nontariff barriers and the new protectionism

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C H A P T E R S E V E N

Nontariff Barriers and the New Protectionism

7.1 IntroductionNontariff 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 concernedabout such barriers in the past few years, for three reasons. First, postwar success inreducing tariffs through international negotiations has made NTBs all the more visi-ble. Nontariff barriers have proven much less amenable to reduction through interna-tional negotiations; and, until recently, agreements to lower trade barriers more orless explicitly excluded the two major industry groups most affected by NTBs, agri-culture and textiles. Second, many countries increasingly use these barriers preciselybecause 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 cir-cumvent WTO rules by using loopholes in the agreements and imposing types of bar-riers over which negotiations have failed has been called the new protectionism. Re-cent estimates suggest that NTBs on manufactured goods reduced U.S. imports in1983 by 24 percent.1 The fears aroused by the new protectionism reflect not only the

1Trefler (1993).

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228 PART ONE / International Microeconomics

negative welfare effects of specific restrictions already imposed but also the damagedone to the framework of international agreements when countries intentionally ig-nore or circumvent the specified rules of conduct. Third, countries often apply NTBsin a discriminatory way; that is, the barriers often apply to trade with some countriesbut not others. In particular, exports from developing countries appear especially vul-nerable to restriction through nontariff barriers. NTBs by the European Union, theUnited States, and Japan apply to a higher percentage of exports from developingcountries than from industrial countries. Such barriers can only make the develop-ment process more difficult.

7.2 QuotasThe simplest and most direct form of nontariff trade barrier is the import quota, adirect quantitative restriction on the number of units of a good imported during aspecified period. Countries impose quotas for the same reasons as those for impos-ing import tariffs (see section 6.2). The two most common policy goals of quotas areto 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 pro-tection issue and postpone balance-of-trade questions until Part Two. Developedcountries (for example, Japan, the United States, and the members of the EuropeanUnion) have used import quotas primarily to protect agricultural producers. Devel-oping countries, on the other hand, have used quotas to try to stimulate growth ofmanufacturing industries; but we shall see in Chapter Eleven that protection’s re-peated failure to stimulate manufacturing has persuaded many developing countriesto move toward more open trade policies.

The Uruguay Round agreement contains two major developments concerningquotas. First, the accord requires countries to convert their quotas to equivalent tar-iffs, which then fall subject to the agreement’s phased-in tariff reductions. Second,countries agreed to establish minimum market access for products, mostly agri-cultural, previously subject to prohibitive trade barriers. The most notable prod-ucts 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 Figure7.1, 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 omitsthe total world supply curve of good Y. Assume the unrestricted trade equilibrium isat point C. Residents consume Y0 units of good Y, of which Y1 units are produceddomestically and Y0 2 Y1 imported. The price of the good, both domestically and inworld markets, is P0

Y.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 industryfrom foreign competition is to impose a quota on imports. To determine the quota’seffect, we define a horizontal line whose length represents the quota (for example, 1million tons of sugar per year). Then we “slide” the line representing the quota upuntil it fits between the domestic demand and supply curves. Point E in Figure 7.1denotes equilibrium with the quota. The domestic price of good Y is P1

Y; at this

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CHAPTER SEVEN / Nontariff Barriers and the New Protectionism 229

price, the quantity produced domestically (Y3) plus the imports allowed under thequota (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 areasc, 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-resented by c in a higher price (P1

Y rather than P0Y). Triangle e is a deadweight wel-

fare loss. The quota causes the country to produce units between Y1 and Y3 do-mestically rather than importing them; however, each unit costs more to producedomestically (represented by the height of the domestic supply curve) than to im-port (represented by P0

Y). Triangle g is the other deadweight loss, this one caused byinefficient consumption. The quota reduces domestic consumption of good Y fromY0 to Y2. For each unit of consumption forgone, the value to consumers (repre-sented by the height of the demand curve) exceeds the cost of importing the good

Figure 7.1 M What Are the Effects of an Import Quota on Good Y?

SdPY

Dd

C

EP1

Y

P0Y

Y1 Y3 Y2 Y0 Y0

Quota

gfec

By restricting imports, a quota increases domestic production from Y1 to Y3 and decreases domestic con-sumption 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 therents from the quota.



(represented by P0Y). 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 nowpay 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 an-swer is less certain; rents generated by the quota may go to any of several groups,depending on their relative bargaining strengths and the institutional arrangementsthe government uses to administer the quota. Importers or exporters, foreign pro-ducers, or the quota-imposing government may capture the rents; or they may be-come an additional deadweight loss.

The rents will go to importers if they have the bargaining power to buy Y2 2 Y3

units on world markets at price P0Y and sell them domestically at P1

Y. This will occuronly 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 priceproducers or exporters charge will rise above P0

Y. In that case, the sellers of good Y,either producers or exporters, will capture the quota rents represented by area f inFigure 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 maybe imported. To enforce the restriction, the government must devise a scheme toboth keep track of how many units of Y enter the country and allocate the quotaamong competing importers. The government may choose to auction import li-censes. Under such a system, the rents from the quota would go to the government.An importer able to buy Y on the world market for P0

Y would willingly pay approx-imately P1

Y 2 P0Y 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 thirdpossibility is that area f may end up as an additional deadweight loss; that is, therents may go to no one. Suppose, for example, the government does not sell importlicenses but gives them away on a first-come, first-served basis. Importers then havean incentive to lobby to obtain licenses and otherwise spend resources to obtainthem; for example, importers might be willing to wait in line for hours, an allocationmethod economists refer to as queuing. Because the value of a license to import 1unit of Y is approximately (P1

Y 2 P0Y), importers would be willing to expend re-

sources equal to that amount to obtain a license. The total resources spent on lob-bying or waiting in line equal area f. The process of competition for licenses “uses

2Most economic analyses assume governments use tariff revenue in place of domestic taxes. However,rent-seeking behavior by producers may use up the revenue, adding an additional deadweight loss due totrade restrictions (see footnote 5 in Chapter Six).3See C. Fred Bergsten et al., Auction Quotas and United States Trade Policy (Washington, D.C.: Institutefor International Economics, 1987). Kala Krishna, “The Case of the Vanishing Revenues: Auction Quo-tas with Monopoly,” American Economic Review 80 (September 1990), 828–836, demonstrates thatauction quotas do not raise revenue under monopoly.



up” the quota rents which, in this case, represent an additional deadweight lossfrom society’s viewpoint.

The final possibility is that foreign producers or exporters will capture the rentsfrom the quota. A quota in the form of a voluntary export restraint makes this out-come more likely.

7.3 Voluntary Export RestraintsMajor world industries—automobiles, steel, and textiles/apparel—are among thosesubject to trade restrictions known as voluntary export restraints (VERs). As theterm suggests, importing and exporting countries negotiate agreements for the ex-porter to “voluntarily” restrict exports. The voluntarism may be more apparentthan real, because the exporting country often faces the choice of agreeing to theVER, facing a tariff, or, most likely, facing a quota on its exports. U.S. imports ofmany steel products have been subject to VERs off and on since 1968. The UnitedStates negotiated a VER on Japanese automobile imports in 1981 and extended itannually until 1985, after which Japan unilaterally kept the VER in place. In 1992,a single European Union–wide VER with Japan—scheduled to last until December1999—replaced EU-member countries’ national quotas and VERs on Japanese cars.The Uruguay Round succeeded in restricting use of VERs, one of the fastest growingtypes of protection. Under the new rules, countries cannot impose new VERs in re-sponse to escape-clause claims of injury by domestic industries, and their existingVERs had to be phased out by 1999.

A VER has effects similar to those of a quota. The primary difference lies in themethod of administration. In the case of a quota, the importing or quota-imposingcountry typically handles the administration; under a VER, the exporting countryenforces the agreement.4 This distinction carries important implications for the allo-cation of the quota rents (area f in Figure 7.1). Administration by the exportingcountry increases the likelihood that foreign producers or exporters will capture alarge share of the rents. Usually the exporting-country government administers theVER by assigning export limits to each firm. This prohibits competition among thefirms and facilitates their charging a higher price (P1

Y rather than P0Y). As a result, ex-

porters much prefer VERs to tariffs or quotas. Because VERs require negotiationsbetween exporting and importing countries, they typically restrain exports fromsome but not all suppliers. Exporters not included in a VER agreement sometimescan expand exports to fill the gap left by restrained exporters; often, this results infurther expansion of the VER as additional exporters become restrained.5

4In this sense, most U.S. quotas operate like VERs, because most are administered by the exporting coun-try. The major exception is the dairy product program.5The Multifiber Agreement (MFA) represents the classic case. It began in the early 1960s restrictingJapanese exports of cotton shirts to the United States. Today, the MFA (now called the Uruguay RoundAgreement on Textiles and Clothing) restricts exports of textiles and apparel from virtually all develop-ing countries and to almost all developed countries. Some aspects of this web of protection will be phasedout over the next decade, but only for WTO members.



