Tariffs, Embargoes, Otiier Trade Barriers By G. Edward Schuh and Philip L Paartberg mimM ^^^^ agriculture has been charac- society, some groups may be harmed. In UU terized as in disarray because of addition, policymakers may be able to M m policies established by national benefit certain groups in society by trade governments. This chapter briefly ex- interventions, even though the country amines the nature of trade policies in as a whole may be worse off. agricultural markets to determine their impact upon U.S. farm programs and the An important aspect of trade is that it is U.S. farmer. Purpose of these trade poli- a two-way street. For a country to be cies usually is to keep market forces able to export its goods and services and from coming into play so as to determine thereby gain from trade, it has to be will- where production will take place. Conse- ing to accept imports from other coun- quences of such interventions are that tries. Other countries must be able to much of the world's agricultural output is seU their own products in order to have produced inefficiently, and consumers the income to purchase products firom have to pay more for food and other the exporting country. Current attempts agricultural products they buy. to liberalize trade result from the experi- ence with protectionism during the Great Why do countries trade to begin with? Depression. The depression prompted Presumably because they are better off producer groups in many countries to ask wath trade than without it. This means governments to impose import tariffs to their national income is higher with trade. protect their dwindling domestic markets. For trade to take place, some countries Tariff protection curtailed world trade, must be able to produce certain commod- which reduced the gains from trade and ities at a lower relative cost than other worsened the depression as workers in countries. In turn, this implies that other trade-oriented sectors were laid off. commodities can be produced relatively cheaper elsewhere. If there are such Role Of G.A.T.T. — FoUowing World War gains from trade, why do individual coun- II, the experience with tariffs in the tries want to intervene in trade rather 1930's prompted creation of an interna- than to become more specialized in tional organization concerned with pro- producing what they do best? The reason moting freer trade, the General Agree- is that while trade may benefit the nation ment on Tariffs and Trade (G.A,T.T.). as a whole, or particular groups within G.A.T.T, has developed procedures to G. Edward Schuh is Professor and Head, Department of Agricultural and Applied Economics, University of Minnesota, St Paul. Philip L. Paarlberg is an Agricultural Economist with the Economic Research Service, USDA, at Purdue University, West Lafayette, IN. 112 reduce tariffs and provide for settling on the use of countervailing duties, an trade disputes. It also has conducted a important means by which countries re- series of multilateral trade negotiations taliate against each other for trade designed to systematically lower trade interventions. Export subsidies on agri- barriers. Unfortunately, agriculture has cultural products are permitted if the not received a great deal of attention in subsidies do not displace other nations' the negotiations. This in part is because exports, or involve "material injury" in a most of the industrialized countries of the particular market. After determining in- West, including the United States, have jury to an industry, a country may im- trade barriers designed to protect pose a countervailing duty on the subsi- domestic commodity programs. dized export. The latest round of multilateral trade The latest round of multilateral trade negotiations was completed in 1979. negotiations reduced tariff barriers in ag- Agriculture received more attention in ricultural markets. However, the pragma- this round, with the result that tariff tism of trade negotiations within the reductions on a number of agricultural G.A.T.T. framework has resulted in only commodities now are being implemented. limited gains in reducing nontariff barriers The new agreement also provides rules Trade ¡s a two-way street. To be able to export its goods and services, a country must accept imports from ot/ier countries. Here, dates irom the Pers/an Gulf are beirtg un/oaded in Savanrtal), Ga. 113 and export subsidies. Thus, agricultural The variable import levy system also markets remain highly protectionist de- affects the variability in U.S. prices. spite existence of G.A.T.T. Since the levy adjusts daily to changing market conditions, domestic prices in the Variable Levy on Imports E.C. are completely insulated from the For grains and livestock products, Euro- effects of world markets. Consequently, pean countries — including the European E.C. producers and consumers do not Community (E.G.) — generally rely on adjust to world market price signals. This an import barrier known as a variable forces