Economics 340: International Economics
Andrew T. Hill
Nontariff Barriers to Trade
& Textbook Readings: Pugel & Lindert, International Economics, 11th Edition, pp. 139-162.
10th Edition, pp. 133-153.
: Textbook Web Site: Key Graph 3 at http://www.mhhe.com/economics/pugel
The General Agreement on Tariffs and Trade (GATT) made tremendous strides to reduce the
overall levels of tariffs in the United States and around the world. Since GATT members had
multilaterally agreed to eliminate many tariffs, these countries came up with more innovative
ways to reduce imports and protect domestic industries. These innovative measures are called
nontariff barriers (NTB’s). It is important to note that there are many different types of NTB’s.
Any measure that reduces imports and leaves domestic producers unaffected is an NTB. A tax
on leather goods would reduce imports, but it would also reduce consumption of domestically
produced leather coats, shoes, belts, etc. Therefore, such a tax on leather goods would not be an
NTB.
There are a great number of nontariff barriers to trade that were not immediately intended to
reduce imports and provide protection to domestic producer.
Examples:
1.
2.
3.
4.
5.
6.
American auto safety and emissions regulations enacted in the 1970’s
Japanese standards and U.S. baseball bats, European skis, and Canadian lumber
French VCR regulations on importation of Japanese VCRs.
Japanese restrictions on leather goods.
Government procurement.
Ontario’s tax on beer sold in cans.
More directly, an import quota places a physical limit on the quantity of a good that may be
imported during a specific time period. Agricultural products and textiles were global
industries that were heavily regulated by quotas. The Uruguay Round of GATT forced the
conversion of the agricultural quotas back into tariffs and phased out the quotas on apparel and
textiles. (Why would GATT want to try to get countries to change quotas into tariffs when the
original reason for GATT in the 1940’s was to reduce tariffs? WE SHALL SEE!)
Table 20: Examples of U.S. Import Quotas (prior to the complete of the Uruguay Round)
Import Article
Wheat (Canada)
Swiss cheese (EU)
Milk and cream (N.Z.)
Animal feeds (Ireland)
Chocolate (U.K.)
Cheddar cheese (Australia)
Ice cream (Belgium)
Quota Q (per year)
21.6 million kg
20.5 million kg
5.7 million L
5.4 million kg
3.3 million kg
1.2 million kg
0.9 million kg
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Import quotas could be assigned in two general ways:
1.
Global quota - specifies a set amount allowed to be imported in a given year but
does not specify from where. There are some problems with this
method of assigning the quota:
2.
Selective quota - specifies amount allowed to be imported in a given year and
tells where that amount can come from.
● Import Quota Graphically
Unlike tariffs, we will only consider the small-country case when looking at the import
quota. Differences between the small-country and large-country import quota cases are
similar to those differences we saw when considering tariffs.
The key to imposing the import quota is to shift the domestic supply curve to the right
by the amount of the quota. Why? Because total supply from domestic and foreign
producers will be the quantity produced domestically plus the amount that is allowed
to be imported under the quota regime.
P
SNZ
Market for widgets in New Zealand
P*=price in autarky
Pw=free trade price
a
Q*=equilibrium Q in autarky
Qs=Q supplied domestically with
b
c
d
free trade
Qd=Q demanded domestically
e f
g
h
i
j
DNZ
Q
with free trade
QsQd=imports with free trade
Qs’=Q supplied domestically with
import quota in place
Qd’=Q demanded domestically
with import quota in place
Qs’Qd’=imports with quota in place
Sw=world supply curve
SNZ=domestic supply curve
SNZ+Q=domestic supply curve +
quota
PQ=price after the VER is imposed
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Table 21: Welfare Effects of an Import Quota in a Small-Country
Group
Autarky
Free Trade
Quota
Net
Consumers
____________
____________
____________
____________
Producers
____________
____________
____________
____________
New Zealand
As a Whole
____________
____________
____________
____________
As with the tariff cases we studied before, there are a number of specific effects
stemming from the imposition of the quota in the market for widgets in New Zealand.
The redistributive effect is the economic welfare transferred from consumer surplus to
producer surplus as a result of the quota. The protective or production effect of the
quota is the welfare loss associated with increased production of the good in the relatively inefficient domestic market. The consumption effect is the welfare loss associated
with consumers purchasing less at a higher price. Let’s identify these areas on the graph
above. The production (protection) effect combined with the consumption effect are
called deadweight losses.
The redistributive effect is the area __________.
The productive (protective) effect is the area __________.
The consumption effect is the area __________.
The revenue effect of the quota is the amount of the import quota times the amount by
which the price is increased in the country as a result of the import quota’s imposition.
The revenue effect of the quota is the area __________.
The big question is where does the revenue effect go? To whom does this economic
welfare accrue? There are three distinct places that the revenue effect can go depending
on the conditions that prevail when the quota is put in place.
1.
Import companies might bargain favorably with the foreign producers and
purchase the good at the prevailing world price. In this case, the importing
companies would obtain the revenue effect as additional profits. I call these
importing companies “domestic middlemen”. In this case, the economic welfare
represented by the revenue effect would remain in the United States
Example: Walmart purchases sweaters from Venezuelan producers. There is a
U.S. import quota on sweaters from Venezuela. Walmart purchases the
sweaters at the prevailing world price from Venezuela, but sells the
sweaters in their stores in the United States at the higher PQ price.
2.
Foreign producers might organize as sellers and drive up the delivered price of
the good. Therefore, the foreign producers would capture the revenue effect for
themselves. In this case, the revenue effect would be economic welfare that would
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leave the home country and would be added to the deadweight losses to get the
total net loss from the quota.
