International Economics

Week 6
Tariff and non-tariff barriers

Thomas Goda

28.02.2018

Medellín, 04.02.2015
Agenda

Introduction

Impact of commercial barriers

Trade Agreements

Multinational organizations

2
According to neoclassical trade theory tariffs and non-tariff barriers will have a
negative impact on social welfare

 The theory of comparative advantage and the factor endowment theory state that free
trade is beneficial for all countries

 According to these theories social welfare will thus be lower if counties introduce
barriers to trade

 However, some groups within countries might loose because of free trade and we
have seen that some of the assumptions in the theory are not very realistic

 Countries thus might introduce barriers to free trade to support (infant) industries or to
protect certain groups

 There exists also the tendency to retaliate (i.e. if one countries enacts a barrier
another country does the same)

 To avoid the implied costs of this behavior countries have increasingly signed free
trade agreements to ensure that trade barriers are declining

3
Tariffs can be used for the protection of domestic producers or to generate revenue,
there exists different types of tariffs

 A tariff is a tax levied on a product when it crosses national boundaries and normally
only applies to imports
 Protective tariff – designed to reduce the amount of imports entering a country;
increase sales for domestic producers
 Revenue generation – designed to generate additional funds for domestic
government (sometimes to decrease inequality: tariff on luxury goods)

 There are three types of tariffs

 Specific tariff – fixed monetary amount per unit of the imported good
(e.g. $100 per computer)
 Ad valorem tariff - fixed percentage of the value of the imported good
(e.g. 10% of the worth of the computer)
 Compound tariff - combines the elements of specific and ad valorem tariffs
(e.g. $20 plus 10% of the worth of the computer)

 Often countries are using a mixture of the different existing tariff types

 Normally tariff statistics report tariffs in percentages to compare different countries

4
Next to tariffs countries also can introduce non-tariff barriers; one important non-tariff
barriers are quotas

 A non-tariff barrier is a form of restrictive trade where barriers to trade are set up and
take a form other than a tariff
 The most well known non-tariff barrier is an import quota:
 An import quota is a physical restriction on the quantity of goods that can be
imported during a specific time period
 Import license - domestic producers need to get a license to import (typically
licenses are distributed via auctions or via historical market shares)
 Global quota - countries export on a first-come first-served basis
 Selective quota - specifies the maximum amount of goods that different
countries can export

 Quotas for manufactured goods, textiles, and clothing are nowadays outlawed by
WTO regulations. But, quotas are still used by to protect their agricultural sector

 Quotas can also be used together with tariffs. A so called tariff-rate quota means that
up to a certain amount of imports a low tariff applies (within quota rate) and afterwards
a very high tariff applies (over-quota rate) to prohibit further imports

5
Next to quotas countries can introduce other non-tariff barriers like subsidies,
domestic content, standards, rules and regulations etc.

 Other non-tariff barriers include

 Domestic content requirement – part of the total value of the product needs to
come from domestic producers (aim often is a technology transfer)
 Subsidies – government funding to domestic producers (e.g. tax concessions,
low interest loans, cash disbursements etc.)
 Product dumping – temporary or persistent reduction of prices below costs to
force other competitors out of the market
 Government procurement policies – the domestic government has a buy
national policy
 Social regulations – governments have certain health and safety regulations
(sometimes those regulations are only introduced to prevent imports)
 Transport and freight regulations – restrictive practices on unloading cargo
(e.g. only few duty officers that check imports), administrative burdens, small ports
to increase transportation costs etc.

6
Agenda

Introduction

Impact of commercial barriers

Trade Agreements

Multinational organizations

7
When the international price of the good decreases, Home consumers demand more,
while Home producers supply less, so the demand for imports (MD) rises

8
On the contrary, when the international price of the good rises, Foreign producers
supply more while Foreign consumers demand less, so the supply of export (XS)
rises

9
The equilibrium world price (PW) is where Home import demand (MD) equals Foreign
export supply (XS) => Dhome + Dforeign = Shome + Sforeign => Dworld = Sworld

10
A tariff increases the price in Home and reduces the price in Foreign => both countries
are affected (PT = PT* + t) and the trade volume decreases (Dhome  and Sforeign )

11
When Home is a small country, the tariff it imposes will not lower the price in Foreign;
accordingly, the protection of Shome is higher (PT = PW + t)

12
However, the effective protection of Shome also depends on the tariffs for imported inputs

 The effective rate of protection can be defined as (VT – VW) / VW

 VW = value added in the sector at world prices; VT = is value added in the presence of
trade policies.

