International Economics

Session 11&12 : Trade Intervention Mechanism

(Non-Tariff Barriers)
Faculty: Prof. Sunitha Raju
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Non-Tariff Barriers (NTBs)

International Economics

1. Definition
 Trade policy instruments, other than tariffs,
that restrict market access or distort trade.
2. Reasons
 To protect industry from competition
 Not amenable to disciplining or reduction
 Can be applied in a discriminatory manner
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Major Categories of Non-Tariff
Measures
International Economics
i) Quantitative restrictions
(Import quotas, export restrictions, Licensing, VER etc.)
ii) Non-tariff charges
(Variable levies, Anti dumping duties, Countervailing duties etc.)
iii) Government participation in trade
(State trading, Govt. procurement, competition policies etc.)
iv) Customs procedures
(Customs valuation, customs classification, customs clearance)

v) Technical barriers to trade

(Health & sanitary regulations, safety standards, labelling etc.)
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Market Effects of Import Quota:
Small Country
International Economics

PY Sd

Quota
E
P1 Y
c e f g C
P0 Y
Dd

O Y1 Y3 Y2 Y0 Y

 Domestic prices higher than world prices

 Quota increases domestic production and reduces domestic

consumption
Quota rents captured by producers
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Administration of Quota
International Economics

1. Auction (Govt. earns revenue)

2. First come first serve (Nobody earns
due to transactions costs))
3. Historical basis (Producer gains)
4. Monopoly power (Importer/producer)
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Market Effects of Import Quota:
Large Country
International Economics

 Fall in consumption (imports) leads to fall in

world price
- Export price of Country B falls
 Deadweight loss of exporting country equals
quota rents of suppliers in importing country
 To reduce the negative welfare effects, countries
employ VER
 VER allows the exporting country to capture
quota rents
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Costs of U.S. Import Quotas,
1990 (Million $)
International Economics
Product Redistribution Quota Rent Production Net Welfare
Category Effect (Area c) Effect (Area f) and Effect on
(Tariff Consumption U.S. (-[Area
Equivalent) Effects (Areas e+f+g])
e+g)
Protected by
import
quotas:
Dairy $ 835 $244 $104 -$104
products (50%)
Peanuts 32 0 22 - 22
(50%)
Sugar (66%) 776 396 185 - 581
Maritime (85%) 1,275 0 556 - 556
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Tariff vs. Quota

International Economics
(a) Import Tariff (b) Import Quota

PY PY
Sd Sd

Sd+w+t

P2 Y
P 1
Y
P0 Y
P 0
Y

Dd’ Dd’

Dd Dd
0 Y1 Y3 Y0 Y2 Y
0 Y1 Y5 Y0 Y4 Y
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Export Quota
International Economics

 Restrictions on the quantum of exports

 Similar effects of an export tax
 Export quota makes goods cheaper in
domestic market
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What are the Effects of an Export
Quota?
International Economics
a) Small-Country Case b) Large-Country Case
PX
PX
S
d
P1 X E P3 X k Sd
Dw
f g h j P1 X M
P2 X g j
L f h Dd+w
P2 X
P0 X
Quota P0 X Quota

Dd +Quota

Dd
Dd
0 X1 X3 X2 X0 X
0 X1 X3 X2 X0 X
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Export Quotas
International Economics

1. Small Country
 decreases domestic production, increases domestic
consumption and reduces domestic prices

2. Large Country
 decreases domestic production, increases domestic
consumption, reduces domestic prices and
increases world prices
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Voluntary Export Restraint

International Economics

(i) Definition
 Bilateral agreement between two countries
wherein the exporting country limits its exports
to the importing country.
 Mainly done to forestall other trade restrictions
(ii) Economic Effects of VER
 Same as import quota for importing country
 VER administered by exporting countries : rents
captured by foreign exporters.
(e.g.: Textiles, Steel, Automobiles)
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Export Subsidies
International Economics

 Payment made to a firm to export

 Economic effects (inverse of a tariff)
 raises prices in the exporting country
 lower prices in importing country
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What are the Effects of an Export Subsidy?

