anhui university of finance & economics 1/30 nontariff trade barriers and new protectionism...

ANHUI UNIVERSITY OF FINANCE & ECONOMICS 1/30

Nontariff Trade Barriers and New Protectionism

Chapter 9


We discuss the definition of import quotas aWe discuss the definition of import quotas and the definitions of other nontariff barriers and nd the definitions of other nontariff barriers and the new Protectionismthe new Protectionism

Understand the political economy of protectiUnderstand the political economy of protectionismonism

Know the definition of strategic trade and indKnow the definition of strategic trade and industrial policiesustrial policies

Introduce the Uruguay Round and outstandinIntroduce the Uruguay Round and outstanding trade problemsg trade problems

1 Introduction1 Introduction


Key TermsKey Terms• Nontariff trade barriersNontariff trade barriers• New protectionismNew protectionism• International cartelInternational cartel• Persistent dumpingPersistent dumping• Predatory dumpingPredatory dumping• Sporadic dumpingSporadic dumping• Export subsidyExport subsidy• Infant industryInfant industry• Strategic trade policyStrategic trade policy• Game theoryGame theory


2 Nontariff Trade Barriers2 Nontariff Trade BarriersImport Quotas Import Quotas Voluntary Export RestraintsVoluntary Export RestraintsImport License SystemImport License SystemForeign Exchange Control Foreign Exchange Control Government Procurement PolicyGovernment Procurement PolicyInternal TaxesInternal TaxesMinimum PriceMinimum PriceProhibitive ImportProhibitive ImportAdvanced DepositAdvanced DepositCustoms Valuation Customs Valuation Technical Barrier to TradeTechnical Barrier to Trade


2.1 Import Quotas & Their Effects2.1 Import Quotas & Their Effects A quota iA quota is the most important nontariff trade s the most important nontariff trade barrier. It is a barrier. It is a direct direct quantitative restriction on the quantitative restriction on the amount of a commodity allowed to be imported oamount of a commodity allowed to be imported or exported. So we have import quotas and export r exported. So we have import quotas and export quotas.quotas.

Import quotas can be used to protect a domeImport quotas can be used to protect a domestic industry, to protect domestic agriculture, andstic industry, to protect domestic agriculture, and/or for balance-of-payments reasons. /or for balance-of-payments reasons.


2.2 Partial Equilibrium Analysis of 2.2 Partial Equilibrium Analysis of An Import QuotaAn Import Quota


2.3 Import Quota & Import TariffThe First Difference:The First Difference: With an import quota, an increase in demand will resu With an import quota, an increase in demand will result in a higher domestic price and greater domestic prodult in a higher domestic price and greater domestic production than with an equivalent import tariff. ction than with an equivalent import tariff.

When adjustment When adjustment (thru(thru any shift in DX or any shift in DX or Sx) occurs Sx) occurs iin the domestic n the domestic price price with an import quota,with an import quota, import quota import quota completely replaces the market mechanism.completely replaces the market mechanism.

With an import tariff, an increase in demand will leave With an import tariff, an increase in demand will leave the domestic price and domestic production unchanged the domestic price and domestic production unchanged but will result in higher consumption and imports than wbut will result in higher consumption and imports than with an equivalent import quota.ith an equivalent import quota.

When adjustment (to any shift in DX or When adjustment (to any shift in DX or Sx) occurs Sx) occurs in tin the he quantity of imports quantity of imports with a tariff, an import tariff alters with a tariff, an import tariff alters market mechanism (as an import tariff does). market mechanism (as an import tariff does).


The Second Difference: The Second Difference:

The quota involves the distribution of import licenseThe quota involves the distribution of import licenses. If the government does not auction off these licenses is. If the government does not auction off these licenses in a competitive market, firms that receive them will reap n a competitive market, firms that receive them will reap monopoly profits. In that case, the government must decimonopoly profits. In that case, the government must decide the basis for distributing licenses among potential imde the basis for distributing licenses among potential importers of the commodity. Such choices may be based oporters of the commodity. Such choices may be based on arbitrary official judgments rather than on efficiency con arbitrary official judgments rather than on efficiency considerations, and import quotas tend to remain frozen evnsiderations, and import quotas tend to remain frozen even in the face of changes in the relative efficiency of varien in the face of changes in the relative efficiency of various actual and potential importers of the commodity. ous actual and potential importers of the commodity.