 To encourage a domestic auto industry, the first country places a 25% tariff on imported autos
(cost of imported inputs are $6,000; domestic costs $2,000)
 Domestic assemblers can charge $10,000 instead of $8,000
 The effective rate of protection is 100%
 Instead of $2,000 (VW) domestic assemblers can have costs of $4,000 (VT1)

 To encourage the domestic production of parts for the domestic auto industry, the country also
introduces a 10% tariff on imported parts
 The costs of imported inputs increase from $6,000 to $6,600
 As a result, the effective rate of protection now only is 70% (30% less than before)
 Instead of $4,000 (VT1) domestic assemblers now only can have costs of $3,400 (VT2)

13
Consumer surplus is equal to the area under the demand curve and above the price

14
Producer surplus is equal to the area above the supply curve and below the price

15
In a large country, a tariff rises the domestic price (PW => PT), and lowers the foreign
price (PW => PT*); domestic production rises, domestic C falls, domestic G revenue rises

Net cost of tariff

(a+b+c+d) – a – (c+e)

= b+d – e
t

16
The gain/cost of a tariff depends on the ability of the tariff-imposing country to drive
down foreign export prices (i.e. as smaller the country, as lower e, as higher the cost)

17
Export subsidies rise the price in exporting country (PW => PS) and lower the price in
the importing country (PW => PS*);

Ne costs

(a+b) + (b+c+d+e+f+g) – (a+b+c)

=b+d+e+f+g

Terms of trade are negatively

affected (prices of X fall)

18
Import quotas are also more costly the tariffs because foreign producers receive quota
rents and the government does not gain (can be circumvented by auctioning)

Costo neto

b+d+c

19
Effects of different commercial policies

20
According to (neoclassical) theory, free trade should provide gains for an economy;
however, this might not be always the case

 Tariff and non-tariff barriers reduce consumer surplus, increase producer surplus and
lead to a deadweight loss

 Thus, free trade provides short-term gains for an economy and also can lead to long-
term gains due to increasing competition

 However, restrictive trade policies can also have long-term gains which outweigh the
short-term losses if the protection of industries leads to an increase in their
competitiveness and increase their economies of scales (commercial policies; week 8)

 Another negative effect of free trade can be persistent current account deficits which
are not sustainable in the long-run and can lead to BoP crisis which are very costly

 Thus, countries need to outweigh the costs and benefits of trade restrictions and it is
questionable if free trade always has positive impact on the economy

 In general, it is important to note that nowadays the effects of lowering barriers are
quite small

21
Agenda

Introduction

Impact of commercial barriers

Trade Agreements

Multinational organizations

22
According to theory the gains from trade agreements should be quite high

 Tariff barriers are nowadays quite low

 Therefore their trade distortion effects are also quite low

 In other words, the gains from completely free trade would be also quite low
nowadays

 However, additional advantages of trade agreements could be the following:

 Economies of scale (the formation of clusters in certain regions due to a larger
market size)
 Less corruption and rent seeking due to the established standards in the
agreements
 A lower possibility that there is a reversal of the lowering of tariffs

 Therefore, trade agreements are very popular nowadays

23
A bilateral trade agreement is signed between two countries and tariffs are lowered
reciprocally

 In a bilateral free trade agreement two nations agree to lower / eliminate trade barriers

 Often the contract includes a most favored nation (MFN) clause

 Tariffs must be as low as agreed with other countries
 E.g. the US has a bilateral trade agreement with India and Bangladesh
 The US agrees with India to lower the tariffs on textiles from 20% to 10%
 Automatically this lowering of the tariff to 10% tariffs also applies to textile
imports from Bangladesh

 An example of a bilateral trade agreement is the recently ratified TLC (tradado de libre
comercio) between Colombia and the US
 Two-thirds of Colombian imports from the US are manufactured goods (chemicals,
plastics, electrical equipment, machinery, computer etc.)
 The agreement eliminated tariffs on 80% of US exports of consumer and industrial
products to Colombia; the other tariffs will be eliminated within 5 -15 years
 Colombian producers will also gain nearly100% free access to the US market
 US agricultural products benefiting are meat, wheat, corn, soybeans, cotton (e.g.
Colombian tariffs on pork (20% - 30%) must be lowered to 0% within 15 years)
24
Regional trade agreements are free trade agreements between more than two
countries that typically are neighbouring countries