The effects of quotas and voluntary export restraints include a tendency for ex-porters to raise the average quality of their exported goods. In 1981, Japan agreedunder U.S. pressure to restrict its exports of passenger cars to the United States to1.68 million per year. Japanese automobile companies responded by stopping ship-ments of plain, low-priced models in favor of higher priced ones with more optionalfeatures. This implies that quotas and VERs impose especially high welfare costs onlow-income individuals, because the imports such policies eliminate often includethe low-cost items bought primarily by low-income families.

As with tariffs, administering quotas or VERs requires defining the categories ofgoods to be restricted. Product categories tend to be very specific, and exporters canuse definitional loopholes to circumvent the restrictions. For example, one clothingexporter got around a quota on two-piece suits by sewing the tops and bottoms to-gether and importing them as jumpsuits. Another circumvented a quota on ski jack-ets by cutting off the sleeves, importing the sleeveless jackets as vests, then reattach-ing the sleeves with zippers once the items reached the United States.6 In 1994, theEuropean Union placed an $81.7 million import quota on “nonhuman dolls” fromChina, while leaving “human dolls” with no quota. So far, EU officials have ruledteddy bears and two popular European dolls, Noddy and Big Ears, subject to thequota. Batman, Robin, and Star Trek’s Captain Kirk escaped the quota by an affir-mative ruling on their humanity. The biggest controversy surrounded Star Trek heroMr. Spock. Spock’s mother was human, which some aficionados claimed should winhim exemption, but customs officials used the size of his ears to rule him nonhumanand subject to the quota.7

Thus far, with the exception of the rents issue, the effects of quotas and VERs ap-pear identical to those of tariffs. Nonetheless, economists generally believe quotasand VERs cause larger losses of welfare than do equivalent tariffs. Section 7.4 fur-ther examines the reasoning behind this belief.

7.4 Comparison of Tariffs and QuotasWe have seen one major difference between the effect of an import tariff and that ofan import quota: The revenue from a tariff goes to the tariff-imposing government,but it is unclear who receives the quota rent. Several other, more subtle differencesmatter in evaluating the overall effects of the two policies.

Domestic firms in an industry seeking protection typically prefer a quota to othertypes of import restrictions. One explanation for this preference is the greater cer-tainty associated with the protective effects of a quota. A quota assures the domes-tic industry a ceiling on imports regardless of changing market conditions. Even ifthe domestic industry’s comparative disadvantage grows more severe, the quota pro-hibits consumers from switching to the imported good. Note, however, that thequota does cause a decline in the total quantity demanded by raising the good’s

6“The Warp and Weft of Anti-Dumping,” The Economist, November 23, 1991, 72.7Dana Milbank, “British Customs Officials Consider Mr. Spock Dolls to be Illegal Aliens,” The WallStreet Journal, August 2, 1994.



domestic price. Therefore, a quota cannot keep the domestic industry from facing ashrinking market.

Beyond increasing their market share, domestic firms seek protection from com-petition by foreign firms to gain and exploit monopoly power in the domestic mar-ket. Suppose an industry following this strategy gains protection in the form of animport tariff. Firms in the industry can raise their prices. However, if they raiseprices too much, consumers will switch to the imported good even though they haveto pay the tariff. In particular, if domestic firms try to charge a price that exceeds theworld price plus the tariff, consumers will not buy from domestic firms. If the in-dustry’s protection takes the form of a quota, however, the attempt to monopolizeby restricting foreign competition will more likely succeed. Under a quota, domesticconsumers do not have the option of switching to the imported good. If domesticfirms try to exploit a monopoly position by raising prices, the only choice consumersface is to pay the higher prices or consume less of the good. Because successfulmonopolization of an industry reduces the efficiency of the economy, economists be-lieve the tendency of quotas to facilitate monopolization makes quotas more dam-aging than tariffs.8

Setting aside the issue of who gets the associated rents, it is possible, given anytariff, to define a quota with precisely the same effects on prices, production, con-sumption, and trade at any moment. Similarly, given any quota, it is possible to seta tariff with exactly the same effects. This result is referred to as the equivalence oftariffs and quotas.9 We have hinted, however, that as market conditions change, tar-iffs and quotas cease to have identical effects. Figure 7.2 illustrates this more rigor-ously for a large country. Panel (a) analyzes an increase in demand for good Y un-der a tariff; panel (b) examines the effect of the same increase in demand under aquota. We define the tariff and quota such that given the initial level of demand(Dd), Y0 units are consumed under both systems, Y1 units are produced domesti-cally, and Y0 2 Y1 units imported at price P0

Y.In panel (a), with an increase in demand to Dd9, the quantity of good Y consumed

rises to Y2, of which firms produce Y3 units domestically under a tariff. Note thatdomestic production rises by less than domestic consumption; part of the increasedconsumption comes from increased imports. The tariff allows increased imports bypermitting consumers to either buy domestically or import at a price equal to theworld price plus the tariff.

In panel (b), the same increase in demand raises consumption of Y to Y4 and do-mestic production to Y5 under the quota. Increased domestic production exactlymatches increased consumption, because the quota prohibits any increase in im-ports. The increased domestic production is inefficient (that is, more costly than in-creased imports); therefore, the domestic price of good Y rises more under the quota

8Monopolization reduces efficiency by allowing firms to restrict output and charge prices that exceedmarginal costs.9This result provides the basis for the process of tariffication, through which countries replace theirquotas with equivalent tariffs, as required by the Uruguay Round. Equivalence also underlies one tech-nique for measuring or quantifying NTBs; see section 7.9.



(to P2Y) than under the tariff (to P1

Y). The quota forbids additional imports no matterwhat price domestic consumers are willing to pay for them. (Compare the effects ofa reduction in domestic supply under a tariff and under a quota.)

Table 7.1 presents estimates of the effects of several of the most important U.S.quotas and VERs. Areas c, e, f, and g in the table correspond to the redistribution,production, quota rent, and consumption effects in Figure 7.1. All U.S. quotas exceptthe dairy-products program are administered by exporting countries; so the estimatesin Table 7.1 assume that foreign exporters capture the quota rents, making it part ofthe U.S.’s net welfare loss from the quotas. By far the biggest welfare loss comes fromthe Multifiber Agreement, which restricts U.S. apparel imports from 47 developingcountries. These restrictions cost the United States almost $8 billion a year; and theyhinder the economic growth of developing-country exporters as diverse asBangladesh, China, Kenya, and Ukraine. The 1995 Uruguay Round Agreement onTextiles and Clothing requires that apparel quotas against WTO members end by2005; but quotas can continue against non-WTO members. This development cre-ated an important additional incentive for China and Taiwan, the largest and third

Figure 7.2 M What Happens in Response to Increased Demand under a Tariff and under a Quota?

0

(a) Import Tariff

P1Y

P0Y

PYSd

Sd + w+ t

Dd ′

Dd

YY2Y0Y3Y1

(b) Import Quota

PYSd

Dd ′

Dd

P2Y

P0Y

0 Y4Y0Y5Y1 Y

An import quota is more restrictive than an equivalent tariff in the face of an increase in demand. Undera tariff, imports cover a portion of the increased demand; in panel (a), increased demand causes a largerincrease in consumption than in domestic production. A quota forces all increased demand to be matchedby increases in (inefficient) domestic production, as panel (b) illustrates. An equal increase in demandcauses a larger price increase under a quota than under a tariff.



largest apparel exporters to the United States in 1997, to succeed in gaining WTOmembership.

Until recently, most attention devoted to trade barriers focused on tariffs andquotas. In the last few years, a number of subtler, more complex restrictions haveproliferated. In the following sections, we briefly examine several of these barriers,including export subsidies and countervailing duties, dumping, voluntary import ex-pansions, domestic-content rules and rules of origin, government procurement, andtechnical standards.

