International Economics: Nontariff Trade Barriers and New Protectionism

FACULTY OF ECONOMICS
Kardan University
International Economics
Chapter 07: Nontariff Trade Barriers and New Protectionism
Book by: Dominick Salvatore
John Wiley & Sons, Inc.
Ahsanullah Mohsen M.Sc.
a.mohsen@Kardan.edu.af
Ahsanullah.Mohsen@rub.de
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Kardan.edu.af
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.
2
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.
3
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
4
Import Quotas
• 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.
• Monopoly profits lead firms to lobby for licenses in rent-
seeking activities.
• Thus, import quotas replace market mechanism , resulting in
waste, and possible corruption.
5
Import Quotas
• 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.
6
Import Quotas
• Since import quotas are more restrictive than equivalent import tariffs,
society should resist domestic producers’ efforts to use quotas instead of
tariffs.
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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.
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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.
9

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.
10

• Dumping Protectionism
• 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.
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.
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.
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• Export Subsidies Protectionism
• 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 (hidden) form.
• Example: Export-Import Bank
• U.S. government agency that extends subsidized loans to foreigners to finance U.S.
exports.
12
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.
13

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.
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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.
15

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.
16

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.
17
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.
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Who Gets Protected?

• Consumers lose, Producers Win
• Producers lobby for protection
• Labor intensive industry has large number of unskilled labor,
for which it is difficult to find job
• More organized industries more likely to get protected, few
firms
• Geographically decentralized industries with large number of
labors are protected due to huge voting power
• Industries competing with developing countries are
protected more because competitors have less economic
and political power
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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.
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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.
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Major Provisions of Uruguay Accord (agreement):
• 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
22

Major Provisions of Uruguay Accord:
• 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 (banded) from implementing health and safety standards that
are not based on scientific research.
• Temporary tariffs allowed to protect domestic industries from temporary imports
surges (rush).
23

• 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.
24

• 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.
25

• Trade-Related Investment Measures
• Phased out requirement that foreign investors buy supplies locally
or export as much as they import.
26

• 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.
27

• 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.
28

• 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”
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• 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.
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• 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.
31
Thanks
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FACULTY OF ECONOMICS

Other Nontariff Barriers and the New

Other Nontariff Barriers and the New

Other Nontariff Barriers and the New

Other Nontariff Barriers and the New

Other Nontariff Barriers and the New

The Political Economy of Protectionism

The Political Economy of Protectionism

The Political Economy of Protectionism

The Political Economy of Protectionism

The Political Economy of Protectionism

Strategic Trade and Industrial Policies

• According to the strategic trade policy argument, a

Who Gets Protected?

The Uruguay Round, Outstanding Trade

• The Uruguay Round

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

• High subsidies and tariffs on agricultural products,

The Uruguay Round, Outstanding Trade

• Outstanding Trade Problems

• Call by some developed nations for labor and

The Uruguay Round, Outstanding Trade

The Uruguay Round, Outstanding Trade

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