Global

ll":1i:i:":t !c11mia' I f,tf raitl1

:'ti:

Analysis of a Tariff ig$st economisrs far,or ietting nalions tr"ade freeiy', with few larifit or oiher barriers tc trade. Indee{ economists have tended to ire even more critical of trade barriers than

har.e other€roups in society, even though economists have taken great care to lisi tlie

e.x*eptionai"cases in wilifli they feel trade liarriers caii be justified. Such agreernent among eccnomists is rare. Why should ihey agree on this one issue l . T'he srriking consensus in favor of free trade is based primarily on a body of eco-

nomic analysii cleffionstraiing that iheie are usually net gains fu'om fieer trade. both

f*r naiions alel lbr the world. Chaptel2 shorvec!- with detnand and suppil' ctrves. ihat

free trade brings greater aggregate well-being than no trade, The maill task of this r, -.--... ^.. I rL . +'^rr.'.,.;r-,! ,.1-.--r,:r-c .r{'Ptrr It ic *n nn rlrnnrF lrrce-11Xflg p,lliCieS lVil}f aL lluptUl illlU tlltr ltlll\rWIlrg lildlitt't) ur I dr t rr IJ tu uvt'rP(trv ri!!

wide range offrade barriers. barriers that do not necessarily shut out all international

trade. It ii mainly on this more detailed analysis of trade policies lhat economists have based their view ihat liee trade is generally better rhan parlial restrictjotts on ffade, with a list of exceptions. This analysis makes it easier to understand what divides the malonr-1'- of economists frcm grcups cailirig lbr resiricficfis oii f,"8de.

T'o see what is lost or gained try putr.ing up barriels to international trade. let us take

a close look at the eftects of the classic kind of trade barrier, a lariff on an imported prodnct. This chapter spelis out $'ho is 1ike1y to gain and who is likely to lose {ion] i tarift-, r"nil explains conditions *nder ..^:ltich a rtalion eouLl end up better ofT fronr a tarifl Chapfers 9 through I I wiil exlend tlie basic slory lold here.

A ?*riff, as the terrn is used in intelnational trade. is a tax on importing a good n! \{r!'\ ire irrtn n {-{rulltv. rrsrrallr' collctrtcd bv eustonls oflicials at the place of'etttrv. 'farills come in two main types. A sfi*{*f;{ Xari'ff is stipulated as a money fiIilounl per unit oi iinpr:rt, such as clollars per ton of steei bars, or dollars per eigirlcylinrier rw.o-door sporr,s car. A-n eq-i v***r-er:: (on the velue) t*nlff is a percentage of the esti- mated market value of tire goods *'hen they reach the importing counfry. \Are will not pav much attention to this distinction, because it nrakes alnrost no difl-erence ic our conc,lusirrls.

-iariffrates ilave treen cleclining, but they'are stiii intportant. Indeed" only one coun- rry in the r.','orl4 Singapore, has na tariff.q. {ln adclition, two aufonomolls custoffis arsas, l-{ong Kong and Macau, harre no tarilli}.

Iior th* ililustrialized eoLlntries. averagr tariff rales in the 1930s were about 60 p*r'ceni. in the aJtennath r:f the infarnous Smoot-Ffawley tarifli lhat fhe United States enacie{ in 1930 and the increased rates adopted by othel coitntries in response ttl

.,{.58',, lnternational Economics - Vol. 1

{44 Part Two Trude Poticl

,Duri*g the ,past f;5,:yeais., govgftr*ents: of industr:ialized {ountf ie1:r€aehed . a ser:ies of glo-bal agreernents'that hav€ r€du(ed tariff: ,on their nonagric*ltural imports to very'Iow levels. How did they accornplish this remarkable reduetion? And, what is the position of the develoroing coun- tries in,the process? To answer *hese questions, we take up the topic of global governa4cfppp6l.ut and institutions thet condition how national gov- €rnments interafi with each other=--{vith a focus on,international econamic issues like trade^

6ATT TO WfO The story begins duriryg Woild War lJ, when the United States, Britain, and the.alher allies began, to discuss:how to ensure thatthe ecancmic syst€m worked better after the war than":it,had b€fore. the war. For trade, the goal was to find a way to avoid the virulent protedioniin that had taken hold in many countri*s in the early 1930s; The, United Statet Britairr. and their allies expected the key institution to be the lnternatisnal'Trade' Organization. Hcwev€r; it never cam€ into exis:' tence becau:e;of oSposition, led ,by memberi of the,U.5. Congress. to what many vievred as the excessive breedth of the organizationt prroposed ch arter.

lrJstead, a "provis!*nal{l atcord; thd.S*r:*r,al *g,*f***r*t s*,, lxri#*,*ry*f .,!1ggt {*4:1; becarne the tey institutlix.,;fh€ Ceff waisigne-d in 1947 by 23 .c*untri*g.and focused sguarely, on':interna- tionattrade isiues. The number of countries in the cAl]' rose to'38 in 1960, 77 in ,1970, 84.in 1980; and 99 in 1390" A new grobal agreqnrgnt in the ea,rly 199$s led lgthecrcation,of the. Organieation {Wf*l in January 1995. The WTO, which subsumes and expands on the GAn, is'now the organizatisn that ov€rsees: the global rules 'cf gsvernment policies tourard internaiional trade 4_11d provides tLlg, forum'for negotiating global 6greementgto:improvc'theserules. :'' : .l The lL\r{O {}ike the GATT before ir} espouses. three major principles:

r 'Reductions of barriers to trade. , ' .'Nsndiscri$ination"'*ften called.the fiost-

{&vored aatiofi,tVFN)principie.,, : ., *.:rl&,ggtair ead*qr-agement'{or' expot'ts..' .'

