1. Chapter 9: Nontariff Trade Barriers and the New Protectionism
Topics in chapter 9:
The “new” protectionism
Import quotas
Import licences
Voluntary Export Restraints (VER)
Export subsidies
Product standards
Costs of protection

2. 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

3. 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

4. Effects of a quota

5. Effects of a quota

6. Welfare effects of quotas

7. 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

8. 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

9. Export subsidies

10. 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

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

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

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

14. 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.

15. 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

16. Political Economy of Protectionism
Are there any valid economic reasons for imposing a tariff?
Protect domestic labour
Infant industry argument
Optimum tariff
Who gets protected?
Consumer and producer interests

17. Strategic trade policy
Airbus
Produce
Don’t produce
-10, -10
100, 0
0, 0
0, 100
Produce
Boeing
Don’t produce 95

18. Development of a New Aircraft
Boeing
Produce
Don’t produce
Airbus
-10, -10
100, 0
0, 0
0, 100
Boeing will produce
Airbus will not produce 95

19. Development of a Aircraft After European Subsidy of 20
Airbus
Produce
Don’t produce
Produce
-10, 10
100, 0
0, 0
0, 120
Boeing
Don’t produce 97

20. Development of a Aircraft After European Subsidy
Boeing
Produce
Don’t produce
Airbus
-10, 10
100, 0
0, 0
0, 120
Airbus will produce
Boeing will not produce 95

21. The World Trade Organisation

22. Principles of the WTO

23. 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”.

24. Exceptions to MFN
About 100 of the 151 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