Chapter 8: Nontariff Barriers to Imports Topics in chapter 8: The “new” protectionism Import quotas Import licences Voluntary Export Restraints (VER) Product standards Costs of protection

New protectionism Although tariffs have historically been the most important trade restriction, there are many other types of trade barriers As tariffs were negotiated down during the postwar period, the importance of nontariff trade barriers has greatly increased

Import quotas A quota is the most important nontariff barrier to trade. It is a direct quantitative restriction on the amount of a commodity allowed to be imported or exported Import quotas were very common in Western Europe immediately after World War II. Since then import quotas have been used by practically all industrial nations to protect their agriculture

Effects of a quota P S S + q Pw D Q S0 S1 D1 D0

Effects of a quota

Quota in a large economy

Welfare effects of quotas

Welfare effects of a quota With competition, welfare effects of a quota and a tariff are identical, but there are important differences too With a quota, an increase in demand will raise prices and domestic production With a tariff, domestic production and prices will not be affected by an increase in demand A quota involves the distribution of import licenses

Ways to allocate import licenses Import licenses can be distributed in several ways Competitive auctions Fixed favouritism Resource-using application Since import licenses result in monopoly profits, potential importers are likely to devote a great deal of effort of lobbying and bribing to obtain them

Tariff-quotas Modul 3

Voluntary Export Restraints An importing country induces another nation to reduce its exports of a commodity “voluntarily” under the threat of higher all-round trade restrictions VERs have been negotiated since the 1950s by the US, EU and other industrial nations to curtail exports of textiles, steel, electronic products, cars and other products from Japan, Korea and other nations

Effects of a VER P VER quota Pq Quota rent Pw Qq Qf Q

VER - American cars From 1977-1981 US car production fell by about one third and the share of imports rose from 18 to 29 percent and nearly 300 000 workers lost their jobs Japan agreed to limit car exports to 1.68 million units per year from 1981 - 1983 and 1.85 million units for 1984 and 1985 This resulted in a $ 660 price increase for US made cars and $ 1 300 for Japanese cars US automakers jobs were saved at a cost of around $ 100 000 each

Technical, Administrative and other regulations These include Safety regulations Health regulations Labelling restrictions Domestic content requirement (rules of origin) Subsidies and countervailing duties

Costs of protection Very difficult to measure Static resource allocation costs are likely to be low (area b + d in our models) Dynamic long term effects can be much higher Johnson`s formula for measuring b + d Net loss/GDP = 1/2 tariff • percent change in import quantity • import value/GDP

Rule of origin: Made in….where? “Rules of origin” are the criteria used to define where a product was made. They are an essential part of trade rules because a number of policies discriminate between exporting countries: quotas, preferential tariffs, anti- dumping actions, countervailing duty (charged to counter export subsidies), and more. Rules of origin are also used to compile trade statistics, and for “made in ...” labels that are attached to products.

International commercial diplomacy - GATT/WTO

WTO – some facts

The 10 benefits

Benefit nr 1: Peace Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade to flow smoothly, and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. It is also an outcome of the international confidence and cooperation that the system creates and reinforces. History is littered with examples of trade disputes turning into war. One of the most vivid is the trade war of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and retaliate against each others’ barriers. This worsened the Great Depression and eventually played a part in the outbreak of World War 2.

Nr 10: Good government

The World Trade Organisation

Principles of the WTO

Why is it called “most-favoured”? The name sounds like a contradiction. It suggests some kind of special treatment for one particular country, but in the WTO it actually means non-discrimination — treating virtually everyone equally. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most-favoured”.

Exceptions to MFN About 100 of the 144 members are developing countries - and it it “permitted” to discriminate favourably towards developing countries Regional trade agreements are permitted, but not encouraged Bilateralism vs. multilateralism

Regional agreements

GATT - WTO

Did GATT succeed ? Tariff rates dramatically reduced from 40 % to 4 % on industrial goods Much smaller success with NTBs Small or no legal power, but has been much strengthened in the WTO Outstanding problems regional agreements EU and CAP (Common Agricultural Policy)

Eight (nine) rounds since 1947

What happened in the different rounds of negotiations between 1947 and nowadays? The first five GATT rounds concentrated largely on tariff reductions. The first round, involving 23 countries in 1947, resulted in 45,000 tariff concessions affecting $10 billion of trade, about one-fifth of the world's total. The 23 also agreed to adopt the General Agreement in Tariffs and Trade, rescued from the failed attempt to create an International Trade Organisation. The next GATT rounds concentrated on further reducing tariffs. Then, the Kennedy Round in the mid-sixties brought about a GATT Anti-Dumping Agreement. The Tokyo Round during the seventies was the first major attempt to tackle trade barriers that do not take the form of tariffs (non-tariff barriers), and to improve the system. The eighth, the Uruguay Round of 1986-94, was the latest and most extensive of all. It led to the WTO and a new set of agreements covering goods, services, intellectual property and a new dispute settlement mechanism.

Problem nr 1: Agriculture

Agriculture - very expensive

Solving disputes

Much faster than it used to be