' .As of.'early , 20t l th€ .WTO had.' 1S3,,.member -countri**, in addi*on,. 30::{ountfieS, inelud. 'ing Russia,'hava been negotiating to becorne member:s. The WIO's 'headquarters, are in :Geneva, Switzerfand,

NEGOTIATIOHS LOW€N TARIFFS .]: ln the first, decades af its exi$tence' rhe SAfi focused on tariffs:'ln recent decades other {"non-

,tariffo) $31y"iers have received more,attention, and these are taken up in the next chapter. , Under ihe GATT; member eountrie$ pursued eight rounds of nultitateral trade negotiations

.to lower barrierts. The first five .r+unds,focused ,on redu{tions in tariff retes,. uiing ftem-by- item neg€tiations in ,which the largest trading 'countries agreed to mutual reductions and then extended there n€w{ow*r tariffs to a!l.rnembers. foflowing the MFN nofidiscrimination principle, This 'meant that the' aegotiationJ w€re con- duc,ted *rn on g,the, la rgesi,i *d ustria l cou ntl"ies. I n addilia* it was qu ickJy,recog nieed that lowering' 'barriers to,trade in agriculturalr products would .be,fraught with ccntroversy; s* the negotiations focusedfn nonagricultwal pioducts. , The first round, Geneva 1947, achieved sub-

stantial tariff reductlonr ffor instance,.the ,aver- a ge, U.S". tariff rate, was,reduced, by, 2 1 per:cent). Th* nex three rounds,, Anfte{y, 1949, Torquay 1950-1'951. and Geneva .1956;,achieved,rnod- est new reduciions; as'did the Dillon Round t1 960: 1 961), which also took up the rreation of a'common external tariff schedr.rle for the newly

,f ornle d, :Egropean . Economic.,, eomm u nity {now the f.rropeAn Uninn).

To accompiish more :substantial:.{ariff reduc- tions;' ihe Kennedy Rcund' {1963*1967} shifted the",procesr,so that the industrialized countries began:with an agreem€nt to use e forrnula to lower all'nonagricultural larjffs and the* negoti- ated :Iim ited exeeptio!]E, i n w-hich .jsom e' pl:od u{ts had lesser tar.iff cuts. Ihis innovation worked*the *veriige tarfff'reduction was,3€ per{ent for non- agricultura I irnports' i nto ind usrialized cou ntries. The Tokyo Round {1973-1979) and'the i.}ruguay Round, {1 9S6* 1 994)'eontinued the pracess using {ermulas .for,cuts; xrith:,negotinted,'excep-tisns.,

, I *dustr.i alized., cou ntriesf nona g rieuf tu ra l' taliffs

lnternational Economics, 1 5th Edition 159

ChaPlerB \'r,,,''ir' i 1..':'

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ffi ;*5*

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fell by ail average of 33 percent and 38 percent, respective lY.

DEVELOPING COUNTRIES Lnrhile the indusrrialized couniries have negoti- ated tariff reductions, what has been ihe role of develcping tountries? O{ tne 23 founding mem- bers of GAil, 13 were developing countries, and riovv trlost wTo members ar€ developing ccun- tries. Hovve'rer, until recentiy, develaping coun- tries piayeci little role in the nrultilateral tracle negotiations. lje<.aule Litey were seiciom rnajoi exporteri or importerE of specific rionagricultural prodLrcts, they were nci active irr ihe negotiations ,rf tha firct {irrp vnrrn.l( In thF Kerrnedv ROund ilrerL' rrras forrnal recognition that developing rounlries did not rreed to offer tariff cuts even though tirey benefited from the tariff reductions iry the ir:eJustrialized coLintries. The Tokyo Rounri irontiilued the apprr:ach. forrnalizing "special and di{fe rential" lreatfi}ent for developing ccuir- tries. in fact, nrr:st ciet;eloping courrities had noi even agreed ro maxiixufn bound tariffs for niost producls, so they were free to raise their tariffs if they u,'anted to.

while the cievelaBinE counlries benefited from tlre tari*f reductions by industrialized cquntries, they wei'e rrot able to infiuence l'row the industrialized countries wers lower- ing tariffs, because they were not involved in the give-and-take of negotiating over muiuai recluctions. lnduslrialized couniries siried frorri lowering tariff: on "sensitive" products, which ru",ere cftt-:n the labor-iniensive nonagricultural prcc!ucts lh*t were the nrast pronisit'rg prcdur-ts for expanding deveicping counl.ries' manufac- iured exports"

ln the 'i 9BOs mariy de,veloping countries shifteri toward a more culward-oriented strat- *gy for develr-rpment (see Chapter 'l 4 for further rl iscr-rssio i.:). M any r-rn i I atera i ly lowered th ei r ta riff rates. ihey ais{i became more invciveci in the rregotiations of the Uruguay Rclund, althcurllt ultimately the conclusiun of the round stiil laras r{nn!l:lqr'{ hrr nannli:tinnq ;l!1.}nnrt the irtdUS-\, !/ IrlyvL'q$vMy - * "" trialized currrtries, especially the Uniieci States and the Ii:rofiean Unir:n. A5 part of the Urugu..ly Roi;nrl, inariy developinc; cr:liniries agreed to

adopt bound rates for most of their tariffs, thaugh these bound rates often rernain aL:cve their actual rates. For example, Mexico has rto*r

bound mcst of its rates. but Mexico's average ariual taiiff raie of i2 p€rceni is rrvell bei*',ru il: average bor,tnd rate of 36 percent.

