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

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

Effects of a quota

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

Export subsidies

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

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.

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

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

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

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

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

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

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 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