Tariff barriers

7/27/2019 Tariff barriers

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ANHUI UNIVERSITY OF FINANCE & ECONOMICS 1/30

Nontariff Trade Barriers and

New Protectionism

Chapter 9


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We discuss the definition of import quotasand the definitions of other nontariff barriersand the new Protectionism

Understand the political economy ofprotectionism

Know the definition of strategic trade andindustrial policies

Introduce the Uruguay Round andoutstanding trade problems

1 Introduction


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Key Terms

Nontariff trade barriers New protectionism International cartel

Persistent dumping Predatory dumping Sporadic dumping Export subsidy

Infant industry Strategic trade policy Game theory


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2 Nontariff Trade Barriers

Import QuotasVoluntary Export RestraintsImport License SystemForeign Exchange ControlGovernment Procurement PolicyInternal TaxesMinimum Price

Prohibitive ImportAdvanced DepositCustoms ValuationTechnical Barrier to Trade


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2.1 Import Quotas & Their Effects

A quota is the most important nontariff tradebarrier. It is a directquantitative restriction on theamount of a commodity allowed to be importedor exported. So we have import quotas and

export quotas.Import quotas can be used to protect a

domestic industry, to protect domesticagriculture, and/or for balance-of-payments

reasons.
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2.2 Partial Equilibrium Analysisof An Import Quota


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2.3 Import Quota & Import Tariff

The First Difference:With an import quota, an increase in demand will

result in a higher domestic price and greater domesticproduction than with an equivalent import tariff.

When adjustment (thruany shift in DX orSx) occu rs

in the domestic pr icewith an import quota, impor t quotacompletely replaces the market mechanism.

With an import tariff, an increase in demand will leavethe domestic price and domestic production unchangedbut will result in higher consumption and imports than

with an equivalent import quota.When adjustment (to any shift in DX orSx) occursin

the quant ity of impor tswith a tariff, an import tariff altersmarket mechanism (as an import tariff does).



The Second Difference:The quota involves the distribution of import licenses.If the government does not auction off these licenses in acompetitive market, firms that receive them will reapmonopoly profits. In that case, the government must

decide the basis for distributing licenses among potentialimporters of the commodity. Such choices may be basedon arbitrary official judgments rather than on efficiencyconsiderations, and import quotas tend to remain frozeneven in the face of changes in the relative efficiency of

various actual and potential importers of the commodity.As for import tariff, the government collects it for all

the imports.




The Third Difference:An import quota limits imports to the specified levelwith certainty, while the trade effect of an import tariffmay be uncertain.

Furthermore, foreign exportersmay absorb all or part

of the tariff by increasing their efficiency of operation orby accepting lower profits. As a result, the actualreduction in imports may be less than anticipated.Exporters cannot do this with an import quota since thequant i tyof imports allowed into the nation is clearlyspecified by the quota. It is for this reason, and alsobecause an import tariff is less "visible," that domesticproducers strongly prefer import quotas to import tariffs.




3 Voluntary Export RestraintsThese refer to the case where an importing

country induces another nation to reduce itsexports of a commodity "voluntarily," under thethreat of higher all-round trade restrictions, whenthese exports threaten an entire domestic

industry.VERs have been negotiated since the 1950s

among industrial nations to curtail exports oftextiles, steel, electronic products, automobiles,

and other products from Japan, Korea, and othernations. These are the mature industries thatfaced sharp declines in employment in theindustrial countries during the 1980s.



3.1 Effects of VERsThey have all the economic effects of equivalent

import quotas, except that they are administered by theexporting country, and so the revenue effect or rents arecaptured by foreign exporters.

Voluntary export restraints are less effective inlimiting imports than import quotas because the

exporting nations agree only reluctantly to curb theirexports. Foreign exporters are also likely to fill theirquota with higher-quality and higher-priced units of theproduct over time.

Furthermore, only major supplier countries are

involved, leaving the door open for other nations toreplace part of the exports of the major suppliers andalso from transshipments through third countries.