RECENT PROGRTSS Under the WTO, reduction of tarif{ barriers (ontlrrues. First. a special negotiation led to the infarmation Technology Agreement of 1996' iach country to the agreemen{ {inltially 29 coun- tries) ccmmits to eiiminate tariffs on impcrts of infcrrnation technoiogy goods {computers, 'telerommunicaiions equiprrrent, 5emiconductors, serniconductor nranuf.liturin5; equipment, and related iilstrumenis and parts) and software. By 2011, 73 countries had adopted ihe agreement, so thai 97 percent cf glotlai irarje in these infor- rnation technology products is {or soorr wilt be) tariff-free.

SeconC, the derveloping counffles that i"lave jcined ihe WTO since 1995 have g*oneraily lttw- ered their actual tariff rates as a conditicn for joining and accepted bound rates equal to or very close to their actual rates. For instance, the average tariff raie *f China, which ioined the WTO in 2001, fell from 17 percelit in 20{j0 t$ 1 1 per.ent in 2003' Third, reducing r'ariffs is an important part of the agenda far ihe (urrent Dcha Round of trade negotiatians, a

,r,,r.-.:ll L=^ ^..--*i^^J 1...+h^. i,. r}-',\ '\^wttOplC l-l1dt VVlll Ue cxdrlllllYu rur lrrer rrr tilc rrt^(

th apter. Overali, the liberalizatir:n prcceelures set

up r:nr-ler the G/\TT and continuecJ under tl":e WTO have been remarkably sucressful irr low'- erinq industrialized countries' tariffs on non- agriculturai products. ln part tir* multilateral ilegotiatiorls have succeeded because each courr- try's government is able to defend iis tariff- cutting "concessions" against the protests of don:estic iirotectionists as the pi ice ihe cour!ii'v- murt pay to qive its exparters betler sccess to other rnarkets. This rnerarrtiiist logic is bad economics*-rv-e know instead thet imports aie something the country gains and exports aie s{)rnething lhe ccr-inti'y gives up-Lrtrt the logic qeem5 io be Lrseful P0liti(s.

I6{} lnternational Economics - Vol. 1

::: Part Two Jiutlc I'iriirr

the irigher U.S. tariffs. Negotiated a[Jreements since then have dropped most taritTs on nonagriculturai products ir: these countrtes to very 1ow ler,eis. T'he key roie of the Ceneral Agreerlent on Tariffs and Tracie (CAl-f ), rvhicir is no-,v lolded itto the World Tt'ade Organization {WTO), as a fbrui}r for these multilateral trade negotiations is descri'neci in the box "WTO and GAIT: TarifT Silccess."

in 2009. taritT rates averaged 2.5 to 4.0 percent on nottagricultural prodlicts irnportecl into the L;nited States, Canada, the European Unt'on" and.lapan. But tarifJi

on solne nonagricuitural prodLrcis are much higher" up to 60 perceilt in ihe Uniled States. 25 percent in Canada. 26 percent in lhe Er-iropean Union. and 384 perceilt in .lapan. l"arilT rates for agrrcultural products are higher for man,v indrrstrialized coLtnfies. q,ith average taritft of 5 percent ior the United Siaies (liighest i'ate 350 petcegt). avel"age 1 l percelt ior Canada (highest 539 percent), average 14 percent for the European Union (higitest 166 percent), and average 21 percent for Japan {highesi 641 perceni).

Average tariff rates are higher in most developing collntries. For exantple. for Cirlna, itr 20091he average tarilf rale on nonagricultural imports was 9 percent, rvith a maximum raie oi'50 percent, and the avelage tariff raie an agricrtltural imports 'was 1 6 percent. with a high rate af 65 percent. For Mexico, the average atrrl maximlim tar-

iffiates were 10 percent and -50 percent for nonagricultural products and22 and254 pel'ccni l'or agriculrural piodticts.

Our exploration of the pros and cons of a tadlT rvil1 be detailed enough lo rvarrant listing its main conclusions lrere at the oritset. This chaptel and fihapters 9 antl I0 will ciiscirss horv ',

A taritTalruost ah.lays lowers rvorld well-beittg. ." A tariff r-lsually lower-c the well-being oleach nation. ineluding the ttation itttprlsitrg

the tarift'.

' As a genc'ral mle. rvhatever a tarifT can do for the nation, sonrethin-t else can do

There are exceptiotis to the case for free trade:

a. 'fhe fir:st exception is the '"nationaily optimai" tariff discussed near the end of this ciraprer. When a nation can afieci the prices at which it trades with foreigners. it can gain fronr its orvn tarifT. {The rvorld as a whole loses. howe'ver. )

7;. Chapler'10 presents solne "second-best" arguments for a tariff: ln cases where r:ther incurable distortions exist in the econon:ry, imposing a taritTmay be better

than doing nolhing.

r'. in a narrow range of cases tvith ciistortions tirat are specific to internatiotrai trade jtself" a tariff cau be better than any other polic-r,. and not just better than doing nothing.

