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 Chapter (6)-Non-tariff trade barriers
and the new protectionism
(1) Import quota:
a Definition is a direct quantitative restriction on the amount of a commodity
allowed to be imported or exported

(2)
SNe Partial equilibrium effects of an import quota:
a Dx and Sx represents the nation's demand and supply curves of commodity X
A t price $1, consumption = 70x, ofwhich 10x is produced domestically, and

the reminder 60x is imported

A n import quota of 30x would raise the domestic price to $2
A t $2, consumption - 50x, equals the 20x produced domestically and the 30x
quota
The effects of quota:
Consunmption decrease by 20x
Production increase by 10x T
Imports decrease by 30x
Revenue increase by $30
With an increase in demand from Dx to Dx', with the same import quota 30x
(J'H)
Consumption increase by 5x 55 -50 5 units)
Production increase by 5x (25-20 =
5units)
Px6)

H
2.5

$2

D'x

X
10 20 25 30 40 50 55 60 65 70

b0 imports (70-10)
 Partiol equigbriun etedsot an import quota

P
S Sda
Ad volerm taxitts

(bo3o) $3

$2

20 30 50 70
Ox
30 impors (50-20-30)

60 imports (70-10-6o)

Consumption ettect (AQ) 20 TO-50)

poduchiontfiect (A9T0 (20-10)

inports 30 (b0-30)
elenue e e = (2-1) (60-30) -$30
 eWitR an incxease in demand

$3

$25

D
Dx Q
20 25 30 50 55
Qdd

QAT 55-50-5 uits

QT 25-20 5 units
= 55 units
Qs Quota
25 units 30 wnits
 Consumption -import'-pfodudtion)
CQ Economics of International Trade

(3) Import quota vs. equivalent import tariff

Import quota
Higher domestic price than tariffT Higher pYice
Higher domestic production than tariff production
Import tariff
Higher consumption than quota Higher Consumption
Higher imports than quota imporfs
(4) Other non-tariff barriers:
Voluntary exportrestraints "VERs": an importing country induces
another nation to reduce its exports voluntarily, under threat of higher
trade restrictions SlpbN,+e s
bTechnical, administrative.and other regulations! health and safety
regulations may serve as barriers to international trade by raising the
costs of imported products

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. a i SJp9Us) ai»:
al t D Jlsaai 974- 1973 fIJsR)
For example, OPEC (the Organization of Petroleum Exporting
Countries) quadrupled the price of crude oil between 1973 and
1974 by restricting production and exports

(5) Dumping:
@ Definition: 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:

A l s . Persistent dumnping: is the continuous tendency of a domestic
monopolist to maximize total profits by selling the commodity at
a higher price in the domestic market

Coz) 9b).Predatorydumpingt is the temporary sale of a commodity at

below cost or a lower price abroad to drive foreign producers out

ofbusiness l ) i N b i l l i g JEy

2
( a g a s s .Sporadic dumping is the occasional sale ofa commodity at
below cost or lower price abroad to
unload surplus of the
commodity without reducing domestic prices
Clalaas
(6) Export subsidies:
aDefinition: the granting of tax relief to exporters or subsidized loans to
foreign buyers to stimulate a nation's exports ls sii oJwlas
Can be regarded as a form of dumping
Export subsidies are illegal by international agreement, but often used
in disguised form d
dExample: Export-Import Bank: U.S. government agency that extends
subsidized loans to foreigners to finance U.S. exports

(7) Partial equilibrium of an export subsidy:

At price $3.5, production =35x, of which consumption =20x, and the
reminder exports= 15x
6With subsidy $O.5 on each unit of commodity X exported, the price rise
to $4
A t price $4, production = 40x, of which consumption =10x, and the
reminder exports = 30x

C o n s u m e r loss = area a' + area b'

Producer gain = area a' + area b' + areac'

Government subsidy = area b ' +area c' + area d'

Deadweight loss (protection cost)= area b' +area d'

