Nontariff Barriers and the New Protectionism

CH07_Yarbrough 10/15/99 2:31 PM Page 227 CHAPTER SEVEN Nontariff Barriers and the New Protectionism 7.1 Introduction Nontariff barriers (NTBs) include quotas, voluntary export restraints, export subsi- dies, and a variety of other regulations and restrictions covering international trade. International economists and policy makers have become increasingly concerned about such barriers in the past few years, for three reasons. First, postwar success in reducing tariffs through international negotiations has made NTBs all the more visi- ble. Nontariff barriers have proven much less amenable to reduction through international negotiations; and, until recently, agreements to lower trade barriers more or less explicitly excluded the two major industry groups most affected by NTBs, agri- culture and textiles. Second, many countries increasingly use these barriers precisely because the main body of rules in international trade, the World Trade Organization, does not discipline many NTBs as effectively as it does tariffs. The tendency to circumvent WTO rules by using loopholes in the agreements and imposing types of barriers over which negotiations have failed has been called the new protectionism. Re- cent estimates suggest that NTBs on manufactured goods reduced U.S. imports in 1983 by 24 percent.1 The fears aroused by the new protectionism reflect not only the 1Trefler (1993). 227 CH07_Yarbrough 10/15/99 2:31 PM Page 228 228 PART ONE / International Microeconomics negative welfare effects of specific restrictions already imposed but also the damage done to the framework of international agreements when countries intentionally ig- nore or circumvent the specified rules of conduct. Third, countries often apply NTBs in a discriminatory way; that is, the barriers often apply to trade with some countries but not others. In particular, exports from developing countries appear especially vul- nerable to restriction through nontariff barriers. NTBs by the European Union, the United States, and Japan apply to a higher percentage of exports from developing countries than from industrial countries. Such barriers can only make the develop- ment process more difficult. 7.2 Quotas The simplest and most direct form of nontariff trade barrier is the import quota, a direct quantitative restriction on the number of units of a good imported during a specified period. Countries impose quotas for the same reasons as those for imposing import tariffs (see section 6.2). The two most common policy goals of quotas are to protect a domestic industry from foreign competition and to cut imports to re- duce a balance-of-trade deficit. As in the case of tariffs, we shall focus on the protection issue and postpone balance-of-trade questions until Part Two. Developed countries (for example, Japan, the United States, and the members of the European Union) have used import quotas primarily to protect agricultural producers. Devel- oping countries, on the other hand, have used quotas to try to stimulate growth of manufacturing industries; but we shall see in Chapter Eleven that protection’s re- peated failure to stimulate manufacturing has persuaded many developing countries to move toward more open trade policies. The Uruguay Round agreement contains two major developments concerning quotas. First, the accord requires countries to convert their quotas to equivalent tariffs, which then fall subject to the agreement’s phased-in tariff reductions. Second, countries agreed to establish minimum market access for products, mostly agricultural, previously subject to prohibitive trade barriers. The most notable products subject to the minimum-access rule include Japanese and South Korean rice imports. Analysis of an import quota’s effects closely resembles that for a tariff. In Figure 7.1, Dd and Sd represent, respectively, the domestic demand and supply for good Y, the import good of the country imposing the quota. For simplicity, the figure omits the total world supply curve of good Y. Assume the unrestricted trade equilibrium is at point C. Residents consume Y0 units of good Y, of which Y1 units are produced domestically and Y0 2 Y1 imported. The price of the good, both domestically and in 0 world markets, is PY. Now suppose the country decides that availability of low-cost imports is limiting sales by domestic producers to Y1. One method to protect the domestic industry from foreign competition is to impose a quota on imports. To determine the quota’s effect, we define a horizontal line whose length represents the quota (for example, 1 million tons of sugar per year). Then we “slide” the line representing the quota up until it fits between the domestic demand and supply curves. Point E in Figure 7.1 1 denotes