CHAPTER 9
NONTARIFF BARRIERS TO IMPORTS
Objectives of the Chapter
This chapter notes the numerous other ways to restrict foreign trade without using a tariff. Nontariff
barriers (NTBs) have gained importance since World War II as a result of continuous multilateral
negotiations to cut tariffs. Many of these barriers reduce imports to a fixed amount by either setting an
import quota or coercing the exporting country to limit the quantity it exports. Other barriers restrict the
quantity of imports through discrimination by quality or content.
Import tariffs, import quotas, and voluntary export restraints (VERs) all have the same effects on the
home country’s producers and consumers: the producers win and the consumers lose. The major
difference in economic impact comes in who receives the profits from higher-priced imports. In the case
of a tariff, the government collects the revenue in the form of the import tax. In the case of a quota, the
government may auction rights to import the limited quota amount (in which case the quota looks just
like a tariff), or the government may use some alternative form of license distribution such as favoritism
(in which case the cronies who receive the licenses get the windfall). With a VER, the windfall goes to
the agents in the exporting country who get the privilege of selling expensive good to the importing
country.
After studying Chapter 9 you should know
1. the rationale behind imposing nontariff trade barriers.
2. the import quota and reasons for using it.
3. how a tariff and a quota can be equivalent.
4. the ways to allocate import licenses.
5. the comparisons between import quotas and VERs.
6. other costs that arise from erecting import barriers, such as foreign retaliation.
Important Concepts
Domestic content requirements: Directs that a product made or assembled in a country must have a
certain amount of “domestic value,” in the form of local factors of
production that are used in (or locally made components that are part
of) the finished product.
Fixed favoritism:
A way of allocating import licenses in which the government simply
assigns fixed shares to firms, often based on the shares of imports
the firms had before the quota was imposed.
Import license:
A legal right to import goods subject to quotas or other nontariff
barriers. Import licenses can be allocated by governments using
competitive auction, fixed favoritism, or resource-using application
procedures.
Import quota:
A limit on total quantity of imports allowed into a country each year.
Import quotas are the most common nontariff trade barrier.
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MFN:
Most favored nation status. An agreement between two nations to
levy tariffs on each other at rates as low as those levied on any other
country. If one of these nations reduces tariffs on a third country, all
of that nation’s MFN partners must also receive that lower tariff
rate.
Section 301:
Part of the U.S. Trade Act of 1974. It gives the President power to
impose import barriers against goods from a country using “unfair
trade practices” to limit imports from the U.S. and other countries.
VERs:
Voluntary export restraints. Nontariff barriers to trade that are
equivalent to quotas. Exporting countries are coerced by the
importing country into allocating a limited quota of exports. VERs
are not legislated and can be imposed with or without formal
international negotiations. International trade in textiles and clothing
is subject to numerous VERs.
Warm-up Questions
True or False? Explain.
1.
T/F
Quotas give government officials greater administrative flexibility than tariffs do.
2.
T/F
As long as quota licenses are auctioned, the welfare effects of a quota are equivalent to
the welfare effects of a tariff.
3.
T/F
If a government has a small tax base, it might prefer tariffs to quotas.
4.
T/F
A VER is worse than a quota for the country that imposes it.
5.
T/F
There is very little that is voluntary about a Voluntary Export Restraint.
Multiple Choice
1.
Which of the following is most correct?
A. Import quotas usually create monopoly rents.
B. A quota system is more efficient than a tariff system.
C. An import quota is more suitable for emergency application by government officials than a
comparable tariff.
D. Under competitive conditions, an import quota allows import-competing producers to reap
more profits than a tariff.
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2.
Quotas are often preferred to tariffs because
A. quotas are a richer source of government revenues.
B. tariff changes are strictly controlled by international trade agreements.
C. quotas do not hinder competition in the domestic market.
D. quotas create a less fertile environment for corrupt government officials.
3.
Under a VER regime, the tariff equivalent revenue accrues to the
A. importing-country government.
B. importing-country consumers.
C. exporting country.
D. import-competing industries.
4.
A domestic monopolist facing import competition
A. prefers a tariff to its equivalent quota.
B. prefers a quota to its equivalent tariff.
C. is indifferent between a tariff and an equivalent quota.
D. loves free trade.
5.
Which is the most efficient method of allocating import licenses?
A. Competitive auctions.
B. Fixed favoritism toward domestic importers.
C. Resource-using application procedures.
D. Fixed favoritism toward foreign exporters.
Problems
1.
Leinster bakers have petitioned their government officials for protection against competition
from imported Saxon bread. You have been hired by the government to discuss the options
available. The Minister of Trade wants to know about the ease of implementation and the welfare
effects of the following:
a. An import quota of 40 million loaves.
b. A VER of 40 million loaves.
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2.
In response to information received from a “mole” (spy) in Leinster’s Ministry of Trade, the
Prime Minister of Saxony wants a retaliatory reduction in imports of telephones. He is especially
interested in tariffs and quotas. Keep in mind that Saxony is a “small country” in the following:
a. Illustrate how a tariff and a quota can have equivalent effects on the price and quantity of
imported telephones.
b. Describe two different ways that the quota licenses can be allocated, and explain who would
get the quota rents in each case.
3.
The Bureau of National Statistics in Leinster has calculated that Gross Domestic Product is, in
real terms, 200 million telephones. (We don’t yet have a currency, so all values must be
measured in units of goods.) Using your answers from Problem 1 in Chapter 8, calculate a Harry
G. Johnson figure for the cost to Leinster of protecting its domestic bread market.
4.
The diagram below depicts an import quota of 100,000 cameras imposed by a small country. The
quota raises the domestic price from the free trade level of $100 to a level of $150.
Price
(dollars per camera)
Figure 9.4
S
Domestic price
with quota
$150
$100
World price
D
100
150 200 300 350
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Cameras
(thousands)
Using the information in this diagram, quantify the following:
a. The revenue gained by the government by auctioning import licenses at $50 per camera.
b. The value of the increase in producer surplus associated with the imposition of the quota.
c. The value of the decrease in consumer surplus associated with the imposition of the quota.
d. The net effect of the quota on the country’s welfare.
5.
You are given the following data comparing the effects of free trade, a U.S. import quota, and a
Voluntary Export Restraint on the American market for compact discs (CDs):
Price of CDs in
the U.S.
Foreign price per CD
(at U.S. ports)
Imports of CDs into
U.S. (millions)
Free trade
Import quota of 8 million
VER of 8 million
$12
$15
$15
$12
$10
$10
10
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a. Quantify the welfare gains for the United States from the import quota and from the VER,
both relative to free trade. Which of the two import-reducing policies is better for the United
States?
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b. Quantify the welfare gains for countries that export CDs to the United States resulting from
the import quota and the VER, both relative to free trade. Which of the two trade-reducing
policies is better for those exporting countries?
Discussion Topics
1.
Do you think replacing all import quotas with Voluntary Export Restraints would improve or
worsen relations between the United States and other countries?
2.
Some people think that the United States’ “free trade” stance is hypocritical. Do you agree with
them?
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