' A tariff absoluteiy helps those grollps tied closely to the production of import sub- stitutes" even when the tarillis bad firr tlte nation as a rvhole.

lnternational Economics, 1 5th Edition . -,.,.... :---..,.--, -,..--.,

ChaPter I AnirlYris of u1'ar{f 16?

you mav wish to review these overall conclusions after we have completed tlre analysis

oi i*p*, barriers in this and the next two chapters'

TT{H fiFFfrCT L}F A TA$IIFF *N ffi#TdfiSTii F}ft#*UTTffiS

lntuitron suggests that donrestic pt'oducers which compete against 'TOo.tt:,*tt-l ?:T:t]t; ; bri#:If the government piaces a tax on imports.of the product. the domestrc

;;; ;i C ;r;#; o'"o.," roitt lrt. Domestic-producers can then e1rynd their

;;;-fi;;d#u*J ruies, or raise the price thev gharqe' or both. The tariff, bv tax- ing imporls to make *potrt less competitive in the domestic market, should make domestic producers bettsr off' :rr- -_.--:.^a-_

The demand ""a

u.,pplv.ralysis of a tariffagrees with our intuition' It goes beyond

i"t;ii*., ifr"rifr, r-V .ii'"ti'irg us ro calculate ju-st how much a tariffbenefits domestic producers. "'"ri[J-gi" with a demand-suppg_view:f th* U.S. market for bicycles without

anv

tarjff. For most of this chapter, we Ae* with the simple case in r'vhich o-ur nation is a

;d{.1;il1;;;-i,gJi in ttt. u'orld markets for the products we trade' This is the same s*tall **.r,ntry- tftat we defined in Chapter ?' Fo1 a.small coYnt"rY, th- ,gtl:: ll:l the country must palithe foreign sellers is not affected by how

much the small counffy

imports of the product. In the free-trade situation shown in Figure 8-1, bicycles are impcrled lreely

at the

gir*;;dd il;;;i$tgO. At this price clnsun:ers buy 'lo bikes a vear fi'orn do'restic

F:**ilJ*s s.t The U.S. Market foi' Bicycles with Free Tracle

Price f S ptr b,kr,')

54 (domestic suPPIY curve)

World price

5o-0.6 Dq= 1.6 krwqsw#

lmports Mo=1-A

D6 (domestic demand curve)

Quantity -",; 'tli: : , 'l \ ':

fi tf't" ,rotfO price is $300 per bike, with free trade the courtryb consumers. buy

1.6 million Uites, anO its local firms produce 0.6 million bikes' so 1'0 million

bikes are imported. With free trade damestic producer surplus is area CBA

and domestic consrimer swplus is area FEC,

lnternational Economics, 1 5th Edition

Fls{Jfir *.} The Effect ot a tar1ff on Domestic Producers

Chapter 8 Arx;lY.sis ol uTxnff 1a*

Price {$ **r i:ike}

540 56 (domestic suPP|Y curve or marginal cost curve)

330

300

.

210

Domestic Price with tariff A rrri{{

J3 World Price

Da (domestic demand curve)

0 5g* 0'6 5r = 0.8 tr1 Do !@q;!e#

:

M1

Quantity rr*iiiii:rrs *i L'il{}t i}ijl' {q*i:}

Mo,

Shaded,area a=,Producerrs gain from tariff = $2t mi[lion

Th. $30 ;.;tf on imports allows domestic ploducers toexpand their prodtrclion fro1,'ft to 5r The S30 bike tariffgives dornesiic producers extra surpius cn all the bikes they wquld have

produced even with-out the tariff{an exhra $30 X So) plus smalief net gains on additional

sales fgainequaling % x $30 x (S, - q)].

We can think of this as conlposed of t\rvo pieces. First, the rectangular part of area

d covering the first 0.6 miilion bikes refleits the higher price received on r-rnits that

are suppli;d even if ttrere is no tariff. Second" the triangle at the right-hand end of arca a'ieflects the additional producer surylus earned on the exfa 0.2 million bikes

supplied.

YMffi XTPffiCY #F A T&ffi,l$r #rd ffi#re4ffi$T'$fl t*P*$UPJ*HffiS

Intuition also suggests that buyers of a good.rmported from ab.roaf wi1lte hu*by a tariff. Domestic iinsumers end up paying a higher price, or buying less of the product,

or both. Again, we can use delnand'anA supply analysis to calculate the consumer los.s'

First, le-t's ,ut r* to the free-trade situa-tion {before the tariff is imposed) Shown in Fi;;;

"8.;. Witrr ;."" trade domesfic consumers b1y D, bikes at ttre rvorld price of

gi?0. *r6i itot" ifrupter 2 that {silslrl!?€r 5$r$l.t{5 is the amount that consumers gain from being able to tuy bikes at the going market price. Graphicaily, consumef

ffirut ii trt* aiea below the deman'd curve and abov? the market price iine'.ro 13e thii. recall that the demand curve tells us the highest price that some consumer: is will- ing to pay for each additional bike. Thus. accorcling to the demand citrve in Figure 8' I ,

:::;.,.':;!@[.1;:,

!

lnternational Economics - Vol. 1

15* Part Two Tia.de Policr

* F**tiRE S.3 The E{Iect ofa Tariff on Domestic Consumers

some consuner is,wiiling to pay $540 forthe first6ike (atpolntF), This consuner can buy the bike at the irarkeiprice of $300, so the consumer receives a net gain (consumer surplus)of $240 on tl'lat first unit. As we go down the demand curve frortl point F to point E, we find that the vertical distances befween the demand curve and the world price of $300 show us the bargains that these consumers are getting. These consumers pay less for bikes than the maximum amount they would have been rvilling to pay. By summing the net gain on each unit purchased we sec that the entire area (FEC) between the dernancl curve and the S300 pnce line tells us the total anrourtt of collsumer surplus.

Now the govemmenl imposes a tariff of 10 percent on imported bikes. Figure 8.3 shows the consumers?view of the bicycle market with the tariff The tariffraises the price that consunrers must pay for bikes (both imported and domestically produced) to $330.

By raising the price to $330, the tanff forces consumers who were buying the I.6 million bikes to make a decision;

' Some will continue to buy bikes, paying $30 more per bike. " Sorne will decide that a bike ls not worth $330 to thenr, so they will not buy at the

higher price.

