Trade Barriers
Ing. Mansoor Maitah Ph.D. et Ph.D.
Economic Basis for Trade
Distribution of Economic Resources
Different Technologies
Goods are Differentiated as to Quality and other Non - price Attributes
Labor-Intensive Goods
Land-Intensive Goods
Capital-Intensive Goods
Trade Barriers
What is a Trade Barrier
Import duties
Import quotas
Import licenses
Tariffs
Export licenses
Subsidies
Non-tariff barriers to trade
Voluntary Export Restraints
Trade Restrictions
• Arguments for Trade Restrictions
– National Defense
• Certain industries need protection
• Imports may not be available during wartime. Domestic production
essential to provide war materials.
• Prevent valuable technologies from being used to strengthen
competition, especially militarily
• National Security Is threatened by trade.
– Sanctions to Punish Offending Nations
• Inflict economic damage to encourage, to modify behavior
– Protect Infant or Dying Industry
• In the long run will have a comparative advantage
• Special Industries with Unique and Substantial Economic Potential
will not mature without Protection from Trade.
Trade Restrictions
• Arguments for Trade Restrictions
- Jobs are destroyed by trade. Protect Domestic Jobs from Cheap Foreign Labor.
- Worker wages are hurt by Trade. Greatest problem for low-skilled workers.
- Infant Industry Argument: Special Industries with Unique and Substantial Economic
Potential will not mature without Protection from trade.The contention that tariffs
should be imposed to protect from import competition an industry that is trying to
get started. After the industry becomes technologically efficient, the tariff can be
lifted.
-Unfair competition undermines the Benefits of Trade. Fair competition brings cost of
imported goods up to domestically produced goods to prevent unfair advantage
Trade Restrictions
• Protection to Reduce Trade Deficit
– Deficits due to Macroeconomic imbalance → national saving <
national investment.
– Direct effect of protection is lower imports, but also appreciates
currency → exports fall, imports rise → no reduction in trade
deficit!
• Protection as Bargaining Device
– Trade barriers as bargaining chip in trade negotiations.
– Gains from unilateral liberalization
– More threats, but how much trade liberalization?
Trade Restrictions
Retaliation
• Import restrictions placed by another country may
result in similar restrictions by domestic government.
(EU ban on hormone treated U.S. beef).
What is Dumping?
Normal Value in the
Exporting Market
Export Price
If a product is exported at a price (Export
Price) lower than the price (Normal Value)
it normally charges on its own home
market, it constitutes “dumping”
Reasons for Retaliation
• Dumping is the selling of a product abroad for less
than
– The average cost of production in the exporting nation
– The market price in the exporting nation
– The price to third countries
• Result of
– Excess production
– Cyclical or seasonal factors
– Attempt to force domestic producers out of business
The Impact of dumping
Loss of Sales
Reduced Profits
Loss of market share
Reduced returns on investments
Decline in output
Under utilization of capacity
Adverse Effect On
Cash flow
Inventories
Employment
Wages
Growth
New Investment
Ability to raise capital
Sanctions Justified
• Dumping for which sanctions are considered
justified
– Social dumping
• Lower labor costs and poorer working conditions
– Environmental dumping
• Lax environmental standards
– Financial services dumping
• Low requirements for bank capital/asset ratios
– Cultural dumping
• Cultural barriers aid local firms
– Tax dumping
• Differences in corporate tax rates or special breaks
Other Reasons for Retaliation
• Subsidies
– Government provides to domestic firm to encourage exports or
protect from imports
– Can be
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Cash payment
Government participation in ownership
Low-cost loans
Preferential tax treatment
• Countervailing Duties
– Set by importing nation to offset effects of subsidy
– Equal to the subsidy amount
Types of Restrictions - Tariffs
• Ad Valorem
• Percentage of invoice value
• Specific
• Fixed sum of money per unit
• Compound duty
• Combination of the above
Types of Restrictions - Tariffs
• Official Prices
– Minimum import duty regardless of invoice price
• Variable Levy
• Calculated daily based on world market price
• Lower Duties for Local Input
• Encourages some local production
Types of Restrictions - Nontariff
• Quantitative
– Quotas
– Voluntary Export Restraints
– Orderly Marketing Arrangements
• Nonquantitative Nontariff
– Direct government participation in trade
– Customs and other administrative procedures
– Government and private standards
• Quota System
– A government-imposed restriction
on the quantity of a specific good that another country
is allowed to sell in the Czech Republic
– In other words, quotas are restrictions on imports,
usually applied to one or several specific countries.
Quotas
• Quota is a set maximum on imports in volume or value terms.
• Similarities to tariff that results in same level of imports:
– increase domestic sale price and production; reduce
consumption.
– transfer from consumer to producer.
• Quotas do not generate any tariff revenue!
– quota rent → domestic sale price in excess of cost of
imports. Quota rent is pure profit.
• Quotas likely welfare inferior to tariff due to lost quota rent.
– wasted in costly lobbying for quota licenses.
– given to foreign governments.
Equilibrium with restrictions
Equilibrium without restrictions
Quotas – additional considerations
• Suppose domestic demand increases:
– tariff: imports increase, no change in price.
– quota: domestic price increases, no change in imports
• Quotas reduce price competition.
– foreign firms cannot increase sales by lowering price, so don’t
compete on basis of price → domestic firms end up with more
market power.
