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Tariff and Non-Tariff Barriers to Trade

Daniel A. Sumner, Universtiy of California-Davis
Vincent H. Smith, Montana State University
C. Parr Rosson, Texas A&M University

Introduction Background
This paper examines tariff and non-tariff policies Tariffs and Tariff Rate Quotas
that restrict trade between countries in agricultural
commodities. Many of these policies are now subject Tariffs, which are taxes on imports of
to important disciplines under the 1994 GATT commodities into a country or region, are among the
agreement that is administered by the World Trade oldest forms of government intervention in economic
Organization (WTO). activity. They are implemented for two clear
The paper is organized as follows. First, tariffs, economic purposes. First, they provide revenue for
import quotas, and tariff rate quotas are discussed. the government. Second, they improve economic
Then, a series of non-tariff barriers to trade are returns to firms and suppliers of resources to
examined, including voluntary export restraints, domestic industry that face competition from foreign
technical barriers to trade, domestic content imports.
regulations, import licensing, the operations of import Tariffs are widely used to protect domestic
State Trading Enterprises (STEs), and exchange rate producers’ incomes from foreign competition. This
management policies. Finally, the precautionary protection comes at an economic cost to domestic
principle, an environment-related rationale for trade consumers who pay higher prices for import-
restrictions, and sanitary and phytosanitary barriers to competing goods, and to the economy as a whole
trade are discussed. through the inefficient allocation of resources to the
import competing domestic industry. Therefore, since
1948, when average tariffs on manufactured goods
exceeded 30 percent in most developed economies,
those economies have sought to reduce tariffs on
manufactured goods through several rounds of
negotiations under the General Agreement on Tariffs
Trade (GATT). Only in the most recent Uruguay

S. Non-Tariff Trade Barriers In a legal sense and at the WTO. Tarrification of Explicit import quotas used to be quite common in agricultural commodities was largely achieved and agricultural trade. even when they have agreed not to use imports. In some cases. although often Governments have used domestic content only under threat of some even more restrictive or regulations to restrict imports. is a net high enough can block all trade and act just like exporter of many agricultural commodities. automobile. policy even under GATT. lower each tariff rate and raise the quantity to which such as automobiles. trade would illustrate their effects. The typical TRQ will set a barriers need to be reduced.S. low tariff for imports of a fixed quantity and a higher tariff for any imports that exceed that initial quantity. successive U. In the United States. willing to comply with a VER because they were able Domestic content regulations typically specify the to capture economic benefits through higher prices percentage of a product’s total value that must be for their exports in the importing country’s market. Australia used domestic be taxed at a lower rate and trade flows would content requirements to support leaf tobacco increase. They are normally used in In the Uruguay round of the GATT/WTO conjunction with a policy of import substitution in negotiations. the initial tariff agricultural commodities (including quotas) and.S. and textile production. shared by the U. A critical objective of the Uruguay Round of strict import quotas. agricultural imports from other countries. In the past. tariffs levied on some agricultural innovations in the 2002 Farm Bill vis a vis tariffs on commodities by some countries have been very large. but some agricultural examples the low tariff applied.Round of negotiations were trade and tariff Given current U. the utilization of new non-tariff barriers setting domestic commodity programs.S. governments have generally taken a A tariff-rate quota (TRQ) combines the idea of a strong position within the WTO that tariff and TRQ tariff with that of a quota. In each case. commitments under the WTO restrictions in agriculture addressed. import bans. Several developing countries have imposed domestic content Issues requirements to foster agricultural. Thus. particularly because the U. rate is quite low. Providing When coupled with other barriers to trade they have higher prices to domestic producers by increasing often constituted formidable barriers to market access tariffs on agricultural imports is not permitted. In order to pay a relatively low import . import quotas and other non-tariff barriers in favor of Domestic content requirements have not been as tariff-rate quotas. members agreed to drop the use of which domestic production replaces imports. Another to trade is not really an option for the 2002 Farm Bill. and on market access. tariffs that are set addition.S.S. but the over-quota tariff is prohibitive where necessary. countries are allowed to combine the use of two tariffs in the form Countries use many mechanisms to restrict of a TRQ.. produced domestically in order for the product to be sold in the domestic market (Carbaugh). over time. Thus. options are limited for U. common non-tariff barrier (NTB) was the so-called “voluntary export restraint” (VER) under which Domestic Content Requirements exporting countries would agree to limit shipments of a commodity to the importing country. if the U. In fact. important GATT negotiations. Countries also agreed to gradually prevalent in agriculture as in some other industries. In from foreign producers. exporters were stimulate the development of domestic industries. honors its GATT and thus to plan on a particular import quantity in commitments. was the TRQ schedules are set for beef. peanuts. and elimination of non-tariff barriers to trade in many dairy products. process called tarrification. production. The intent is usually to onerous activity. sugar. to replace them with tariffs – a or close to prohibitive for most normal trade. They allowed governments to viewed as a major success of the 1994 GATT strictly limit the amount of imports of a commodity agreement.

