1. Welcome to Econ 414 International Economics
Study Guide
Week Nine
Ending: Friday October 26

2. Nontariff Barriers to Trade (Chapter 7)
What are GATT and WTO and what is their role in international trade?
There is little on WTO in you book

3. Here is a little more information on GATT (General Agreement on Tariff and Trade)
Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II.
The GATT's main objective was the reduction of barriers to international trade.
This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements.
Originally, the GATT was supposed to become a full international organization called the International Trade Organization.
However, the agreement was not ratified, so the GATT remained simply an agreement.
The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s.

4. These types of protection are increasing as tariffs are decreasing.
What are Non-tariff barriers to trade and how common are they?
The answer is in the book
Problems:
These types of protection are increasing as tariffs are decreasing.
They are less visible than tariff but in many cases they are more restrictive than tariffs.

5. What are Quotas?
A government policy that limits imports of a product to a certain number of units.
It is banned by the WTO but it still exists.

6. How common is quota?
In 1955 Ireland suspended its import quota on fertilizers.
China's Grain and sugar import quotas remain unchanged in 2008
In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year
In 2005 the European Union decided to increase quotas for Chinese textiles
In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT.

7. Facts Not all countries are members of the WTO
Members of WTO are allowed to maintain quotas for a specified period of time.
Transition period
How much power does WTO have?
Some countries implement quotas defying WTO rules.

8. What are Multifibre Arrangements?
Quota on textile
Uruguay Round negotiations of GATT have led to phasing out of the MFA.

9. What are Voluntary Export Restraint (VER)?
It is an agreement by a country to limit its exports to another country to a certain number of units.
It differs from a quota because the exporting country administers VER
Since it is “voluntary” it is legal under WTO regulations.
VER is difficult to negotiate

10. Examples of VERs
In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States.
In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear.
In 1991 a VER was established between the European Union (EU) and Japan that established “voluntary” quotas on Japanese cars until 1999.

11. Moving from no trade to free trade
World Price = 10, Domestic Price = 20
Imports = 50, CS goes up
Price of Cloth
Quantity of Cloth S D E 20 10 20 70

12. The Economic Effects of a Quota
Supply curve shifts right by 30
At P =10 there is a shortage of ______ Price goes up to ____ 20 12
What is d?
Price of Cloth
Quantity of Cloth S D
S + Q
CS goes down by?
Who gets c?
Who gets a? G 12 a c b 30 60 d 10
What is b? 20 70
Quota 50

13. Who gets c? In case of tariff c went to government. In case of quota:
Domestic license holders, if they buy 30 units at p =10 and sell it at p = 12
Domestic government, if it sells licenses at $2 per unit of imported good.
Foreign producer, if this is VER.

14. Suppose initially quota has the same effect as tariff
The only difference may be in who gets c
Price of Cloth
Quantity of Cloth S D
S + Q 12
Tariff 30 c 60 10 20 70

15. Now domestic demand grows to D’
Under quota, at p =12 there is a shortage P up to 13, CS?
Under tariff, P is still 12, import grows to 40, CS↑
Price of Cloth
Quantity of Cloth S D’ D
S + Q
Quota is more restrictive 13 12 c
Tariff b 30 60 d a 10 20 70 35 65

16. Other Nontariff Distortions
Industrial Policy
Domestic regulations can distort international trade.
Regulations sometimes have the intent of directly impacting trade.
Regulation effects difficult to quantify.
Examples:
Guaranteed low interest government loans for domestic producers
Tax advantage to exporting industries

17. Other Nontariff Distortions
2. Government Procurement
Laws that direct a government to buy domestically-made products unless comparable foreign products are substantially cheaper.
Spending of public funds places restrictions on funds.
Justification that buying domestic is better for the country.
Similar to Mercantilist’s view

18. Other Nontariff Distortions
In countries where government owns industry and has government procurement, trade is severely restricted.

19. Other Nontariff Distortions
3. Technical Barriers to Trade
Laws that apply technical standards to goods or services that may distort trade.
Domestic country’s national standards for safety, health, and product labeling
They may require firms to produce two different goods or packages to allow exports.
Some goods must meet technical standards like cars from the U.S. to the Ireland.

20. Other Nontariff Distortions
4. Subsidies
Governments subsidies distort trade flows.
Such subsidies can be directly tied to exports, or more commonly they are domestic subsidies that indirectly influence trade.

21. Other Nontariff Distortions
5. Labor and Environmental Standards
Countries differ in regulations for workers with respect to safety and work conditions.
Developed countries argue they cannot compete with wages in countries with less strict labor laws.
Empirical evidence has not shown significant effects on trade.

22. Other Nontariff Distortions
Labor standards
Laws that apply labor standards to manufactured products that may restrict imports.
Pollution intensive industry feels disadvantaged in countries with high pollution regulations.
Little of no empirical evidence of effects
WTO ruled countries cannot impose standards by limiting imports.

23. Transportation Costs and Trade
Transportation costs tend to reduce the quantity of trade between countries by raising the price of imported goods.
A good will be traded internationally if transportation costs are low enough so that it is profitable to international trade the goods between countries.

24. Transportation Costs and Trade
Price of Cloth
Quantity
of Cloth
Price of Cloth
Quantity
of Cloth
SUS
DINDIA
SINDIA
DUS E
PUS
QUS P1 Q5 Q6 T P* C Q1 Q2 D Q3 Q4 P2 Q7 Q8 F
PINDIA
QINDIA
U.S. Cloth Market
India’s Cloth Market

25. Assignment 4 (10 points) Due: before 10PM on Friday, October 26 You will do this one in pre-determined teams of 2
Is the following statement true or false? Use a graph and a numerical example to explain. “The American car producers will prefer a new tariff on imported cars to an equivalent amount of quota if the U.S economy is predicted to be in recession in the near future.” [Hint: during a recession, the demand for cars drops]