As for import tariff, the government collects it for all thAs for import tariff, the government collects it for all the imports.e imports.

2.3 Import Quota & Import Tariff


The Third Difference:The Third Difference:

An import quota limits imports to the specified level An import quota limits imports to the specified level with with certainty, certainty, while the trade effect of an import tariff mawhile the trade effect of an import tariff may be uncertain. y be uncertain.

Furthermore, foreign Furthermore, foreign exporters exporters may absorb all or part may absorb all or part of the tariff by increasing their efficiency of operation or of the tariff by increasing their efficiency of operation or by accepting lower profits. As a result, the actual reductiby accepting lower profits. As a result, the actual reduction in imports may be less than anticipated. Exporters caon in imports may be less than anticipated. Exporters cannot do this with an import quota since the nnot do this with an import quota since the quantity quantity of imof imports allowed into the nation is clearly specified by the qports allowed into the nation is clearly specified by the quota. It is for this reason, and also because an import tariuota. It is for this reason, and also because an import tariff is less "visible," that domestic producers strongly prefff is less "visible," that domestic producers strongly prefer import quotas to import tariffs. er import quotas to import tariffs.

2.3 Import Quota & Import Tariff2.3 Import Quota & Import Tariff


3 Voluntary Export Restraints 3 Voluntary Export Restraints These refer to the case where an importing coThese refer to the case where an importing country induces another nation to reduce its exportuntry induces another nation to reduce its exports of a commodity "voluntarily," under the threat os of a commodity "voluntarily," under the threat of higher all-round trade restrictions, when these ef higher all-round trade restrictions, when these exports threaten an entire domestic industry. xports threaten an entire domestic industry. VERs have been negotiated since the 1950s aVERs have been negotiated since the 1950s among industrial nations to curtail exports of textilmong industrial nations to curtail exports of textiles, steel, electronic products, automobiles, and oes, steel, electronic products, automobiles, and other products from Japan, Korea, and other natiother products from Japan, Korea, and other nations. These are the mature industries that faced shns. These are the mature industries that faced sharp declines in employment in the industrial counarp declines in employment in the industrial countries during the 1980s. tries during the 1980s.


3.1 Effects of VERs3.1 Effects of VERs They have all the economic effects of equivalent impoThey have all the economic effects of equivalent import quotas, except that they are administered by the exportrt quotas, except that they are administered by the exporting country, and so the revenue effect or rents are capturing country, and so the revenue effect or rents are captured by foreign exporters. ed by foreign exporters. Voluntary export restraints are less effective in limitinVoluntary export restraints are less effective in limiting imports than import quotas because the exporting natig imports than import quotas because the exporting nations agree only reluctantly to curb their exports. Foreign ons agree only reluctantly to curb their exports. Foreign exporters are also likely to fill their quota with higher-quaexporters are also likely to fill their quota with higher-quality and higher-priced units of the product over time. lity and higher-priced units of the product over time. Furthermore, only major supplier countries are involvFurthermore, only major supplier countries are involved, leaving the door open for other nations to replace pared, leaving the door open for other nations to replace part of the exports of the major suppliers and also from trant of the exports of the major suppliers and also from transshipments through third countries. sshipments through third countries.


3.2 Other Regulations3.2 Other Regulations

Safety regulations Safety regulations Health regulations Health regulations Labeling requirements Labeling requirements Government procureGovernment procurement policies ment policies


3.3 International Cartels3.3 International Cartels An international cartel is an organization of suppliers of a commodity located in different nations that agrees to restrict output and exports of the commodity with the aim of maximizing or increasing the total profits of the organization. Although domestic cartels are illegal in the US and restricted in EU, the power of international cartels cannot easily be countered because they do not fall under the jurisdiction of any nation. Conditions for its success

A few international suppliers Essential commodityNo close substitutes


3.4 Dumping3.4 Dumping Dumping Dumping is the export of a commodity at belis the export of a commodity at below cost or at least the sale of a commodity at a low cost or at least the sale of a commodity at a lower price abroad than domestically. Dumping iower price abroad than domestically. Dumping is classified as persistent, predatory, and sporadis classified as persistent, predatory, and sporadic. c.

