International Economics: Nontariff Trade Barriers and New Protectionism

CHAPTER N I N E
9 International Economics
Tenth Edition
Nontariff Trade Barriers and New

Protectionism
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
In this chapter:
9.1. Introduction
9.2. Import Quotas
9.3. Other Nontariff Barriers and the New Pro-
tectionism
9.4. The Political Economy of Protectionism
9.5. Strategic Trade and Industrial Policies
9.6. History of U.S. Commercial Policy
9.7. The Uruguay Round, Outstanding Trade
Problems and the Doha Round
9.1. 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 bar-
riers was greatly increased.
 Nontariff barriers (NTBs): trade barriers other
than tariffs such as import quotas, voluntary ex-
port restraints (VERs), anti-dumping duties, ex-
port subsidies, technical, administrative and
other regulations, etc
9.2. 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.
9.2. 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.
9.2. Import Quotas

 Import quota involves distribution of import
licenses, while tariff does not.
 If not auctioned by government in competitive mar-
kets, receiving firms will reap monopoly profits.
 Allocation decision often based on arbitrary judg-
ments rather than efficiency concerns.
 Monopoly profits lead firms to lobby for licenses in
rent-seeking activities.
 Thus, import quotas replace market mechanism , re-
sulting in waste, and possible corruption.
9.2. Import Quotas

 Import quota limits imports to specified levels
with certainty, while the trade effect of an im-
port tariff may be uncertain.
 When elasticity of demand and supply are not
known, it is difficult to estimate the import tariff re-
quired 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 pro-
ducers prefer them over tariffs.
9.2. Import Quotas

 Since import quotas are more restrictive than
equivalent import tariffs, society should resist
domestic producers’ efforts to use quotas in-
stead of tariffs.
9.2. Import Quotas
 With tariff, the government will receive tax

revenue, but in the case of quota, revenue
goes to the licensed firms unless licenses
are auctioned off in a competitive market.
tectionism
 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 quo-
tas because exporters tend to fill the quota with
higher quality, higher priced goods over time.
tectionism
 Technical, Administrative, Other Regulations

 Health and safety regulations may serve as barriers
to international trade by raising the costs of im-
ported 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.
tectionism
 International Cartels
 Organization of suppliers from different na-
tions 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 Pe-
troleum Exporting Countries) quadrupled the
price of crude oil between 1973 and 1974 by
restricting production and exports.
tectionism
 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.
tectionism
 Dumping
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.
tectionism
 Dumping
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 re-
ducing domestic prices.
tectionism
 Export Subsidies
 The granting of tax relief to exporters or sub-
sidized 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.
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 na-
tion specializing in labor-intensive commodi-
ties.
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 “scien-
tific” tariffs.
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 pro-
tection because they come at the expense of other
nations.
 Other nations retaliate; all nations lose in the end.
A Qualified Argument for Protection

 Infant-industry Argument
 Temporary trade protection is justified to establish
and protect a domestic industry during its “in-
fancy” until it can meet foreign competition,
achieve economies of scale, and reflect the na-
tion’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.
A Qualified Argument for Protection

 Infant-industry Argument
 Requires several qualifications which, to-
gether, 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.
 According to the strategic trade policy argu-

ment, a nation can create a comparative advan-
tage in industries deemed crucial to future
growth in the nation.
 Nation may use temporary trade protection, sub-
sidies, tax benefits and cooperative government-
industry programs.
 Similar to infant-industry argument in develop-
ing nations.
 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.
9.6. History of U.S. Commercial Policy (skip)
 1930 – Smoot-Hawley Tariff Act

 Raised average import duties to 59% by 1932.
 Spurred international retaliation
History of U.S. Commercial Policy
 1934 – Trade Agreements Act

 Authorized the president to negotiate mutual
tariff reductions by as much as 5%.
 Reductions were based on the principle of
most favored nation.
 The most favored nation principle extends to all
trading partners any reciprocal tariff reduction
negotiated with any trading partner.
 For example, a negotiated reduction with Canada
would extend to Mexico if it had most favored
nation status.
 1947 – The General Agreement on Tariffs

and Trade (GATT)
 Designed to promote expanded international
trade through multilateral negotiations.
 GATT rested on three basic principles:
1. Nondiscrimination
2. Elimination of nontariff barriers
3. Consultation among nations in solving trade
disputes
 1950s – Movements away from free trade

