International Economics
Li Yumei
Economics & Management School
of Southwest University
International Economics
Chapter 9
Non-tariff Trade Barriers
and the New Protectionism
Organization
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9.1 Introduction
9.2 Import Quotas
9.3 Other Non-tariff Barriers and the New
Protectionism
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 and Outstanding
Trade Problems
Chapter Summary
Exercises
9.1 Introduction

Tariff

Non-tariff
During the past three decades the non-tariff has been
widely used to restrict trade , such as quotas and
New forms of protectionism (Voluntary Export
Restraints, Technical or other Regulations, Cartels,
Dumping, Subsidies)

Protectionism ( Freedom)
Political Economy, Strategic Trade, Industrial Policy
9.2 Import Quotas
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Effects of an Import Quotas
Comparison of an Import Quota to an
Import Tariff
Conclusion
 Effects of an Import Quotas

Import Quotas
Import quotas can be used to protect a domestic industry, to
protect domestic agriculture, and /or for balance of payments
reasons. Import quotas were very common in Western Europe
after World War Ⅱ.

For all industrial nations
To protect agriculture

For developing nations
To stimulate import substitution of manufactured products and
for balance of payments.
 Effects of an Import Quotas
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Partial Equilibrium Effects of an Import Quota
FIGURE 9-1 Partial Equilibrium Effects of an Import Quota.
 Effects of an Import Quotas

Explanation of Figure 9.1

DX and SX represent the demand curve and supply curve of
commodity X;
With free trade, the world price of PX=$1, the nation
consumes 70X (domestically produced 10X, imported 60X);
With an import quota of 30X, it leads to the domestic price
of X to $2, the nation consumption is decreased to 50X
(domestically produced 20X, imported 30X);
With the increased DX to D’X, the given import quota of 30X,
it results in the domestic price of X rising to PX=$2.5, the
nation consumes 55 X (domestic supply 25X, imported 30X)

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 Effects of an Import Quotas
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Conclusion of Figure 9.1

The import quotas lead to the increase of the domestic
supply, the decrease of the domestic consumption and the
rising of the imported commodity price ;

With the increased domestic demand, the given import
quota must lead to the domestic rising further while the
imported amount of commodities can not be increased with
the increased domestic demand.
 Comparison of an Import Quota to an
Import Tariff
There are three differences between an import quota
and an import tariff:

With a given import quota, an increase in
demand will result in a higher domestic price and
greater domestic production than with an
equivalent import tariff. With a given import tariff,
an increase in demand will leave the domestic
price and domestic production unchanged but
will result in higher consumption and imports
than with an equivalent import quota (see figure
9.1 point K)
 Comparison of an Import Quota to an
Import Tariff

The quota involves the distribution of import
license (three situations)
If the government can auction off import licenses to the
highest bidder in a competitive market, the revenue effect
will go to the government;

If the importers have strong bargaining power to obtain the
imported goods with the lower price and then sell them at
higher price, the revenue effect will go to the importers;

If the exporters have strong bargaining power to sell the
goods at higher price and then the revenue effect will go to
the exporters;
Government distributes the import license may lead to so-called
rent-seeking activities or the corruption.

 Comparison of an Import Quota to an
Import Tariff

An Import quota limits imports to the specified
level with certainty, while the trade effect of an
import tariff may be uncertain

With the increased domestic demand, the nation import
will increase under an import tariff as long as the domestic
consumers are willing or afford to buy;
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With the increased domestic demand, the nation import
will not increase , it only leads to the increase of domestic
supply.
 Conclusion
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Import quotas are more restrictive than
equivalent import tariff;
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Import quotas have the same economic effects
of the equivalent import tariff;
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The revenue effect of an import quota is
uncertain;
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Domestic producers strongly prefer the import
quotas to import tariffs due to its less “visible”;
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Uruguay Round was to change import quotas
and other non-tariff barriers into equivalent
tariffs ( a process known as “tariffication”, such
as agriculture goods).
9.3 Other Non-tariff Barriers and
the New Protectionism
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Voluntary Export Restraints
Technical, Administrative, and Other
Regulations
International Cartels
Dumping
Export Subsidies
Conclusion
 Voluntary Export Restraints
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Voluntary Export Restraints
They refer to the case where an importing country induces
another nation to reduce its exports of a commodity
“voluntary”, under the threat of higher all-round trade
restrictions, when these exports threaten an entire domestic
industry. Sometimes, it is called “orderly marketing
arrangements”