3.
The domestic government might auction off import licenses to the highest
bidders thereby recouping the quota revenue as government revenue. In this case,
the import quota and the tariff would be very similar in their welfare effects. How
would the import license auction take place and why would the sale of the import
licenses guarantee the recouping of the revenue of the import quota given a perfectly competitive auction?
● Import Quotas Versus Tariffs
In order for an import quota and tariff to be called equivalent, they must have the same
effect on imports and on the prevailing market price. So, an import quota and a tariff that
reduce imports by the same amount and raise the prevailing domestic price by the same
amount are called equivalent.
P
SNZ
P
SNZ
SNZ+Q
a
a
b
c
e f
g
h
Sw+t
i
d
j
Sw
DNZ
b
c
e f
g
h
i
j
d
DNZ
Q
Tariff
Sw
Q
Import Quota
The tariff and the import quota illustrated immediately above are equivalent because
they reduce imports by the same amount from __________ to __________. They also raise
price by the same amount. The consumption effect, redistributive effect, production
(protective) effect, and revenue effect are the same under the tariff as in the case of the
import quota.
However, there is more to the comparison of the tariff and the import quota than just this
static comparison. Over time, we would expect that there may be significant increases in
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demand for the good in question. What effect does an increase in demand have in each
case?
P
SNZ
P
SNZ
SNZ+Q
a
a
b
c
e f
g
h
Sw+t
i
j
d
Sw
DNZ
b
c
e f
g
h
i
j
d
Sw
DNZ
Q
Q
Import Quota
Tariff
An equivalent increase in demand has been illustrated with the dashed line in each
graph. Now, let’s illustrate the consumption effect, production (protection) effect,
revenue effect, and redistributive effect after the increase in demand.
Legend
Consumption effect
Production (Protective) effect
Redistributive effect
Revenue effect
Let us now compare the graphs immediately above with those on the previous page. As
a result of the increase in demand, show the changes (or lack thereof) in the prevailing
domestic price, level of imports, size of the deadweight losses (DWLs), and the size of
the revenue effect.
Tariff
Import Quota
P
P
DWLs
DWLs
Revenue Effect
Revenue Effect
Imports
Imports
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From this analysis, we can conclude that the import quota is more restrictive than the
tariff since the import quota will result in an increase in the domestic price, an increase
in DWLs, an increase in the revenue effect, and leave imports unchanged in response to
an increase in demand. Under the tariff regime, the price and DWLs will remain
unchanged while imports will increase. So, the import quota restricts imports more and
provides a greater level of protection to the domestic firms. The import quota’s effects
are more damaging to domestic and world economic welfare since demand increases
will result in larger losses with the quota than with the tariff. So, given increases in
demand over time, the effective rate of protection provided by the import quota will
increase over time.
● Voluntary Export Restraint
In the 1980’s, another form of nontariff barrier to trade that emerged was the voluntary
export restraint (VER). The voluntary export restraint is an agreement between the
exporting country and the importing country whereby the exporting country places a
restriction on the quantity of a good that can be exported from the exporting country to
the importing country. The VER looks very similar to the import quota graphically. There
is a fundamental difference that we will investigate.
P
SNZ
Market for widgets in New Zealand
P*=price in autarky
Pw=free trade price
a
Q*=equilibrium Q in autarky
Qs=Q supplied domestically with
b
c
d
free trade
Qd=Q demanded domestically
e f
g
h
i
j
DNZ
Q
with free trade
QsQd=imports with free trade
Qs’=Q supplied domestically with
VER in place
Qd’=Q demanded domestically
with VER in place
Qs’Qd’=imports with VER in place
Sw=world supply curve
SNZ=domestic supply curve
SNZ+Q=domestic supply curve +
VER quantity
PQ=price after the VER is imposed
The redistributive effect, consumption effect, production (protective) effect, and revenue
effect are exactly the same as they were in the import quota case above. However, the
revenue effect in the case of the VER will always accrue to the foreign producers as
increased profit.
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Therefore, while with a properly placed import quota or a tariff, it is possible for the
revenue effect to stay in the domestic economy, in the case of the VER, the revenue effect
will be a loss to the domestic economy. So, while the economic losses associated with the
properly imposed import quota with import licenses or the tariff is only the deadweight
losses, in the case of the VER, the economic losses will be the deadweight losses and the
revenue effect.
The primary reason why a domestic government might be willing to enter into a
voluntary export restraint agreement with the exporting country’s government is for
political reasons. The VER, if an agreement can be reached, can be viewed by the
domestic population as a “victory” by the domestic government in a “trade battle” with
the exporting government. The exporting government will usually be very willing to
negotiate VER’s because such agreements help the exporting country’s producers.
Moreover, VER’s are nontariff barriers which are under the exporting country’s control.
While the domestic government can lift tariffs and import quotas at will, the exporting
country has complete control as to when it will lift the VER. For instance, a VER agreement between the United States and Japan negotiated during the Reagan Administration
has been continued to today not because the U.S. has insisted on it, but rather because
the Japanese have unilaterally decided to extend it since the net effect of the VER for
Japanese producers was so positive.
✍ Predicated Essays for Non-tariff Barriers
1.
Which is a more restrictive trade barrier—an import tariff or an equivalent import quota? HINT: Consider
an increase in demand when answering.
2.
Which tends to result in a greater welfare loss for the home economy: (a) an import quota levied by the
home government or (b) a voluntary export quota imposed by the foreign government?
3.
Given your understanding of the different effects of tariffs and quotas, why has the World Trade
Organization (formerly GATT) attempted to reduce sharply the current reliance on quotas and other
quantitative measures often in favor of tariffs?
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