agreements also use domestic content rules to ensure they can impose a set of implicit import tariffs by that nonmembers do not manipulate the agreements purchasing imports at world prices and offering them to circumvent tariffs. product definitions. North American for sale at much higher domestic prices. or utilize complex and costly Again. the challenges provided by STEs will quota mechanism. South Korea’s through bilateral and multilateral trade negotiations Livestock Products Marketing Organization. restricting operations of import and export STEs as a primary concern.duty on imported tobacco. Oranges grown in Korea happen to be much smaller Import State Trading Enterprises (STEs) are than Navel oranges grown in California. In the producers is unlikely an option for the 2002 Farm context of international trade. and other agricultural commodity imports be permitted only under license. and . In spite of these bring into the country. labeling. information needed to make such assessments.S. etc. such rules may also be Bill. for example.S. domestic leaf tobacco. imagine if Korea were to require that oranges sold in Import State Trading Enterprises the country be less than two inches in diameter. and wheat). the United States targeted the trade 2002 Farm Bill. Australian cigarette China’s National Cereals. it implicit import rules that make importing into the seems unlikely that introducing domestic content market unprofitable. Prior to the implementation of in the context of domestic legislation through the 2002 NAFTA. For example. Such rules violate WTO provisions that often enjoy a partial or pure domestic monopoly over require countries to treat imports a nd domestic the sale of those commodities. importers of a commodity are claiming that such disclosure is not required because required to obtain a license for each shipment they they are quasi-private companies. however. so this type government owned or sanctioned agencies that act as of “technical” rule would effectively ban the sales of partial or pure single buyer importers of a commodity California oranges and protect the market for Korean or set of commodities in world markets. these issues will likely be dealt with Agency (barley. Under an import. For example. First. rice. a country can simply restrict almost certainly continue to be addressed through imports on any basis it chooses through its allocation bilateral and multilateral trade negotiations rather than of import licenses. licensing scheme. commodity markets include the Japanese Food Again. in a submission to the current WTO agricultural commodities is a viable option for the negotiations. Elimination of import licenses for Technical Barriers to Trade agricultural commodities was a critical objective of the Uruguay Round of GATT negotiations and thus All countries impose technical rules about the use of this mechanism to protect U. used as non-tariff trade barriers. Current important products equivalently and not to advantage products examples of import STEs in world agricultural from one source over another. Mexico required that wheat Farm Bill. A major problem with import STEs Import Licenses is that it is quite difficult to estimate the impacts of their operations on trade. STEs often refuse to provide the mechanisms for restricting imports. Without explicitly utilizing a difficulties. because those operations Import licenses have proved to be effective lack transparency. even in indirect ways. Oil and Foodstuffs Import manufacturers were required to use 57 percent and Export Commission (COFCO). They also oranges. as is the case with other trade barriers. must be made from 100 percent NAFTA origin fresh Import STEs may also implement implicit general and citrus fruit. rules to enhance domestic demand for U. Recently. The Free Trade Agreement (NAFTA) rules of origin difference between the purchase price and the provisions stipulate that all single-strength citrus juice domestic sales price simply represents a hidden tariff. targeted import quotas. agricultural packaging. Member countries of trade STEs can restrict imports in several ways.