 Under regional trading arrangements member nations agree to impose lower barriers to
trade within the group than to trade with nonmember nation

 Each nation still determines its domestic policies, but the trade policy of each includes
preferential treatment for group members

 Getting a large number of countries to agree on reforms can be extremely difficult,

therefore regional trade agreements are seen as a second best option to foster free
trade

 Countries still discriminate against the rest of the world (ROW) but reduce trade barriers
significantly between each other (i.e. overall global protection decreases)

 An increase in regional trade agreements also is seen to foster free trade as

 other countries try to join to get the same preferential treatment
 other regions also sign free trade agreements to stay competitive

 Nowadays, most countries in the world are part of at least one regional free trade
agreement

25
There are different types of agreements with different degrees of deepness (e.g. tariff
lowering, free movement of capital, free movement of labour etc.)

 The major distinction for regional trade agreements is between

 Shallow integration
Just lowering of tariffs and removal of quotas – predominant in first wave of
integration in 1960s and 1970s

 Deep integration
Allowing in addition the free movement of factors, up to an integration of monetary
policy (i.e. European Monetary Union)

 A more detailed distinction is the following:

 Preferential trade agreement: reduces tariffs on intraregional trade
 Free trade agreement: Elimination of tariffs in intraregional trade, but often rules of
origin
 Customs Union: FTA, but also common tariffs against rest of the world, so no rules
of origin
 Common Market: CU, but also factor mobility
 Economic Union: CU, but also common regulations, sometimes also with common
currency
26
Regional trade agreements are free trade agreements between more than two
countries that typically are neighbouring countries

 An example for a regional free trade agreement is NAFTA (Canada, Mexico, US)
 Elimination of trade and investment barriers between the three member countries
(Phasing out of most tariffs within 10-15 years after the signing in 1994)
 Many economists claim that NAFTA was not very beneficial for Mexico

 An example for a customs union is MERCOSUR (Argentina, Brazil, Paraguay,

Uruguay, Venezuela since July 2012)
 Free transit of goods within the area: intra-MERCOSUR merchandise trade is US$
88 billion (before it was US$ 10 bill)
 A common external tariff and some common trade policies with regard to non-
member states
 Some coordination of macroeconomic and sectorial policies

 An example for an economic union is the EU (27 European countries)

 Free trade within member states, common external tariffs
 Free factor movements (labour and capital)
 Common regulations (European commission) and laws (European court of justice)
 Some common politics (e.g. defense, foreign affairs, etc.)
27
There exist various reasons why regional trade agreements are so popular, and they
have trade creation and trade diversion effects

 An expanded regional market can

 Lead to economies of scale
 Foster specialisation
 Attract FDI (larger market, better/more human resources etc.)
 Lead to the spillover of technology and knowledge
 Ensure higher bargaining power in international arrangements

 Regional trade agreements have trade creation and trade diversion effects
 Trade creation: trade between countries in the RIA is increasing
 Specialisation
 More efficient use of resources (production, consumption)
 Trade diversion: imports from outside the RIA are decreasing
 World production is less efficient than under global free trade

 It is therefore assumed that RIA are more beneficial if

 The region is big (many members and/or large economies)
 The countries in the agreement are diverse (i.e. producing different products)
28
 Historical evolution of Colombia’s trade agreements (country count today 68)

Entrada de
Colombia en
la OMC

Salvador;
Alianza
Guatemala; TLC con TLC con la del
Honduras EE.UU.
Países Andinos Chile UE Pacífico
(1969)

Costa Rica y
Nicaragua (1984)
1995 2006 2007 2008 2012 2013 2014 2016
Panamá (1993)
MERCOSUR Venezuela
CARICOM (1994)
(2004) (2011)
Canadá Israel;
México (1994) EFTA Panamá;
(Suiza, Noruega, Costa Rica;
Liechtenstein) Corea

29
After WWII 23 countries developed countries signed The General Agreement on Tariffs
and Trade (GATT) in order to liberalize trade

 23 countries signed a general agreement on tariffs and trade to lower trade barriers in
1947. After the Great Depression and WWII tariffs in most countries were relatively high
and thus some countries wanted to liberalize trade

 This first round took place in Geneva and covered 45,000 tariff concessions (affecting
around US$ 10 bill of trade) with an average tariff cut of 21%