3.2 Other Regulations

Safety regulations Health regulations

Labeling requirements Governmentprocurement policies



3.3 International CartelsAn international cartel is an organization of

suppliers of a commodity located in differentnations that agrees to restrict output and exportsof the commodity with the aim of maximizing orincreasing the total profits of the organization.

Although domest iccartels are illegal in the USand restricted in EU, the power ofin ternat ionalcartels cannot easily be countered because theydo not fall under the jurisdiction of any nation.

Conditions for its successA few international suppliers

Essential commodity

No close substitutes
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3.4 DumpingDumping is the export of a commodity atbelow cost or at least the sale of a commodity at

a lower price abroad than domestically. Dumpingis classified as persistent, predatory, andsporadic.

Persistent dumping

Sporadic dumping

Predatory dumping



3.4 Dumping

It is often difficult to determine the type ofdumping, and domestic producers demandprotection against any dumping.

They discourage imports and increase theirown production and profits (rents). In some

cases of persistent and sporadic dumping, thebenefit to consumers from low prices mayactually exceed the possible production lossesof domestic producers.

These restrictions usually take the form o fant idumpingduties to offset price differentials,or the threat to impose such duties.



3.5 Export Subsidies

Export subsidies aredirect payments or thegranting of tax reliefand subsidized loans tothe nation's exportersor potential exportersand/or low-interestloans to foreign buyersso as to stimulate the

nation's exports. Assuch, export subsidiescan be regarded as aform of dumping.



4 Arguments for ProtectionAre trade restrictions needed to pro tect domest iclabo r against cheap fo reign labo r?

Comments:This is fallacious because even ifdomestic wages are higher than wages abroad,domestic laborcos tscan still be lower if the

productivity of labor is sufficiently higherdomestically than abroad. Even if this were notthe case, mutually beneficial trade could still bebased on comparative advantage.

Can they use scientific tariff to protect domesticmarket?

Comments:This would eliminate internationalprice differences and trade in all commodities

subject to such "scientific" tariffs.



4.1 Questionable Arguments

Protection is needed (1) to reduce domesticunemployment and (2) to cure a deficit in thenation's balance of payments

Comments: Protection can reduce domesticunemployment and a balance-of-payments deficit.But theyre beggar- thy-neighborarguments forprotection because they come at the expense ofother nations.

As a result, other nations are likely to retaliate,

and all nations lose in the end. Domesticunemployment and deficits in the nation'sbalance of payments should be corrected withappropriate monetary, fiscal, and trade policies

rather than with trade restrictions.



4.2 Infant-Industry for Protection

A nation may have a potential comparative edge in acommodity, but because of lack of know-how and theinitial small level of output, the industry will not be set upor, if already started, cannot compete successfully withmore established foreign firms.

Temporarytrade protection is then needed to establishand protect the domestic industry during its "infancy"

until it can meet foreign competition, achieve economiesof scale, and reflect the nation's long-run comparativeadvantage. At that time, protection is to be removed.

For this argument to be valid, the return in the grown-up industry must be sufficiently high also to offset thehigher prices paid by domestic consumers of thecommodity during the infancy period.


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Qualifications for Protection

1. It is clear that such an argument is more justifiedfor developing than for industrial nations.

2. It is difficult to identify which industry or potentialindustry qualifies for this treatment, and experience has

shown that protection, once given, is difficult to remove.3. What trade protection can do, an equivalentproductionsubs idyto the infant industry can do better.

A domest ic dis tor t ionsuch as this should beovercome with a purely domest ic pol icyrather than with

a trade policy that also distorts relative prices anddomestic consumption. A production subsidy is also amore direct form of aid and is easier to remove than animport tariff. One practical difficulty is that a subsidyrequires revenues, rather than generating them as an

import tariff does.

4.2 Infant-Industry for Protection


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4.3 Who Gets Protected?

Trade protection benefits producers andharms consumers

Since producers are few and stand to gain agreat deal from protection, they have a strong

incentive to lobby the government to adoptprotectionist measures.

