An Introduction to
International Economics
Chapter 6: Nontariff Barriers and the
Political Economy of Protectionism
Dominick Salvatore
John Wiley & Sons, Inc.
Dale R. DeBoer
University of Colorado, Colorado Springs
6-1
Nontariff barriers to trade
• The previous chapter explored the effect of
tariffs as barriers to international trade.
• This chapter extends this discussion by
considering the effects of barriers to trade
other than the tariff such as:
–
–
–
–
–
Quotas
Voluntary export restraints (VERs)
Regulations
Export subsidies
Dumping
Dale R. DeBoer
University of Colorado, Colorado Springs
6-2
Nontariff barriers to trade
• The previous chapter explored the effect of tariffs
as barriers to international trade.
• This chapter extends this discussion by
considering the effects of barriers to trade other
than the tariff such as:
• The growth of these nontariff barriers is
important as they have grown in use in recent
years and their effects are typically not as
transparent as with a tariff.
– This increases the opportunity for hidden
protectionism.
Dale R. DeBoer
University of Colorado, Colorado Springs
6-3
Quotas
• A quota is a numerical
limit on the number of
allowed imports.
• Using the example from
tariffs, a quota that
reduces imports to the
same numerical amount
as an equivalent tariff
changes the market in a
similar way to the tariff.
120
110
100
Supply
90
80
70
60
50
40
Quota
price
30
20
Quota
10
Demand
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
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20 30 40 50
60 70 80 90 100 110 120
6-4
Quotas
• Initial effects of a quota
– The equilibrium price
under a quota (the quota
price) will be the same as
the price with an
equivalent tariff.
120
110
100
Supply
90
80
70
60
50
40
Quota
price
30
20
Quota
10
Demand
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
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20 30 40 50
60 70 80 90 100 110 120
6-5
Quotas
• Initial effects of a quota
– The equilibrium price
under a quota (the quota
price) will be the same as
the price with an
equivalent tariff.
– The level of production
will be the same as with
a tariff.
120
110
100
Supply
90
80
Production
70
60
50
40
Quota
price
30
20
Quota
10
Demand
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
10
20 30 40 50
60 70 80 90 100 110 120
6-6
Quotas
• Initial effects of a quota
– The equilibrium price
under a quota (the quota
price) will be the same as
the price with an
equivalent tariff.
– The level of production will
be the same as with a
tariff.
– The level of domestic
consumption will be the
same as with a tariff.
120
110
100
Supply
90
80
70
Consumption
60
50
40
Quota
price
30
20
Quota
10
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
Demand
10
20 30 40 50
60 70 80 90 100 110 120
6-7
Quotas
• Initial effects of a quota
– The level of production will
be the same as with a
tariff.
– The level of domestic
consumption will be the
same as with a tariff.
– The allocation of the
quota rents depends on
how the government
allocates the licenses to
import the product.
120
110
100
Supply
90
Quota rent
80
70
60
50
40
Quota
price
30
20
Quota
10
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
Demand
10
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60 70 80 90 100 110 120
6-8
Quotas
• Initial effects of a quota
– The level of domestic
consumption will be the
same as with a tariff.
– The allocation of the quota
rents depends on how the
government allocates the
licenses to import the
product.
– The same regions of
deadweight loss exist.
120
110
100
Supply
90
Deadweight
loss
80
70
60
50
40
Quota
price
30
20
Quota
10
Demand
0
0
Dale R. DeBoer
University of Colorado, Colorado Springs
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20 30 40 50
60 70 80 90 100 110 120
6-9
Concerns about quotas
• The initial effects of a tariff and a quota are
similar.
• The effect of market changes
– Changes in domestic supply or demand alter
imports with a tariff.
– Since imports are fixed with a quota, the quantity
of imports does not change with market changes.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 10
Concerns about quotas
• The initial effects of a tariff and a quota are
similar.
• The effect of market changes
• The effect of imperfect competition
– By introducing a numerical limit on imports,
quotas limit the competition faced by domestic
producers.
– This better allows domestic producers to exploit
their monopoly power.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 11
Concerns about quotas
• The initial effects of a tariff and a quota are
similar.
• The effect of market changes
• The effect of imperfect competition
• The allocation of the quota rents is ambiguous
– If the government auctions off the licenses, it
should capture the quota rent.
– If the allocation of the quota rent is arbitrary, it is
possible that a portion of the quota rent will be
lost to the society.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 12
Voluntary export restraints
• A voluntary export restraint exists when the
exporting nation voluntarily restricts its
exports to a numerical limit.
– Generally, this action is taken to reduce the
likelihood of the importing country imposing
some other form of barrier to trade.
– The welfare effects are similar to quotas but with
the quota rent going to the foreign producer.
– In 1981, Japan and the US agreed to a VER of 1.68
million automobiles to be imported annually by
the US from Japan.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 13
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
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 14
International cartels
• An international cartel may form to limit sales
– For example, OPEC (the Organization of
Petroleum Exporting Countries) acts to limit
exports of petroleum.