Price {$ pe:"*;k*l

s40].r

330

3*0

; - ' .;,Domestic Prke with tari{f{ t anTT

World price

5,q (domestic suPPlY curve)

Da (domestic demand curve)

' , QuantitY {rr'rilliant *f .Lrik*:; $*rt y*l"i}

M1 L"e"d"*.@l4

Mo

, shaded area i:Cost.of thetarifJ to cons*mers -$45 million

no i*porr tariffof $30 raises the price that dcmesticconsumel'1;Tust.pay for imported and

domestic bikes. Quantity demanCed fal1s fron Do to D,' The tariff costs consumers botir the

fu|1 $30 on every bike tbey cootinue to tluy (a loss of $30 X D,) and the net en1o1'rnent on

;;;;;t;""i6 troo* lought at the loweitariff-free price but do not buy at the higher pti.* in ioai"g the tariff [air additional ioss of % x $30 x i'0

* Dl)]'

:r' 18,11'r'.lnternational Economics, 1 5th Edition

I.{ontariff Barriers to I*ports

, Ilr*tectin$'doniesti c pro*Lrcers aga i nst i inport conrpetiti on

'' ClearlY helPs those Producers. - Harlns i-lomestic c()nsumers of the products' u Fn:babiy hurts the importi-ng nation as a u'iroie'

Altnost surelv hurts lne uorld as a wliolc' d,,

So ir is with a typicai tariffbarrier as sr.rggested in Chapler 8. and so- it is witlr other

kincls or barners agait-tst inrports that r.vc- u,ill anaiyze in tlds chapter" In t-act' as tari{f

rates have iieclined in indusinalized countries and rnarry deveioping cormfries, the use

,;il;;;';';;-;;;;il"'d*;;"t*;; t; *o**"ti' p""r''"" has iicreased -

The niajor purpose of tli chapter is to exarnine various kinds of nontariffbarriers t* imports and their etflects. We aiso look at horv large are deadrveigltt losses froln pr:otection. in relation to the size of th,e who11"11tional e."::1t.y^ i:.: '!t :_lLi l'l; rlucer treitefits created by the protection. In addition. we continue our exalnlnfltioil

or

tt; -;;;;i*; ;iA; lvo.l* i'uo. organization. first in a bax that looks at wro rr'rles ofr*tr nonturitrlairiers unJ ur the Jurrent Duha Round clmultilateral trade negotia-

tionu, anO then in a section at the end of the chapter that examines liow irade disputes

hetween couutdes can be resolved.

,?l$J$--'. r,]ir h,i3{\l irr:-iilt cii-it-'h,qi;Ft5 T1. t,,.,'ryflrii 1l,

A r"ri:,ir;r-+rlif !:r;siriqrr ir:irlj;? to inports is an-v policy used by the goverrutrent to reduce

trnports. other than a sirnple tanflon importi. Nontariff barriers can take many forn-rs-

inciuding inrporl quiltas, biscriminatorv procluct t:1li:1i.?:Y:1iT- rules for gov- *rn**ntlur*1upr. atd alirninisuative red tape to harass imp_oners of.foreign.products'

n" Nig reduces irnports through one or more of the follorving direct efl'ects:

" I-imitlng the quantity of imports. " ]ncreasing the cost of getting imports inlo tire market' ,, Creating uncertaiptl, about thc conditions under whicit intports will

'ne perrnittecl'

16r

:.-'.! lnternational Economics -Vol. 1

lSS Part Two TradePalicl

Covernment Procurement

TyPe:

lmpon quota . l

Vof untarir expo'rr restr*int S/lR)

Tariff quota

Direct:sftsct{r} ' ,

QuanJhy .r .' , , . ":" , Q-u;ntiqr' ,i" . ,,. i'

Quantity (if the tariff for potentiaf :imports above the specitied quantity is so high tha"t it is prohibitive, so that there are no imPorts above

the specif ied quant'itY)

Quant {for instance, an outright prohibition) Cost of importing (for instance, special procedures for imports)

QnantitY.' ', '' '1"', ', ' ' :

Cost {to conforrn to slandards or demonstrate comPltance) Uncertainty (if apProval proc*dures ai'e t;nclear)

Cost (forgone interesO

Desription

Quantitative limrit o* impcrts ' ' , , Quantita.tive'limit'on, foleign exports

{based,on rhreat of import restriction).

Allows imporls to enter the country at a.low or zgi:o tariff up to a speeified quantity impo:es a lrigher tariff on ' impons above this.QLentitY, : ,, "

Laws: and qovernment rules that fa,vor local prsducts when.the qovernm€nt* 1s the buyer ' ' '

Require specified use o{ local labor, miterials;,o-tr other produc.ts ' , , Diserirninale against' imports by wriiing or enf6rci.ng standards in a way that'

adversely;ffe(ts improrts more than donresticprodu{ts .', Requir€ssomeoJ:thevalue'

.:':' of, ifiten'ded imaorts to be deposited' . ' with the governrnent,:and allows, the qovernment to PaY {ow or ' zero interest on these dePosits

Requires importers to apply for and , receiw. apProval foi intended inports

Affect the anlotrn-t of tariff,dutie5 owed or the quota limit applied'''' :' 'proiedures can be'ilow or costlY

Figure 9.1 provides a listing of major rypes of NTBs and indicates the main way that

ea;h affects imports. Although antidumping duties and countervailing duties are not

listed in the figure, they are also oflen considered NTBs. Because governments claim

that they impo-se thess kinds of measures in response to unfair practices by_foreign expofie;s, we defer an in-depth discussion of antidumping ryd countervai.ling

duties 1o

Chapter t 1. Here we will eximine careiirlly several types of NTBs. listed in Figure 9.1' Fiow much protection do NTBs provide? Kee et al. (2009) estimate that NTBs are

mor;im;;fiuni thun tariffs in restricting world trade. One way to summarize.the size of NTBs on a product is to estimate the equivalent tariffthat would lead !o the same

reduction in import quantity as does the set of NTBs. {We will se,e explicitly what this

means when we anaiyze the import quota in the next section.) Using this approach,

fi*{J}q$r 9.Y MajorTypes ofNTBs , .,.....-.-.--

Local ccntent a,nd' '- , mixinq requirements

Technical and Product standards.

