International Economics: Tenth Edition

CHAPTER N I N E
9International Economics
Tenth Edition
Nontariff Trade Barriers and New Protectionism
Dominick Salvatore
John Wiley & Sons, Inc.
Presented by: Assoc. Prof. Dr. Nguyen Thuong Lang
Salvatore: International Economics, 10th

Edition © 2010 John Wiley & Sons, Inc.
In this chapter:
• Introduction
• Import Quotas
• Other Nontariff Barriers and the New
Protectionism
• The Political Economy of Protectionism
• Strategic Trade and Industrial Policies
• History of U.S. Commercial Policy
• The Uruguay Round, Outstanding Trade Problems
and the Doha Round
Introduction
• Though tariffs have historically been the most

important form of trade restriction, there are
many other types of trade barriers.
• As tariffs were negotiated down during the
postwar period, the importance of non-tariff
barriers was greatly increased.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Import Quotas
• A quota is a direct quantitative restriction on

the amount of a commodity allowed to be
imported or exported.
• Import quotas are used to protect domestic
industry and agriculture, and/or for balance of
payments reasons.
Import Quotas
• Import Quota vs. Equivalent Import Tariff

– Import quota:
• Higher domestic price than tariff
• Higher domestic production than tariff
– Import tariff:
• Higher consumption than quota
• Higher imports than quota
FIGURE 9-1 Partial Equilibrium Effects of an Import Quota.
Import Quotas
• Import Quota vs. Equivalent Import
Tariff
– Import quota involves distribution of import
licenses, while tariff does not.
• If not auctioned by government in competitive markets,
receiving firms will reap monopoly profits.
• Allocation decision often based on arbitrary judgments
rather than efficiency concerns.
• Monopoly profits lead firms to lobby for licenses in rent-
seeking activities.
• Thus, import quotas replace market mechanism , resulting
in waste, and possible corruption.
Import Quotas
• Import Quota vs. Equivalent Import Tariff

– Import quota limits imports to specified levels with
certainty, while the trade effect of an import tariff
may be uncertain.
• When elasticity of demand and supply are not known, it is
difficult to estimate the import tariff required to restrict imports
to desired level.
• Foreign exporters cannot maintain export quantity simply adjust
to barrier by increasing efficiency or accepting lower profits, as
with tariff
• Because import quota is less “visible, domestic producers prefer
them over tariffs.
Import Quotas
• Import Quota vs. Equivalent Import

Tariff
– Since import quotas are more restrictive than
equivalent import tariffs, society should resist
domestic producers’ efforts to use quotas
instead of tariffs.
Other Nontariff Barriers and the New
Protectionism
• Voluntary Export Restraints (VERs)

– With VERs, an importing country induces another nation
to reduce its exports voluntarily, under threat of higher
trade restrictions.
– Sometimes called orderly marketing arrangements,
VERs allow industrial nations to appear to support the
principle of free trade.
– Less effective in limiting imports than import quotas
because exporters tend to fill the quota with higher
quality, higher priced goods over time.
Protectionism
• Technical, Administrative, Other

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
– Rebates for indirect taxes may be given to exporters and
imposed on importers of a commodity.
Other Nontariff Barriers and the
New Protectionism
• International Cartels
– Organization of suppliers from different nations
that agrees to restrict output and exports of a
commodity with the aim of maximizing or
increasing total profits.
– For example, OPEC (the Organization of
Petroleum Exporting Countries) quadrupled the
price of crude oil between 1973 and 1974 by
restricting production and exports.
Protectionism
• Dumping
– The export of a commodity at below cost, or the
sale of a commodity at a lower price abroad than
domestically.
– Three types of dumping:
1. Persistent dumping is the continuous tendency of a
domestic monopolist to maximize total profits by
selling the commodity at a higher price in the domestic
market.
Other Nontariff Barriers and the
New Protectionism
• Dumping
domestically.
1. Persistent dumping
2. Predatory dumping is the temporary sale of a
commodity at below cost or a lower price abroad to
drive foreign producers out of business.
Protectionism
• Dumping
domestically.
1. Persistent dumping
2. Predatory dumping
3. Sporadic dumping is the occasional sale of a
commodity at below cost or lower price abroad to
unload surplus of the commodity without reducing
domestic prices.
Protectionism
• Export Subsidies
– The granting of tax relief to exporters or
subsidized loans to foreign buyers to stimulate a
nation’s exports.
– Can be regarded as a form of dumping.
– Export subsidies are illegal by international
agreement, but often used in disguised form.
– Example: Export-Import Bank
• U.S. government agency that extends subsidized loans
to foreigners to finance U.S. exports.
FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.
The Political Economy of
Protectionism
Fallacious Arguments for Protection
1. Trade restrictions are needed to protect domestic
labor against cheap foreign labor.
– Even if domestic wages are higher than wages abroad,
domestic labor costs can still be lower if the
productivity of labor is sufficiently higher domestically
than abroad.
– Mutually beneficial trade could be based on
comparative advantage, with cheap labor nation
specializing in labor-intensive commodities.
Protectionism
Fallacious Arguments for Protection
2. Scientific tariffs are needed so that domestic
producers can compete.
– A scientific tariff raises the price of imports to the
domestic price.
– This would eliminate price differences and trade in all
commodities subject to such “scientific” tariffs.
Protectionism
Questionable Arguments for Protection
– Protection is needed to:
1. Reduce domestic unemployment, and
2. To cure a deficit in the nation’s balance of
payments
• Protection would lead to substitution of imports with
domestic production.
• These are beggar-thy-neighbor arguments for protection
because they come at the expense of other nations.
• Other nations retaliate; all nations lose in the end.
Protectionism
A Qualified Argument for Protection
– Infant-industry Argument
• Temporary trade protection is justified to establish
and protect a domestic industry during its “infancy”
until it can meet foreign competition, achieve
economies of scale, and reflect the nation’s
comparative advantage.
• To be valid, the return in the grown-up industry must
be high enough to offset the higher prices paid by
domestic consumers of the commodity during infancy.
Protectionism
A Qualified Argument for Protection
– Infant-industry Argument
• Requires several qualifications which, together,
take away most of its significance:
1. More justified for developing nations than
industrial nations.
2. May be difficult to identify which industry
qualifies for protection, which, once given, is
difficult to remove.
3. What trade protection can do, an equivalent
production subsidy to the infant industry can do
better.
Strategic Trade and Industrial
Policies
• According to the strategic trade policy argument, a
nation can create a comparative advantage in industries
deemed crucial to future growth in the nation.
• Nation may use temporary trade protection, subsidies, tax
benefits and cooperative government-industry programs.
• Similar to infant-industry argument in developing nations.
Strategic Trade and Industrial
Policies
 Concerns
 Difficult to pick winners and devise appropriate
policies to nurture them.
 Efforts largely neutralized when leading nations
undertake strategic trade policies at the same time.
 Retaliation in other markets may eliminate any
gains.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
• The Uruguay Round

