International Economics

International Economics Li Yumei Economics & Management School of Southwest University

International Economics Chapter 9 Non-tariff Trade Barriers and the New Protectionism

Organization • 9.1 Introduction • 9.2 Import Quotas • 9.3 Other Non-tariff Barriers and the New Protectionism • 9.4 The Political Economy of Protectionism • 9.5 Strategic Trade and Industrial Policies • 9.6 History of U.S. Commercial Policy • 9.7 The Uruguay Round and Outstanding Trade Problems • Chapter Summary • Exercises

9.1 Introduction • Tariff • Non-tariff During the past three decades the non-tariff has been widely used to restrict trade , such as quotas and New forms of protectionism (Voluntary Export Restraints, Technical or other Regulations, Cartels, Dumping, Subsidies) • Protectionism ( Freedom) Political Economy, Strategic Trade, Industrial Policy

9.2 Import Quotas • Effects of an Import Quotas • Comparison of an Import Quota to an Import Tariff • Conclusion

Effects of an Import Quotas • Import Quotas Import quotas can be used to protect a domestic industry, to protect domestic agriculture, and /or for balance of payments reasons. Import quotas were very common in Western Europe after World War Ⅱ. • For all industrial nations To protect agriculture • For developing nations To stimulate import substitution of manufactured products and for balance of payments.

Effects of an Import Quotas • Partial Equilibrium Effects of an Import Quota FIGURE 9-1 Partial Equilibrium Effects of an Import Quota.

Effects of an Import Quotas • Explanation of Figure 9.1 • DX and SX represent the demand curve and supply curve of commodity X; • With free trade, the world price of PX=$1, the nation consumes 70X (domestically produced 10X, imported 60X); • With an import quota of 30X, it leads to the domestic price of X to $2, the nation consumption is decreased to 50X (domestically produced 20X, imported 30X); • With the increased DX to D’X, the given import quota of 30X, it results in the domestic price of X rising to PX=$2.5, the nation consumes 55 X (domestic supply 25X, imported 30X)

Effects of an Import Quotas • Conclusion of Figure 9.1 • The import quotas lead to the increase of the domestic supply, the decrease of the domestic consumption and the rising of the imported commodity price ; • With the increased domestic demand, the given import quota must lead to the domestic rising further while the imported amount of commodities can not be increased with the increased domestic demand.

Comparison of an Import Quota to an Import Tariff There are three differences between an import quota and an import tariff: • With a given import quota, an increase in demand will result in a higher domestic price and greater domestic production than with an equivalent import tariff. With a given import tariff, an increase in demand will leave the domestic price and domestic production unchanged but will result in higher consumption and imports than with an equivalent import quota (see figure 9.1 point K)

Comparison of an Import Quota to an Import Tariff • The quota involves the distribution of import license (three situations) • If the government can auction off import licenses to the highest bidder in a competitive market, the revenue effect will go to the government; • If the importers have strong bargaining power to obtain the imported goods with the lower price and then sell them at higher price, the revenue effect will go to the importers; • If the exporters have strong bargaining power to sell the goods at higher price and then the revenue effect will go to the exporters; Government distributes the import license may lead to so-called rent-seeking activities or the corruption.

Comparison of an Import Quota to an Import Tariff • An Import quota limits imports to the specified level with certainty, while the trade effect of an import tariff may be uncertain • With the increased domestic demand, the nation import will increase under an import tariff as long as the domestic consumers are willing or afford to buy; • With the increased domestic demand, the nation import will not increase , it only leads to the increase of domestic supply.

Conclusion • Import quotas are more restrictive than equivalent import tariff; • Import quotas have the same economic effects of the equivalent import tariff; • The revenue effect of an import quota is uncertain; • Domestic producers strongly prefer the import quotas to import tariffs due to its less “visible”; • Uruguay Round was to change import quotas and other non-tariff barriers into equivalent tariffs ( a process known as “tariffication”, such as agriculture goods).

9.3 Other Non-tariff Barriers and the New Protectionism • Voluntary Export Restraints • Technical, Administrative, and Other Regulations • International Cartels • Dumping • Export Subsidies • Conclusion

Voluntary Export Restraints • Voluntary Export Restraints They refer to the case where an importing country induces another nation to reduce its exports of a commodity “voluntary”, under the threat of higher all-round trade restrictions, when these exports threaten an entire domestic industry. Sometimes, it is called “orderly marketing arrangements” • Economic Effects of Voluntary Export Restraints They have the same economic effects of equivalent import quotas, except that administered by the exporting country and the revenue effect or rents are captured by foreign exporters.