often U. Farm Bill. Canada in January 2000. For example. cancer. climate different exchange rates for foreign currency change. financial markets are not usually targeting agricultural Most recent attempts to invoke the principle have imports. for example. for resurgence of popularity during a meeting of the U. Thus. exploitation of Some countries have targeted specific types of natural resources. beef on world markets is $2. To some degree.000 yen. or foresight planning. they are clearly principle could lead to trade embargoes on products under the purview of the Federal Reserve Board and. countries can and have used exchange rate The Precautionary Principle and Sanitary and policies to discourage imports and encourage exports Phytosanitary Barriers to Trade of all commodities. and contamination with toxic depending on the commodities they were importing. will not likely be a major issue for the 2002 initiatives. the exchange rate between the context of environmental and health concerns. then the U.S. and the price of a an observer) in 1982. to offset the Exchange Rate Management Policies negative impacts caused by a strengthening US dollar with counter-cyclical payments to export dependent Some countries may restrict agricultural imports agricultural products. inhibit imports of agricultural technologies should be considered dangerous until commodities. if one has recently been frequently proposed as a U. imports through implementing multiple exchange rate Concerns about species extinction. exchange rate policies are usually not example. cited the use of toxic substances. It was first dollar. would mean that the price of one responsibility to maintain natural systems (O’Riordan U. rigid adherence to the precautionary sector-specific. dollar can be used to purchase 100 Japanese justification for government restrictions on trade in the yen (and vice versa). The exchange rate between two countries’ currencies is simply the price at which one The precautionary principle. high rates of policy under which importers were required to pay birth defects. and generally have been concerned that the precautionary principle will not been utilized by developed economies. cost effectiveness. There have been many calls in recent congressional testimony.N. In the context of managing One effect of currency depreciation is to make all environmental uncertainty. example. ozone depletion. chemicals and nuclear materials have also been used The objectives of such programs have been to reduce to justify trade and other government restrictions on balance of payments problems and to raise revenues the basis of the precautionary principle. and included elements of yen. learning deficiencies. Multiple exchange rate countries seeking more open trading regimes have programs were rare in the 1990s. simply be used to justify nontariff trade barriers. For Finally. A 10 percent depreciation or devaluation of the prevention. dollar increased to 110 yen. and again price of that ton of beef in Japan would increase from in Montreal. the principle enjoyed a imports more expensive in the country itself. and Cameron). through managing their exchange rates.S.rather than through domestic Farm Bill policy as such. as well as imports of all other proven otherwise. is only initial value of 100 yen per dollar.000 yen to 220. dollar.N. 200. Thus. countries that pursue deliberate responsible for an activity or process to establish its policies of undervaluing their currency in international harmlessness and to be liable if damage occurs. and environmental degradation. dollar and the Japanese yen is 100 yen per regardless of cost or scientific evidence. and ethical yen. currency trades for the other. for the government. Its use was re-endorsed by the ton of U. If. In the United States. A policy that The precautionary principle has been interpreted deliberately lowers the exchange rate of a country’s by some to mean that new chemicals and currency will. It therefore requires those commodities. Convention on Bio-diversity in 1992. If the yen depreciates in value relative to the proposed as a household management technique in U. the yen depreciates by 10 percent from an World Charter for Nature (of which the U.S. then a dollar is able to purchase more the 1930s in Germany.000. such as genetically modified oil seeds with little or no . therefore.S.S.S. however.

Volume 53:3. Frank B. International Economics. “Paradoxical Perils of the Precautionary Principle. Island Press. CQS. “Interpreting closure. South-Western. a member country must show that the barrier has solid scientific justification and restricts trade as little as possible to achieve its scientific objectives.” Earthscan Sometimes.” Revision 851. Earth Guardian. or agriculture from harmful diseases or pests that may accompany the imported product. places are fully consistent with protecting consumers. 1999. on scientific analysis to justify market O’Riordan. any options for sanitary and phytosanitary initiatives considered in the 2002 Farm Bill must be based on sound science and they do not have to be harmonized with the initiatives of other countries.. Robert J. Washington and Lee Home Page. This requirement has resulted in a number of barriers being relaxed around the world. Ltd.” Health Alert. The WTO Sanitary and Phytosanitary (SPS) provisions on technical trade rules specifically recognize that all countries feel a responsibility to secure their borders against the importation of unsafe products. 1994. These phony technical barriers were just an excuse to keep out competitive products. however. . restrictions on imports from certain Publications. It should be emphasized that WTO rules do not require member countries to harmonize rules or adopt international standards — only that there must be some scientific basis for the rules that are adopted. such barriers were often simply used as excuses to keep out a product for which there was no real evidence of any problem. The current WTO agreement requires that whenever a technical barrier is challenged. the Precautionary Principle. References and Suggested Readings Carbaugh. 1996. “New Principle to Protect Human Health and the Environment. the environment. Tim and James Cameron. 1995. Thus. Prior to 1994.