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Chapter 8 Nontariff Barriers to Imports Objectives of the Chapter This chapter notes numerous other ways to restrict foreign trade without using a tariff. Non tariff barriers have gained importance since World War II as a result of continuous multilateral negotiations to cut tariffs. Many of these barriers decrease imports to a fixed amount by either setting an import quota or coercing the exporting country to limit its exported quantity. Others restrict the quantity of imports through discrimination by quality or content. After studying Chapter Eight you should know:
■ Created by the Uruguay Round trade agreement, the World Trade Organization, which incorporates the General Agreement on Tariffs and Trade, is the multilateral institution that oversees the global rules of government trade policies. Under the GATT, countries engaged in 8 rounds of trade negotiations that were successful in lowering the tariff rates of industrialized countries. The two most recent rounds also attempted to liberalize NTBs, but with less success. (The box on the Uruguay Round summarizes the major features of the wide-ranging agreements that came out of these negotiations.) ■ The chapter then turns to analysis of an import quota. If both the domestic industry and the foreign export industry are perfectly competitive, then the effects of a quota are almost all the same as the effects of a tariff that permits the quantity of imports. For a small importing country, the increase in domestic price, the increase in domestic production, the decrease in domestic consumption, the increase in domestic producer surplus, the decrease of domestic consumer surplus, and the net national loss are the same. The possible difference is what happens to the amount that would be government revenue with a tariff. With an import quota this is the amount that is the difference between the cost of imports purchased from foreign exporters at the world price and the value of these quota-limited imports when sold in the domestic market at the higher domestic price. (We presume that the holders of the import quota rights can continue to buy at the world price. If any foreign exporter tried to charge more, the importers would turn to other export suppliers who would sell at the going world price.) If the government gives away these quota rights to import with no application procedure (fixed favoritism), then the import price markup goes as extra profits to whoever is lucky enough to receive the rights. If the government auctions the quota rights (import-license auction), then the government gains the markup as auction revenues because bidders vie for these valuable import rights. If the government uses elaborate applications procedures (resource-using application), then some of the markup amount is lost to resource usage in the application process, leading to a larger net national loss because of the extra resource costs of the quota process. For the large-country case, again the effects of imposing a quota are nearly all the same as the equivalent tariff, except for what happens to what would be tariff revenue. Specifically, the importing country can benefit from imposing an import quota, if the rectangle of gain from the lower price paid to foreign exporters for the quota quantity imported is larger than the triangle losses from distorting domestic production and consumption. If the domestic industry is a monopoly, then the effects of imposing a quota are different from the effects of imposing a tariff. The text of the chapter briefly explains that a quota cuts off foreign competition, so the monopoly-creating quota leads to a higher domestic price and greater national losses. Appendix E provides a more rigorous analysis of this case. ■ The VER is usually not voluntary, but it is an export restraint. Because the government of the exporting country must organize its exporters into a kind of cartel, they should realize that they should raise the export price. If the exporters do raise the export price, then the exporters get the amount that otherwise would be government revenue with a tariff, or the price markup with an import quota. The net national loss is larger for the importing country with a VER because of this additional rectangle loss. ■ Governments use a variety of other barriers to imports in addition to tariffs. NTBs lower imports