An Introduction to International Economics

Chapter 6: Nontariff Barriers and the Political Economy of Protectionism Dominick Salvatore John Wiley & Sons, Inc.
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Nontariff barriers to trade

The previous chapter explored the effect of tariffs as barriers to international trade. This chapter extends this discussion by considering the effects of barriers to trade other than the tariff such as:
Quotas Voluntary export restraints (VERs) Regulations Export subsidies Dumping
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Nontariff barriers to trade

The previous chapter explored the effect of tariffs as barriers to international trade. This chapter extends this discussion by considering the effects of barriers to trade other than the tariff such as: The growth of these nontariff barriers is important as they have grown in use in recent years and their effects are typically not as transparent as with a tariff.
This increases the opportunity for hidden protectionism.
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Quotas
A quota is a numerical limit on the number of allowed imports. Using the example from tariffs, a quota that reduces imports to the same numerical amount as an equivalent tariff changes the market in a similar way to the tariff.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Quota price

Quota

Demand

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Quotas
Initial effects of a quota
The equilibrium price under a quota (the quota price) will be the same as the price with an equivalent tariff.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Quota price

Quota

Demand

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Quotas
Initial effects of a quota
The equilibrium price under a quota (the quota price) will be the same as the price with an equivalent tariff. The level of production will be the same as with a tariff.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Production

Quota price

Quota

Demand

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Quotas
Initial effects of a quota
The equilibrium price under a quota (the quota price) will be the same as the price with an equivalent tariff. The level of production will be the same as with a tariff. The level of domestic consumption will be the same as with a tariff.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Consumption

Quota price

Quota

Demand

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Quotas
Initial effects of a quota
The level of production will be the same as with a tariff. The level of domestic consumption will be the same as with a tariff. The allocation of the quota rents depends on how the government allocates the licenses to import the product.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Quota rent

Quota price

Quota

Demand

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Quotas
Initial effects of a quota
The level of domestic consumption will be the same as with a tariff. The allocation of the quota rents depends on how the government allocates the licenses to import the product. The same regions of deadweight loss exist.
120 110 100 90 80 70 60 50 40 30 20 10 0
0 10 20 30 40 50 60 70 80 90 100 110 120

Supply

Deadweight loss

Quota price

Quota

Demand

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Concerns about quotas

The initial effects of a tariff and a quota are similar. The effect of market changes
Changes in domestic supply or demand alter imports with a tariff. Since imports are fixed with a quota, the quantity of imports does not change with market changes.

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Concerns about quotas

The initial effects of a tariff and a quota are similar. The effect of market changes The effect of imperfect competition
By introducing a numerical limit on imports, quotas limit the competition faced by domestic producers. This better allows domestic producers to exploit their monopoly power.

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Concerns about quotas

The initial effects of a tariff and a quota are similar. The effect of market changes The effect of imperfect competition The allocation of the quota rents is ambiguous
If the government auctions off the licenses, it should capture the quota rent. If the allocation of the quota rent is arbitrary, it is possible that a portion of the quota rent will be lost to the society.
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Voluntary export restraints

A voluntary export restraint exists when the exporting nation voluntarily restricts its exports to a numerical limit.
Generally, this action is taken to reduce the likelihood of the importing country imposing some other form of barrier to trade. The welfare effects are similar to quotas but with the quota rent going to the foreign producer. In 1981, Japan and the US agreed to a VER of 1.68 million automobiles to be imported annually by the US from Japan.
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Regulations
Health and safety regulations may serve as barriers to international trade by raising the costs of imported products Government purchasing restrictions may be biased against foreign goods
The Buy American Act of 1933

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International cartels
An international cartel may form to limit sales
For example, OPEC (the Organization of Petroleum Exporting Countries) acts to limit exports of petroleum. The Energy Information Administration provides a good summary of current activities of OPEC
WWW link

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Dumping
Dumping exists when (1) the sales price in the importing country is lower than the sales price in the exporting country or (2) the sales price in the importing country is below the costs of production. Types of dumping
Persistent Sporadic Predatory
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Dumping
Dumping exists when (1) the sales price in the importing country is lower than the sales price in the exporting country or (2) the sales price in the importing country is below the costs of production. Types of dumping Countervailing duty
US international trade law allows for the imposition of a tariff (known as a countervailing duty) just sufficient raise the domestic price to either the foreign price or the average costs of production.
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Arguments for protectionism

Fallacious argument 1 Trade restrictions are needed to protect domestic labor against cheap foreign labor.
The cost of labor is only partially determined by wages. Greater productivity may more than offset the advantages offered by low foreign wages.

