1. International Economics Tenth Edition
CHAPTER N I N E 9
International Economics Tenth Edition
Nontariff Trade Barriers and New Protectionism
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

2. In this chapter: Introduction Import Quotas
Other Nontariff Barriers and the New Protectionism
The Political Economy of Protectionism
Strategic Trade and Industrial Policies
History of U.S. Commercial Policy
The Uruguay Round, Outstanding Trade Problems and the Doha Round
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

3. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

4. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

5. Import Quota vs. Equivalent Import Tariff
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, 10th Edition © 2010 John Wiley & Sons, Inc.

6. FIGURE 9-1 Partial Equilibrium Effects of an Import Quota.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

7. Import Quota vs. Equivalent Import Tariff
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, 10th Edition © 2010 John Wiley & Sons, Inc.

8. Import Quota vs. Equivalent Import Tariff
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, 10th Edition © 2010 John Wiley & Sons, Inc.

9. Import Quota vs. Equivalent Import Tariff
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, 10th Edition © 2010 John Wiley & Sons, Inc.

10. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

11. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

12. 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 by restricting production and exports.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

13. 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:
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, 10th Edition © 2010 John Wiley & Sons, Inc.

14. 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:
Persistent dumping
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, 10th Edition © 2010 John Wiley & Sons, Inc.

15. 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:
Persistent dumping
Predatory dumping
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, 10th Edition © 2010 John Wiley & Sons, Inc.

16. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

17. FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

18. The Political Economy of Protectionism
Fallacious Arguments for Protection
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, 10th Edition © 2010 John Wiley & Sons, Inc.

19. The Political Economy of Protectionism
Fallacious Arguments for Protection
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, 10th Edition © 2010 John Wiley & Sons, Inc.

20. The Political Economy of Protectionism
Questionable Arguments for Protection
Protection is needed to:
Reduce domestic unemployment, and
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, 10th Edition © 2010 John Wiley & Sons, Inc.

21. The Political Economy of Protectionism
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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

22. The Political Economy of Protectionism
A Qualified Argument for Protection
Infant-industry Argument
Requires several qualifications which, together, take away most of its significance:
More justified for developing nations than industrial nations.
May be difficult to identify which industry qualifies for protection, which, once given, is difficult to remove.
What trade protection can do, an equivalent production subsidy to the infant industry can do better.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

23. 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, 10th Edition © 2010 John Wiley & Sons, Inc.

24. Strategic Trade and Industrial Policies
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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

25. The Uruguay Round, Outstanding Trade Problems, and the Doha Round
GATT’s eighth round of negotiations, with 123 countries participating.
Began in September 1986 with completion scheduled for December 1990.
Disagreements between United States and European Union, on reducing agricultural subsidies, delayed conclusion for three years.
Agreement took effect in July, 1995.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

26. The Uruguay Round, Outstanding Trade Problems, and the Doha 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, 10th Edition © 2010 John Wiley & Sons, Inc.

27. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

28. The Uruguay Round, Outstanding Trade Problems, and the Doha 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
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

29. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

30. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

31. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

32. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

33. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

34. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

35. The Uruguay Round, Outstanding Trade Problems, and the Doha 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

36. The Uruguay Round, Outstanding Trade Problems, and the Doha Round
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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

37. The Uruguay Round, Outstanding Trade Problems, and the Doha Round
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”
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

38. The Uruguay Round, Outstanding Trade Problems, and the 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

39. The Uruguay Round, Outstanding Trade Problems, and the 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.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.