– GATT’s eighth round of negotiations, with 123
countries participating.
– Began in September 1986 with completion
scheduled for December 1990.
– Disagreements between United States and
European Union, on reducing agricultural
subsidies, delayed conclusion for three years.
– Agreement took effect in July, 1995.

Aims of the Uruguay Round:
– Establish rules for monitoring protectionism and reversing
the trend.
– Bring services, agriculture and foreign investments into
negotiations.
– Negotiate international rules for protection of intellectual
property rights.
– Ensure more timely decision and compliance with GATT
rulings on dispute settlements.

Major Provisions of Uruguay Accord:
– Tariffs
• Tariffs on industrial products to be cut from an average
of 4.7% to an average of 3%.
• The share of good with zero tariffs to increase from 20-
22% to 40-45%.
• Tariffs removed on pharmaceuticals, constructions
equipment, medical equipment, paper products, and
steel.

– 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

– Antidumping
• Tougher and quicker resolution of disputes resulting
from antidumping laws, but not a ban on their use.
– Subsidies
• The volume of subsidized agricultural products was to
be reduced by 21 percent, with government subsidies
for industrial research limited to 50% of the applied
research cost.

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

– Intellectual property
• Twenty-year protection of patents, trademarks, and
copyrights.
• A 10 year phase-in period for patents over
pharmaceuticals in developing countries.

– Services
• United States failed to gain access to markets in Japan,
Korea and many developing nations for banks and
security firms.
• United States did not succeed in having France and the
European Union lift restrictions on showing American
films and TV programs in Europe.

– Other Industry Provisions
• United States and Europe agreed to talks on limiting
government subsidies to civil aircraft makers, opening
up distance telephone market, and limiting European
steel subsidies.
• United States expressed intention to negotiate opening
Japanese computer chip market.

– Trade-Related Investment Measures
• Phased out requirement that foreign investors buy
supplies locally or export as much as they import.

– World Trade Organization (WTO)
• Established the WTO in place of the GATT Secretariat,
with authority in industrial and agricultural products and
services.
• Trade disputes to be settled by vote of two-thirds or
three-quarters of nations rather than unanimously.
The Uruguay Round, Outstanding
Trade Problems, and the Doha Round
• Outstanding Trade Problems
– Trade disputes between the United States and the
European Union.
• EU subsidies to Airbus
• EU ban on US exports of hormone-raised beef and
genetically modified food
– High subsidies and tariffs on agricultural products,

and frequently abused antidumping laws.
• Outstanding Trade Problems

– Tendency for world to divide into three major trade
blocs:
• European Union (EU)
• North American Free Trade Area (NAFTA)
• Asian Bloc
– Call by some developed nations for labor and

environmental standards, to ensure “leveling of
working conditions” and avoid “social dumping”
The Uruguay Round, Outstanding
Trade Problems, and the Doha Round
• Doha Round
– Launched in November, 2001, in Doha, Qatar.
– Agenda included:
• Further liberalization of production and trade in
agriculture, industrial products, and services.
• Further tightening of antidumping regulations,
investment and competition policies.
• Doha Round
– Developing nations reluctant to make concessions because of
feeling that Uruguay Round failed to deliver on promises.
– Developing nations insisted on making Doha Round a true
“development round”.
– Intended to conclude by end of 2004, all but collapsed in
2006 over disagreements over agricultural subsidies between
developed and developing nations.
– As of beginning of 2009, still not concluded.

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CHAPTER N I N E

Salvatore: International Economics, 10th

• Though tariffs have historically been the most

• A quota is a direct quantitative restriction on

• Import Quota vs. Equivalent Import Tariff

• Import Quota vs. Equivalent Import Tariff

• Import Quota vs. Equivalent Import

• Voluntary Export Restraints (VERs)

• Technical, Administrative, Other

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

• The Uruguay Round

– High subsidies and tariffs on agricultural products,

• Outstanding Trade Problems

– Call by some developed nations for labor and

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