 GATT was never intended to become an organization but after the success of the first
round other trade negotiation rounds followed that included more countries

 The next important round took place between 1964 – 1967 where 62 countries
negotiated an average decrease of taxes by about 35%

 In the following rounds (Tokyo and Uruguay) further tariff reductions of over 30% were
negotiated. In addition, a reduction of non-tariff barriers, intellectual property rights and
trade rules were agreed upon by the participating countries (123 in Uruguay)

 In 2001 the last round (Doha round) started but until today no agreement have been
reached between the participating countries (155). The main obstacle in the ongoing
negotiations are different points of view between developed and developing countries
regarding agricultural subsidies and tariffs
30
The GATT agreements were based on the most favoured nation and the national
treatment principle

 The GATT agreements were based on a most favoured nation clause (i.e. all have
members have the same preferential access to all countries)
 If on country negotiates a tariff reduction or quota exemption during a GATT round
with another country all member-countries benefited from this reduction
 The lower tariff/quota could also be extended to non-member countries (but
optional)

 Two exemptions to the most favoured nation clause existed

 Industrial countries could grant preferential access to developing countries
 Countries could grant preferential access to partners from regional integration
agreements

 Another principle of the GATT negotiations was the national treatment clause
 GATT members were not allowed to treat domestic industries differently than other
member’s industries

 The rounds also included the commitment of participating countries to bind their tariffs
to an agreed ceiling

31
A weakness of GATT was that no authority existed to enforce the recommendations of
the dispute-settlement panel

 In 1995 when the negotiated changes of the Uruguay round took affect GATT was
transformed into the WTO. The GATT obligations remain at the core of the WTO.

 To ensure that member’s did not violate the rules GATT included a process to settle
trade disputes. However, GATT’s dispute-settlement process did not include the
authority to enforce the conciliation panel’s recommendations. This changed with the
inauguration of the WTO

 The WTO is overseeing the adherence and implementation of the negotiated rules
(especially anti-dumping and subsidies) more strongly

 If a country does not comply with the WTO rules other countries are allowed to impose
higher tariffs (countervailing duty) and sanctions against the violating countries

 Another important change is that the WTO has a wider scope than GATT (tariffs on
finished products are so low that they do not form a significant barrier anymore)
 trade in services (under GATT only trade in goods)
 intellectual property rights, and
 investment
32
Agenda

Introduction

Impact of commercial barriers

Trade Agreements

Multinational organizations

33
There are some organisations that have as their agenda to help developing countries
in their development process

 The World Bank

 Founded 1944 with the aim to help countries to recover from WW II
 Today the WB provides loans to developing countries to finance infrastructure
programs and programs that help to achieve the Millennium Development Goals
 Eradicate extreme poverty
 Achieve universal primary education
 Promote gender equality
 Reduce child mortality / improve maternal health
 Combat diseases (malaria, HIV/Aids, etc.)
 Ensure environment sustainability
 The loans have much lower interest rates than poor countries would need to pay
normally
 Around 10,000 professionals work at the headquarters in Washington D.C. and in
local offices
 The chief of the WB normally is US American

34
There are some organisations that have as their agenda to help developing countries
in their development process

 IMF (International Monetary Fund)

 Founded 1944 with the aim to oversea the international monetary system and to
ensure exchange rate stability (Bretton Woods agreement)
 Today its main role is to help countries that experience BoP problems (i.e. crisis
intervention) and the surveillance of the global economy
 In a crisis the IMF provides loans to countries to ensure that they can pay their
external debts
 Those loans are, however, conditional and are only given if the receiving country
 Cuts expenditure (balanced budgeting)
 Devaluates the currency
 Removes government intervention (subsidies, state-owned enterprises etc.)
 Enhances the rights of foreign investors
 Improves governance and fights corruption

 IMF funds for the loans mainly come from the member states
 IMF’s headquarters also is in Washington DC: the chief of the IMF normally is European

35
Both, the World Bank and the IMF, have been heavily criticised in the past

 Both, the IMF and the World Bank have been criticized because
 They are often unfamiliar with local conditions
 They are often using a one-fits-all approach
 They have a free market agenda and they are dominated by developing countries
 Structural reforms can be more harmful than helpful (e.g. spending cuts can deepen
the recession, which deepens the fiscal deficit)
 Developing countries can become over-indebted
 Developing countries can become dependent on aid (not all aid is helpful for the
long-term development)
 Developing countries often have not the administrative capacities to evaluate and
oversea the reforms / development projects successfully
 The help can lead to moral hazard
 The help can lead to corruption
 Undemocratic regimes might be strengthened

