International Economics International Economics Tenth Edition Nontariff Trade Barriers and New Protectionism Dominick Salvatore John Wiley & Sons, Inc. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc. CHAPTER N I N E 9

Learning Goals: Know the meaning and effect of quotas and other nontariff trade barriers Describe the effect of dumping and export subsidies Explain the political economy of protectionism and strategic and industrial policies Describe the effect of the Uruguay Round and the aims of the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Introduction Though tariffs have historically been the most important form of trade restriction, there are many other types of trade barriers. As tariffs were negotiated down during the postwar period, the importance of non-tariff barriers was greatly increased. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Import Quotas A quota is a direct quantitative restriction on the amount of a commodity allowed to be imported or exported. Import quotas are used to protect domestic industry and agriculture, and/or for balance of payments reasons. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Import Quotas Import Quota vs. Equivalent Import Tariff Import quota: Higher domestic price than tariff Higher domestic production than tariff Import tariff: Higher consumption than quota Higher imports than quota Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

FIGURE 9-1 Partial Equilibrium Effects of an Import Quota. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Import Quotas Import Quota vs. Equivalent Import Tariff Import quota involves distribution of import licenses, while tariff does not. If not auctioned by government in competitive markets, receiving firms will reap monopoly profits. Allocation decision often based on arbitrary judgments rather than efficiency concerns. Monopoly profits lead firms to lobby for licenses in rent-seeking activities. Thus, import quotas replace market mechanism, resulting in waste, and possible corruption. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Import Quotas Import Quota vs. Equivalent Import Tariff Import quota limits imports to specified levels with certainty, while the trade effect of an import tariff may be uncertain. When elasticity of demand and supply are not known, it is difficult to estimate the import tariff required to restrict imports to desired level. Foreign exporters cannot maintain export quantity simply adjust to barrier by increasing efficiency or accepting lower profits, as with tariff Because import quota is less “visible, domestic producers prefer them over tariffs. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Import Quotas Import Quota vs. Equivalent Import Tariff Since import quotas are more restrictive than equivalent import tariffs, society should resist domestic producers’ efforts to use quotas instead of tariffs. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Voluntary Export Restraints (VERs) With VERs, an importing country induces another nation to reduce its exports voluntarily, under threat of higher trade restrictions. Sometimes called orderly marketing arrangements, VERs allow industrial nations to appear to support the principle of free trade. Less effective in limiting imports than import quotas because exporters tend to fill the quota with higher quality, higher priced goods over time. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Technical, Administrative, Other Regulations Health and safety regulations may serve as barriers to international trade by raising the costs of imported products. Government purchasing restrictions may be biased against foreign goods. The Buy American Act of 1933 Rebates for indirect taxes may be given to exporters and imposed on importers of a commodity. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism International Cartels Organization of suppliers from different nations that agrees to restrict output and exports of a commodity with the aim of maximizing or increasing total profits. For example, OPEC (the Organization of Petroleum Exporting Countries) quadrupled the price of crude oil between 1973 and 1974 by restricting production and exports. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Dumping The export of a commodity at below cost, or the sale of a commodity at a lower price abroad than domestically. Three types of dumping: 1. Persistent dumping is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Dumping The export of a commodity at below cost, or the sale of a commodity at a lower price abroad than domestically. Three types of dumping: 1. Persistent dumping 2. Predatory dumping is the temporary sale of a commodity at below cost or a lower price abroad to drive foreign producers out of business. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Dumping The export of a commodity at below cost, or the sale of a commodity at a lower price abroad than domestically. Three types of dumping: 1. Persistent dumping 2. Predatory dumping 3. Sporadic dumping is the occasional sale of a commodity at below cost or lower price abroad to unload surplus of the commodity without reducing domestic prices. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Other Nontariff Barriers and the New Protectionism Export Subsidies The granting of tax relief to exporters or subsidized loans to foreign buyers to stimulate a nation’s exports. Can be regarded as a form of dumping. Export subsidies are illegal by international agreement, but often used in disguised form. Example: Export-Import Bank U.S. government agency that extends subsidized loans to foreigners to finance U.S. exports. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Political Economy of Protectionism Fallacious Arguments for Protection 1. Trade restrictions are needed to protect domestic labor against cheap foreign labor. Even if domestic wages are higher than wages abroad, domestic labor costs can still be lower if the productivity of labor is sufficiently higher domestically than abroad. Mutually beneficial trade could be based on comparative advantage, with cheap labor nation specializing in labor-intensive commodities. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Political Economy of Protectionism Fallacious Arguments for Protection 2. Scientific tariffs are needed so that domestic producers can compete. A scientific tariff raises the price of imports to the domestic price. This would eliminate price differences and trade in all commodities subject to such “scientific” tariffs. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Political Economy of Protectionism Questionable Arguments for Protection Protection is needed to: 1. Reduce domestic unemployment, and 2. To cure a deficit in the nation’s balance of payments Protection would lead to substitution of imports with domestic production. These are beggar-thy-neighbor arguments for protection because they come at the expense of other nations. Other nations retaliate; all nations lose in the end. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