Px($)

a
3.5
A' N B'I
3

DX

10 20 30 35 40 X
50 60
 Partia equiibrium of an export subsids
P

C
$3.5 4Consumption.
20-100
qSd $3 Production t
40-35-=5
exports t
30-15 = 15

30 35
Gd
epors
35-20 I15x
exporTs= 40-10 = 30 y

Loss consumer Supus +b)

gan pro ducer Surpkus
oss qpNe nwneMT (b+d) 8lusö issiiyAs2
=Oeadueioht oss (b+d)
 Economics of International Trade

D&8) Fallacious arguments for protection:

Trade restrictions are needed to protect domestic labor against cheap
foreign labor.
bScientific tariffs are needed so that domestic producers can compete. A
scientific tariff raises the price of imports to the domestic price.
O9) Questionable arguments for protection: ss) 5y \ ) l s s olrAli
a Protection is needed to:
Reduce domestic unemployment Clisllp2jg
To cure a deficit in the nation's balance of payments EILTBSlar

e t (10) A qualified argument for protection: L l z 0 , i a_MaiL

aInfant-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

A(11) The general argument on tariffs and trade "GATT": ls)lwa,

4 Definition: The General Agreement on Tariffs and Trade (GATT) was AD|
/219
an international organization, created in 1947 and headquartered in
Geneva (Switzerland), devoted to the promotion of freer trade through
multilateral trade negotiations ( J))Jo i ) 1 ossN|

6 Basic principles
s Nondiscriminationi this principle refers to the unconditional
, acceptance ofthe most-favored-nation principle
) - Dj 1. The only exceptions to this principle are made in cases of
economic integration, such as customs unions, and in thee
trade between a nation and its former colonies and
dominions

Elimination of nontarifftradebarriers (such as quotas except for

agricultural products and for nations in balance-of-payments
difficulties

Consultation among nations in solvingtrade disputes within the

GATT framework

4
 slslpLS L l N i J L sl,,b 1993,
li,L 123
Economics of International Trade

as(12) The Uruguay Round:

I n December 1993, the Uruguay Round, the cighth and most ambitious
round of multilateral trade negotiations in history, in which 123
countries participaled, was completed after seven years of tortuous
negotiations

Aims of the Uruguay Round: ILallan Lu,i lori

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 u d GAAT s l t l l l |
Ensure more timely decision and compliance with GATT rulings
on dispute settlements G! s)TLaLS ai u i

Provisions ofthe UruguayRound:

l a z l Tariffs tariffs on industrial products to be cut from an average of
4.7% to an average of 3%. Tariffs removed on pharmaceuticals,
constructions equipment, medical equipment, paper products, and
steel
O Ouotasi quotas on agricultural products were to be replaced with
less restrictive tariffs by 1999
GL Antidumping: tougher and quicker resolution of disputes resulting
from antidumping laws, but not a ban on their use.
o JA: Asibsidies: the volume of subsidized agricultural products was to
2Je) he reduced by 21 percent, with government subsidies tor
Ly J ) industrial research limited to S0% of the applied research cost )
s u r s i Safeguardst countries barred from implementing health and safety )
standards that are not based on scientific research l a a E a
) aa) Intellectual property twenty-year protection of patents,
trademarks, and copyrights
Ob)Services United States failed to gain access to markets in Japan,
Korea and many developing nations for banks and security firms
 Economics of International Trade

c ysi) °Other Industry Provisions!United States and Europe agreed to

li ass l i talks on limiting government subsidies to civil aircraft makers,
s opening up distance telephone market, and limniting Furopean 3w n
p s , oils steel subsidies
alio,l Trade-Related Investment Measures phased outrequirement that
aforeign investors buy supplies locally or export as much as they
import
L is,
"World Trade Organization (WTO)¥ established the WTO in place
of the GATT Secretariat, with authority in industrial and
agricultural products and services

XX13) 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
Tendency for world to divide into three major trade blocs:
European Union (EU)
North American Free Trade Area (NAFTA)
Asian Bloc
d Call by developed nations for labor and environmental standards,
some
to ensure leveling of
working conditions" and avoid "social dumping