Voluntary Export Restraints • Evaluation of Voluntary Export Restraints • Voluntary export restraints were less effective in limiting imports than import quotas because the exporting nations agree reluctantly to curb their exports. Foreign exporters also tend to fill their quota with higher-quality and higher-priced units of the product over time (such as Japanese Automobile upgrading). • Voluntary export restraints may lead the door open for other nations to replace part of the exports of the major suppliers and also from transshipments through third countries. Case Study 9-1(page 278)

Technical, Administrative, and Other Regulations • They includes safety regulations, health regulations (hygienic production) and labeling requirements (origin and contents) • Laws regulations Such as “Buy American Act” passed in 1933 (Government Procurement Policies) • Border taxes • Rebates(减税) for domestic export and imposed on importers; • Value-added tax (VAT); • International commodity agreements and multiple exchange rates (Chapter 11, Chapter 18)

International Cartels • International Cartels An international cartel is an organization of suppliers of a commodity located in different nations (or a group of governments) that agrees to restrict output and exports of the commodity with the aim of maximizing or increasing the total profits of the organization. (such as OPEC) • A Successful International Cartel An international cartel is more likely to be successful if there are only a few international suppliers of an essential commodity for which there are no close substitutes.

International Cartels • Evaluation of International Cartels • The power of cartels lies in its ability to restrict output and exports, there is incentive for any one supplier to remain outside the cartel or to “cheat” on it by unrestricted sales at slightly below the cartel price; • As predicted economic theory, cartels are inherently unstable and often collapse or fail; • The cartel may be successful if a cartel could behave exactly as a monopolist (a centralized cartel) in maximizing its total profits

Dumping • Dumping Dumping is the export of a commodity at below cost or at least the sale of a commodity at a lower price abroad than Domestically. • Types of Dumping • Persistent dumping (持续倾销) Persistent dumping or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market (which is insulated by transportation costs and trade barriers) than internationally (where it must meet the competition of foreign producers)

Dumping • Predatory dumping (掠夺倾销) It is the temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad. • Sporadic dumping (偶尔倾销) It is the occasional sale of a commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.

Dumping • Anti-dumping Duties Dumping restrictions usually take the form of anti-dumping duties to offset price differentials, or the threat to impose such duties. • The Economic Effects of Anti-dumping Duties It’s hard to determine the type of dumping, while domestic producers demand protection against any form of dumping, as a result, they discourage imports and increase their own production and profits. And in some cases of the persistent and sporadic dumping , the benefits to consumers from low prices may actually exceed the possible production losses of domestic producers.

Dumping • Examples of Dumping • Japanese steel and television sets in U.S; • European Union having persistently dump agricultural commodities arising from their farm support programs; • Examples of Anti-dumping • Anti-dumping laws; • U.S. trigger-price mechanism (触发价格机制); • Anti-dumping measures in force Case Study 9-2 (page 282)

Export Subsidies • Export Subsidies Export subsidies are direct payments or the gaining of tax relief and subsidized loans to the nation’s exporters or potential exporters and /or low-interest loans to foreign buyers so as to stimulate the nation’s exports. Export subsidies can be regarded as a form of dumping. • Measures to Support Exports • Export-Import Bank • Tax Relief (减税)or Tax Exemption (免税) • Domestic High Support Prices (e.g. agricultural goods) Case Study 9-3(page 284)

Export Subsidies • Countervailing Duties (反补贴税) Countervailing duties are often imposed on imports to offset export subsidies by foreign governments. Case Study 9-4 (page 285) • Partial Equilibrium Effects of an Export Subsidies • DX and SX represent Nation 2’s demand and supply curves of commodity X; • With free trade, world price of X were $3.5, Nation 2 would produce 35X, consume 20X, exporting 15X. Nation 2 became an exporter rather than being an importer of X at prices above $3 (point E)

FIGURE 9-2 Partial Equilibrium Effect of an Export Subsidy.