7.5 Export Subsidies and Countervailing DutiesAn export subsidy is a financial contribution from a government to a firm for exportof a commodity; the firm receives the government subsidy along with the price paidby foreign consumers. Note that this definition restricts subsidies to exports ratherthan the country’s export good. For example, if American Steel Company produces5 million tons of steel per year of which it exports 2 million tons, a subsidy of $10 per ton on exports implies a total subsidy of $20 million, while a $10-per-ton subsidy on production (regardless of whether sold domestically or exported) implies a total subsidy of $50 million. Both types of subsidies are important in in-ternational trade, but more controversy surrounds export subsidies because they

Table 7.1 M Costs of U.S. Quotas and VERs, 1990 ($ Millions)

Production andRedistribution Quota Rent Consumption Net Welfare Effect

Product Category Effect Effect Effects on U.S.(Tariff Equivalent) (Area c) (Area f)a (Areas e 1 g) (2[Area e 1 f 1 g])a

Protected by ImportQuotas

Dairy products (50%) 835 244 104 2104

Peanuts (50%) 32 0 22 222

Sugar (66%) 776 396 185 2581

Maritime (85%) 1,275 0 556 2556

Protected by VERs

Apparel (48%) 9,901 5,411 2,301 27,712

Textiles (23.4%) 1,749 713 181 2894

Machine tools (46.6%) 157 350 35 2385

aIn all cases except dairy products, quota rents are assumed to be captured by foreign exporters (and, therefore, to be anet welfare loss to the United States), because all other quotas are administered by the exporting country. In the case ofdairy products, the rents are assumed to be captured by licensed U.S. importers (and, therefore, not a net welfare loss tothe United States).

Source: Data from Gary Clyde Hufbauer and Kimberley Ann Elliott, Measuring the Costs of Protection in the UnitedStates (Washington, D.C.: Institute for International Economics, 1994), pp. 8–9.



involve differential or discriminatory treatment of domestic sales versus exports.Such subsidies create incentives for firms to export larger shares of their produc-tion and sell smaller shares domestically, since the latter do not receive the subsidy payment.

7.5.1 The Importing-Country View

Given the jealousy with which industries guard their domestic markets from foreigncompetition, it is not surprising that government subsidization of exports is one ofthe most controversial issues in international trade policy. Domestic industries oftenargue they face unfair competition from rivals subsidized by foreign governments.

Our initial examination of export subsidies’ effects takes the perspective of theimporting country, which we assume to be small in the market for good Y. (Notethat desirability of subsidies from the exporting country’s standpoint also is an issue,the subject of section 7.5.2.) The importing country’s trading partners subsidize exports of good Y by s per unit.10 Because a subsidy is just a negative tax, it lowersthe price at which importing-country consumers can buy the good.

In Figure 7.3, the total supply curve for good Y, the country’s import good, shiftsdown by the amount of the subsidy from Sd1w to Sd1w 2 s. The overall effect is toincrease consumption of good Y from Y0 to Y2, decrease importing-country pro-duction from Y1 to Y3, and increase imports from Y0 2 Y1 to Y2 2 Y3. The price ofgood Y falls from the free-trade price, P0

Y, to P1Y; exporting-country producers will-

ingly sell at lower prices because they now receive the subsidy in addition to theprice received directly from consumers. Importing-country consumers gain anamount represented by area e 1 f 1 g 1 h in consumer surplus. (Why?) The subsidyharms importing-country producers, as lower-priced imports reduce sales by domes-tic firms and dictate lower prices. Area e captures this loss of producer surplus,which is transferred to domestic consumers. The remainder of domestic consumers’gains (area f 1 g 1 h) come at the expense of exporting countries’ taxpayers, whomust finance the subsidy.

Importing-country producers of good Y are likely to lobby for protection fromsubsidized exports to prevent the loss of area e. WTO rules allow for countervailingduties (CVDs), or import taxes designed specifically to offset the competitive advan-tage provided by trading partners’ export subsidies. A countervailing duty of c (5 s)per unit in Figure 7.3 eliminates the subsidy’s effect on trade. Importing-countryconsumption returns to Y0 and production to Y1. Note, however, that one impor-tant effect of the subsidy remains even with the countervailing duty: The importingcountry continues to gain area g at the expense of exporting-country taxpayers, whostill pay a subsidy of s per unit on units Y1 through Y0. With the countervailing duty,importing-country consumers do not reap the subsidy directly through lower prices,but the importing-country government collects the duty and can lower domestic

10We assume all exporting countries subsidize, so an importing country can purchase all the good Y itwants at the subsidized price. If a single small country subsidized, buyers would compete for the country’sexports, driving the price back up to the initial world price and allowing the subsidizing country’s ex-porters to earn the world price plus the subsidy for each unit exported.



taxes accordingly. Therefore, area g represents a transfer from exporting-countrytaxpayers (who finance the subsidy) to importing-country taxpayers (who enjoylower domestic taxes).

Analysis of Figure 7.3 makes clear the importing country as a whole loses froma countervailing duty. The duty imposes costs on importing-country consumers(area e 1 f 1 g 1 h) that outweigh the gains to producers (area e) and the govern-ment (area g). From the importing-country perspective, countervailing duties repre-sent a victory of protectionist pressures by domestic producers. From a worldwideview, imposition of a countervailing duty improves total welfare because the cost ofthe subsidy to exporting countries outweighs the benefits to the importing country.The countervailing duty cancels the production and consumption inefficiencies in-troduced by the subsidy; only the transfer from taxpayers in the exporting countriesto those in the importing country remains.

U.S. law requires firms that allege foreign subsidies to file complaints with theDepartment of Commerce and the International Trade Commission. Commerce

Figure 7.3 M What Are the Effects of an Export Subsidy? Importing-Country Perspective

0

Sd + w– s

Dd

Y3 Y1 Y0 Y2 Y

Sd + w= Sd + w– s + cs chgfe

P1Y

P0Y

PY

Sd

An export subsidy of s per unit increases domestic consumption from Y0 to Y2 and reduces domesticproduction from Y1 to Y3. The difference is made up by increased imports now available at a lower price(P1

Y rather than P0Y). Importing-country producers are harmed (area e), but by less than the gains to

importing-country consumers (area e 1 f 1 g 1 h) in the form of lower prices and increased availabil-ity of imports. A countervailing duty (c) can offset the subsidy’s effects on trade and consumption butwill not eliminate a transfer (area g) from exporting-country to importing-country taxpayers.



investigates to determine whether a subsidy in fact exists, and the Commission de-termines whether the subsidy, if any, harms or threatens to harm domestic firms. Ifboth findings are affirmative, the United States imposes a countervailing duty. Table7.2 summarizes recent investigations. The two cases resolved in 1996, both with af-firmative findings of foreign subsidies and injury, covered pasta from Italy andTurkey. As of the end of 1997, the United States had 52 countervailing duties in ef-fect, some of which dated from the late 1970s, that covered goods ranging from liveswine to fresh-cut flowers and trading partners from Belgium to Venezuela.

Sometimes, a subsidy investigation leads to a protectionist outcome other than acountervailing duty. A “suspension agreement” occurs if the accused exporter agreesto stop exporting to the United States or to charge higher prices to eliminate theharm to the U.S. industry. In effect, suspension agreements work like VERs. Theylimit U.S. imports and facilitate noncompetitive pricing among domestic and foreignfirms. At the end of 1997, the United States had seven such suspension agreementsin effect, most dating from the early 1980s.

7.5.2 The Exporting-Country View

From the perspective of the importing country, foreign export subsidies produce anet welfare gain but impose losses on importing-country producers who must com-pete with the subsidized products. The situation in the exporting country is quitedifferent. There, subsidized producers gain at the expense of consumers and/or tax-payers, depending on how many countries in the market subsidize exports.

Figure 7.4 represents the market for good Y in the exporting country. We con-tinue to assume the country is small in the world market. Point C represents the unrestricted-trade equilibrium. The country produces Y0 units, consumes Y1, andexports Y0 2 Y1. Domestic consumer surplus is P0

YMZ, and domestic producer sur-plus is NP0

YC.

Table 7.2 M U.S. Countervailing-Duty Investigations

Status 1995 1996 1997

Petitions filed 2 1 6

Final Commerce determinations:

Negative 0 0 0

Affirmative 5 2 4

Suspended 0 0 0

Final Commission determinations:

Negative 2 0 4

Affirmative 3 2 0

Terminated 0 0 0

Source: Data from U.S. International Trade Commission, The Year in Trade 1997 (Washington, D.C.: USITC, 1998),p. 139.



Scenario 1: What If a Single Exporting Country Subsidizes?Assume first the country under consideration is the only one providing export subsi-dies in the market for good Y. The small country’s subsidy will not affect the worldprice of the good, P0

Y.11 Exporting firms receive P0Y from foreign consumers plus the

subsidy, s1, from the government. Point G in Figure 7.4 represents the new equilib-rium. Exporting-country production rises to Y2 because of the higher total price re-ceived for exports. The higher price also creates an incentive for producers to sellmore abroad (Y2 2 Y3) and less domestically (Y3). Domestic consumer surplus fallsto (P0

Y 1 s1)MH. Domestic producer surplus rises to N(P0Y 1 s1)G. In addition, tax-

payers pay RHGF to finance the subsidy. Note that import barriers must accompanyexport subsidies; otherwise foreign producers will bring in the good and re-export itto take advantage of the subsidy. (Why?)