equilibrium with the quota. The domestic price of good Y is PY; at this CH07_Yarbrough 10/15/99 2:31 PM Page 229 CHAPTER SEVEN / Nontariff Barriers and the New Protectionism 229 Figure 7.1 M What Are the Effects of an Import Quota on Good Y? P Y Sd Quota 1 E PY c e f g 0 C PY Dd 0 Y1 Y3 Y2 Y0 Y By restricting imports, a quota increases domestic production from Y1 to Y3 and decreases domestic consumption from Y0 to Y2. The net welfare loss from the quota is shown as the sum of the areas of trian- gles e and g. Area c represents a transfer from domestic consumers to producers; area f represents the rents from the quota. price, the quantity produced domestically (Y3) plus the imports allowed under the quota (Y2 2 Y3) equals the quantity demanded by domestic consumers (Y2). Area c 1 e 1 f 1 g represents the loss of consumer surplus due to the quota, much as in the case of an import tariff. (The reader can review the concepts of consumer and producer surplus in section 6.4.2.) The basic interpretations of areas c, e, f, and g are the same as the analogous areas in the tariff analysis. Area c is a transfer from domestic consumers to domestic producers able to sell more of their product at higher prices with the quota. Consumers pay the amount rep- 1 0 resented by c in a higher price (PY rather than PY). Triangle e is a deadweight welfare loss. The quota causes the country to produce units between Y1 and Y3 domestically rather than importing them; however, each unit costs more to produce domestically (represented by the height of the domestic supply curve) than to im- 0 port (represented by PY). Triangle g is the other deadweight loss, this one caused by inefficient consumption. The quota reduces domestic consumption of good Y from Y0 to Y2. For each unit of consumption forgone, the value to consumers (represented by the height of the demand curve) exceeds the cost of importing the good CH07_Yarbrough 10/15/99 2:31 PM Page 230 230 PART ONE / International Microeconomics 0 (represented by PY). Therefore, the reduction in consumption caused by the quota is inefficient. Area f symbolizes a type of “revenue” generated by the quota, called the quota rents. For each unit of good Y imported under the quota (Y2 2 Y3), consumers now pay a higher price. But to whom do the rents go? Under a tariff, the answer is clear: The tariff revenue goes to the tariff-imposing government.2 Under a quota, the answer is less certain; rents generated by the quota may go to any of several groups, depending on their relative bargaining strengths and the institutional arrangements the government uses to administer the quota. Importers or exporters, foreign producers, or the quota-imposing government may capture the rents; or they may become an additional deadweight loss. The rents will go to importers if they have the bargaining power to buy Y2 2 Y3 0 1 units on world markets at price PY and sell them domestically at PY. This will occur only if importers have some degree of monopoly power; if importing is a competi- tive industry, importers will bid against one another to buy good Y, and the price 0 producers or exporters charge will rise above PY. In that case, the sellers of good Y, either producers or exporters, will capture the quota rents represented by area f in Figure 7.1. Administration of an import quota typically is less simple than it first appears. The government issues a statement that no more than Y2 2 Y3 units of good Y may be imported. To enforce the restriction, the government must devise a scheme to both keep track of how many units of Y enter the country and allocate the quota among competing importers. The government may choose to auction import licenses. Under such a system, the rents from the quota would go to the government. 0 An importer able to buy Y on the world market for PY would willingly pay approx- 1 2 0 imately PY PY for a license to import 1 unit of Y. (Why?) The total amount for which the government could sell the import licenses would equal the area of rectan- gle f. Quotas administered under such a scheme are called auction quotas.3 A third possibility is that area f may end up as an additional deadweight loss; that is, the rents may go to no one. Suppose, for example, the government does not sell import licenses but gives them away on a first-come, first-served basis. Importers then have an incentive to lobby to obtain licenses and otherwise spend resources to obtain them; for example, importers might be willing to wait in line for hours, an allocation method economists refer to as queuing. Because the value of a license to import 1 1 2 0 unit of Y is approximately (PY PY), importers would be willing to expend resources equal to that amount to obtain a license.

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