additional price adjustment onto levy to protect their domestic price sup- other nations, such as the United States, port programs from imports. A variable which do not insulate their domestic mar- levy is a tariff which adjusts daily to kets. maintain a constant import price. For commodities subject to this form of Many nations continue to use import protection, the European Commission tariffs and taxes to protect their domestic each year establishes a minimum import agriculture from world market competi- price for each commodity — the thres- tion. Japan, the United States, and the hold price. The daily difíerence between European Community, for example, im- the threshold price and the world market pose import tariffs on various types of price is the levy. vegetable oils. Several developing coun- tries which are currently major markets The variable levy has important conse- for U.S. exports impose import tariffs. quences for U.S. farmers. For example, They include Mexico and Taiwan. Effects it keeps agricultural prices within the of these trade restrictions are somewhat community considerably above world like those of variable levies. World trade market levels. Hence, production by of the protected commodity is reduced, E.C. farmers is stimulated and consump- as are prices for farmers in the exporting tion is dampened. The net effect is to re- nation. duce E.C. imports of the commodities subject to the levy, grains and livestock Past rounds of multilateral trade negotia- products, and to lower the price received tions have been successful in reducing by farmers in exporting countries. Thus, tariff barriers. Consequently, such bar- U.S. farm prices and production of grains riers are now less severe than in the and livestock products are lower because past. In 1961, the European Community of E.C. policies. In the markets for agreed to free entry of oilseeds and oil- grains, where the United States operates seed meals. Recently, Japan agreed to its own price support programs, U.S. duty-free imports of soybeans, while treasury outlays are larger because of Taiwan conceded to fix maximum duties the variable levy. On the other hand, on soybeans, com and cotton. Other na- since the E.C. does not subject some tions agreed to reduce tariff barriers on products — such as soybeans and meal, livestock, livestock products, tobacco, manioc, com gluten feed, and citrus pulp fioiits, vegetables, oilseed products, feed — to such levies, imports of these grain grains and rice. The United States substitutes have expanded to meet the agreed to gradually reduce its import needs of artificially stimulated E.C. live- duty on pakn oil. stock production. 114 Although tariff barriers have been re- considered a state trading agency. duced, nontariff barriers continue as obstacles to agricultural trade. Nontariff State trading in wheat is so frequent that barriers include import quotas, import it is said the bulk of worid trade has a licensing, government purchasing agen- state trader on at least one side of the cies (state trading), health sanitary transaction. State trading results in dif- regulations, and other import regulations. ferent degrees of restriction of trade, de- Virtually every countr>^ has one or more pending upon the price and import deci- of such barriers. Japan has quantitative sion of the agency. Finally, state trading restrictions on dairy products, livestock agencies which are large buyers, such as and meats, fruits and vegetables, and the Soviet Union or Japan, can potentially vegetable oils. Korea employs a combina- use their large volume to gain favorable tion quota-tariff to protect its farmers. purchase terms. Restrictions by U.S. The United States Barriers in Export Markets also relies heavily upon quantitative im- Exporting nations also intervene fre- port restrictions. Section 22 of the Agri- quently in world trade, usually to prom- cultural Adjustment Act of 1933 restricts ote exports, but occasionally to limit imports through duties or quotas when trade and channel production to domestic imports interfere with the Commodity markets. Trade barriers adopted by Credit Corporation price support opera- exporting countries generally can be clas- tions. Four groups of commodities cur- sified as export subsidies, export taxes, rently are subject to import restrictions state trading, and export embargoes. under Section 22: cotton and products, Here we will discuss all but the last trade wheat and products, dairy products, and barrier, export embargoes, which are peanuts. Although not covered under considered a bit later on. Section 22 authority, meat imports into the United States are subject to quota Export subsidies and export taxes are in restrictions under 1964 legislation. principle the same type of barrier with opposite effects. The purpose of an ex- One of the most common forms of non- port subsidy is to lower the price of the tariff trade barriers currently in use is commodity to the purchaser, thereby en- state trading.