Economic Effects of Voluntary Export
Restraints
They have the same economic effects of equivalent import
quotas, except that administered by the exporting country and
the revenue effect or rents are captured by foreign exporters.
 Voluntary Export Restraints
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Evaluation of Voluntary Export Restraints

Voluntary export restraints were less effective in limiting
imports than import quotas because the exporting
nations agree reluctantly to curb their exports. Foreign
exporters also tend to fill their quota with higher-quality
and higher-priced units of the product over time (such as
Japanese Automobile upgrading).
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Voluntary export restraints may lead the door open for
other nations to replace part of the exports of the major
suppliers and also from transshipments through third
countries.
Case Study 9-1(page 278)
 Technical, Administrative, and Other
Regulations
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They includes safety regulations, health
regulations (hygienic production) and labeling
requirements (origin and contents)
Laws regulations
Such as “Buy American Act” passed in 1933 (Government
Procurement Policies)
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Border taxes
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Rebates(减税) for domestic export and imposed on
importers;
Value-added tax (VAT);
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International commodity agreements and
multiple exchange rates (Chapter 11, Chapter 18)
 International Cartels
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International Cartels
An international cartel is an organization of suppliers of a
commodity located in different nations (or a group of
governments) that agrees to restrict output and exports of the
commodity with the aim of maximizing or increasing the total
profits of the organization. (such as OPEC)

A Successful International Cartel
An international cartel is more likely to be successful if there
are only a few international suppliers of an essential
commodity for which there are no close substitutes.
 International Cartels

Evaluation of International Cartels

The power of cartels lies in its ability to restrict output
and exports, there is incentive for any one supplier to
remain outside the cartel or to “cheat” on it by
unrestricted sales at slightly below the cartel price;

As predicted economic theory, cartels are inherently
unstable and often collapse or fail;

The cartel may be successful if a cartel could behave
exactly as a monopolist (a centralized cartel) in
maximizing its total profits
 Dumping

Dumping
Dumping is the export of a commodity at below cost or at least
the sale of a commodity at a lower price abroad than
Domestically.
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Types of Dumping
Persistent dumping (持续倾销)
Persistent dumping or international price discrimination, is the
continuous tendency of a domestic monopolist to maximize
total profits by selling the commodity at a higher price in the
domestic market (which is insulated by transportation costs
and trade barriers) than internationally (where it must meet the
competition of foreign producers)

 Dumping

Predatory dumping (掠夺倾销)
It is the temporary sale of a commodity at below cost or at a
lower price abroad in order to drive foreign producers out of
business, after which prices are raised to take advantage of
the newly acquired monopoly power abroad.

Sporadic dumping (偶尔倾销)
It is the occasional sale of a commodity at below cost or at a
lower price abroad than domestically in order to unload an
unforeseen and temporary surplus of the commodity without
having to reduce domestic prices.
 Dumping

Anti-dumping Duties
Dumping restrictions usually take the form of anti-dumping
duties to offset price differentials, or the threat to impose such
duties.
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The Economic Effects of Anti-dumping Duties
It’s hard to determine the type of dumping, while domestic
producers demand protection against any form of dumping, as
a result, they discourage imports and increase their own
production and profits. And in some cases of the persistent
and sporadic dumping , the benefits to consumers from low
prices may actually exceed the possible production losses of
domestic producers.
 Dumping
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Examples of Dumping
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Japanese steel and television sets in U.S;
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European Union having persistently dump agricultural
commodities arising from their farm support programs;
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Examples of Anti-dumping
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Anti-dumping laws;
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U.S. trigger-price mechanism (触发价格机制);
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Anti-dumping measures in force
Case Study 9-2 (page 282)
 Export Subsidies
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Export Subsidies
Export subsidies are direct payments or the gaining of tax
relief and subsidized loans to the nation’s exporters or
potential exporters and /or low-interest loans to foreign buyers
so as to stimulate the nation’s exports.
Export subsidies can be regarded as a form of dumping.
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Measures to Support Exports
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Export-Import Bank
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Tax Relief (减税)or Tax Exemption (免税)
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Domestic High Support Prices (e.g. agricultural goods)
Case Study 9-3(page 284)
 Export Subsidies
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Countervailing Duties (反补贴税)
Countervailing duties are often imposed on imports to offset
export subsidies by foreign governments.
Case Study 9-4 (page 285)
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Partial Equilibrium Effects of an Export
Subsidies
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DX and SX represent Nation 2’s demand and supply
curves of commodity X;
With free trade, world price of X were $3.5, Nation 2
would produce 35X, consume 20X, exporting 15X. Nation
2 became an exporter rather than being an importer of X
at prices above $3 (point E)
FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.
 Export Subsidies