Export Subsidies • With an export subsidy of $0.5, PX rises to $4.00 for domestic producers and consumers of X. Nation 2 produces 40X while domestic consuming 10X, the remaining of 30X for export. • Economic Effects of an Export Subsidies • Higher price benefits producers but harms consumers; • Four Effects • Consumption effect: a’+b’ • Production effect: a’+b’+c’ • Government subsidy: b’+c’+d’ • Protection effect: d’ Deadweight loss: b’+d’

Export Subsidies • The Reason to use an export subsidy The domestic producers may successfully lobby the government for the subsidy or the nation wants to promote the industry. Case Study 9-5 (page 286)

Conclusion • Tariff belongs to the law regulations while non-tariff belongs to the administrative regulations; • Tariff need a long time to formulate while non-tariff used at any time ; • Non-tariff trade restrictions are much more flexible and disguised (隐蔽) forms compared with tariff trade restrictions.

9.4 The Political Economy of Protectionism • Fallacious and Questionable Arguments for Protection • The Infant-industry and Other Qualified Arguments for Protection • Who gets Protected? • Conclusion

Fallacious and Questionable Arguments for Protection • To protect domestic labor against cheap foreign labor • Productivity of 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. • Comparative advantage Mutually beneficial trade could still be based on comparative advantage, with the cheap-labor nation specializing in the production of and exporting labor-intensive commodities, and the capital-labor nation specializing in the production of and exporting capital-intensive commodities.

Fallacious and Questionable Arguments for Protection • To impose scientific tariff This is the tariff rate that would make the price of imports equal to domestic prices and allow domestic producers to meet foreign competition. This would eliminate international price differences and trade in all commodities subject to such “scientific” tariff. • To reduce domestic unemployment This is belong to the beggar-thy-neighbor argument for protection because they come at the expense of other nations. • To cure a deficit in the nation’s balance of payment This is the beggar-thy-neighbor argument for protection.

The Infant-industry and Other Qualified Arguments for Protection • Infant-industry Argument It holds that a nation may have a potential comparative advantage in a commodity, but because of lack of know-how and the initial small level of output, the industry will not be set up or, if already started, cannot compete successfully with more established foreign firms. Temporary trade protection is then justified to establish and protect the domestic industry during its “infancy” until it can meet foreign competition achieve economies of scale, and reflect the nation’s long-run comparative advantage. At that time, protection is to be removed.

The Infant-industry and Other Qualified Arguments for Protection • The Valid Infant-industry Argument On the whole, the returns in the grown-up industry must be sufficiently high to offset the higher prices paid by domestic consumers of the commodity during the infancy period. There are several important qualifications to cover the argument: • It is more reasonable for developing nations ( due to the inefficient capital market) than for industrial nations • It is difficult to identify the industry or potential industry qualifies for this treatment, and once protection given, it is hard to remove • Domestic subsidy can do better than tariff (the former is the direct form of aid and easy to remove, the latter is hard to remove)

The Infant-industry and Other Qualified Arguments for Protection • Other types of domestic distortion • External economy (benefit to the society, not the specific industry) — to restrict imports, or subsidy for the specific industry), or direct tax • To correct a domestic distortion — with domestic policies rather than trade policy • Conclusion Trade protections may be advocated to protect domestic industry for national defense. • Direct production subsidies are generally better than tariff protection • Tariff may arouse retaliation so that in the end all of nations lose

Who gets Protected? • By increasing the commodity price, trade protection benefits producers and harms consumers ( usually the nation as a whole) • Producers have a strong incentive to lobby the government to adopt protectionist measure. Since they are few and stand to gain a great deal from protection; • Consumers are many, their losses are diffused among them , each of whom loses very little from the protection, they are not likely to effectively organized to resist protectionist measures

Who gets Protected? • In industrial nations, protection is more likely to be provided to labor-intensive industries employing unskilled, low-wage workers who would have great difficulty in finding alternative employment if they lost their present jobs. And highly organized industries receive more trade protection than less organized industries • More protection seems to go to geographically decentralized industries that employ a large number of workers than to industries that operate in only some regions and employ relatively few workers

Who gets Protected? • Protection seems to be more easily obtained by those industries that compete with products from developing countries because these countries have less economic and political power in industrial countries to successfully resist trade restrictions against their exports • Conclusion These theories have been only partially confirmed empirically. Case Study 9-6 (page290)

Conclusion • Trade protection is inefficient from the economic point of view, while from the political point of view it is reasonable • The usual government measures to correct the domestic distortion • Import tariff • Direct domestic subsidy • Domestic direct tax The domestic subsidy and direct tax are better than import tariff (no direct distortion of domestic commodity prices)