The sum of triangles j and k measures the net deadweight loss to the exportingcountry. Area j is “lost twice”—once in the form of lost consumer surplus and againin the form of subsidy payments by taxpayers—and only “gained once”—in in-creased producer surplus. Taxpayers pay area k as part of the subsidy, but it doesnot go to producer surplus because of the high cost of producing units Y0 throughY2. Overall, exporting-country producers gain at the expense of exporting-countryconsumers and taxpayers. The welfare losses exceed the gains; thus, the export sub-sidy fails the compensation test from the exporting country’s perspective.

Scenario 2: What If All Exporting Countries Subsidize?Now we assume the country under consideration is not the only one providing an ex-port subsidy on good Y; all exporting countries subsidize. In this case, a subsidy of s2

(5 s1) dollars per unit on exports of Y shifts down the price exporting-country pro-ducers require for sales in the export market.12 The downward shift represents theamount of the subsidy. Producers are willing to sell abroad at P0

Y 2 s2 in Figure 7.4 be-cause they also receive s2 from their government for each unit sold abroad; therefore,the total price producers receive, including both the price paid by foreign consumersand the subsidy, continues to equal P0

Y. Exporting-country production does notchange, nor do domestic producer and consumer surplus. However, taxpayers payTZCV to finance the subsidy. (Why?) The net loss to the country is simply area TZCV,transferred to importing-country consumers in the form of a lower price.

7.5.3 The Controversy over Export Subsidies

Export subsidies raise an obvious question: Why would any country choose to subsi-dize its exports, thereby providing artificially low-priced imports to foreign con-sumers? One possible answer lies in the redistribution of income that subsidies gener-ate in the exporting country. If the country is alone in subsidizing (Scenario 1),export-country producers gain and therefore have an incentive to lobby for export

11See footnote 10.12When many countries subsidize exports, they drive down the world price by the amount of the subsidy(see footnote 10).



subsidies. But if many countries subsidize in the same market (Scenario 2), the subsi-dies drive down the world price. Producers then cease to gain from the subsidy, butthey still cannot ask their governments to stop the subsidies. A producer whose gov-ernment stopped subsidizing while other governments continued could not sell anyoutput in the world market. (Why?) This explains the importance of Uruguay Roundnegotiations for all member countries to lower export subsidies in agricultural prod-ucts simultaneously; no single country wanted to lower its subsidies while other coun-tries continued theirs, because that country would lose its export markets.

The clustering of export subsidies in markets for agricultural products provides aclue to a second motivation for the subsidies. Most industrial economies (includingthe United States, the European Union, and Japan) administer agricultural price-support systems that keep prices for those products and farmers’ incomes artificiallyhigh. When a country imposes a price floor above the equilibrium price of a good—say, wheat—the good’s quantity supplied exceeds the quantity demanded. Under asimple price-support program, the government prevents the natural fall in price bybuying the surplus wheat. Were the government to turn around and sell that wheat

Figure 7.4 M What are the Effects of an Export Subsidy? Exporting-Country Perspective

0

– s2

P0Y

+ s1

P0Y

P0Y

M

PY

H

j

R Z

T

N

V

C Fk

G

s1

s2

Sd

YY3 Y1 Y0 Y2

Dd

Dw + s1

Dw

Dw – s2

If the small country is the only exporter subsidizing (Scenario 1), export firms receive the world price plusthe subsidy (P0

Y 1 s1), and the net welfare effect on the exporting country is a loss equal to areas j and k.If all exporters subsidize (Scenario 2), the world price is bid down by the amount of the subsidy (s2). Ex-porting firms receive only P0

Y, and the net welfare loss to the exporting country is area TZCV.



domestically, the sales would undermine the domestic price-support system. How-ever, export sales do not undermine the artificially high domestic price. The differ-ence between the high price paid to domestic farmers and the lower world price ob-tained by the government for export sales represents the subsidy.

The United States and the European Union have bickered for decades over oneanother’s agricultural subsidies. In 1998, the United States announced it would sub-sidize 30,000 tons of barley exports to Algeria, Cyprus, and Norway under the Ex-port Enhancement Program in retaliation for EU shipments of subsidized Finnishbarley to the United States.

The Uruguay Round agreement requires member countries to cut their agricul-tural export subsidies, reduce the volume of agricultural exports receiving subsidies,and refrain from granting new subsidies to additional agricultural products. As weshall see in Chapter Nine, reaching this compromise between demands for agricul-tural trade reform and farmers’ demands for protection almost derailed the UruguayRound talks and delayed the agreement for almost four years.

Each year, as part of its report on foreign trade barriers that hinder U.S. trade, theU.S. Trade Representative compiles a list of countries’ export subsidies. Table 7.3lists the export subsidies on specific products included in the 1998 report; manycountries in addition to those in the table implement broad export-subsidy pro-grams that favor all or most exports rather than exports of a specific product. Al-though a few manufactured items appear on the list, the prevalence of agriculturalproducts among subsidized exports is striking.

A more complex reason for export subsidies involves the possibility that tempo-rary export subsidies in markets with certain characteristics may allow a country tocapture a larger share of the world market that it can then exploit by chargingmonopoly prices for the good. A full examination of this argument, part of a branchof international trade called strategic trade policy, must wait until Chapter Eight.

Table 7.3 M Export Subsidies, 1998

Country Subsidized Products

Australia automobiles and components, textiles, clothing, footwear, automotive leather

China textiles, corn

European Union wheat, wheat flour, beef, dairy products, poultry, certain fruits, pasta, rice, olives, processed cheese

India agrochemicals

Indonesia textiles, shoes, electronics, timber and rattan products, leather goods, palm oil,pulp and paper products

Poland sugar, coal

Thailand rice

Source: Data from U.S. Trade Representative, 1998 National Trade Estimate Report on Foreign Trade Barriers (Wash-ington, D.C., 1998).



Export subsidies rarely take the form of explicit and direct payments from a gov-ernment to exporting firms. As mentioned earlier, WTO guidelines, even before theUruguay Round, ruled out such payments on industrial products. Actual subsidiestake less direct and visible forms. Defining precisely which actions do and do notcomprise subsidies was one of the most difficult issues facing negotiators in theUruguay Round of WTO talks. One of the most common types of subsidy involvesprovision of low-cost government loans to firms in certain industries. A second typeof subsidy is provision of favorable tax treatment for firms involved in exporting.The Uruguay Round agreement clarifies that forgone or uncollected government taxrevenue, that is, tax credits, do constitute a subsidy under WTO rules.

Government subsidies have been a source of increasing controversy. During theTokyo Round of GATT talks, which ended in 1979, a subset of member countriesagreed to a Code on Subsidies and Countervailing Duties. The signatory countriesagreed that if one country’s subsidized exports injured another signatory’s domesticindustry, the injured party could either impose a countervailing duty or request that

Figure 7.5 M Countervailing-Duty Cases Reported to the WTO in 1996

Norway(0, 1)

EU(1, 3)

South Africa (0, 3)

Australia (1, 0)

New Zealand (4, 0)

Argentina(1, 1)

Canada(0, 1)

United States (2, 0)

For each country, the two numbers in parentheses report (number of cases as initiator, number of casesas subject).

Source: World Trade Organization, Annual Report 1997, Vol. I (Geneva: WTO, 1997), pp. 108–109.



the exporting country eliminate the subsidy. A signatory country also could seek re-dress when one country’s subsidized exports displaced its own exports in third-country markets. A failure to adopt a clear definition of subsidies continued to ham-per the functioning of the Code, which made little progress on domestic (nonexport)subsidies. The subsequent Uruguay Round succeeded in reducing agricultural exportsubsidies, clarifying the definition of industrial export subsidies, providing disciplineon domestic subsidies if they distort trade, and reforming rules on implementationof countervailing duties.

Figure 7.5 illustrates the geographic pattern of new countervailing-duty cases re-ported by WTO member countries in 1996; for each country, the first number inparentheses gives the number of countervailing-duty cases that country initiated in1996 and the second number reports the number of new countervailing-duty inves-tigations to which that country was subject in 1996. New Zealand initiated thelargest number of cases (4); and the European Union and its members, along withSouth Africa, tied as subjects of the largest number of investigations (3).

7.6 DumpingPerhaps no phenomenon in international trade generates as much controversy andas many calls for protection as does dumping. Dumping can be defined in one of twoways.13 According to the “price-based” definition, dumping occurs whenever a firmsells a good in a foreign market at a price below that for which the same good sellsin the domestic market. Under the “cost-based” definition, sale of a good in a for-eign market at a price below its production cost constitutes dumping. The defini-tional distinction is important, because dumping under one definition is not neces-sarily dumping under the other. In particular, whenever the domestic price of a gooddiffers from its cost of production, the requirements for dumping differ under thetwo definitions.