With an export subsidy of $0.5, PX rises to $4.00 for
domestic producers and consumers of X. Nation 2
produces 40X while domestic consuming 10X, the
remaining of 30X for export.

Economic Effects of an Export Subsidies
Higher price benefits producers but harms consumers;

Four Effects
1.
Consumption effect: a’+b’
2.
Production effect: a’+b’+c’
3.
Government subsidy: b’+c’+d’
4.
Protection effect: d’
Deadweight loss: b’+d’

 Export Subsidies
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The Reason to use an export subsidy
The domestic producers may successfully lobby the
government for the subsidy or the nation wants to promote the
industry.
Case Study 9-5 (page 286)
 Conclusion
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Tariff belongs to the law regulations while nontariff belongs to the administrative regulations;
Tariff need a long time to formulate while nontariff used at any time ;
Non-tariff trade restrictions are much more
flexible and disguised (隐蔽) forms compared
with tariff trade restrictions.
9.4 The Political Economy of
Protectionism
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Fallacious and Questionable Arguments
for Protection
The Infant-industry and Other Qualified
Arguments for Protection
Who gets Protected?
Conclusion
 Fallacious and Questionable
Arguments for Protection
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To protect domestic labor against cheap foreign
labor
Productivity of 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.

Comparative advantage
Mutually beneficial trade could still be based on comparative
advantage, with the cheap-labor nation specializing in the
production of and exporting labor-intensive commodities, and
the capital-labor nation specializing in the production of and
exporting capital-intensive commodities.

 Fallacious and Questionable
Arguments for Protection
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To impose scientific tariff
This is the tariff rate that would make the price of imports
equal to domestic prices and allow domestic producers to
meet foreign competition. This would eliminate international
price differences and trade in all commodities subject to such
“scientific” tariff.

To reduce domestic unemployment
This is belong to the beggar-thy-neighbor argument for
protection because they come at the expense of other nations.
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To cure a deficit in the nation’s balance of
payment
This is the beggar-thy-neighbor argument for protection.
 The Infant-industry and Other Qualified
Arguments for Protection
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Infant-industry Argument
It holds that a nation may have a potential comparative
advantage in a commodity, but because of lack of know-how
and the initial small level of output, the industry will not be set
up or, if already started, cannot compete successfully with more
established foreign firms. Temporary trade protection is then
justified to establish and protect the domestic industry during
its “infancy” until it can meet foreign competition achieve
economies of scale, and reflect the nation’s long-run
comparative advantage. At that time, protection is to be
removed.
 The Infant-industry and Other Qualified
Arguments for Protection
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The Valid Infant-industry Argument
On the whole, the returns in the grown-up industry must be
sufficiently high to offset the higher prices paid by domestic
consumers of the commodity during the infancy period. There
are several important qualifications to cover the argument:

It is more reasonable for developing nations ( due to the
inefficient capital market) than for industrial nations
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It is difficult to identify the industry or potential industry
qualifies for this treatment, and once protection given, it is
hard to remove
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Domestic subsidy can do better than tariff (the former is the
direct form of aid and easy to remove, the latter is hard to
remove)
 The Infant-industry and Other Qualified
Arguments for Protection
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Other types of domestic distortion

External economy (benefit to the society, not the specific
industry) — to restrict imports, or subsidy for the specific
industry), or direct tax
To correct a domestic distortion — with domestic policies
rather than trade policy
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Conclusion
Trade protections may be advocated to protect domestic
industry for national defense.