Advance deposit

lmporl licensing

Other eustoms Procedures (classif ication of product, valuation of product, procedures for clearing)

9651 (of applicati$n Proced ure)

'Uncertainlyli:f'basjs *or ,' apprpvaljs'unelear)','': Cost., .' : . " Uncertainty

lnternational Economics, 1 5th Edition 183

Chapter 9 Ni.'r:trri'rlJ lliiili(r rir .lllll)r'iJ I

and averaging across products. Kee et al. esiimaie ihat the couniry's NTBs create prc'-

tection against irnports that is the equivalent olall avetage tariffof 5'5 percertt for tlte

Unite<lSiates. 3.0 perceut for Clanada. 9.6 percent tbr the Litropeatl Union' B'5 perceltt

lbr Japait. {r.4 perient fbr C'hina, ancl i3.9 percent tbr Mexico.

The lVorlcl Trarie Orgarization has rttles that trrv to limit the use of nontariiTbar-

riers. aitcl it serl,es o* ,',?o.r,rrl 1br negotiations to retlttce NTBs. T'he first box of this

chapter" "T'l-re wTo: Beyoncl TaLill's, dcscribes the role olthe wTl) (and tlie tjAfT betbre it) in areas that extend outside its traditional tbcus on reclr'tcitlg tariffs on

nc,nagriciltural goocls. Ptessures 1br tariil ailci nonlarijTbarriers to in:ports usuallv

rise Juri*g receisions. The secorrcl box. "Do<lg:i*g Protectioilisltl." examittes lorv

the world}anage6 to 1i*rit new i*rport barriers that eollld have trlade the global

financial and economic crisis wolse'

Thg besr-knorvn lontariil barrier: is the r,,,,, ' :, , : (or just ). a lirlijt on the h')ta1 Quantity) of irnports ola prorluct alloweil into the countfY duri*g

a pertod

ciltine (fbr ilstancr', a yeafl. (Jne rvav of an()thel'. the governntent gives ont a lirn-

iteci nLrmbcr oi licenses io import the qriota quantitY iegally and prohibits illportittg

rvith*gt a license. As long asihe quota q,,aniity is iess than the quantitv that peopie

rvouicl want to impgrt r.viihogt the qlicla, the quota has an impact on the market fbr

this product. -['here are several reasolls rvh-y pr-otectionists and governtnent off ifials may favcrr

using a quola instead of a tarilL For ittstance.

' A qucta eitslpes that the quantitv of irnports is strictly linlited: a taritf would allou' the irnport quantity tti incrlase iftfb.eigrr proclucers cut the ir prices or i1'our dotne

s{ic

dr:rtand ittcreases. . A quota giyes gorrerttment oflicials greatef power' As rve will see belor1'. the se oll'i-

ctais olien have acfuninistrative aLrthority oier who gets the inrport licenses uttdel

a qui)ta svstem. and t1te1.' cilll usc this porver tei iheir adYalltage (ibr instailce' by

taking bribes).

Note tirat these are not alguillents showing that an iurpofi quotrt is in the nationai

iniet csi. [.et! ccrrnpafe the quota to a tariff tls a way of irnpeding ilnports' As we salv,in

(,ihapter 8. a tarilf incr.ur., the'rjcnlesfic price of the inrporfed producl and recittces the

quantit.v irnportecl. A quofa reduces the r;irantit,v' imported. Does a quofa also ittcrease

tire doprestic price of tle irnportecl proifi-rct/ \ve rvi11 see that the ;rnswer is yes' In fact'

rvc will see that" il most rvays. tire efl'ects of a qrota irre the sallle aS the efiects 6f a tarifTthat Jcarls fr: the same quantiry,'of inlports as the quota. illiarliets are llerlectll' contpr-titive,

As u'e dirt *'ith the anaiysis o1'the tarifJ'' rve begin our analYsis ol tlte quc'ita tl'ilh

the sntall-c*untry case ancl ihen proceed to the large-cor"llitry case' Ortr analVsis in the

text assgines that a1i relevant marke{s are highl-v cofipetitive' (l'he box 'A Donrestic Monopoly Ptetet's a Qnota" examirtes an altertrative case')

184 lnternational Economics - Vol,'l

tlart Tw,o .Iiir,l,'

ft,lir*'

;:rr:::'::itl-' i:i :;:;:::l{:,i f .:tJr j.:,itf ti:r; t-:r.lli.:i- i

lhe box "WTCI and GATT: Tariff Success" in Chaptel S intrqcJuced the Worid Trade Organization (VWO), rryhich in '1995 subsumed the General Agreement on 'Iariffs and

-lrade {64I'l). That box dccumented

the succ*ss of the rounds of ntultilateral trade negotiations in reducing the tariffs imposed i:y industrialized coltntr;es on most nonagricuitural g;oods. We now turn to examine three ways in which the WTO tries to ga beyond tariffs on non- agrirultura{ goods:

. As tariffs have cleclined, the use oi nontari{f import i:arriers has increased. How have the vvrc and th€ GATT tried to limit ;nd reduce nonlariff h,arriers?

. Tlre birth cf the wTO in 1995 coincided with efforts to push tratJe rules and traCe liberai- ization into new areas. What are these new 61945, 3nd what are the agreements?

c The curr€ni rcund of trade negotiations, the Doha Round, is ;n ambitious effort to push further. but as of eariy 201 1 there was iittle progress. What are the key objectives of the Doha Rounel. and why the laek of progress?

