Last month, I posted about New Zealand farmers arguing for an anti-dumping ban on imported frozen potato fries. The farmers were not successful in their arguments. However, that hasn't stopped the next group from trying, this time cheesemakers are looking for new tariffs on cheese, as reported by Rural News:
Simon Berry, managing director of Whitestone Cheese and spokesperson for New Zealand Specialist Cheesemakers Association on EU tariffs and trade, says up to 25% of retail cheeses are imported – mostly subsidised European cheeses.
With imported cheeses often selling for around half the price of local ones New Zealand producers are struggling.
Berry says Kiwi cheese producers can’t compete with cheap European product flooding into the market and wants an anti-dumping duty to be placed on some imported speciality cheeses.
This week, my ECONS102 class is covering international trade, so I thought it might be timely to discuss why import tariffs (such as the 'anti-dumping duty' the cheesemakers are arguing for) are bad in terms of economic welfare. Consider the market below. The demand curve shows the demand from domestic consumers, while the supply curve shows the supply by domestic suppliers. If there was no international trade, the market would operate in equilibrium with a price of PD, and QD cheese would be traded. The consumer surplus (the difference between what the consumers are willing to pay, shown by the demand curve, and the amount they actually pay, PD) is the area AEPD. The producer surplus (the difference between the price that producers receive, PD, and their costs, shown by the supply curve) is the area PDED. Total economic welfare is therefore the area AED (made up of consumer surplus and producer surplus).
Now consider international trade. Say that the world price of cheese is PW, and is lower than the domestic equilibrium price PD. Let's also assume that the world market can supply as much cheese as New Zealand consumers want at the price PW. If the domestic market was opened to international trade, domestic consumers would find it cheaper to buy cheese from the international market and would do so. Domestic consumers would increase their purchases of cheese to Qd1. Domestic producers would have to meet the world price of PW, since no consumer would be willing to pay more than PW for cheese (since they can buy cheese on the world market for PW). Domestic production of cheese would fall to Qs1. The difference between Qs1 and Qd1 is the quantity of cheese imported. In terms of economic welfare, consumer surplus increases to the area AFPW - consumers are made a lot better off. Producer surplus decreases to PWGD - producers are made a lot worse off, so it is no surprise that they would argue against open international trade of cheese. However, total economic welfare is now the area AFGD. The gains to consumers more than make up for the losses to producers, and society is better off in terms of total welfare, by the area EFG - this represents the value of the gains from trade of cheese.
Now consider what happens if the government puts an anti-dumping duty (a tariff) on cheese imports. This is illustrated in the diagram below. Now, if consumers purchase from the world market for the price PW, they have to also pay the tariff. So, effectively the price for consumers increases to PW+T. They will reduce their total purchases of cheese to Qd2. Domestic producers now don't have to compete with the price PW, they have to compete with the price PW+T. So, the domestic production of cheese increases to Qs2. The quantity of imports of cheese falls to the difference between Qs2 and Qd2. In terms of economic welfare, consumer surplus decreases to ABK - consumers are made worse off by the tariff, compared with free international trade. Producer surplus increases to KCD - producers are made better off by the tariff (which is why they would argue in favour of it). Taxpayers receive some benefit from the tariff, in terms of government revenue. This is the quantity of imports (Qd2-Qs2), multiplied by the per-unit value of the tariff (T), which is the area CBJH. That tariff revenue is part of economic welfare, because the government can use it to pay for schools, roads, hospitals, and so on. Total economic welfare now is made up of consumer surplus, producer surplus, and government revenue - it is the area ABCD+CBJH [*]. Compared with free international trade, total welfare is smaller by the area BFJ+CHG - this is the deadweight loss of the tariff.
Import tariffs decrease total welfare. They make domestic producer surplus bigger, but make consumer surplus smaller, and the loss in consumer surplus is larger than the gain in producer surplus. As a whole, society is made worse off.
Having said that, there are arguments that could be made in favour of this particular anti-dumping duty. One argument that we discuss in our ECONS102 class is unfair competition - where international firms have lower costs due to lighter regulation than domestic firms, international firms are placed at an unfair advantage in competing with domestic firms. The cheesemakers here are arguing slightly differently:
Berry says there has been a gradual growth in imported EU cheese over the past three years.
With strong marketing and distribution networks, these high-volume subsidised EU cheeses are undercutting NZ cheesemakers.
If EU cheesemakers have large subsidies, then that means that they can sell at lower prices and still make a profit. That puts them at an advantage relative to New Zealand cheesemakers, who are unsubsidised. The question for a policy maker though, is whether acting to reduce this unfair competition provides benefits that are sufficient to offset the loss of economic welfare from the anti-dumping duty. How much cost should the New Zealand consumer bear in order to support the New Zealand cheesemaking industry?
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