Nontariff Trade Barriers, GATT, and the WTO
Lecture 7

 

Nontariff Barriers to Imports
1. Nontariff Barriers to Imports – gov. reduces imports using other tools than a tariff
  • Nations reduced tariffs, but increased nontariff trade barriers
2. Types of nontariff barriers
  1. Import Quotas – a limit on the quantity that can be imported
  2. Export Quotas – a nation limits the quantity of an item that can exported
  3. Export Subsidies – reduces the price of an exported product
    • Decreases market prices to foreigners
    • Foreigners buy more
    • Boosts exports
    • Expands the exporting industry, creating jobs
    • Note – a subsidy is paid for by gov. imposing a tax on something else
  4. Currency Devaluations – a country devalues its currency
    • Money is weaker
    • Consumers buy less imports
    • Exporters export more, because exports are less expensive
    • Asian tigers and China weaken their currencies
  5. Bureaucracy – complicated gov. regulations to reduce trade
    • Gov. plays with definitions
      • EU ruled carrots were a fruit, so Portugal could sell carrot jam with low duties
      • U.S. trade representative told Japan that Japanese made cars in the U.S. were Japanese, and subsequently told Europe that the same cars were U.S. made
    • Quality standard - gov. makes the process slow and difficult
      • Health and safety standards
      • Gov. must inspect foreign factories, and never do
      • Example - Europe bans U.S. beef, because U.S. uses growth hormones
    • Compliance with environmental regulations
      • U.S. EPA ruled Malaysian palm biodiesel does not reduce greenhouse gas emissions enough
      • U.S. soybean industry has political power
    • Licensing and labeling requirements
    • Domestic content requirements – gov. requires a min. percentage be from domestic producers
      • Could include the hire of local labor
      • Malaysia requires auto makers to include parts made in Malaysia
    • Gov. is a large consumer
      • Gov. imposes rules to buy from domestic industry first
      • Gov. discriminates against foreign companies
      • Gov. pays higher prices; gov. can claim better quality
      • Military goods fall under this category
      • Gov. could encourage buy-national policies
  6. Strategic Trade Practices – gov. subsidizes research and development of a product
    • Provides subsidies to help an industry
    • Low interest loans
    • Tax abatements
    • Gov. invests in building, etc.
    • Economies of scale – supply a large international market
      • Example - South Korea and U.S. build and sell cars for $10,000
      • If the South Korean gov. encourages the auto industry to grow, then Korean companies can sell cars for $8,000
      • South Korea can take over the auto industry

Economies of Scale

  1. Dumping – practice of selling an item for less abroad than at home
    • Creates monopoly power
    • Drive competitors out of business
  2. Countervailing Trade Practices – defensive measures to counter the advantage gained by another state
      • Prevent dumping
      • Impose tariffs or quotas temporarily
 

Import Quotas
 
  1. Government imposes an import quota of T Q
  2. Quota and tariff are equivalent, if the quota is set to a level that equals the tariff = P Q - P W
    1. Increases the price of imported goods
    2. Decreases price of exported good
    3. Consumers buy less
    4. Protects domestic industry
    5. Note - tariffs and quotas become different if supply/demand functions shifts
      • Demand increases - quota is more restrictive, because the same quantity is imported; imports can increase under a tariff
      • Demand decreases - quota becomes less restrictive; it is possible a quota will have no effect if imports fall below the quota
The Welfare Effects from the U.S. Government's Import Quota

Country imposes an import quota

  1. Welfare effects
    1. Free trade
      • Consumers' surplus = a + b + c + d + e + f + g
      • Producers' surplus = h
      • Welfare = a + b + c + d + e + f + g + h
    2. Import quota
      • Consumers' surplus = a + b + c
      • Producers' surplus = d + h
      • Economic rent = f +r
      • Welfare = a + b + c + d + f + h + r
    3. Loss is e +g + q + s
  2. Economic rent - unfair profit because gov. or a firm with market power manipulates the market
    1. If government gives quotas freely, then government does not collect revenue
      • Foreign firms collect this rent
      • Fair method is to allocate quotas based on a company's import proportions before the quota
    2. Government can capture this rent by auctioning licenses to foreign firms
      • Gov. collects revenue
      • Increases rent-seeking behavior
      • May increase gov. corruption, as firms pay bribes for licenses
      • Increases political lobbying and favoritism
 

Voluntary Export Restraints (VERs)
Voluntary Export Restraints (VERs) – graphically similar to import quota, except foreign exporting companies capture area f as rent
  1. Export quota – exporting country imposes quota on itself
    • Usually a major trade partner threatens import protection
    • Canada, Europe, and U.S. used them
  2. Japan voluntary imposed quotas on itself for Japanese cars sold to U.S. during 1980s
    • U.S. threatened to impose trade barriers
    • U.S. encouraged free trade, and used VERs to protect U.S. market (not to contradict itself)
    • Result
      • Thus, Japan exported its best, luxury cars to U.S.
      • Honda, Nissan, and Toyota started producing cars in the U.S. to circumvent trade barrier
        • Note - The Japanese greatly appreciated against the dollar until the mid 1990s
      • The VER shut out the small auto companies like Suzuki and Izuzu from U.S. export market
      • Ford, GM, and Chrysler had time to retool and build better cars
      • Instead, U.S. producers raised the price of cars to make more money and did nothing
    • Note – Dangerous to subsidize a domestic industry that is having problems
    • Note - VERs are worse than quotas and tariffs, because country loses area "f"
    • Estimated the U.S. lost $13 billion in consumers' surplus to Japan
 

GATT and WTO
 
  1. General Agreement on Tariffs and Trade (GATT)
    • Founded in 1948
    • GATT reduced trade barriers through rounds
      • Reciprocal - member nations lowered trade barriers together
      • Reduced tariffs to less than 4% on average
      • 1/10 of the level of 1948
      • Uruguay round created WTO
      • Countries reduced tariffs, but increased nontariff trade barriers
  2. World Trade Organization (WTO)
    • Comprised of 153 members (as of 2010)
    • WTO accounts for over 90 percent of world trade
    • Headquarters are in Geneva, Switzerland
    • More enforcement power than GATT
      1. Review national trade policies
      2. Protect intellectual property rights
        • Patents, copyrights, and trademarks
        • Prevent piracy
      3. Provide technical assistance and training to Less Developed Countries (LDCs)
      4. Transparency – countries must disclose trade regulations
      5. Help settle trade disputes
      6. WTO can impose trade sanctions on member states that violate trade agreements
    • Protest – many WTO meetings have large protests
      • Usurps sovereignty from countries
      • Should focus beyond trade
        • Environmental problems
        • Good wages and safe working conditions for workers
      • Tool of large corporations