NOf{TARIFF BARRIERS The criginal GATT of 1947 included provisions that limited countries' use of some barriers to imports other than tariffs. Most Irrportant was a prr;hibition on th€ use of import quotas on nonagricultural goocls. Countries cornplied by renrr:ving such quotas-*ancther major suc{ess for the €ATT" The agreement also stated that any governmental rules and regulations should not cliscriminate against imports; imports and domes- tic proclucts should be treated equrally, often callerj "national treatnent'" ln additicn, the agreement included prcvisions for national gov- ernnrent to take actions against foreign dr-rmpinq using anticiumping measure: and against export subsicJies using count*rvailing measures. topics thai '"ve wili take up in Chapter 11.

As tariffs declined and NTSs rose in impor- tence, the CATT rnembers began to discuss NTBs

more seriously. Yet, negotiations have had less su{cess in reducing t'lTBs. The protective ef{ects of NTBs are harder to measure. so it is harder tc gei negotiated agre*r'nent on vuhat fonstitutes an internaiiorral exchange clf "cornp:*rable" NIB red r-rrtions.

The Kennedy Round {1963*1967) inciuded scme NTB neqotiations but the results were slirn-one r/oiuntary code on dumping and anti- dumping proceclures. The Tokyc Round {1973- 1979) maCe sorne progress and resuited in six vcluntary cccjes on NTBs, cr:vering custorns valu-' ation, impoit licensing prccedures, government procurement, product standards and similar tech-

nical barrier:, subsidies a*d countervailing mea- sures, and dumping and antidumping measures' Hcwever, the codes had oniy mcdest ef{ects in lilniting or reducing NTBs.

The Uruguay Round (1986- 1994) was more ambitious. The aqreements fronr this raund cre- ated the WTo, addressed a :rumber of NTBs. anci required that all countries joining the nevr WTO accept nearly ali the NTB agreeilenls' The

. Uruguay Round agreement5 also gave lhe new Wl O a ,nuch stronger process for resolving dis- putes between aouniries abcut NTB and otirer trarje issues. (Dispute setttement iruiil be discussed in ihe final section of this chapter.)

The UruEuay Round agreements on NTSs are far-ranging and include nevv or revised codes on customs rvaluation, irrport licensing, import proccdures, lafeguards iterupcrary increased proiection againrt import surgesi. sutlsidiel, and durnping. Codes on technlcal standards estab- lished lwo rules to reduce the use of standards as subtle NTBs. Standards and regulations should nct restrict imports morg than the rninirnum necessary to achieve their legitimate objectives, and standards about food safety should be based on scientilic evidenee. Another major outcome r,n:as that governments agreed t0 phase out ihe giobal web of voluntary export reslraints on textiles anci clothing (a topic taken up in a case study later in this chapier), ln addition'

lnternational Economics, I 5th Edition 185

(hailtel 9 \rrntrrili jlrjrri"t'\ tlr Jrll j)'rirs

1

governnlefiis agreed to end the use of most ither ltERs. anci they agreeci to lirnit their use of dornesiic content requirernents.

rijfW ARgAs The Uruguay RounC agreement estabtished wTO

rr.iles lc covei' thre* areas that had received nlrnost 11c atter"ition in 6:r.evious roi.:nds' First, the treatffisnt of agricullural goocls was shifted tc be similar ta that of induEtrial goods' Tariifs {and tariff-r'ate quotas) have repiaced many agriculturai irnpcrt quotas and other NTBs' tn

aeidition, governments agreed to limits on tlreir donrestic subsidiels to agricuilural plrociuclion, anrJ to rorne redu.itiorrs of their:export subsiclies for agricultural prcduct:. Overaii, the efferis of these rhanqes have been rncdest' For inslailce,

the r"lew tariffs were usLrally let high enough that there has been !ittle increase in total trad€'

5econd, the agreernent on "trade-related intellertual pfoperty" ci'eated global riri*s ri:quiring protectionr of pater-'ts, copyrights, arrd tracl*nrarks. fhe purpose is io get all qovern- nents i:eirind efforts to preveni counterfeitinq of bra*decl products and piratifig of technoloqy, software, nusic, and fiims.

l-hird, the Uruguay Rcund establi:hed a new Sel cf ruies, the Ceneiai Agreement on Trade in 5*rvices. M*ny ccuntries lirnit internalicnal trade in services iviih leEal red tape or rvith otrtright i:alis cn {oreign prc",iders. Thjs new agreefierrt prcviries a fr"amewo;"k for efforts to libetaiize traiie in -"ervices, althour;h it ccntained little in the iruay ol actuai liberalizations. Subsequentiy, there w6s scrTle pr.Jgre-ss. in 1997, 69 countlies reacherJ an agreernellt 10 open up national rnarket5 for basic teieccrnrnunicetionl services, and 70 cslun-

rries reaehed an agreement to re mov€ lestrictions in banking, financiai service:, and insurance'

T$JE D*$"iA R*IJN* "J'he effoii to l,lunch a new round of rnuitiiaierai iracie negoliiatiorrs in the late 1$90s was tilrbLrlent in tvr,o v,;ays. First, the WTC. w*ith its broarier mandaie, became a foc.al point far ili'otests

alJainEt giobaiizaiiort' Second, the govelnments ol the member eountries had diff iculty agreeinq on what lhe nevn" round shE:uld acccmpli:h, a chailenq* becau:e decision-making in the WTO is

gerrerally bY consettsu: Since the iate 1990s protest: have swirlecl

around rneetings of tl're WTO and cther inter- ilational organizations Many qrollps have been

invoiverl, including humar";-rights aictivists, envi

ronmentalists, cotrsumer-rigi-rts advocates. orga-

nizerJ labor {uriions), anti-immigration groups,

animal-rights atlivists, ar:d anarci"rists' lt is nat easy

to summarize their positions ioward the WTO' but praminent corlplaints anrj delnancls. some oi

them coniracilttr:ry r,r'ith others. have inciucicri:

' I'hat the W]'O is too powerfui, undemclcrati" and secretive ancl should be abolished or greatlY reined in'

* That the WTO shauiri expand thg i15g of its powers to achi*ve qoals othet th*n fi'ec irade'

especially such goais as envircltrrtental prclec-

tion and better vdages ancl warking conditions

in deveioPing cluntries.