7.6.1 Sporadic Dumping

Economists divide dumping into three categories. The first is sporadic dumping,which involves sale of a good in a foreign market for a short time at a price beloweither the domestic price or the cost of production. This short-lived variety of dump-ing resembles an international “sale.” Stores sometimes sell goods for short periodsat prices below their regular prices, often to eliminate undesired inventories. Saleprices may even fall below the average total cost of production in the short run.Sporadic dumping is the international equivalent of such sales.

Sporadic dumping may disrupt the domestic market because of the uncertaintygenerated when foreign supply changes suddenly. However, it is unlikely to causepermanent and serious injury to a domestic industry, just as a store’s market positionis unlikely to be damaged irrevocably by a competitor’s occasional sales. During the

13Many economists agree that rules against dumping should be restricted to predatory dumping (definedin section 7.6.3); the original 1916 U.S. law was so restricted.



brief period of dumping, domestic consumers benefit from availability of the im-ported good at an unusually low price.

7.6.2 Persistent Dumping

Persistent dumping, as the term suggests, is continued sale of a good in a foreignmarket at a price below either the domestic price or production cost, a practice thatprovides the basis for many calls for protection. The distinction between the price-based and cost-based definitions is crucial in analyzing persistent dumping.

The major cause of persistent dumping according to the price-based definition isinternational price discrimination. Any firm able to separate its customers into twoor more groups with different elasticities of demand for its product and to preventresale of the good among them can increase profit by charging the groups differentprices.14 This practice is called price discrimination. Often a firm serving both a do-mestic and an export market can charge a higher price to domestic consumers, whotypically exhibit a lower elasticity of demand than foreign consumers. Other things

14A good’s elasticity of demand is the percentage change in quantity demanded resulting from a 1 percentchange in price (elasticity of demand 5 % change in quantity demanded/% change in price).

Figure 7.6 M Persistent Dumping as International Price Discrimination

0

PY

(a) Home Market

0

PHY

MRHDH

MCH

YYH

(b) Export Market

MCE

DE

MRE

PEY

PY

YE Y

If a firm can prevent resale of its product between domestic and foreign customers, price discriminationbased on different elasticities of demand by the two groups will increase the firm’s profits. Because of thegreater number of competitors in export markets, the firm generally will charge a higher price in thehome market than in the export market (that is, PY

H . PEY), generating dumping by the price-based

definition.



being equal, the more and better the substitutes for a good, the higher the elasticityof demand; good substitutes allow consumers to be very responsive to changes in thegood’s price. In most industries, a firm has more competitors in export markets thanin the home-country market; this implies that the elasticity of demand facing thefirm in the export market typically exceeds that in the home market and creates anincentive for price discrimination.15

Figure 7.6 illustrates the relationship between international price discriminationand persistent dumping. A firm producing good Y faces the situation in panel (a) inthe home market and the situation in panel (b) in the export market. The demandcurves reflect a higher elasticity of demand for good Y in the export market at anygiven price; in other words, the firm possesses more market power in the home mar-ket than in the export market—an intuitively plausible assumption.

The firm maximizes profit in each market by producing the level of output atwhich marginal cost (denoted by MC and assumed for simplicity to be constant atall levels of output and equal across markets) equals marginal revenue (MR).16 Theheight of the corresponding demand curve at the profit-maximizing level of outputgives the profit-maximizing price. The price in the home market (PY

H) exceeds that inthe export market (PE

Y) because of the relative inelasticity of home-country demand.The firm dumps by the price-based definition, with a dumping margin of PY

H 2 PEY.

However, such price discrimination produces ambiguous welfare effects. The marketpower reflected in the firm’s ability to charge prices above marginal cost (especiallyin the home market) reduces economic efficiency and harms consumers, as with anycase of monopoly. However, the effect of restricting the firm to charge equal pricesin the two markets cannot be ascertained without further information about themarket in question. Hence, international trade theory provides no clear rationale forpolicies that prohibit international price discrimination.

What about persistent dumping under the cost-based definition? Would we ex-pect to observe continual sales of a good below cost? The answer depends on whatone means by cost. If cost is defined as the firm’s marginal cost of production, econ-omists believe the general answer to the question is no: Firms will not sell a goodpersistently at a price below its marginal cost of production. Although many indus-tries in many countries ask for protection from foreign competition by pointing toalleged persistent dumping, there are few cases in which such behavior has been ob-served.17

Charges of dumping under the cost-based definition often use a concept of costother than the exporting firm’s marginal cost. For example, firms may sell in the

15In Chapter Eight (section 8.4.2), we discuss the case of two monopolists charging high prices in their re-spective home markets and dumping (under the price definition) to capture part of the rival’s market, apractice known as reciprocal dumping.16Marginal revenue is defined as the change in total revenue when the firm changes its level of output byone unit. Under the assumption that the firm has some market power and must charge the same price forall units sold in a given market, marginal revenue at any level of output is less than price. To sell an addi-tional unit of output in any market, the firm must lower its price, and the lower price must apply to allunits sold in that market. Therefore, the marginal revenue from sale of the additional unit is less than theprice for which the unit itself is sold.17See Appendix A in the Congressional Budget Office volume in the chapter references.



short run at prices below their average total cost. In fact, we expect firms with sig-nificant fixed costs to do so in periods of low demand, such as during recessions. Aslong as sales bring in revenue sufficient to cover variable cost, the profit-maximizingfirm will choose to produce rather than shut down in the short run—even if pricefalls below average total cost. This holds regardless of whether the firm sells domes-tically or internationally.18

Another problem arises because foreign production costs often are difficult to de-termine, presenting a temptation to use indirect measures of those costs. Carelessuse of the cost-based definition of dumping could allow domestic producers to ac-cuse any foreign rival who undersold them. Assume American Steel Company losesbusiness to Brazilian Steel Company, which sells steel products at lower prices.American Steel accuses Brazilian Steel of dumping. Since neither American Steel norU.S. trade-policy makers know Brazilian Steel’s true cost of production, AmericanSteel argues that Brazilian Steel’s prices are below American Steel’s production cost.Acceptance of such an argument as evidence of dumping sets a dangerous prece-dent. Domestic producers in any comparative-disadvantage industry could accuseforeign rivals of dumping. Recall that a country with a comparative advantage al-ways can sell the industry’s product for less than a country with a comparative dis-advantage. Disallowing trade based on dumping charges that involve careless use ofthe cost-based definition of dumping could eliminate all trade based on compara-tive advantage!

In practice, use of the cost-based definition in dumping cases is not yet quite asdisastrous as the previous example might suggest. When a domestic firm files dump-ing charges, trade law requires an effort to determine their validity using the price-based definition. If domestic-country prices of the good in question are not available(for example, if the foreign firm produces only for export), investigators must makean effort to determine the price of the good in a third market. When this fails, inves-tigators seek production costs in the country of origin, followed by production costsin third markets.

The most famous example of this situation involved a 1974 U.S. charge thatPoland dumped golf carts in the U.S. market. Since Poland sold no golf carts domes-tically, the price-based definition of dumping proved useless. No one knew the truecost of production by Polish firms because Poland, then a centrally planned econ-omy, did not use market-determined prices for its inputs. To resolve the case, inves-tigators evaluated the inputs the Polish firm used to make a golf cart at input pricesfrom Spain. The estimated cost turned out to be very close to the price Polandcharged for golf carts sold in the United States. Rapid changes in nonmarketeconomies raise interesting issues for the calculations in dumping investigations. Indumping charges against China, another centrally planned economy, the UnitedStates historically used prices from third countries including Germany, Japan,France, Canada, Switzerland, the Netherlands, India, Pakistan, and Thailand to substitute for missing Chinese prices. However, as China has increased the role of

18If sales at high prices in a protected domestic market cover the firm’s fixed cost, sales in export marketscan occur at any price that covers only the variable cost of production.



market prices in its economy, U.S. dumping-investigation procedures have adjusted.In recent cases regarding sparkler fireworks and lug nuts, investigators used someChinese prices.

7.6.3 Predatory Dumping

Domestic firms often claim foreign firms sell in the domestic market at prices belowproduction cost to drive domestic firms from the industry. The alleged purpose be-hind this strategy of predatory dumping is to eliminate domestic competitors andthen exploit the newly created monopoly power by raising prices. Although intu-itively appealing, several aspects of this story stand up poorly to scrutiny.