Direct production subsidies are generally better than tariff
protection

Tariff may arouse retaliation so that in the end all of nations
lose
 Who gets Protected?

By increasing the commodity price, trade
protection benefits producers and harms
consumers ( usually the nation as a whole)

Producers have a strong incentive to lobby the government
to adopt protectionist measure. Since they are few and stand
to gain a great deal from protection;

Consumers are many, their losses are diffused among them ,
each of whom loses very little from the protection, they are
not likely to effectively organized to resist protectionist
measures
 Who gets Protected?
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In industrial nations, protection is more likely to
be provided to labor-intensive industries
employing unskilled, low-wage workers who
would have great difficulty in finding alternative
employment if they lost their present jobs. And
highly organized industries receive more trade
protection than less organized industries
More protection seems to go to geographically
decentralized industries that employ a large
number of workers than to industries that
operate in only some regions and employ
relatively few workers
 Who gets Protected?


Protection seems to be more easily obtained by
those industries that compete with products
from developing countries because these
countries have less economic and political
power in industrial countries to successfully
resist trade restrictions against their exports
Conclusion
These theories have been only partially confirmed empirically.
Case Study 9-6 (page290)
 Conclusion
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Trade protection is inefficient from the economic
point of view, while from the political point of
view it is reasonable
The usual government measures to correct the
domestic distortion
Import tariff

Direct domestic subsidy

Domestic direct tax
The domestic subsidy and direct tax are better than import tariff
(no direct distortion of domestic commodity prices)

9.5 Strategic Trade and Industrial
Policies
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Strategic Trade Policy
Strategic Trade and Industrial Policies
with Game Theory
The U.S. Response to Foreign Industrial
Targeting and Strategic Trade Policies
Conclusion
 Strategic Trade Policy
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Strategic Trade Policy
Strategic trade policy is a relatively recent development
advanced in favor of an activist trade policy and protectionism,
and suggests that by encouraging high-technology industries,
the nation can reap the large external economies that result
from them and enhance its future growth prospects.

Evaluation of Strategic Trade Policy

It is extremely to pick winners;
Since most leading nations undertake strategic trade
policies at the same time, their efforts are largely
neutralized, so that the potential benefits to each may be
small;
When a country does achieve substantial success with
strategic trade policy, this comes at the expense of other
countries.
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 Strategic Trade and Industrial Policies
with Game Theory
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Game Theory
Game theory can examine the strategic trade and industrial
policy. There are three situations: negative , positive, zero
games.
As for the strategic trade, it is the positive and zero game.

Take Two-firm Competition for the Strategic
Trade Policy
U.S. Boeing company and Europe Airbus company (page 292)

One single company can earn a profit of $100;

Both produce the aircraft, each losses $10;
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If using domestic subsidy, one company can compete
with the other company (strategic comparative advantage)
 Strategic Trade and Industrial Policies
with Game Theory

Game Theory
Game theory can examine the strategic trade and industrial
policy. There are three situations: negative , positive, zero
games.
As for the strategic trade, it is the positive and zero game.

Take Two-firm Competition for the Strategic
Trade Policy
U.S. Boeing company and Europe Airbus company (page 292)

One single company can earn a profit of $100;

Both produce the aircraft, each losses $10;

If using domestic subsidy, one company can compete
with the other company (strategic comparative advantage)
 Strategic Trade and Industrial Policies
with Game Theory

Evaluation of the Theory and Policy

It shows that how a nation could overcome a market
disadvantage and acquire a strategic comparative
advantage in a high-tech field by using an industrial and
strategic trade policy.

The real world is much more complex, It is very difficult
to accurately forecast the outcome of government
industrial and trade policies. So there are many
economists would say that free trade may still be the best
policy after all.
 The U.S. Response to Foreign
Industrial Targeting and Strategic
Trade Policies
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To stimulate education and encourage basic
research as a way of increasing U.S.
international competitiveness


Government subsidies in industries and commercial
technologies (picking winners)
Supported list of 26 technologies in the early 1990s
(electronic materials, high-performance metals,
computing networking, medical technology and so on)

To take unilateral steps to force foreign markets
to open and retaliate with restriction of its own
against nations that fail to respond

Semiconductor agreement with Japan
Banana trade disputes with European Union (beef with
hormones)