Persistent dumpingPersistent dumpingSporadic dumpingSporadic dumpingPredatory dumpingPredatory dumping


3.4 Dumping3.4 Dumping It is often difficult to determine the type of dIt is often difficult to determine the type of dumping, and domestic producers demand proteumping, and domestic producers demand protection against any dumping. ction against any dumping. They discourage imports and increase their They discourage imports and increase their own production and profits (rents). In some casown production and profits (rents). In some cases of persistent and sporadic dumping, the benes of persistent and sporadic dumping, the benefit to consumers from low prices may actually efit to consumers from low prices may actually exceed the possible production losses of domeexceed the possible production losses of domestic producers.stic producers. These restrictions usually take the form These restrictions usually take the form of of aantidumping ntidumping duties to offset price differentials, oduties to offset price differentials, or the threat to impose such duties. r the threat to impose such duties.


3.5 Export Subsidies3.5 Export Subsidies Export subsidies are Export subsidies are direct payments or the direct payments or the granting of tax relief granting of tax relief and subsidized loans to and subsidized loans to the nation's exporters the nation's exporters or potential exporters or potential exporters and/or low-interest and/or low-interest loans to foreign buyers loans to foreign buyers so as to stimulate the so as to stimulate the nation's exports. As nation's exports. As such, export subsidies such, export subsidies can be regarded as a can be regarded as a form of dumping. form of dumping.


4 Arguments for Protection 4 Arguments for Protection Are trade restrictions needed to Are trade restrictions needed to protect domestic protect domestic labor against cheap foreign labor?labor against cheap foreign labor? Comments:Comments: This is fallacious because even if This is fallacious because even if domestic wages are higher than wages abroad, ddomestic wages are higher than wages abroad, domestic labor omestic labor costs costs can still be lower if the producan still be lower if the productivity of labor is sufficiently higher domestically ctivity of labor is sufficiently higher domestically than abroad. Even if this were not the case, mututhan abroad. Even if this were not the case, mutually beneficial trade could still be based on compally beneficial trade could still be based on comparative advantage.arative advantage.Can they use scientific tariff to protect domestic Can they use scientific tariff to protect domestic market?market? Comments:Comments: This would eliminate international This would eliminate international price differences and trade in all commodities suprice differences and trade in all commodities subject to such "scientific" tariffs. bject to such "scientific" tariffs.


4.1 Questionable Arguments4.1 Questionable Arguments Protection is needed (1) to reduce domestic uneProtection is needed (1) to reduce domestic unemployment and (2) to cure a deficit in the nation's mployment and (2) to cure a deficit in the nation's balance of payments balance of payments Comments: Protection can reduce domestic uComments: Protection can reduce domestic unemployment and a balance-of-payments deficit. nemployment and a balance-of-payments deficit. But they’re But they’re beggar-thy-neighbor beggar-thy-neighbor arguments for prarguments for protection because they come at the expense of othotection because they come at the expense of other nations. er nations. As a result, other nations are likely to retaliate,As a result, other nations are likely to retaliate, and all nations lose in the end. Domestic unempl and all nations lose in the end. Domestic unemployment and deficits in the nation's balance of payoyment and deficits in the nation's balance of payments should be corrected with appropriate monments should be corrected with appropriate monetary, fiscal, and trade policies rather than with tretary, fiscal, and trade policies rather than with trade restrictions. ade restrictions.