First, foreign firms—if indeed they sell at prices below their production cost—suffer losses while dumping. The prospective monopoly power they hope to gainmust promise future rewards high enough to compensate for current losses. Second,domestic firms would know predatory dumping could be only temporary becauseof the losses it would create for its instigators. If the “unfair competition” is onlytemporary, domestic firms should be able to borrow funds with which to hold outuntil the foreign firms give up on the attempt to drive rivals out of business. Third,even if predatory dumping drove domestic firms from the industry, the strategywould prove worthwhile only if foreign firms could then exploit their monopolypower by charging higher prices. However, once this occurred, what would preventdomestic firms (either old or new) from re-entering the industry and undersellingthe foreign monopolist? If domestic firms did this, foreign firms would have sufferedlosses during the dumping for little or no reward. Finally, the predatory dumpingstory requires a firm to perceive an opportunity to monopolize the industry. Butlarge groups of firms often file dumping charges against dozens of competitors; thelarge number of firms involved on both sides of the typical dumping case implies alow probability of monopolization.

The United States’ first antidumping law, passed in 1916, applied only to preda-tory dumping. In the almost 80 years since, no firm has been convicted under thatstatute. Current dumping cases use statutes that embody much broader definitionsof dumping to include that with no predatory intent or effect.19

7.6.4 Policy Responses to Dumping

Under U.S. trade law, when a domestic firm charges its foreign counterpart withdumping, the U.S. Department of Commerce and the U.S. International Trade Com-mission conduct investigations. Those investigations must determine (1) whetherdumping is occurring, and (2) if so, whether it materially injures or threatens to ma-terially injure the domestic industry. If both questions are answered affirmatively,the government imposes an antidumping duty, an import tariff equal to the dumpingmargin.

19The Congressional Budget Office volume in the chapter references contains a useful history of U.S.dumping legislation.



Despite rules written into antidumping laws, many analysts argue that U.S. pro-cedures in dumping investigations almost guarantee guilty findings for foreign firmscharged with dumping. The computation of dumping margins involves many com-plex issues, and trading partners complain with some justification that U.S. proce-dures bias findings toward high dumping margins and, therefore, high antidumpingduties.

Historically, the United States used antidumping policies much more extensivelythan other countries. However, in recent years, trading partners have been catchingup. Twenty-three member countries reported to the WTO having taken antidump-ing actions in 1996. Figure 7.7 indicates the cases’ geographic distribution. For eachcountry in the map, the first number reports the number of antidumping actions ini-tiated during the year and the second number reports the number of new an-tidumping investigations to which the country was subject. South Africa (30), Ar-gentina (23), the European Union (23), and the United States (21) reported filingthe largest number of cases in 1996. The United States also ranks high (21), alongwith EU members (35) and China (39), as a target of trading partners’ dumping ac-cusations.

Figure 7.7 M Antidumping Cases Reported to the WTO in 1996

South Africa (30, 6)

Australia (17, 0)

New Zealand (4, 0)

Argentina (23, 0)

Canada (5, 0)

United States (21, 21)

Mexico (3, 3)Guatemala (1, 0)

Colombia (1, 0)

Peru (5, 0)

Chile (3, 2)

Venezuela (3, 0)

Brazil (17, 10)

Russian Federation (0, 6)

EU

(23, 35)

Poland (0, 3)Ukraine (0, 3)Switz. (0, 2)

Romania (0, 2)

Turkey (0, 2)

Pakistan (0, 2)

Thailand (1, 8)

Malaysia (2, 3)

Indonesia (8, 7)

Hong Kong (0, 2)Chinese Taipei (0, 8)

China (0, 39)

Korea (13, 8)

Japan (0, 7)

Israel (6, 0)Egypt (0, 2)

India (20, 10)

Bulgaria (0, 3)

For each country, the two numbers in parentheses report (number of cases as initiator, number of cases assubject).

Source: World Trade Organization, Annual Report 1997, Vol. I (Geneva: WTO, 1997), p. 111.



At the end of 1997, the United States had 296 antidumping orders in effect, cov-ering goods from pears to shop towels to bicycle speedometers and involving tradingpartners as varied as Canada and Uzbekistan. Table 7.4 reports the number of U.S.dumping cases in recent years, along with the number of negative and affirmativefindings by both the Department of Commerce and the International Trade Com-mission. Affirmative dumping and injury findings in 1997 covered goods such ascrawfish tails, melamine dinnerware, and steel plate.

Like subsidy investigations, dumping investigations can lead to a protectionistoutcome other than an antidumping duty. Accused exporters can negotiate suspen-sion agreements in which they agree to stop exporting to the United States or to raisetheir prices until the U.S. industry no longer claims injury. Suspension agreementswork like VERs; they reduce competition, lead to higher prices, and make it easierfor domestic and foreign firms to engage in cartel-like behavior. For example, Chinaagreed to its first suspension agreement in 1995. China agreed to cut its honey ex-ports to the United States to 43.9 million pounds a year for five years (a cut of about40 percent), to charge a price no lower than 92 percent of the price of non-Chineseimported honey, and to enforce the agreement by issuing quota certificates to Chi-nese producers. (How does the pricing rule risk ignoring comparative advantage?Do you think Chinese honey sales were predatory? Why, or why not?) The alterna-tive to the suspension agreement would have been to accept antidumping dutiesranging from 127 to 157 percent. At the end of 1997, the United States had 13 sus-pension agreements in effect, covering goods from fresh tomatoes to uranium andtrading partners from the Netherlands to Kyrgyzstan.

Trading partners complain about the U.S. practice of demanding extraordinaryamounts of detailed information on short notice from firms accused of dumping. Ifa firm cannot or chooses not to provide any piece of the requested information, theU.S. investigators can use their own “best information available” to substitute for

Table 7.4 M U.S. Antidumping Investigations

1995 1996 1997

Petitions filed 14 20 15

Final Commerce determinations:

Negative 2 0 1

Affirmative 40 12 17

Terminated 0 0 0

Suspended 1 1 1

Final Commission determinations:

Negative 16 3 2

Affirmative 24 8 15

Terminated 3 1 1

Source: U.S. International Trade Commission, The Year in Trade 1997 (Washington, D.C.: USITC, 1998), p. 139.



the missing data. In practice, the “best information available” consists of data pro-vided by the domestic firms seeking protection and, as a result, might be expected tocontain a bias toward a large dumping margin. For example, a 1996 complaint byCray Research, Inc., that it lost a bid to sell a weather-forecasting supercomputer tothe U.S. National Science Foundation because NEC Corporation was dumping ledthe Department of Commerce to set the dumping margin and antidumping duty at454 percent when NEC stopped cooperating with the investigation. During thesame supercomputer dumping probe, Fujitsu received a preliminary antidumpingduty of 27 percent, but the final duty was raised to 173 percent when Fujitsudecided not to provide all the requested information.20

The Uruguay Round elaborated on antidumping rules negotiated as a code dur-ing the Tokyo Round. However, progress in dealing with dumping fell far short ofthat in many other areas. The new agreement does require countries to remove an-tidumping duties that have been in place for five years unless they can demonstratethat doing so would reinstitute the damage to the domestic industry that led to theinitial finding. This provision should help curtail the current practice of more-or-lesspermanent protection in the form of antidumping duties, a non-trivial accomplish-ment since several U.S. antidumping duties have been in effect since 1972.

7.7 Voluntary Import ExpansionsA voluntary import expansion (VIE) requires a country to import a specified quan-tity of foreign goods in a given industry. The mandated imports typically are statedas a minimum market share. Failure to achieve the target usually leads to retaliationwith tariffs.21 The exporting country pushing a trading partner to accept a VIE of-ten alleges that foreign trade barriers block exports and necessitate the agreement.On the surface, VIEs appear different from other protectionist policies. After all,VIEs aim to increase, not decrease, trade and claim to offset or break through for-eign trade barriers.

VIEs form a key part of “results-oriented” trade policies, that is, policies that focuson generating specific trade outcomes rather than on establishing a framework ofrules under which market forces determine trade patterns. Japan has been a particulartarget of results-oriented policies, because of the widespread perception than thestructure of the Japanese economy embodies many “informal” or “invisible” tradebarriers, such as a preference on the part of Japanese firms for long-term business re-lationships that favor domestic partners. These informal barriers present problemsfor the international trading system for three reasons. First, their very informalitymakes substantiating their existence, much less measuring their magnitude or impact,

20“Punitive Tariffs Set on Supercomputers From Japanese Firms,” The Wall Street Journal, August 22,1997, and Bob Davis, “In Effect, ITC’s Steep Tariffs on Japan Protect U.S. Makers of Supercomputers,”The Wall Street Journal, September 29, 1997. The fact that the United States and Japan have an ongoingdispute over alleged barriers to sales of U.S. supercomputers to the Japanese government, following a1990 “fair access agreement,” increases the irony of the Cray–NEC case.21See Case One in Chapter Five on the U.S.–Japan semiconductor pact. Chapter Eight (section 8.10)treats more generally the use of protectionist policies to force trade liberalization on trading partners.



difficult. Second, the complexity of the barriers, if indeed they exist, makes multilat-eral or even bilateral negotiations for their reduction difficult. Finally, the barriers areembedded in the structure of the economy and culture in such a way that interna-tional pressures for change encounter resistance. Proponents of VIEs claim thesefactors, taken together, render traditional rules-oriented trade policy ineffective in re-ducing Japan’s informal barriers.