 Conclusion
Strategic trade and industrial policy is another
qualified argument for protection. It suggests that
by encouraging high-tech industries, a nation can
reap the large external economies that result from
them and enhance its future growth prospects.
Strategic trade and industrial policy does face,
however, many practical difficulties because it is
difficult for nations to pick winners and because it
invites retaliation. Thus, free trade may still be the
best policy after all
9.6 History of U.S. Commercial
Policy
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The Trade Agreements Act of 1934
The General Agreement on Tariffs and
Trade (GATT)
The 1962 Trade Explanation Act and the
Kennedy Round
The Trade Reform Act of 1974 and the
Tokyo Round
The 1984 and 1988 Trade Acts
Conclusion
 The Trade Agreements Act of 1934

Smoot-Hawley Tariff Act
It was originally introduced to aid U.S. agriculture. Under this
act the average import duty reached all time high of 59 percent
in 1932, provoking foreign retaliation

Trade Agreements Act of 1934
The act transferred the formulation of trade policy from the
more politically minded Congress to the President and
authorized the President to negotiate with other nations
mutual tariff reductions by as much as 50 percent of the rates
set under the Smoot-Hawley Tariff Act. It was renewed a total
of 11 times before it was replaced in 1962 by the Trade
Expansion Act. By 1947, the average import duty was 50
percent below its 1934 level
 The Trade Agreements Act of 1934
Most-favored-nation principle
This non-discrimination principle extended to all trade
partners any reciprocal tariff reduction negotiated by U.S. with
any of its trade partners

Bilateral trade
The bilateral tariff reduction negotiated between any other two
nations that were signatories of the most-favored-nation
agreement. The bilateral trade approach faced the serious
shortcoming that tariff reductions were negotiated for the
most part only in commodities that dominated bilateral trade

 The General Agreement on Tariffs and
Trade (GATT)

GATT
It was created in 1947 and headquartered in Geneva, devoted
to the promotion of freer trade through multilateral trade
negotiations.

Three Principles

Nondiscrimination
Elimination of non-tariff trade barriers
Consultation among nations in solving trade disputes
within the GATT framework



Protectionist Devices

Peril-point provisions (危险点条款)
Escape clause
National Security clause


 The 1962 Trade Explanation Act and
the Kennedy Round

Trade Expansion Act of 1962

The act authorized the president to negotiate across-theboard tariff reductions of up to 50 percent of their 1962
(reduction by a total of about 35 percent in five different
trade negotiations between 1947 and 1962) level
Trade Adjustment Assistance (TAA) helped the displaced
workers and firms injured by tariff reductions (such as
retraining , moving assistance, tax relief, low-cost loans,
technical help)
The principle of adjustment assistance was the most
significant aspect of the Trade Expansion Act of 1962
since society at large was to bear, or at least share, the
burden of adjustment


 The 1962 Trade Explanation Act and
the Kennedy Round

Kennedy Round

Under the authority of the 1962 Trade Expansion Act, U.S
initiated the wide-ranging multilateral trade negotiations
known as the Kennedy Round
Kennedy Round was completed in 1967 and resulted in
an agreement to cut average tariff rates on industrial
products by a total of 35 percent of their 1962 level, to be
phased over a five-year period. By the end of 1972, when
the agreement was fully implemented , average tariff rates
on industrial products were less than 10 percent in
industrial nations. But there are many non-tariff trade
barriers, especially in agriculture

 The Trade Reform Act of 1974 and the
Tokyo Round

Trade Reform Act of 1974
This authorized the president (1) to negotiate tariff reductions
of up to 60 percent and remove tariffs of 5 percent or less;(2)
to negotiate reductions in non-tariff trade barriers; and also
liberalized the criteria for adjustment assistance

The Tokyo Round

Negotiated tariff reductions phased over an eight-year
period, starting in 1980, averaged 31 percent for the U.S,
27 percent for the European Union, and 28 for Japan
Non-tariff trade barriers(1) agreement on a government
procurement code; (2) uniformity in the application of
duties in countervailing and antidumping cases; (3) a
“generalized system of preferences” (GSP) to the
manufactured, semi-manufactured, and selected other
exports of developing nations.