4.2 Infant-Industry for Protection 4.2 Infant-Industry for Protection A nation may have a potential comparative edge in a cA nation may have a potential comparative edge in a commodity, but because of lack of know-how and the initiaommodity, but because of lack of know-how and the initial small level of output, the industry will not be set up or, if l small level of output, the industry will not be set up or, if already started, cannot compete successfully with more ealready started, cannot compete successfully with more established foreign firms. stablished foreign firms. TemporaryTemporary trade protection is then needed to establish trade protection is then needed to establish and protect the domestic industry during its "infancy" untand protect the domestic industry during its "infancy" until it can meet foreign competition, achieve economies of sil it can meet foreign competition, achieve economies of scale, and reflect the nation's long-run comparative advantcale, and reflect the nation's long-run comparative advantage. At that time, protection is to be removed. age. At that time, protection is to be removed. For this argument to be valid, the return in the grown-For this argument to be valid, the return in the grown-up industry must be sufficiently high also to offset the higup industry must be sufficiently high also to offset the higher prices paid by domestic consumers of the commodity her prices paid by domestic consumers of the commodity during the infancy period. during the infancy period.


Qualifications for ProtectionQualifications for Protection 1. It is clear that such an argument is more justified f1. It is clear that such an argument is more justified for developing than for industrial nations. or developing than for industrial nations. 2. It is difficult to identify which industry or potential 2. It is difficult to identify which industry or potential industry qualifies for this treatment, and experience has industry qualifies for this treatment, and experience has shown that protection, once given, is difficult to remove. shown that protection, once given, is difficult to remove. 3. What trade protection can do, an equivalent produ3. What trade protection can do, an equivalent productionction subsidysubsidy to the infant industry can do better. to the infant industry can do better. A A domestic distortiondomestic distortion such as this should be overcosuch as this should be overcome with a me with a purely domestic policypurely domestic policy rather than with a trade rather than with a trade policy that also distorts relative prices and domestic conpolicy that also distorts relative prices and domestic consumption. A production subsidy is also a more direct forsumption. A production subsidy is also a more direct form of aid and is easier to remove than an import tariff. Onm of aid and is easier to remove than an import tariff. One practical difficulty is that a subsidy requires revenues, e practical difficulty is that a subsidy requires revenues, rather than generating them as an import tariff does. rather than generating them as an import tariff does.

4.2 Infant-Industry for Protection 4.2 Infant-Industry for Protection


4.3 Who Gets Protected?4.3 Who Gets Protected?Trade protection benefits producers and hTrade protection benefits producers and harms consumersarms consumers Since producers are few and stand to gain a Since producers are few and stand to gain a great deal from protection, they have a strong ingreat deal from protection, they have a strong incentive to lobby the government to adopt protectcentive to lobby the government to adopt protectionist measures. ionist measures. On the other hand, since the losses are diffusOn the other hand, since the losses are diffused among many consumers, each of whom loses ed among many consumers, each of whom loses very little from the protection, they are not likely tvery little from the protection, they are not likely to effectively organize to resist protectionist meao effectively organize to resist protectionist measures. Thus, there is a bias in favor of protectionisures. Thus, there is a bias in favor of protectionism. sm.


5 Strategic Trade Policy5 Strategic Trade Policy A nation can create a comparative advantage (thru teA nation can create a comparative advantage (thru temporary trade protection, subsidies, tax benefits, and comporary trade protection, subsidies, tax benefits, and cooperative govt-industry programs) in such fields as semioperative govt-industry programs) in such fields as semiconductors, computers, telecommunications, and other iconductors, computers, telecommunications, and other industries that are deemed crucial to future growth in the ndustries that are deemed crucial to future growth in the nation.These high-technology industries are subject to hination.These high-technology industries are subject to high risks, require large-scale production to achieve econogh risks, require large-scale production to achieve economies of scale, and give rise to extensive external econommies of scale, and give rise to extensive external economies when successful. Strategic trade policy suggests that ies when successful. Strategic trade policy suggests that by encouraging such industries, the nation can reap the lby encouraging such industries, the nation can reap the large external economies that result from them and enhanarge external economies that result from them and enhance its future growth prospects. ce its future growth prospects. Examples:Examples: the steel industry in 1950s and in semicon the steel industry in 1950s and in semiconductors in 1970s and 1980s in Japan, and in the developductors in 1970s and 1980s in Japan, and in the development of the Concorde in 1970s and the Airbus from 1970s ment of the Concorde in 1970s and the Airbus from 1970s in Europe. in Europe.