1. Peril-point provisions prevented the president
from negotiating tariff reductions that would
seriously damage a domestic industry.
2. Escape clause allowed any domestic industry
claiming injury from imports to petition for tariff
reduction.
3. National security clause prevented tariff
reductions when they would hurt industries
important for national defense.
 1962 – Trade Expansion Act

 Authorized the president to negotiate across
the board tariff reductions of up to 50%.
 Introduced Trade Adjustment Assistance
(TAA) to workers displaced by international
trade.
 Allowed the passage of the Kennedy Round
negotiation of the GATT.
 1974 – Trade Reform Act

 Authorized the president to negotiate tariff
reductions of up to 60% and the elimination of
tariffs below 5%.
 Contributed to passage of the Tokyo Round
negotiations of the GATT.
 1984 – The Trade and Tariff Act

 Authorized the president to negotiate
international agreements for the protection of
intellectual property rights.
 Extended the Generalized System of Preferences
(GSP), a system by which developing nation
exports are granted preferential access to US
markets.
 Provided authority for negotiations leading to
free trade with Israel.
 1988 – The Omnibus Trade and

Competitiveness Act
 Required the U.S. Special Trade Representative
to set a rigorous schedule for negotiating
reductions in trade barriers with countries
maintaining high barriers to U.S. exports.
FIGURE 9-3 U.S. Average Tariff Rates on Dutiable Imports,
1900-2000.
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 Eu-
ropean Union, on reducing agricultural subsi-
dies, 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 invest-
ments into negotiations.
 Negotiate international rules for protection of in-
tellectual 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, construc-
tions equipment, medical equipment, paper
products, and steel.

 Quotas
 Quotas on agricultural products were to be re-
placed 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 re-
sulting 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 govern-
ment 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 in-
dustries from temporary imports surges.

 Intellectual property
 Twenty-year protection of patents, trademarks,
and copyrights.
 A 10 year phase-in period for patents over phar-
maceuticals 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 show-
ing American films and TV programs in Europe.

 Other Industry Provisions
 United States and Europe agreed to talks on lim-
iting government subsidies to civil aircraft mak-
ers, 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 Secre-
tariat, with authority in industrial and agricul-
tural products and services.
 Trade disputes to be settled by vote of two-thirds
or three-quarters of nations rather than unani-
mously.
 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”
 Social dumping is a practice involving the export of a good
from a country with weak or poorly enforced labour stan-
dards, where the exporter’s costs are artificially lower than
its competitors in countries with higher standards, hence
representing an unfair advantage in international trade.
 Doha Round
 Launched in November, 2001, in Doha, Qatar.
 Agenda included:
 Further liberalization of production and trade
in agriculture, industrial products, and ser-

vices.
 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 de-
liver on promises.
 Developing nations insisted on making Doha Round
a true “development round”.
 Intended to conclude by end of 2004, all but col-
lapsed in 2006 over disagreements over agricultural
subsidies between developed and developing na-
tions.
 As of beginning of 2009, still not concluded.

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CHAPTER N I N E

Nontariff Trade Barriers and New

 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 Tariff

 Import Quota vs. Equivalent Import Tariff

 Import Quota vs. Equivalent Import Tariff

 With tariff, the government will receive tax

 Voluntary Export Restraints (VERs)

 Technical, Administrative, Other Regulations

Fallacious Arguments for Protection

Fallacious Arguments for Protection

Questionable Arguments for Protection

A Qualified Argument for Protection

A Qualified Argument for Protection

 According to the strategic trade policy argu-

 1930 – Smoot-Hawley Tariff Act

 1934 – Trade Agreements Act

 1947 – The General Agreement on Tariffs

 1950s – Movements away from free trade

 1962 – Trade Expansion Act

 1974 – Trade Reform Act

 1984 – The Trade and Tariff Act

 1988 – The Omnibus Trade and

 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

 Outstanding Trade Problems

 High subsidies and tariffs on agricultural

 Outstanding Trade Problems

 North American Free Trade Area (NAFTA)

 Call by some developed nations for labor and environmental

in agriculture, industrial products, and ser-

investment and competition policies.

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