by directly limiting the quantity of imports (e.g., import quota, VER, government procurement policies that prohibit or limit government purchasing of imports), increasing the costs of getting imports into the market (e.g., applications and testing procedures), and creating uncertainty about whether imports will be permitted (e.g., arbitrary licensing procedures). The chapter examines two NTBs, product standards and domestic content requirements. Product standards can be worthy efforts to protect health, safety, and the environment. But they can also be written to limit imports and protect domestic producers. Domestic content requirements limit the import of components and materials by requiring that a minimum percentage of the value of a product produced or sold in a country be local value added (wages and domestically produced components and materials). Section 301 of the U.S. Trade Act of 1974 is an unusual government policy. Its goal is to lower foreign barriers to U.S. exports, including failure of foreign countries to protect intellectual property rights (patents, trademarks, copyrights, and trade secrets). But it tries to do this by threatening to raise U.S. barriers to the foreign country's exports if the foreign country does not change its policies. Other countries resent such a heavy-handed approach. And, if the U.S. government carries out the threat, then the approach backfires—it probably lowers well-being for both countries. Fortunately, the United States has decreased its use of Section 301. With the establishment of the WTO with its strong dispute settlement procedures, the United States is more likely to send its complaints about unfair foreign trade practices to the WTO for resolution. How large are the effects of actual tariffs, quotas, VERs, and other nontariff barriers to imports? The chapter begins the answer by showing that the net national loss is probably a small fraction of the value of domestic production (GDP), for a country like the United States that has moderate import barriers and is not highly dependent on imports, if the only national losses are the deadweight-loss triangles. The true cost is probably larger than this basic analysis indicates, because of foreign retaliation and losses in export industries, the costs of enforcing import barriers, the costs of rent-seeking activities like lobbying for import protection, and losses from reduced pressures to innovate. In addition, the costs from raising barriers would accelerate in a nonlinear way, and the areas of the triangles would increase rapidly. Another way to look at the size of the effects of protection is per dollar of increase in domestic producer surplus. Figure 8.3 shows the results of a study of 23 U.S. industries that receive substantial import protection. Each dollar of increase in producer surplus causes a net loss to the U.S. economy of $0.49 (the rest of the U.S. economy loses $1.49). The net world efficiency loss is $0.35 per dollar of gain to U.S. producer surplus. Key Terms Domestic content Directs that a good made/assembled in a country must have a certain requirements: amount of "domestic value" in the form of local factors used in production/assembly of the good 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 on a competitive auctions basis, fixed favoritism, or resource using application procedures. Import quota: A limit on total quantity of imports allowed into a country each year. It is the most prevalent nontarifftrade barrier. 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 also receive that lower tariff rate. Section 301: Part of the U.S. Trade Act of 1974. It gives the president power to impose barriers against imported goods from a country using "unfair trade practices" to limit imports from the U.S. and other countries. The EU and Japan have been major targets of Section 301 cases. VERs: Voluntary export restraints. Nontariff barriers to trade, 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. World Trade Organization: An international organization of most of the world's countries which oversees governmental policies regarding international trade. The chief purposes are to liberalize trade, promote the MFN principle, and limit unfair export policies. 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 for the country which imposes it than a quota would be. 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?