5.1 Difficulties in Implementing Strat5.1 Difficulties in Implementing Strategic Trade Policyegic Trade Policy

First,First, it is extremely difficult to pick winners and devis it is extremely difficult to pick winners and devise appropriate policies to successfully nurture them. e appropriate policies to successfully nurture them. Second,Second, since most leading nations undertake strategi since most leading nations undertake strategic trade policies at the same time, their efforts are largely c trade policies at the same time, their efforts are largely neutralized, so the potential benefits to each may be smalneutralized, so the potential benefits to each may be small. l. Third,Third, when a country does achieve substantial succes when a country does achieve substantial success with strategic trade policy, this comes at the expense of s with strategic trade policy, this comes at the expense of others and so other countries are likely to retaliate.others and so other countries are likely to retaliate. Faced with all these practical difficulties, even supportFaced with all these practical difficulties, even supporters of strategic trade policy acknowledge that ers of strategic trade policy acknowledge that free free trade itrade is still the best policy, after all.s still the best policy, after all. That is, free trade may be sThat is, free trade may be sub-optimal in theory, but it is optimal in practice.ub-optimal in theory, but it is optimal in practice.


5.2 Strategic Trade Policy 5.2 Strategic Trade Policy & Game Theory& Game Theory

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

AirbusAirbus

BoeingBoeingProduceProduce Don’t ProduceDon’t Produce

ProduceProduce －－ 1010

－－ 1010

00

100100

Don’t ProduceDon’t Produce 100100

00

0 0

00


6 The Uruguay Round 6 The Uruguay Round The aim of the Uruguay Round was toThe aim of the Uruguay Round was to

establish rules for checking the proliferation establish rules for checking the proliferation of the new protectionism and reverse its trend;of the new protectionism and reverse its trend; bring services, agriculture, and foreign invebring services, agriculture, and foreign investments into the negotiations; stments into the negotiations; negotiate international rules for the protectinegotiate international rules for the protection of intellectual property rights; and on of intellectual property rights; and improve the dispute settlement mechanism improve the dispute settlement mechanism by ensuring more timely decisions and compliby ensuring more timely decisions and compliance with GATT rulings. ance with GATT rulings. The agreement was signed by the United StThe agreement was signed by the United States and most other countries on April 15, 199ates and most other countries on April 15, 1994, and took effect on July 1, 1995. 4, and took effect on July 1, 1995.


6.1 Major Provisions of the Accord 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.


6.2 Gains from the Uruguay Round


6.3 Outstanding Trade Problems 6.3 Outstanding Trade Problems 1. Some sectors, such as movies and TV programs, were not included in the agreement, agricultural subsidies remain high, and patent protection for pharmaceuticals remains disappointing. 2. Many of the trade problems of developing countries have either not been addressed or liberalization has been long delayed. 3. The agreement did not make any special provision to help the formerly centrally planned economies of Eastern Europe and the former Soviet Union establish market economies and integrate them into the world trading system after the collapse of communism in the late 1980s and early 1990s. 4. It is the tendency for the world to break up into three major trading blocs: the European Union (EU), the North America Free Trade Area (NAFTA), and an Asian bloc.5. It has not dealt with labor and environmental standards, and these may create major trade problems in the future. Trade-related competition policies (such as subsidies and regulations) as well as trade-related investment measures (TRIMs) have also been inadequately dealt with in the Uruguay Round.


7 Discussion Questions7 Discussion Questions• What is meant by voluntary export restriction?What is meant by voluntary export restriction?• What are the technical, administrative, and othWhat are the technical, administrative, and oth

er nontariff barriers to trade? How do they restrer nontariff barriers to trade? How do they restrict trade?ict trade?

• What are international cartels? How do their oeWhat are international cartels? How do their oerations restict trade? What the conditions for trations restict trade? What the conditions for the success of the cartel?he success of the cartel?

• What are the different forms of dumping? What What are the different forms of dumping? What conditions are required to make dumping possiconditions are required to make dumping possible?ble?

• Whay do nations subsidize exports? To what pWhay do nations subsidize exports? To what problems do these subsidies give rise?roblems do these subsidies give rise?


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anhui university of finance & economics 1/30 nontariff trade barriers and new protectionism...

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