 The 1984 and 1988 Trade Acts

Trade and Tariff Act of 1984
It has three major provisions:

It authorized the President to negotiate international
agreements for the protection of intellectual property
rights and to lower barriers to trade in services, hightechnology products, and direct investments

It extended the Generalized System of Preferences (GSP),
which granted preferential access to the exports of
developing countries to U.S

It provided authority for negotiations that led to a free
trade agreement with Israel
 The 1984 and 1988 Trade Acts

Omnibus Trade and Competitiveness Act of
1988 (贸易与竞争法)

It includes 301 provision, which (1) calls on the U.S.
Special Trade Representative (USTR) to designate priority
countries that maintain numerous and pervasive trade
barriers; (2) sets a rigorous schedule for negotiations to
be held on eliminating those barriers; (3)requires
retaliation by curbing imports from those countries if the
negotiations are not successful
Under Super 301 Act, Nations faces tariffs of 100 percent
on selected exports to U.S. if they did not relax trade
restrictions

FIGURE 9-3 U.S. Average Tariff Rates on Dutiable Imports, 1900-2000.
 Conclusion



In history, U.S. adjusted the commercial policy
many times
One the whole, U.S trade policy prefers to the
freer trade policy
The multilateral trade system has been
developed by U.S trade acts. So U.S trade acts
played a great role in establishing the
multilateral trade system
9.7 The Uruguay Round



The Uruguay Round
Outstanding Trade Problems
Conclusion
 The Uruguay Round

Uruguay Round
It started in 1986 in Punta del Este in Uruguay and completed
in 1993 after seven years of negotiations. Altogether, there
were 123 countries participating the negotiations. Its aim was
to establish rules for checking the proliferation of the new
protectionism and reverse its trend; bring services, agriculture,
and foreign investments into the negotiations; negotiate
international rules for the protection of intellectual property
rights; and improve the dispute settlement mechanism by
ensuring more timely decisions and compliance with GATT
rulings.
 The Uruguay Round

Major Provisions

Tariffs
Quotas
Anti-dumping
Subsidies
Safeguards
Intellectual property
Services
Other industry provisions
Trade-related investment measures
World Trade Organization









Case Study 9-7 (page 303)
 Outstanding Trade Problems







Subsidies and tariffs in Agricultural Products remain very
high. Quantitative restrictions on textiles and apparel will
not be completely removed until the end of 2004, and
even then tariffs on these products will remain very high
Many of the trade problems of developing countries have
not been adequately addressed (such as textiles and
agricultural trade)
No any special provision to help transitional economy
countries
The tendency for the world to break into three major
trading blocks (EU, NAFTA, Asian bloc.)
It did not deal with labor and environmental standards
International Trade and the anti-globalization(page306)
Doha Round in 2001 to 2004 (failed)
Chapter Summary

Non-tariff Trade Barriers

Political Economy of Protectionism
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U.S Commercial Policy on the impact of
Multilateral Trade System
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Multilateral Trading System (eight
negotiation rounds before WTO )
Exercises
Discussion Problems:
Page 310 to 311 from 1 to 14 questions
Exercises
Additional Reading
For a discussion of tariffs, quotas, and other nontariff
barriers, see:
 J.N.Bhagwati, “ On the Equivalence of Tariffs and Quotas,” in
the R.E.Baldwin et al., eds., Trade, Growth and the Balance of
Payments: Essays in Honor of Gottfried Haberler ( Chicago:
Rand McNally, 1965) pp. 53-67
 OECD, Post-Uruguay Round Tariff Regimes (Paris:
OECD,1999)
On industrial and strategic trade policy, see:
 J.A.Brander and B.Spencer, “Export Subsidies and
International Market Share Rivalry,” Journal of International
Economics, February 1985, pp.83-100
 P.R.Krugman, “ Is Free Trade Pass?” Journal of Economic
Perspectives, Fall 1987, pp.131-144
Internet Materials
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http://www.state.gov
http://www.usitc.gov
http://www.wto.org
http://www.iie.com/topics/fasttrach/hotfast.htm
http://www.citt.gc.ca
http://www.exim.gov
http://www.infoexport.gc.ca
http://www.nologo.org
http://www.worldbank.org/research/journals/wbro/obsf
eb00/art3.htm