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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, 11th Edition © 2013 John Wiley & Sons, Inc.
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.
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
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
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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.
The Political Economy of Protectionism
A Qualified Argument for Protection
 Infant-industry Argument
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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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Political Economy of Protectionism
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.
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
 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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 The Uruguay Round

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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, 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:
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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, Outstanding Trade
Problems, and the Doha Round
 The Uruguay Round
Major Provisions of Uruguay Accord:
 Tariffs

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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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 The Uruguay Round
Major Provisions of Uruguay Accord:
 Antidumping

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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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 Outstanding Trade Problems

Trade disputes between the United States and
the European Union.

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
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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 Outstanding Trade Problems

Tendency for world to divide into three major
trade blocs:

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
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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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, 11th Edition © 2013 John Wiley & Sons, Inc.
The Uruguay Round, Outstanding Trade
Problems, and the Doha Round
 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, 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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Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.