On the other hand, since the losses arediffused among many consumers, each of whom

loses very little from the protection, they are notlikely to effectively organize to resistprotectionist measures. Thus, there is a bias infavor of protectionism.


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5 Strategic Trade PolicyA nation can create a comparative advantage (thru

temporary trade protection, subsidies, tax benefits, andcooperative govt-industry programs) in such fields assemiconductors, computers, telecommunications, andother industries that are deemed crucial to future growthin the nation.These high-technology industries are

subject to high risks, require large-scale production toachieve economies of scale, and give rise to extensiveexternal economies when successful. Strategic tradepolicy suggests that by encouraging such industries, thenation can reap the large external economies that result

from them and enhance its future growth prospects.Examples: the steel industry in 1950s and insemiconductors in 1970s and 1980s in Japan, and in thedevelopment of the Concorde in 1970s and the Airbusfrom 1970s in Europe.


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5.1 Difficulties in ImplementingStrategic Trade Policy

First, it is extremely difficult to pick winners anddevise appropriate policies to successfully nurture them.

Second, since most leading nations undertakestrategic trade policies at the same time, their efforts arelargely neutralized, so the potential benefits to each may

be small.Third, when a country does achieve substantial

success with strategic trade policy, this comes at theexpense of others and so other countries are likely toretaliate.

Faced with all these practical difficulties, evensupporters of strategic trade policy acknowledge thatfree trade is st i l l the best polic y, after al l .That is, freetrade may be sub-optimal in theory, but it is optimal inpractice.


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5.2 Strategic Trade Policy& Game Theory

Suppose that Boeing and Airbus are both decidingwhether to produce a new aircraft. Suppose also that asingle producer would earn a profit of $100 million. If bothproducers produce the aircraft, each loses $10 million.

Airbus

BoeingProduce Dont Produce

Produce10

100

100

Dont Produce100

0

0

0


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6 The Uruguay Round

The aim of the Uruguay Round was to

establish rules for checking the proliferationof the new protectionism and reverse its trend;

bring services, agriculture, and foreigninvestments into the negotiations;

negotiate international rules for theprotection of intellectual property rights; and

improve the dispute settlement mechanismby ensuring more timely decisions andcompliance with GATT rulings.

The agreement was signed by the UnitedStates and most other countries on April 15,1994, and took effect on July 1, 1995.


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6.1 Major Provisions of the Accord

1. Tariffs.2. Quotas.3. Antidumping.4. Subsidies.5. Safeguards.6. Intellectual property.7. Services.8. Other industry provisions.9. Trade-related investment measures.10. World Trade Organization.
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6.2 Gains from the Uruguay Round


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6.3 Outstanding Trade Problems1. Some sectors, such as movies and TV programs, were not

included in the agreement, agricultural subsidies remain high, andpatent protection for pharmaceuticals remains disappointing.

2. Many of the trade problems of developing countries have eithernot been addressed or liberalization has been long delayed.

3. The agreement did not make any special provision to help theformerly centrally planned economies of Eastern Europe and the

former Soviet Union establish market economies and integrate theminto the world trading system after the collapse of communism inthe late 1980s and early 1990s.

4. It is the tendency for the world to break up into three majortrading blocs: the European Union (EU), the North America FreeTrade Area (NAFTA), and an Asian bloc.

5. It has not dealt with labor and environmental standards, and thesemay create major trade problems in the future.

Trade-related competition policies (such as subsidies andregulations) as well as trade-related investment measures (TRIMs)have also been inadequately dealt with in the Uruguay Round.


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7 Discussion Questions

What is meant by voluntary export restriction? What are the technical, administrative, and

other nontariff barriers to trade? How do theyrestrict trade?

What are international cartels? How do theiroerations restict trade? What the conditionsfor the success of the cartel?

What are the different forms of dumping? Whatconditions are required to make dumping

possible? Whay do nations subsidize exports? To what

problems do these subsidies give rise?


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