2. Quotas are often preferred to tariffs because:
3. Under a VER regime, the tariff equivalent revenue accrues to the:
4. A domestic monopolist facing import competition:
5. Which is the most efficient method of allocating import licenses?
Suggested answers to questions and problems (in the textbook) 2. Voluntary export restraint (VER) agreements are nontariff barriers to imports. Despite their name, the importing-country government coerces the exporting-country government into allocating a limited quota of exports among its exporting firms. Import-country governments often force exporters into accepting VERs because the government wants to limit imports without explicit import barriers like tariffs or import quotas that would violate international agreements. (The Uruguay Round agreements include a provision to reduce and eliminate the use of VERs, but it remains to be seen if this will be effective.) In choosing VERs, the importing-country government does not create a bigger national gain than with tariffs or quotas. On the contrary, a VER allows foreign exporters to gain the full price markup that the importing country would have kept for itself if it had used a tariff or quota. (Gaining this price markup is a reason that the exporting country may agree to a VER, rather than risking that the importing-country government will impose its own import limits.) 4. a. Product standards are imposed to assure that products meet minimum requirements to protect health, safety, or the environment. But they can be written to discriminate against imports, by setting unreasonable requirements that penalize imports. To the extent that product standards enhance health, safety, and the environment, they can raise national well-being. To the extent that they are used as nontariff barriers to imports, they bring the net national losses that usually accompany protection. b. Domestic content requirements force producers to limit the use of imported components and materials by mandating that a minimum percentage of the value of a product be domestic value added (wages of local workers and domestically produced materials and components). This provides protection for domestic producers of materials and components and results in the net national losses that usually accompany protection. 6. a. The U.S. government is deeply committed to assuring that food products are safe for consumers to eat, and to protecting the health and safety of workers growing the food. These are surely noble and correct goals for government regulations. We have established regulations for growing and harvesting apples that assure that they meet these objectives. In particular, U.S. standards regulate the use of various pesticides and prohibit the use of unsafe pesticides, to protect worker health and to minimize or prevent ingestion by consumers of trace amounts of pesticides. The U.S. government must insist that U.S. production standards be followed in foreign countries for all apples exported to the United States. Otherwise the U.S. government could not be certain to meet its objectives for imported apples. b. The U.S. government has no business forcing us to adopt its production standards. First, our own governments are the best judges of the standards to apply to worker safety within our own countries. Because work and environmental conditions vary from country to country, it is simply inappropriate to apply U.S. standards. Indeed, what is safe in the United States could be unsafe in another country. Second, the U.S. government must regulate product quality by specifically examining product quality as our apples arrive in the United States. The issue here is not the techniques of growing and harvesting, but rather whether the product is safe for the consumer. The U.S. government should test for that directly. If they did this, they would find that our apples are perfectly safe, even though we do not use the same production techniques used in the United States. The emphasis of the U.S. government on production techniques is misplaced—it is an effort to protect its domestic apple growers by raising our costs of production or forcing us to cease exporting to the United States. 8. With a price elasticity of demand for imports of 1, the 50 percent tariff rate has resulted in a 50 percent reduction in imports. The net national loss of the tariff as a percentage of the country's GDP equals (½)×0.50×0.50×0.20, or 2.5 percent. The increase in producer surplus in the protected sectors, as percentage of GDP, is approximately the 50 percent increase in domestic price times the 15 percent share of these sectors in GDP, or 7.5 percent. Thus, the net national loss from the tariff is about 33 percent of the gain to protected producers. For every dollar that domestic producers gain, the rest of the society loses $1.33. 10. Free trade will bring the largest well-being for the entire world. The United States already has few barriers against imports, and we believe that open competition has made the U.S. economy strong. But other countries often have protectionist policies. This hurts the U.S. economy, because we lose export opportunities that would allow us to take maximum benefits from our comparative advantages. Protectionist policies in foreign countries usually also impose net national costs for those countries, and they certainly harm consumers in those countries. The protectionist policies exist to benefit certain producer groups in those countries, at the expense of others in the countries. Section 301 is a tool that the U.S. government can use to reduce foreign protectionism and reduce or eliminate unfair foreign trade practices. Yes, it does involve threats by the U.S. government to raise its own import barriers if the foreign government does not lower its barriers, but this is a useful risk to take. The United States is large enough to influence foreign countries' governments, and the power here is being used for the good of the world. It is successful much of the time. When it is successful, the world moves toward freer trade, bringing benefits to the United States, to the foreign countries through net gains from freer trade, and to the world as a whole. Problems (to be edited) 1. Leinster bakers have petitioned their government officials for protection from 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. 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" when you provide the following: a. Illustrate how a tariff and a quota can have equivalent effects on
the price and quantity of imported telephones. 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 Seven, can you calculate a Harry G. Johnson figure for the cost to Leinster of protecting its domestic bread market? 4. (Not ready, diagram to be drawn) 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. Using the information in this diagram, quantify the following: a. The gains from international trade before the imposition of the
quota. 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):
Discussion Topics 1. Do you think replacing all import quotas with Voluntary Export Restraints would improve or worsen relations between the United States and Japan? 2. Some people think that the United States' "free trade" stance is hypocritical. Do you agree with them?
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