– reduced economies of scale
• Quotas and/or VERs common in textiles, iron/steel, autos,
agriculture
Voluntary quotas
• Voluntary Restraint Agreement (VRA)
• An official agreement with another country that “voluntarily”
restricts the quantity of its exports.
• Rents definitely go to foreigners.
• More politically reasons than formal barriers to trade.
• Voluntary Import Expansion (VIE)
• An official agreement with another country
in which it agrees to import more from the Czech Republic.
Ways to Restrict Foreign Trade
• Tariffs
– Tax on imported goods
• Benefits import-competing industries
• Harms consumers by raising prices
• Tariff Revenue
• Decline in Imports
• Increased Domestic Production
• Increased Domestic Production
Other Barriers to Trade, cont
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Government Procurement Policies
Administrative Classification
Health and Safety Standards
Social Policies
Performance Requirements (typically applying to
foreign direct investment)
Levels of Economic Development
Developed
Classification for all industrialized nations, which are
mostly technologically developed.
Developing
Classification for world’s lower income nations, which
are less technically developed.
Newly Industrialzing Countries (NICs)
Fast-growing, middle-income or higher economies
Heavy concentration of foreign investment
Exported large quantities of manufactured goods,
including high-tech products
Levels of Economic Development
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Newly Industrialized Economies (NIEs). Primarily used to refer to the four
tigers
• Taiwan, Hong Kong, Singapore, South Korea
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IMF combines NIEs with Industrialized Nations to form “advanced
economies
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Emerging Market Economies
• Chile, Malaysia, China, Thailand, Indonesia
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Transition Countries or Eastern Europe
• Former communist countries
Anti-Dumping and Countervailing Duties
• Anti-Dumping and Countervailing Duties
– in response to foreign firms “unfairly” selling goods in the
U.S. at “less than fair value.”
– Countervailing duty meant to offset foreign subsidies.
– Dumping: 1) selling in U.S. at price lower than in home market,
or 2) at price below cost.
• system biased in favor of finding of unfair pricing
• Restrictions on Services
– aircraft landing rights; sea transport restrictions; insurance
• Domestic Content Provisions
– particularly important in Preferential Trade Areas, e.g., NAFTA
Current Trade Sanctions
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Burma (Myanmar)
Cuba
Diamond Trading
Iran
Iraq
Liberia
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Libya
Nonproliferation
North Korea
Sudan
Syria
Zimbabwe
Regional Trade Bloc
A group of nations that grants members special
privileges. Examples include the European Union,
NAFTA, and the Association of Southeast Asian
Nations.
Preferential Trade Areas
Levels of Regional Integration
Political Union
Coordinate aspects of members’ economic and
political systems
Remove barriers to trade, labor, and capital;
Economic Union set a common trade policy against nonmembers;
and coordinate members’ economic policies
Remove all barriers to trade, labor, and capital
Common Market among members; and set a common trade policy
against nonmembers
Customs Union
Remove all barriers to trade among members, and
set a common trade policy against nonmembers
Free--Trade Area Remove all barriers to trade among members, but
Free
each country has own policies for nonmembers
Regional Economic Integration
Previous enlargements
1951 ECSC (European Coal and Steel Community):
France,Italy, Germany, Belgium, The Netherlands,
Luxembourg
1973:
Denmark, Ireland, and UK
1981:
Greece
1986:
Spain and Portugal
1995:
Austria, Finland and Sweden
2004:
Cyprus, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia,
Slovenia.
2007
Romania and Bulgaria
The European Union on the map
New Member States (2007)
Bulgaria, Romania
Candidate Countries
Croatia; (Former Yugoslav Republic of Macedonia)
- Negotiations not yet started; Turkey
Potential Candidate Countries
Albania, Bosnia and Herzegovina, Montenegro,
Serbia
International Trade Organizations
• General Agreement on Tariffs and Trade (GATT)
An international agreement established in 1947 to further world trade
by reducing barriers and tariffs. Several “Rounds” of Liberalization.
first few on tariff reductions, admitting new members; many quotas eliminated.
GATT was replaced by the World Trade Organization in
1995.
International Trade Organizations
• World Trade Organization (WTO)
• Reductions in Tariffs Worldwide - Trade Liberalization
• New Rules to Promote Trade in Services
• Reduction in Agricultural Subsidies
• Intellectual Property Protections
• Phasing Out Textile Quotas and Tariffs
Principles of the Multilateral Trading System (Applies to Goods)
Non-Discrimination
Treat members no worse than any other member.
National Treatment: treat imports no worse than domestic goods once
inside border.
Reciprocity
Mutual, reciprocal, equivalent trade concessions.
Negotiated reductions in trade barriers.
Limits free riding; overcomes Protectionist Bias.
International Trade Blocs
International Trade Blocs
The cost of protecting
• The cost of protecting U.S. jobs
– Restrictions on textiles and apparel goods
cost U.S. consumers $9 billion a year.
• Cost $50,000 a year for each $20,000
job saved
– Restriction on imports of Japanese cars
• Cost $160,000 per year for each job saved in
the auto industry
The cost of protecting
• The cost of protecting U.S. jobs
– Glass industry restrictions
• Cost $200,000 per year per job saved
– Steel industry restrictions
• Cost $750,000 per year per job saved
Thank You for your Attention
☺