– The Energy Information Administration provides a
good summary of current activities of OPEC
• WWW link
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 15
Dumping
• Dumping exists when (1) the sales price in the
importing country is lower than the sales price
in the exporting country or (2) the sales price
in the importing country is below the costs of
production.
• Types of dumping
– Persistent
– Sporadic
– Predatory
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 16
Dumping
• Dumping exists when (1) the sales price in the
importing country is lower than the sales price in
the exporting country or (2) the sales price in the
importing country is below the costs of production.
• Types of dumping
• Countervailing duty
– US international trade law allows for the
imposition of a tariff (known as a countervailing
duty) just sufficient raise the domestic price to
either the foreign price or the average costs of
production.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 17
Arguments for protectionism
• Fallacious argument 1 – “Trade restrictions
are needed to protect domestic labor against
cheap foreign labor.”
– The cost of labor is only partially determined by
wages.
– Greater productivity may more than offset the
advantages offered by low foreign wages.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 18
Arguments for protectionism
• Fallacious argument 1 – “Trade restrictions are
needed to protect domestic labor against cheap
foreign labor.”
• Fallacious argument 2 – “Scientific tariffs are
needed so that domestic producers can
compete.”
– A scientific tariff raises the price of imports to the
domestic price.
– This does increase domestic production but it
also eliminates imports.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 19
Arguments for protectionism
• Questionable argument 1 – “Trade restrictions
are needed to reduce domestic
unemployment.”
– Trade restrictions may reduce imports and lead to
an expansion in the economy which will lower
unemployment in the short-run.
– This conclusion hinges on there being no
retaliation by foreign nations.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 20
Arguments for protectionism
• Questionable argument 1 – “Trade restrictions are
needed to reduce domestic unemployment.”
• Questionable argument 2 – “ Trade
restrictions are needed to cure a balance of
payments deficit.”
– As with the previous argument, trade restrictions
may have this effect but the conclusion hinges on
a lack of retaliation by other countries.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 21
Arguments for protectionism
• A qualified argument – “Infant industries need
to be protected so that they can become
established industries.”
– A new industry likely does not have the skills and
experience to be a successful competitor in the
international market place.
– To gain these skills the firm must be protected
from competition for a limited period of time.
– Qualifications
• The protection must be of limited duration.
• A production subsidy is the lowest cost tool for
achieving this end.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 22
Strategic trade policy
• Oligopolistic markets subject to external
economies may benefit from government
intervention.
– Examples
• Semi-conductors
• Aircraft production
– The dispute between Boeing and Airbus taken to the WTO in
2004 is an example of such policy.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 23
Strategic trade policy
• Oligopolistic markets subject to external
economies may benefit from government
intervention.
• Concerns
– Which industries does the argument apply to?
– Can the government pick winners?
– Retaliation in other markets may eliminate any
gains.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 24
The history of US commercial policy
• 1930 – Smoot-Hawley Tariff Act
– Raised average import duties to 59 percent by
1932
– Spurred international retaliation
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 25
The history of US commercial policy
• 1930 – Smoot-Hawley Tariff Act
• 1934 – Trade Agreements Act
– Authorized the president to negotiate mutual tariff
reductions by as much as 50 percent
– 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.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 26
The history of US commercial policy
• 1930 – Smoot-Hawley Tariff Act
• 1934 – Trade Agreements Act
• 1947 – The General Agreement on Tariffs and
Trade (GATT)
– The U.S. joined the newly formed GATT.
– GATT is designed to promote expanded
international trade through multilateral
negotiations.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 27
The history of US commercial policy
• 1930 – Smoot-Hawley Tariff Act
• 1934 – Trade Agreements Act
• 1947 – The General Agreement on Tariffs and
Trade (GATT)
• 1950s – Movements away from free trade
– Peril-point provisions
– Escape clause
– National security clause
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 28
The history of US commercial policy
• 1947 – The General Agreement on Tariffs and
Trade (GATT)
• 1950s – Movements away from free trade
• 1962 – Trade Promotion Act
– Authorized the president to negotiate across the
board tariff reductions of up to 50 percent.
– Introduced Trade Adjustment Assistance (TAA) to
workers displaced by international trade.
– Allowed the passage of the Kennedy Round
negotiation of the GATT.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 29
The history of US commercial policy
• 1947 – The General Agreement on Tariffs and
Trade (GATT)
• 1950s – Movements away from free trade
• 1962 – Trade Promotion Act
• 1974 – Trade Reform Act
– Authorized the president to negotiate tariff
reductions of up to 60 percent and the elimination
of tariffs below 5 percent.
– Contributed to passage of the Tokyo Round
negotiations of the GATT.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 30
The history of US commercial policy
•
•
•
•
1950s – Movements away from free trade
1962 – Trade Promotion Act
1974 – Trade Reform Act
1984 – The Trade and Tariff Act
– Authorized the president to negotiate international
agreements for the protection of intellectual
property rights.