' That ths WTO i: the taol of bigl businesl, and that freer tr*rJe berreiit: c*rpor"atiorts ancl capitali:ts u'rhile hr-itting ihe envircttntent' ioral cultiires, and rororkeis'

After failing to begin the ne-x round at the WTO ministerial con{erence in Seattle ir-r 1999' the next conference was in Doha, Qatar' in iilt)l Deveioping {ountries i:elieve;J that they had not received a fair rJeal in th* lJri:gr"ray llcund' -IhLry incurred substantial co:ts by acceptinq the

mandaicry llTB ruies and the n.rendatcry irrctec- tians of intellectual property, but their beneljts of greater a{{ess to expcrt markets in the indus- triJize<i countrie! r"vere limited by tlre si':v'r end

to iire V[Rs orr rlat!-rinc; and lextile'q and b5' the lack of acluel iibe r;:lizaiion uf egricultr-ii'al lrade"

Deve ioping .ountry goveraftenls pi'i:lred fcr ;i "development rcund" and vcvved to tlc inole octivc in the riertotiat rrn;

-{ rn{jrii;e d 0n next P;lgtl

186 lnternational Economics - Vol. i

Part Two Ii.r,i. ii,li.r

A{ter much wrangling at the 2001 meet- ing, the ministers agreed on the agenda and iaunched the Doha Round of trade negotiations. Each of the r*ajor players (the United States, the European Union, and the developing countries) campromised to reach the consensus. Key eie- ments of the ambitious agenda include substan- tia I liberal ization of agricultural trade, reductions af tariffs on nonagricultural goods, liberalization of trade in services, provision of assured acc€ss by developing countrles to low-cost medicines to protect public health, and refinement cf rules governing variou: ltT8s' (ln a separate agree- ment reached in 2003, developing countries gained the rigirt to import cheap generic versicns of paterited drugs in health emergencies')

.Ilre Doha Round negotiationt have been

iniermittent and unproductive for more than a

decade. A meeting in ,ir-ily 2008 seemed to make progress brut collapsed when some developing countries, led by lndia and China, demanded a "safeguard" process that v/ou;d allcw them to easily increase tariffs on imBotts af agricultural products if and when such inports increased' It seems unlikely that an agreement would be stymied by such a small issue if progress r'vith the rest of the agreement had been strcng. lt ha: not. The Unitecl states has resisted mearringful cutl in its agricultural subsidies" The Eurelpean Union has sought to limit lowering its barriers to agricul- tural imports. {ndia, Brazi{, and other developing rountries have bee n 'unwitling io reduce tariffs ancl to open up service sectors. 5inee 2008 nego- tiations have been suspended, thouqh discussions have continued at a iess formal level'

Quota versus Tariff for a Small Country Tire ellects o1'a quota on bicyeles are portrayerl in i:igure 9.2 for a slllail in-ipo|t- ilg connlry lacing a givelt rvorlcl price of 5300 pel' bicycle , Recall that a cottntry is ..small" ilits ciectsions about hor.v rnuch to import o1'a proclttct have no ell'ect on the going r.,,gr1-1 pricc of rhe procluct. That is. the fbleign sr-4rir1y of exports to this small

Ioutttrl,'is infinitely elastic at this price. In our example in Figure 9.2, the colltltl-Y rvoulcl irlport I .0 ntil!ton bikes pe I year u'ith {l"e e trade.

'fhe governlller}t fhen intpose s

a quota that linrits it:rports to a. smallet'quanfity" sa,v. 0.6 millicn btkes per -yeflr' The cprora alters the available suppl),of bicycles withi;r thc importing eotrtttry. For

all dr:mestle prices at or itbove the rvorld price. tlre total {dotnestic pius inlport; sr-rpp1y

u,ifhin the coirntry ecl:als the clomestic strpply ctn've plrts the fixed quota qtlailtiry tq,i) olirnpgrts. Ar th; dJmestic price of Si00 ther:e i,voiiid be excess demancl fbr bicycles in the irnporting co1lltfrv.'fhe narket in the irtrporting countr-y rvill clear oirly ilt the

higher donrestii price oi533U, as shonn by thc-- intersectiorl of the total avallable sttp-

olv cir1,c {S, -r g,.) ancl the rlotneslic detnand cut've (D,,) olt the le1t side of F-rgul"r: b.i. 1,, tt.1* ,ion,*ilc price o{'5330. the doiuestie tllr;tlltit}r supplied is 0.8 nliliioir' the qualtity irrpol.tedis tlre quota qLrantitv of 0.6 ntillion, iittci the domestic cluautitv

clemandedls 1.4 milliot. (\tr''e can see the same eflect on domestic price by usirlg the country's rlentatrcl-for-ittlports cltrve sitorvn in the right side olthe flgure' Ilthe qLlota

limits impor.ts to 0.6 niiliion. then the detnand litr irrtpr:rts indrcates a price ol53.l0.)