Despite benign first appearances, VIEs can act as powerful tools of protection.They ignore the possibility that the observed outcome in a particular industry sim-ply reflects comparative advantage rather than foreign trade barriers.22 The agree-ments allocate specific market shares to foreign and domestic firms, allowing thefirms to act as an informal cartel and charge higher prices than would be feasibleunder market competition. VIEs often allocate the required foreign market share tothe country powerful enough to force the import country to negotiate the VIE;again, competition is restricted rather than encouraged, as the VIE itself shuts po-tential exporters from other countries out of the market. Finally, any industry thatpotentially could export has an incentive to push for VIEs—even if the industry hasa comparative disadvantage. Policy makers tend to measure the “success” of a VIEin increased export sales, regardless of whether those sales coincide with the inter-national pattern of comparative advantage. More trade, however, is not necessarilybetter than less trade. Trade produces gains only if it is based on either compara-tive advantage or economies of scale. VIE-induced exports that run counter to com-parative advantage damage foreign producers, may damage consumers, and reducethe efficiency of the world economy, even though they help exporting firms.

7.8 Administrative and Technical StandardsMost countries subject international trade to a variety of regulatory standards, someprotectionist by design and others unintentionally so. A few of the more commonclasses of restrictions include domestic-content requirements and rules of origin,government procurement policies, technical product standards, and regulatory stan-dards. Such policies constitute a continuing source of controversy within the inter-national trading system because of the inherent difficulty in sorting intentionallyprotectionist policies from those pursued for legitimate domestic reasons but thathave unintended negative effects on international trade.

7.8.1 Domestic-Content Requirements and Rules of Origin

Domestic-content requirements mandate that a specified percentage of a product’s in-puts and/or assembly have domestic origins in order for the good to be sold domesti-cally. Such requirements have three main constituencies. One consists of domesticinput producers. For example, most U.S. auto-parts producers support rules to re-quire all cars sold in the United States, especially those produced by Japanese-basedfirms, to include high percentages of U.S.-made parts. A second constituency includes

22The quotation in problem 4 in the “Problems and Questions for Review” provides one vivid example.

CH07_Yarbrough 10/15/99 2:32 PM 1


workers in the domestic industry. A U.S. domestic-content rule on cars, for example,could require Japanese auto producers to perform a high percentage of assembly tasksin the United States, increasing demand for the services of U.S. auto workers. Finally,domestic producers of the good typically support domestic-content requirements be-cause such rules can raise foreign firms’ costs and make them less competitive. If U.S.-made labor and auto parts cost more than their Japanese counterparts, then forcingJapanese producers to use more U.S. parts and perform more assembly tasks in theUnited States could raise Toyota’s, Nissan’s, and Honda’s costs and shift sales towarddomestic auto producers.

Worldwide, domestic-content requirements have received most attention in theautomobile industry, which in recent years has sponsored almost every type of traderestriction imaginable. The United Auto Workers union has pressured U.S. policymakers to pass domestic-content legislation. The original UAW-supported legisla-tion would have required 90 percent value-added produced in the United States orCanada for all manufacturers selling 500,000 or more cars in the United States. Thereasons for this pressure are twofold. First, domestic-content requirements wouldlimit imports of foreign-produced automobiles. Second, the requirements wouldlimit outsourcing, in which U.S.-based automobile manufacturers buy inputs andperform assembly functions abroad. Many “American” cars—that is, cars sold byU.S.-based automobile companies—now are built abroad, much to the dismay ofAmerican automobile workers. Auto makers have adopted Japan’s high-technologyassembly methods and use them in factories around the world. Cars built outside theUnited States from mostly foreign parts include the Dodge Colt and Stealth, FordFestiva, Plymouth Colt, and Pontiac LeMans. Also, many car parts, including en-gines and transmissions, now are built in Canada, Mexico, and Brazil, imported intothe United States, and placed in “American” cars. U.S. companies are not the onlyones taking advantage of low-cost production in developing countries; Volkswagenand Nissan, for example, maintain assembly operations in Mexico. Foreign-basedauto producers also build cars in the United States, including Honda, Toyota, BMW,Mercedes, Mitsubishi, Subaru, and Mazda. For cars sold in the United States, thevehicle-identification number (VIN) provides information about the country wherethe car was assembled. Cars assembled in the United States have VINs beginningwith 1 or 4, while cars assembled in Japan begin with J and in Sweden with Y, forexample. (Where was your car assembled?)

Modern worldwide production makes it difficult or impossible to determine the“nationality” of a product. A car may be assembled in England from parts producedin Brazil and sold by a firm owned primarily by Germans. One U.S. pro-protectioninterest group wants to require all goods to carry labels listing how much of thegoods’ value-added comes from each country. The South Dakota legislature carriedthe idea further by proposing all goods be labeled with three flags to denote thecountries of the producing firm’s ownership, the product’s manufacture, and theparts used in the product. Since 1994, cars sold in the United States have requiredstickers stating the percentage of parts from U.S. and Canadian sources. The stick-ers, designed by U.S. auto producers, understate the domestic content of cars pro-duced in the United States by foreign-based companies.

Direct political pressure from protectionist-oriented special-interest groups is not the only reason for increased domestic-content requirements. When groups of



countries negotiate reductions in their barriers to trade, those reductions sometimesapply only to members of the group. Recent examples include the European Union’s1992 removal of trade barriers among its members and the North-American Free-Trade Agreement. These agreements require a version of domestic-content rules, often called rules of origin; otherwise, nonmember countries could use the agree-ments to circumvent tariffs. For example, if Canada’s import tariffs exceed those of the United States, countries exporting to Canada would like to ship their goodsto the United States, pay the low U.S. tariff, and then ship to Canada duty-free fromthe United States under the NAFTA. To prevent this, agreements such as theNAFTA must contain provisions that limit duty-free access to goods “originating”in the member countries.23 In practice, this involves complicated and politi-cally sensitive issues, as members of the European Union and the NAFTA have dis-covered.

Nissan built an auto plant in Britain, intending to use the plant to serve the EUmarket. But France and Italy, with domestic auto industries to protect, wanted tocount Nissan Bluebirds imported from Britain as Japanese cars subject to the autoVER negotiated between Japan and the EU. Similarly, France tried unsuccessfully tocount Honda Accord wagons (called Aerodecks in Europe) as Japanese cars—eventhough they were designed in America and built in Marysville, Ohio. In an evenmore bitter dispute, the United States ruled Honda Civics built in Alliston, Ontario,ineligible to enter the United States duty-free because they contained less than 50percent North American content, the cutoff for duty-free treatment under theCanada–U.S. Free-Trade Agreement, the precursor to the NAFTA. Canadians werefurious, especially since engines the United States claimed contained too much for-eign content were cast in Ohio from U.S. aluminum and had been accepted intoCanada duty-free, placed in finished Civics, and re-exported to the United States.The case involved $17 million in back tariff duties and about $180 in tariff for everyHonda Civic shipped from Ontario to the United States. A binational review panelconsidered the dispute, as specified under the dispute-settlement procedures of theCanada–U.S. Free-Trade Agreement and ruled in favor of Canada. The Civics qual-ified for duty-free entry into the United States because they satisfied the agreement’srules of origin.

Under the NAFTA, most goods qualify for duty-free treatment if they either con-tain a specified percentage of North American content or are sufficiently “trans-formed” in North America to change tariff classification.24 For goods in sensitivesectors (autos, computers, and textiles and apparel), both conditions must be satis-fied. Autos, in particular, must contain 62.5 percent North American content; theUnited States insisted on the high percentage after its earlier loss in the Honda Civic case.

The Uruguay Round agreement set in motion a three-year process to develop har-monized rules of origin for WTO member countries. Suggested disciplines includerequiring rules to be consistent and impartial, prohibiting retroactive application of

23The alternative is to form a customs union with a common external tariff on trade with nonmembers;we shall discuss this option in section 9.4.1.24On tariff classification, see section 6.3 and Case One in Chapter Six.



rule changes, and restricting the frequency of rule changes to every three years, sincefrequent changes in rules disadvantage exporters.25

Domestic-content rules and rules of origin discourage production of goods in thecountries where opportunity costs are lowest. Thus, such rules reduce the gains fromtrade. The potential losses may be particularly large in industries, such as the auto-mobile industry, that involve many diverse manufacturing and assembly tasks. Asingle country is unlikely to have a comparative advantage in every aspect of the au-tomobile production process, from research-and-development-intensive design tolabor-intensive assembly. Arrangements such as outsourcing reflect attempts to per-form each manufacturing and assembly stage in the country of comparative advan-tage. As a result, outsourcing not only contributes to efficient production of auto-mobiles but also supports developing countries’ attempts to build manufacturingsectors. A developing or newly industrializing country finds it difficult to build acomplete automobile industry that can compete with the established industries inthe developed economies. An alternative is to specialize in particular stages of theproduction process appropriate for its factor endowment; but domestic-contentrules and rules of origin by developed countries restrict such specialization.

