domestic market is controlled, this may lead to black market. With an import quota, an increase in demand will result in a higher domestic price and greater domestic production. Because of those reasons mentioned, quotas can be considered the worst form of import controls. An import quota can limit the imports to a specific level with certainty.
Quotas involves the distribution of licenses. All items which are restricted in Malta require an import license. Import licenses are required in the case of certain live animals, meat and fish products, dairy products, vegetables and fruit, beverages, chemicals and chemical preparations, pharmaceuticals, detergents, pyrotechnics, textiles, steel, and weapons.
The United States restricted sugar imports into the United States with a quota of 1.4 million tons per year in 2005. The quota more than doubled the price of sugar to U.S. consumers and led to a loss of consumer surplus of about $1.7 billion per year.
The reasons to impose barriers are to generate higher employment, to save from foreign exchange, protect local producers from dumping, give an opportunity for infant industries to take part and compete and security. It is to protect domestic industries. Dumping is when a country sell their product abroad cheaper than in their home market. This is done so they penetrate in a foreign market.
If there are no controls on imports, countries will have more choice on products and price. The country will even be richer by buying efficiently. The downsides of import controls are the protection of inefficient procedures, inferior products and corruption. They are mostly related to comparative advantage and gains from trade. Import controls are there to protect the domestic supplier. But if the quality of the domestic product is not as expected by the consumers, this will lead to inferior products.
The nominal tariff rate is important to consumers because it indicates by how much the price of the final commodity increases as a result of the tariff (imposed on the total price of the imported product), the effective tariff rate is important to producers because it indicates how much protection is actually provided to the domestic processing of the import-competing commodity (rate of protection offered to local producers who import materials). Suppose that €80 of imported wool goes into the domestic production of a suit. Suppose also that the free trade price of the suit is €100 but the nation imposes a 10% nominal tariff on each imported suit. The price of suits to domestic consumers would then be €110. Of this, €80 represents imported wool, €20 is domestic value added, and €10 is the tariff. The €10 tariff collected on each imported suit represents a 10% nominal tariff rate since the nominal tariff is calculated on the price of the final commodity (€10/€100 = 10%) but corresponds to a 50% effective tariff rate because the effective tariff is calculated on the value added domestically to the suit (€10/€20 = 50%).
In the 1970s and early 1980s, the Maltese government imposed import controls practically on every commodity entering in Malta. Some were also requested to obtain import licensing. The government was using import substitution. The government was using this policy to defend the Maltese economy by generating more local jobs and reduction of foreign exchange outflows, as Malta was still using its own currency (Lm). A clear example of this is the chocolate. The government stopped importing Cadbury and employed people to make chocolate. Instead of importing the chocolate as a finished good, they were importing it in a dismantled state for assembling jobs to complete it. This resulted in more employment but the product was inferior and Maltese people still preferred Cadbury.
The infant industry agreement is a protection for the survival of newly emerging industries. The protection will give them chance to improve and grow. The protection is normally a tariff on the imported item. This will help the industry to get experienced and compete without the use of tariffs.
After the Great Depression, countries came together to reduce trade barriers and set up organisations to remove barriers and set up free trade because import controls were leaving undesirable effect. Part of the agreement for free trade was called G.A.T.T., an international organisation created in 1947. Countries meet periodically to negotiate reduction in trade barriers. Kennedy round took years to reduce trade barriers. The Uruguay round significantly reduced trade barriers leading to the creation of WTO. The main objective of the WTO was to promote free trade. Created rules which reduced trade barriers overtime. Under WTO, countries may not impose import controls, except for serious reasons such as health issues. Important negotiations by the WTO is the Doha round, which is still not concluded.
The theory of economic integration refers a policy of reducing/eliminating trade barriers among the nations joining together, such as free trade area, customs union, common market and monetary and economic union.
A free trade area is where all barriers of trade are removed amongst members, but each nation retain its own barriers to trade with non-members countries e.g. the European area EFTA, formed in 1960 by the United Kingdom, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland and the North American area, the NAFTA formed by the United States, Canada, and Mexico in 1993.
Customs union has no barriers among member just like free trade area but charge a common tariff on imports of non-members countries. An example is the European Union (EU), a customs union consisting of 28 countries. It became a common market in 1993, when it laid the foundations for the free movement of goods, services, labour and capital. 18 EU member states also form a monetary union as they use one single monetary policy and the same currency.
Partial equilibrium effects of forming a customs union and removing trade barriers are measured in terms of trade creation and trade diversion.
Trade creation arises as a result of the removal of import controls between the member countries, which in theory should encourage trade between members. This should replace domestic inefficient production by more efficient production within the area. This means that some domestic goods produced in a nation within the customs union is replaced by lower-cost imports from another member nation. This will increase welfare.
Trade diversion arises as a result of the imposition of a common external tariff, which allows domestic inefficient producers to compete with more efficient producers located in non-member countries. This occurs when lower-cost imports from outside the customs union are replaced by higher cost imports from a union member. This would decrease welfare in both the exporting non-member country and the importing member countries because it shifts production from more efficient producers outside the customs union to less efficient producers inside the union. The net welfare result of economic integration would depend on the relative strength of the trade creation and trade diversion effects.