A Qualified Argument for Protection Infant-industry Argument Temporary trade protection is justified to establish and protect a domestic industry during its “infancy” until it can meet foreign competition, achieve economies of scale, and reflect the nation’s comparative advantage. To be valid, the return in the grown-up industry must be high enough to offset the higher prices paid by domestic consumers of the commodity during infancy. The Political Economy of Protectionism Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

A Qualified Argument for Protection Infant-industry Argument Requires several qualifications which, together, take away most of its significance: 1.More justified for developing nations than industrial nations. 2.May be difficult to identify which industry qualifies for protection, which, once given, is difficult to remove. 3.What trade protection can do, an equivalent production subsidy to the infant industry can do better. The Political Economy of Protectionism Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Strategic Trade and Industrial Policies According to the strategic trade policy argument, a nation can create a comparative advantage in industries deemed crucial to future growth in the nation. Nation may use temporary trade protection, subsidies, tax benefits and cooperative government-industry programs. Similar to infant-industry argument in developing nations. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Strategic Trade and Industrial Policies Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc. Concerns Difficult to pick winners and devise appropriate policies to nurture them. Efforts largely neutralized when leading nations undertake strategic trade policies at the same time. Retaliation in other markets may eliminate any gains.

The Uruguay Round, Outstanding Trade Problems, and the Doha Round The Uruguay Round GATT’s eighth round of negotiations, with 123 countries participating. Began in September 1986 with completion scheduled for December Disagreements between United States and European Union, on reducing agricultural subsidies, delayed conclusion for three years. Agreement took effect in July, Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round, Outstanding Trade Problems, and the Doha Round The Uruguay Round Aims of the Uruguay Round: Establish rules for monitoring protectionism and reversing the trend. Bring services, agriculture and foreign investments into negotiations. Negotiate international rules for protection of intellectual property rights. Ensure more timely decision and compliance with GATT rulings on dispute settlements. Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Tariffs Tariffs on industrial products to be cut from an average of 4.7% to an average of 3%. The share of good with zero tariffs to increase from 20-22% to 40-45%. Tariffs removed on pharmaceuticals, constructions equipment, medical equipment, paper products, and steel. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Quotas Quotas on agricultural products were to be replaced with less restrictive tariffs by 1999 Quotas on textiles were to be replaced with less restrictive tariffs by 2004 The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Antidumping Tougher and quicker resolution of disputes resulting from antidumping laws, but not a ban on their use. Subsidies The volume of subsidized agricultural products was to be reduced by 21 percent, with government subsidies for industrial research limited to 50% of the applied research cost. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Safeguards Countries barred from implementing health and safety standards that are not based on scientific research. Temporary tariffs allowed to protect domestic industries from temporary imports surges. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Intellectual property Twenty-year protection of patents, trademarks, and copyrights. A 10 year phase-in period for patents over pharmaceuticals in developing countries. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Services United States failed to gain access to markets in Japan, Korea and many developing nations for banks and security firms. United States did not succeed in having France and the European Union lift restrictions on showing American films and TV programs in Europe. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Other Industry Provisions United States and Europe agreed to talks on limiting government subsidies to civil aircraft makers, opening up distance telephone market, and limiting European steel subsidies. United States expressed intention to negotiate opening Japanese computer chip market. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: Trade-Related Investment Measures Phased out requirement that foreign investors buy supplies locally or export as much as they import. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The Uruguay Round Major Provisions of Uruguay Accord: World Trade Organization (WTO) Established the WTO in place of the GATT Secretariat, with authority in industrial and agricultural products and services. Trade disputes to be settled by vote of two-thirds or three-quarters of nations rather than unanimously. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Outstanding Trade Problems Trade disputes between the United States and the European Union. EU subsidies to Airbus EU ban on US exports of hormone-raised beef and genetically modified food High subsidies and tariffs on agricultural products, and frequently abused antidumping laws. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Outstanding Trade Problems Tendency for world to divide into three major trade blocs: European Union (EU) North American Free Trade Area (NAFTA) Asian Bloc Call by some developed nations for labor and environmental standards, to ensure “leveling of working conditions” and avoid “social dumping” The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Doha Round Launched in November, 2001, in Doha, Qatar. Agenda included: Further liberalization of production and trade in agriculture, industrial products, and services. Further tightening of antidumping regulations, investment and competition policies. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Doha Round Developing nations reluctant to make concessions because of feeling that Uruguay Round failed to deliver on promises. Developing nations insisted on making Doha Round a true “development round”. Intended to conclude by end of 2004, all but collapsed in 2006 over disagreements over agricultural subsidies between developed and developing nations. As of beginning of 2009, still not concluded. The Uruguay Round, Outstanding Trade Problems, and the Doha Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-3 Antidumping Investigations by G20 Members Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-4 Agricultural Subsidies in OECD Countries Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-5 Pervasiveness of Nontariff Barriers Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-6 Benefits to the World Economy from Complete Trade Liberalization Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-7 Gains from the Uruguay Round Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-8 The Multilateral Rounds of Trade Negotiations Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

Case Study 9-9 Benefits from a Likely Doha Scenario Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

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