36
Two other important multinational organisations are the OECD and UNCTAD

 OECD (Organisation for Economic Co-operation and Development)

 Founded 1961 with the aim to stimulate economic progress, free world trade,
democracy, and free market economies
 Its founders and members are rich countries only (with the exception of Mexico and
some Eastern European members)
 Its main working areas is to provide data, reports, and policy advice

 UNCTAD (United Nations Conference on Trade and Development)

 Founded 1964 with the aim to maximize the trade, investment, and development
opportunities of developing countries
 The idea is to provide forums where developing countries can discuss their
problems
 Furthermore, data, reports and policy advice are provided for developing countries
 The main UNCTAD reports are: The Trade and Development Report and The World
Investment Report
 The organization has a critical stance regarding complete free market approaches
37
Appendix

38
For some countries tariffs are an important source of funding for governments

back

Tariff revenues as a percentage of government revenues (2007)

Source: Carbaugh (2012)

39
Often countries are using a mixture of the different existing tariff types

Examples of US tariffs back

Source: Sawyer and Sprinkle (2009) 40

 On average developed countries have lower tariffs than developing countries

Examples of tariffs for selected countries (2007)

Source: Carbaugh (2011)

41
Colombia has an array of tariff protection which are relatively low; these tariffs
are for protection rather than for revenue creation

Colombia’s most favoured nation (MFN) tariffs in 2014 back

Productos lácteos 43,5

Ganadería 20,8
Agricultura 20,8
Alimentos preparados 14,7
Pesca 14,2
Madera 14,1
Bebidas 14,1
Aceites y grasas 13,9
Automotores y sus piezas y… 7,4
Otras manufacturas 6,7
Textiles y confecciones 6,28
Pulpa y desperdicios de papel 5,5
Papel y cartón 5,5
Manufacturas de madera 5,5
Tabaco 5,5
Cuero y calzado 4,8
Maquinaria y equipos 3,6
Petróleo y minería 2,8
Metales y productos… 2,5
Minerales no metálicos 2,5
Caucho y plástico 2,2
arancel NMF
Química y farmacia 2,2
0 10 20 30 40 50
Source: CEPAL (2016) 42
Tariff-quotas are used to allow the market access of foreign competitors after the
quota is fulfilled…

A tariff-quota

Source: WTO (2012)

43
… however over-quota rates are often very high and thus impede the access of
foreign competitors above quota levels

back
Examples of US tariff-quota rates

Source: Carbaugh (2011)

44
Fuente: Rodrik 45
(2007)
 El 74% de las exportaciones y 69% de las importaciones de Colombia recibe
preferencias arancelarias

Exportaciones Importaciones
80 74 80
69
70 70

60 60
50
50
40
40
29
30
30 27
22 21 18 19
20
20
10
10
0
0 1995 2000 2005 2015
1995 2000 2005 2015

Fuente: CEPAL, sobre la base de información oficial de la base de datos COMTRADE

46
 El arancel aplicado promedio bajó desde más de 30% en los 80’s hasta niveles
por debajo del 10%, hasta alcanzar el 5,8% en 2015

Colombia, evolución del arancel promedio NMF, 1985-2015

70

60

50

40
33,8
30

20
13,0
12,0
10
7,5
5.8
0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Fuente: CEPAL, sobre la base de información oficial del Banco Mundial, OMC y García y otros (2014)

47
 Al considerar las preferencias otorgadas por los ALC, el arancel aplicado es de
menos del 2%

Colombia, evolución del arancel aplicado, 1985-2015 back

70

60

50

40

30

20 27,3

10 10,4
8,1 1,8
0
1989
1985
1986
1987
1988

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Fuente: CEPAL, sobre la base de información oficial del Banco Mundial, OMC y García y otros (2014)

48
Actualmente la mayoría de los países tienen algún tipo de acuerdo de libre
comercio regional

back

Fuente: Dullien (2007)

49
Desde 1947, tuvieron lugar varias rondas de negociación en las que se fue
incrementando el número de participantes con el fin de remover las barreras al
comercio (junto a barreras no comerciales)
back

Fuente: Carbaugh (2011) 50