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Arguments for protectionism

Fallacious argument 1 Trade restrictions are needed to protect domestic labor against cheap foreign labor. Fallacious argument 2 Scientific tariffs are needed so that domestic producers can compete.
A scientific tariff raises the price of imports to the domestic price. This does increase domestic production but it also eliminates imports.
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Arguments for protectionism

Questionable argument 1 Trade restrictions are needed to reduce domestic unemployment.
Trade restrictions may reduce imports and lead to an expansion in the economy which will lower unemployment in the short-run. This conclusion hinges on there being no retaliation by foreign nations.

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Arguments for protectionism

Questionable argument 1 Trade restrictions are needed to reduce domestic unemployment. Questionable argument 2 Trade restrictions are needed to cure a balance of payments deficit.
As with the previous argument, trade restrictions may have this effect but the conclusion hinges on a lack of retaliation by other countries.

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Arguments for protectionism

A qualified argument Infant industries need to be protected so that they can become established industries.
A new industry likely does not have the skills and experience to be a successful competitor in the international market place. To gain these skills the firm must be protected from competition for a limited period of time. Qualifications
The protection must be of limited duration. A production subsidy is the lowest cost tool for achieving this end.
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Strategic trade policy

Oligopolistic markets subject to external economies may benefit from government intervention.
Examples
Semi-conductors Aircraft production
The dispute between Boeing and Airbus taken to the WTO in 2004 is an example of such policy.

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Strategic trade policy

Oligopolistic markets subject to external economies may benefit from government intervention. Concerns
Which industries does the argument apply to? Can the government pick winners? Retaliation in other markets may eliminate any gains.

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The history of US commercial policy

1930 Smoot-Hawley Tariff Act
Raised average import duties to 59 percent by 1932 Spurred international retaliation

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The history of US commercial policy

1930 Smoot-Hawley Tariff Act 1934 Trade Agreements Act
Authorized the president to negotiate mutual tariff reductions by as much as 50 percent Reductions were based on the principle of most favored nation
The most favored nation principle extends to all trading partners any reciprocal tariff reduction negotiated with any trading partner. For example, a negotiated reduction with Canada would extend to Mexico if it had most favored nation status.
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The history of US commercial policy

1930 Smoot-Hawley Tariff Act 1934 Trade Agreements Act 1947 The General Agreement on Tariffs and Trade (GATT)
The U.S. joined the newly formed GATT. GATT is designed to promote expanded international trade through multilateral negotiations.

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The history of US commercial policy

1930 Smoot-Hawley Tariff Act 1934 Trade Agreements Act 1947 The General Agreement on Tariffs and Trade (GATT) 1950s Movements away from free trade
Peril-point provisions Escape clause National security clause

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The history of US commercial policy

1947 The General Agreement on Tariffs and Trade (GATT) 1950s Movements away from free trade 1962 Trade Promotion Act
Authorized the president to negotiate across the board tariff reductions of up to 50 percent. Introduced Trade Adjustment Assistance (TAA) to workers displaced by international trade. Allowed the passage of the Kennedy Round negotiation of the GATT.
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The history of US commercial policy

1947 The General Agreement on Tariffs and Trade (GATT) 1950s Movements away from free trade 1962 Trade Promotion Act 1974 Trade Reform Act
Authorized the president to negotiate tariff reductions of up to 60 percent and the elimination of tariffs below 5 percent. Contributed to passage of the Tokyo Round negotiations of the GATT.
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The history of US commercial policy

1950s Movements away from free trade 1962 Trade Promotion Act 1974 Trade Reform Act 1984 The Trade and Tariff Act
Authorized the president to negotiate international agreements for the protection of intellectual property rights. Extended the system by which developing nation exports are granted preferential access to US markets.
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The history of US commercial policy