9.5 Strategic Trade and Industrial Policies • Strategic Trade Policy • Strategic Trade and Industrial Policies with Game Theory • The U.S. Response to Foreign Industrial Targeting and Strategic Trade Policies • Conclusion

Strategic Trade Policy • Strategic Trade Policy Strategic trade policy is a relatively recent development advanced in favor of an activist trade policy and protectionism, and suggests that by encouraging high-technology industries, the nation can reap the large external economies that result from them and enhance its future growth prospects. • Evaluation of Strategic Trade Policy • It is extremely to pick winners; • Since most leading nations undertake strategic trade policies at the same time, their efforts are largely neutralized, so that the potential benefits to each may be small; • When a country does achieve substantial success with strategic trade policy, this comes at the expense of other countries.

Strategic Trade and Industrial Policies with Game Theory • Game Theory Game theory can examine the strategic trade and industrial policy. There are three situations: negative , positive, zero games. As for the strategic trade, it is the positive and zero game. • Take Two-firm Competition for the Strategic Trade Policy U.S. Boeing company and Europe Airbus company (page 292) • One single company can earn a profit of $100; • Both produce the aircraft, each losses $10; • If using domestic subsidy, one company can compete with the other company (strategic comparative advantage)

Strategic Trade and Industrial Policies with Game Theory • Evaluation of the Theory and Policy • It shows that how a nation could overcome a market disadvantage and acquire a strategic comparative advantage in a high-tech field by using an industrial and strategic trade policy. • The real world is much more complex, It is very difficult to accurately forecast the outcome of government industrial and trade policies. So there are many economists would say that free trade may still be the best policy after all.

The U.S. Response to Foreign Industrial Targeting and Strategic Trade Policies • To stimulate education and encourage basic research as a way of increasing U.S. international competitiveness • Government subsidies in industries and commercial technologies (picking winners) • Supported list of 26 technologies in the early 1990s (electronic materials, high-performance metals, computing networking, medical technology and so on) • To take unilateral steps to force foreign markets to open and retaliate with restriction of its own against nations that fail to respond • Semiconductor agreement with Japan • Banana trade disputes with European Union (beef with hormones)

Conclusion Strategic trade and industrial policy is another qualified argument for protection. It suggests that by encouraging high-tech industries, a nation can reap the large external economies that result from them and enhance its future growth prospects. Strategic trade and industrial policy does face, however, many practical difficulties because it is difficult for nations to pick winners and because it invites retaliation. Thus, free trade may still be the best policy after all

9.6 History of U.S. Commercial Policy • The Trade Agreements Act of 1934 • The General Agreement on Tariffs and Trade (GATT) • The 1962 Trade Explanation Act and the Kennedy Round • The Trade Reform Act of 1974 and the Tokyo Round • The 1984 and 1988 Trade Acts • Conclusion

The Trade Agreements Act of 1934 • Smoot-Hawley Tariff Act It was originally introduced to aid U.S. agriculture. Under this act the average import duty reached all time high of 59 percent in 1932, provoking foreign retaliation • Trade Agreements Act of 1934 The act transferred the formulation of trade policy from the more politically minded Congress to the President and authorized the President to negotiate with other nations mutual tariff reductions by as much as 50 percent of the rates set under the Smoot-Hawley Tariff Act. It was renewed a total of 11 times before it was replaced in 1962 by the Trade Expansion Act. By 1947, the average import duty was 50 percent below its 1934 level

The Trade Agreements Act of 1934 • Most-favored-nation principle This non-discrimination principle extended to all trade partners any reciprocal tariff reduction negotiated by U.S. with any of its trade partners • Bilateral trade The bilateral tariff reduction negotiated between any other two nations that were signatories of the most-favored-nation agreement. The bilateral trade approach faced the serious shortcoming that tariff reductions were negotiated for the most part only in commodities that dominated bilateral trade

The General Agreement on Tariffs and Trade (GATT) • GATT It was created in 1947 and headquartered in Geneva, devoted to the promotion of freer trade through multilateral trade negotiations. • Three Principles • Nondiscrimination • Elimination of non-tariff trade barriers • Consultation among nations in solving trade disputes within the GATT framework • Protectionist Devices • Peril-point provisions (危险点条款) • Escape clause • National Security clause

International Economics