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Welcome to Econ 414 International Economics

Study Guide

Week Nine

Ending: Friday October 26

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Nontariff Barriers to Trade(Chapter 7)

1. What are GATT and WTO and what is their role in international trade?

There is little on WTO in you book

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Here is a little more information on GATT (General Agreement on Tariff and Trade)

• Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II.

• The GATT's main objective was the reduction of barriers to international trade.

• This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements.

• Originally, the GATT was supposed to become a full international organization called the International Trade Organization.

• However, the agreement was not ratified, so the GATT remained simply an agreement.

• The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s.

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What are Non-tariff barriers to trade What are Non-tariff barriers to trade and how common are they?and how common are they?

• The answer is in the bookThe answer is in the book• Problems:Problems:1.1.These types of protection are These types of protection are

increasing as tariffs are increasing as tariffs are decreasing.decreasing.

2.2.They are less visible than tariff They are less visible than tariff but in many cases they are more but in many cases they are more restrictive than tariffs.restrictive than tariffs.

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• A government policy that limits imports of a product to a certain number of units.

• It is banned by the WTO but it still exists.

What are Quotas?

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How common is quota?

• In 1955 Ireland suspended its import quota on fertilizers.

• China's Grain and sugar import quotas remain unchanged in 2008

• In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year

• In 2005 the European Union decided to increase quotas for Chinese textiles

• In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT.

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1. Not all countries are members of the WTO

2. Members of WTO are allowed to maintain quotas for a specified period of time.

• Transition period

3. How much power does WTO have?• Some countries implement quotas defying

WTO rules.

Facts

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• Quota on textile

• Uruguay Round negotiations of GATT have led to phasing out of the MFA.

What are Multifibre Arrangements?

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• It is an agreement by a country to limit its exports to another country to a certain number of units.

• It differs from a quota because the exporting country administers VER

• Since it is “voluntary” it is legal under WTO regulations.

• VER is difficult to negotiate

What are Voluntary Export Restraint (VER)?

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Examples of VERs

• In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States.

• In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear.

• In 1991 a VER was established between the European Union (EU) and Japan that established “voluntary” quotas on Japanese cars until 1999.

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S

D

E

Price of Cloth

Quantity of Cloth

20

7020

10

Moving from no trade to free trade World Price = 10, Domestic Price = 20

Imports = 50, CS goes up

12

S

D

Price of Cloth

Quantity of Cloth

a b c d

G

60 703020

10

12

S + Q

Quota

The Economic Effects of a QuotaQuota = 30

Supply curve shifts right by 30

At P =10 there is a shortage of ______ Price goes up to ____

CS goes down by?

Who gets a?

What is b?

What is d?

Who gets c?

50

20 12

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Who gets c?

• In case of tariff c went to government.• In case of quota:

1. Domestic license holders, if they buy 30 units at p =10 and sell it at p = 12

2. Domestic government, if it sells licenses at $2 per unit of imported good.

3. Foreign producer, if this is VER.

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Suppose initially quota has the same effect as tariff

S

D

Price of Cloth

Quantity of Cloth60 703020

10

12

S + Q

Tariff

The only difference may be in who gets c

c

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Now domestic demand grows to D’

S

D

Price of Cloth

Quantity of Cloth

b c d

60 703020

10

12

S + Q

Tariff D’

13

Under tariff, P is still 12, import grows to 40, CS↑

Under quota, at p =12 there is a shortage P up to 13, CS?

35 65

a

Quota is more

restrictive

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1. Industrial Policy– Domestic regulations can distort international

trade.– Regulations sometimes have the intent of

directly impacting trade.– Regulation effects difficult to quantify.

• Examples:– Guaranteed low interest government loans for domestic

producers– Tax advantage to exporting industries

Other Nontariff Distortions

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2. Government Procurement– Laws that direct a government to buy

domestically-made products unless comparable foreign products are substantially cheaper.

– Spending of public funds places restrictions on funds.

– Justification that buying domestic is better for the country.

• Similar to Mercantilist’s view

Other Nontariff Distortions

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– In countries where government owns industry and has government procurement, trade is severely restricted.

Other Nontariff Distortions

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3. Technical Barriers to Trade– Laws that apply technical standards to goods or

services that may distort trade.• Domestic country’s national standards for safety,

health, and product labeling

– They may require firms to produce two different goods or packages to allow exports.

– Some goods must meet technical standards like cars from the U.S. to the Ireland.

Other Nontariff Distortions

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4. Subsidies– Governments subsidies distort trade flows.

• Such subsidies can be directly tied to exports, or more commonly they are domestic subsidies that indirectly influence trade.

Other Nontariff Distortions

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5. Labor and Environmental Standards– Countries differ in regulations for workers with

respect to safety and work conditions.– Developed countries argue they cannot compete

with wages in countries with less strict labor laws.

– Empirical evidence has not shown significant effects on trade.

Other Nontariff Distortions

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– Labor standards• Laws that apply labor standards to manufactured

products that may restrict imports.

– Pollution intensive industry feels disadvantaged in countries with high pollution regulations.

– Little of no empirical evidence of effects

– WTO ruled countries cannot impose standards by limiting imports.

Other Nontariff Distortions

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Transportation Costs and Trade

• Transportation costs tend to reduce the quantity of trade between countries by raising the price of imported goods.– A good will be traded internationally if

transportation costs are low enough so that it is profitable to international trade the goods between countries.

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Transportation Costs and Trade

PINDIA

DUS

PUS

P*

P*C

Price of Cloth

Quantity of Cloth

Price of Cloth

Quantity of Cloth

SINDIASUS

DINDIA

D

E

F

Q1 QUS Q2 Q3 QINDIA Q4

U.S. Cloth Market India’s Cloth Market

P2 P2

T

P1

Q5 Q6 Q7 Q8

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Assignment 4 (10 points)Due: before 10PM on Friday, October 26

You will do this one in pre-determined teams of 2

• Is the following statement true or false? Use a graph and a numerical example to explain. “The American car producers will prefer a new tariff on imported cars to an equivalent amount of quota if the U.S economy is predicted to be in recession in the near future.” [Hint: during a recession, the demand for cars drops]