1950s Movements away from free trade 1962 Trade Promotion Act 1974 Trade Reform Act 1984 The Trade and Tariff Act 1988 Omnibus Trade and Competitiveness Act
Required the U.S. Special Trade Representative to set a rigorous schedule for negotiating reductions in trade barriers with countries maintaining high barriers to U.S. exports.
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The history of US commercial policy

1962 Trade Promotion Act 1974 Trade Reform Act 1984 The Trade and Tariff Act 1988 Omnibus Trade and Competitiveness Act 1993 The Uruguay Round
The Uruguay Round of negotiations of the GATT was completed in December 1993. Given the wide ranging implications of this round of negotiations, it will be considered in detail.
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The Uruguay Round

Eighth round of negotiations for the GATT 123 nations participated in the negotiations The agreement took effect on July 1, 1995

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Provisions of the Uruguay Round

Tariffs
Tariffs on industrial products falls from an average of 4.7 percent to an average of 3 percent. The share of good with zero tariffs increases from 20-22 percent to 40-45 percent. Tariffs removed on pharmaceuticals, constructions equipment, medical equipment, paper products, and steel.

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Provisions of the Uruguay Round

Tariffs Quotas
Quotas on agricultural products were to be replaced with less restrictive tariffs by 1999 Quotas on textiles were to be replaced with less restrictive tariffs by 2004

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Provisions of the Uruguay Round

Tariffs Quotas Antidumping
The use of countervailing duties is not eliminated but a new dispute resolution mechanisms are put in place.

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Provisions of the Uruguay Round

Tariffs Quotas Antidumping Subsidies
The volume of subsidized agricultural products was to be reduced by 21 percent by 1999. Government subsidies for industrial research were limited to 50 percent of the applied research cost.

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Provisions of the Uruguay Round

Quotas Antidumping Subsidies Safeguards
Countries are barred from implementing health and safety standards that are not based on scientific research. Temporary tariffs are allowed to protect domestic industries from temporary imports surges.

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Provisions of the Uruguay Round

Quotas Antidumping Subsidies Safeguards Intellectual property
The agreement calls for 20 year protection of patents, trademarks, and copyrights. A 10 year phase-in period is allowed for patents over pharmaceuticals in developing countries.
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Provisions of the Uruguay Round

Quotas Antidumping Subsidies Safeguards Intellectual property Services
Banking and security markets in Japan and South Korea were opened to U.S. firms.

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Provisions of the Uruguay Round

Antidumping Subsidies Safeguards Intellectual property Services Trade related investment measures
Phases out the requirement that foreign investors buy supplies locally or export as much as they import
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Provisions of the Uruguay Round

Safeguards Intellectual property Services Trade related investment measures World Trade Organization
Established the World Trade Organization in place of the GATT Secretariat. Allows for more expeditious resolution trade disputes
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Continued history of US commercial policy

1974 Trade Reform Act 1984 The Trade and Tariff Act 1988 Omnibus Trade and Competitiveness Act 1993 The Uruguay Round 2002 Trade promotion authority granted President Bush
Allows the president to negotiate trade agreements that may not be amended by Congress, only ratified or rejected.
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Continued history of US commercial policy

1974 Trade Reform Act 1984 The Trade and Tariff Act 1988 Omnibus Trade and Competitiveness Act 1993 The Uruguay Round 2002 Trade promotion authority granted President Bush On-going Doha round negotiations
The current round of negotiations for extending the GATT is currently on-going.
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Issues confronting the Doha round

Existing on-going trade disputes
U.S. tax breaks on income earned from exports Subsidies to aircraft makers (Boeing and Airbus) EU bans on genetically modified food The use of anti-dumping regulations

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Issues confronting the Doha round

Existing on-going trade disputes Developed world agricultural policies
Tariffs and subsidies on agricultural products make developing world entry into these markets difficult

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Issues confronting the Doha round

Existing on-going trade disputes Developed world agricultural policies The development of regional trade groups that undermine efforts of global trade expansion

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Issues confronting the Doha round

Existing on-going trade disputes Developed world agricultural policies The development of regional trade groups that undermine efforts of global trade expansion Calls for uniform labor and environmental standards

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Issues confronting the Doha round

Existing on-going trade disputes Developed world agricultural policies The development of regional trade groups that undermine efforts of global trade expansion Calls for uniform labor and environmental standards Expansion of the GATT into issues related to investment
Elimination of local content rules
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