– Extended the system by which developing nation
exports are granted preferential access to US
markets.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 31
The history of US commercial policy
•
•
•
•
•
1950s – Movements away from free trade
1962 – Trade Promotion Act
1974 – Trade Reform Act
1984 – The Trade and Tariff Act
1988 – 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.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 32
The history of US commercial policy
•
•
•
•
•
1962 – Trade Promotion Act
1974 – Trade Reform Act
1984 – The Trade and Tariff Act
1988 – Omnibus Trade and Competitiveness Act
1993 – The Uruguay Round
– The Uruguay Round of negotiations of the GATT
was completed in December 1993.
– Given the wide ranging implications of this round
of negotiations, it will be considered in detail.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 33
The Uruguay Round
• Eighth round of negotiations for the GATT
• 123 nations participated in the negotiations
• The agreement took effect on July 1, 1995
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 34
Provisions of the Uruguay Round
• Tariffs
– Tariffs on industrial products falls from an
average of 4.7 percent to an average of 3 percent.
– The share of good with zero tariffs increases from
20-22 percent to 40-45 percent.
– Tariffs removed on pharmaceuticals,
constructions equipment, medical equipment,
paper products, and steel.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 35
Provisions of the Uruguay Round
• Tariffs
• 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
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 36
Provisions of the Uruguay Round
• Tariffs
• Quotas
• Antidumping
– The use of countervailing duties is not eliminated
but a new dispute resolution mechanisms are put
in place.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 37
Provisions of the Uruguay Round
•
•
•
•
Tariffs
Quotas
Antidumping
Subsidies
– The volume of subsidized agricultural products
was to be reduced by 21 percent by 1999.
– Government subsidies for industrial research
were limited to 50 percent of the applied research
cost.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 38
Provisions of the Uruguay Round
•
•
•
•
Quotas
Antidumping
Subsidies
Safeguards
– Countries are barred from implementing health
and safety standards that are not based on
scientific research.
– Temporary tariffs are allowed to protect domestic
industries from temporary imports surges.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 39
Provisions of the Uruguay Round
•
•
•
•
•
Quotas
Antidumping
Subsidies
Safeguards
Intellectual property
– The agreement calls for 20 year protection of
patents, trademarks, and copyrights.
– A 10 year phase-in period is allowed for patents
over pharmaceuticals in developing countries.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 40
Provisions of the Uruguay Round
•
•
•
•
•
•
Quotas
Antidumping
Subsidies
Safeguards
Intellectual property
Services
– Banking and security markets in Japan and South
Korea were opened to U.S. firms.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 41
Provisions of the Uruguay Round
•
•
•
•
•
•
Antidumping
Subsidies
Safeguards
Intellectual property
Services
Trade related investment measures
– Phases out the requirement that foreign investors
buy supplies locally or export as much as they
import
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 42
Provisions of the Uruguay Round
•
•
•
•
•
Safeguards
Intellectual property
Services
Trade related investment measures
World Trade Organization
– Established the World Trade Organization in place
of the GATT Secretariat.
– Allows for more expeditious resolution trade
disputes
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 43
Continued history of US commercial
policy
•
•
•
•
•
1974 – Trade Reform Act
1984 – The Trade and Tariff Act
1988 – Omnibus Trade and Competitiveness Act
1993 – The Uruguay Round
2002 – Trade promotion authority granted
President Bush
– Allows the president to negotiate trade
agreements that may not be amended by
Congress, only ratified or rejected.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 44
Continued history of US commercial
policy
•
•
•
•
•
1974 – Trade Reform Act
1984 – The Trade and Tariff Act
1988 – Omnibus Trade and Competitiveness Act
1993 – The Uruguay Round
2002 – Trade promotion authority granted
President Bush
• On-going – Doha round negotiations
– The current round of negotiations for extending
the GATT is currently on-going.
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 45
Issues confronting the Doha round
• Existing on-going trade disputes
–
–
–
–
U.S. tax breaks on income earned from exports
Subsidies to aircraft makers (Boeing and Airbus)
EU bans on genetically modified food
The use of anti-dumping regulations
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 46
Issues confronting the Doha round
• Existing on-going trade disputes
• Developed world agricultural policies
– Tariffs and subsidies on agricultural products
make developing world entry into these markets
difficult
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 47
Issues confronting the Doha round
• Existing on-going trade disputes
• Developed world agricultural policies
• The development of regional trade groups that
undermine efforts of global trade expansion
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 48
Issues confronting the Doha round
• Existing on-going trade disputes
• Developed world agricultural policies
• The development of regional trade groups that
undermine efforts of global trade expansion
• Calls for uniform labor and environmental
standards
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 49
Issues confronting the Doha round
• Existing on-going trade disputes
• Developed world agricultural policies
• The development of regional trade groups that
undermine efforts of global trade expansion
• Calls for uniform labor and environmental
standards
• Expansion of the GATT into issues related to
investment
– Elimination of local content rules
Dale R. DeBoer
University of Colorado, Colorado Springs
6 - 50