Importing-Country Perspective
International Economics
PY

Sd

POY Sd + W = Sd + W – s + c
e g h s c
P1Y f Sd + W – s

Dd

0
Y3 Y1 Y0 Y2 Y
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What are the Effects of an Export Subsidy?

Exporting-Country Perspective
International Economics
PY

M Sd

H G
POY + S1 DW + S1
S1
POY Dw
R Z C F S2
POY – S2 DW – S2
T V

N
Dd

0
Y3 Y1 Y0 Y2 Y
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Export Subsidies
International Economics

Country Subsidized Products

Brazil Regional aircraft
Canada Softwood lumber, dairy products
China Textiles, steel, petrochemicals,
machinery, copper, corn
European Union Aircraft, aircraft engines
Korea Semiconductor chips, paper
Pakistan Wheat
South Africa Textiles, clothing, autos
Venezuela Coffee, cocoa, fruit, seafood
Source: Data from U.S. Trade Representative, National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C.)
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Effects of Alternative Trade
Policies
International Economics
Tariff Export Import Voluntary
Subsidy Quota Export
Restraint
Producer Increases Increases Increases Increases
surplus
Consumer Falls Falls Falls Falls
surplus
Government Increases Falls No change No change
revenue (government (rents to (rents to
spending license foreigners)
rises) holders)
Overall Ambiguous Falls Ambiguous Falls
national (falls for (falls for
welfare small small
country) country)
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Production Subsidies
International Economics

 Subsidies given to promote a specific industry

 Indirect effect on trade
– Rise in production leads to rise in exports
– If a large exporter, pushes down the world price
– Net loosers are the producers in importing country
and third country exporters.
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What are the Effects of a
Production Subsidy?
International Economics
(a) Small-Country Case PX (b) Large-Country Case
Sd Sd

PX Sd + s
Sd + s POX
POX Dw Dw
P 1

s
s

Dd Exports Dd
Exports

O X1 XO X2 X O X1 X3 XO X2 X
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Dumping
International Economics

i) Price-based Definition
 When a good is sold in the foreign market at a
price below that of the domestic market
ii) Cost-based Definition
 When a good is sold in the foreign market at a
price below the cost of production
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Types of Dumping
International Economics

1. Sporadic Dumping
2. Persistent Dumping
3. Predatory Dumping
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Persistent Dumping as International
Price Discrimination
International Economics
(a) Home Market (b) Export Market
PY PY

PHY •
PE Y •

• MCH • MCE

DH
MR
H
DE
MRE

0 YH Y 0 YE Y
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Other NTBs
International Economics

1) Administrative and Technical standards

2) Domestic content requirements

3) Government Procurement Policies

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New Developments in NTB
Policies
International Economics

1. Tariff Rate Quota

2. SPS and Technical standards

3. Trade Facilitation

4. Rules of Origin
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Quantifying the Effects of NTMs

International Economics
1. Methodological Issues
 Producer behaviour differs under Tariffs and NTMs.
Competitive under Tariffs and as a monopolist under
Quota.

 A tariff and a NTM affecting the same product may or

may not be additive.

 Most NTMs are discriminatory, having differential

effects.

 The linkage between exchange rate and trade flows is

strong. Exchange rate fluctuations can have potential
effects on trade flows. Contd….
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Quantifying the Effects of NTMs

International Economics

2. Measurement
 Inventory Approach (Coverage ratio)

= Value of imports/exports subjected to NTB

Total Imports/Exports
 Modelling Approaches
( Price based econometric models, Quantity based
econometric models, Simulation models)
 Price wedge ( Tariff Equivalence)

 Subsidy Equivalents (PSE)

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Price Gap Method

International Economics
1. Compare the price before and after NTB to
capture the mark-up or rent
2. Price difference to be corrected for non-NTB
factors influencing prices
3. Factors that influence Price gap
 Marginal cost vs. Ex-factory price
 f.o.b and c.i.f
 Price after customs clearing (includes tariff)
 Wholesale price (includes VAT & excise)
 Retail price
4. Challenge is to identify where NTB occurs and
who benefits