7.8.2 Government-Procurement Policies

Our analyses of international trade have relied on profit-maximizing motives offirms and utility maximization by consumers. We assume consumers and firms try tobuy at the lowest and sell at the highest available prices. The interaction of buyers’and sellers’ decisions in each market determines the prices of goods and, in turn, offactors of production. A large amount of trade, however, is undertaken by entitiesthat may not respond to these motives of profit and utility maximization, at least inthe simple terms in which we have defined them. Governments are foremost amongthe trading entities with unique goals.

We have seen several effects of government involvement in international trade:agricultural price supports and the role of government subsidization of exports. Twoother areas involve even more direct government roles in international trade. First,governments actually buy and sell many goods and services in international mar-kets. Second, government-owned industries and government-run monopolies makepurchases and sales. These phenomena are called government-procurement policies.

Most countries have buy-domestic requirements, which either legally or infor-mally require governments to purchase domestically made goods on a preferentialbasis. The strength of the requirements varies considerably. Some prohibit govern-ment purchases of certain imports outright; for example, laws require many govern-ments to use the domestic airline exclusively and to patronize only domestic insur-ance firms. Other laws mandate strict guidelines for giving preference to domesticover foreign producers. The Buy American Act of 1933 required a 6 percent marginof preference for domestic producers of goods bought by the government. In otherwords, a foreign firm would have to sell at a price more than 6 percent below the

25See the discussion of the U.S.-EU dispute over EU computer tariffs in Case One in Chapter Six.



domestic firm’s price to win the contract.26 For military or defense-related goods,the margin of preference expanded to 50 percent.

Many of the most controversial government-procurement practices are muchmore subtle and informal than the provisions of the Buy American Act and its for-eign counterparts. For example, governments may keep their bidding practices se-cret so foreign firms will have little or no information about the procedure and tim-ing for submission of bids for government contracts. Government agencies mayadvertise contracts in media unlikely to be available to foreign firms and may keepbids secret to prevent scrutiny of the award process. The Tokyo Round of trade ne-gotiations addressed some of these problems with a government-procurement code,and the Uruguay Round built on this effort. The code has only 27 signatory coun-tries and applies only to specified government agencies and projects; but it repre-sents a step forward in recommending that government bidding procedures be wellspecified and open. The Uruguay Round rules apply to procurement of services aswell as goods and to some purchases by subfederal governments and public utilities.However, governments still can practice many forms of preference for domesticfirms. Italy, for example, barred foreign contractors from bidding on a bridge pro-ject to link Sicily and the mainland.27

Even more controversy arises when the government owns sizable industries, as inthe cases of postal, telephone, and telegraph services (PTTs) in Asia, Europe, andmost developing economies. The governments involved often claim to maintainthese monopolies for purely domestic reasons, including national security and pro-tection of domestic consumers from exploitation by private monopolies. The com-plex web of restrictions on imports of goods used in these industries suggests thatprotection of the domestic industry from foreign competition may be another gov-ernment goal. The scope of the problem varies widely across countries with the ex-tent of public ownership of industry. National policies typically restrict imports oftelecommunications equipment, data processing, and computer-oriented technologyby PTTs. One result has been telephone calls from Germany to New York that costthree times as much as similar calls in the opposite direction.28 Japanese restrictionson telecommunications equipment for Nippon Telephone and Telegraph became thefocus of a wide range of trade complaints between the United States and Japan dur-ing the 1980s. Most governments have recognized the need to privatize or deregu-late their utilities, both to improve the industries’ efficiency and to avoid trade dis-putes, but progress in this reform has varied widely across countries.

26Many U.S. states have gone even further with “buy in the state” legislation, which gives preference toin-state firms for goods purchased by state and local government agencies. Los Angeles requires a speci-fied percentage of local value-added for purchases related to its mass-transportation system.27Shailagh Murray, “European Countries’ Rules on Labor, Environment Hinder a Single Market,” TheWall Street Journal, March 11, 1996.28John Diebold, “The Information Technology Industries: A Case Study of High Technology Trade,” inWilliam R. Cline, ed., Trade Policy in the 1980s (Washington, D.C.: Institute for International Econom-ics, 1983), 667.



7.8.3 Technical, Administrative, and Regulatory Standards

Governments regulate various aspects of activity within their economies and care-fully guard their rights to do so. Regulations may include health, safety, andproduct-labeling requirements, as well as controls over entry into certain professionsand access to certain types of mass media. Domestic considerations motivate manyof these technical barriers to trade. Governments require imported foods to meethygienic standards, toys and autos to meet safety standards, and products to con-form to labeling laws to prevent fraud and provide consumer information.

As in the case of government-owned telecommunications monopolies, some of theobserved restrictions clearly have protectionist effects. In some cases, these effects areso strong that one must suspect the proclaimed domestic goals of the restrictions asmere covers for protectionist intent. Colombia requires 70 percent locally producedprogramming on national television during prime time. Greece bans television toy adsbetween 7 am and 10 pm, making it difficult for foreign toy producers to provide in-formation about their products. Malaysia requires that advertising not “promote aforeign lifestyle.” Brazil bans imports of live ostriches from the United States becauseof one dead bird, which Brazilian authorities claimed died of a disease of which the In-ternational Office of Epizootics has recognized the United States as being free. Forseveral years, the Japanese Ministry of Posts and Telecommunications maintainedtechnical standards that rendered U.S.-made car phones unusable in the Tokyo-Nagoya corridor which encompasses most of Japan’s industrial and financial activity;the standards were altered only after a U.S. threat to impose retaliatory tariffs. Gashoses sold in Britain must have a rubber covering and cannot be extendible; hosessold in Italy must have no cover and be extendible. For 471 years (until 1987), Ger-many’s “beer purity law” decreed that beer sold in Germany could contain only wa-ter, hops, yeast, and barley, effectively ruling out imported beers, most of which con-tain chemical additives, rice, corn, soy, or millet. After forcing changes in the puritylaw, foreign beer producers find their access to the German market blocked by pack-aging rules that foreign firms have a hard time meeting. In the guise of encouraging re-cycling, the rules require that 72 percent of all beverages come in reusable glass; butbottled beer is too delicate and expensive to ship long distances.

China requires foreign firms that want to sell the boilers and valves used in powergenerators and textile mills to pay for Chinese officials to visit and inspect every fac-tory that supplies any parts for the equipment. Inspectors must certify that theplants comply with unspecified safety regulations. The cost is approximately$100,000. Plus, most inspectors are linked to the Chinese firms that produce similarequipment; so industrial espionage is a risk.29 South Korean customs procedures de-lay fruits and vegetables for up to a month, enough time for them to perish; and theUnited States filed a 1996 WTO complaint about the delay procedures. Japan resistschanging its building codes to allow construction with imported lumber, claimingJapanese earthquakes are too severe to allow such construction. Many analysts

29Ian Johnson and Eduardo Lachica, “China Hinders Its Own Bid for WTO, Adding Trade Barriers asOld Ones Fall,” The Wall Street Journal, May 20, 1997, A15.



suggested the destruction caused by the 1994 Kobe earthquake would have beensubstantially less had state-of-the-art construction techniques, developed in Califor-nia, been used in Kobe.30 Egypt allows only Egyptian nationals to become certifiedaccountants. In Colombia, service firms with more than ten employees can have nomore than 20 percent of specialists and 10 percent of unskilled laborers who are for-eign nationals. Italy’s quality standards for bull semen discriminate against foreignanimals, in favor of domestic ones. New Zealand bans all imported uncooked poul-try, despite a 1996 Ministry of Agriculture report that found the risk of disease fromimported poultry to be negligible.

Three of Korea’s nine taxes on passenger vehicles are based on engine displace-ment, so American and other foreign cars, which tend to have larger engines, paydisproportional taxes. Insurance companies in India are government owned, rulingout access for foreign firms. Ghana excludes foreign participation in four economicsectors reserved for Ghanaian nationals: petty trading, operation of taxis and rental-car services with fewer than 10 vehicles, lotteries (except football pools), and beautysalons and barber shops.

Because of the difficulties in sorting legitimate domestic policy goals from protec-tionist ones, efforts at international negotiations to lower technical barriers to tradehave met with relatively little success. Taken individually, the rules may seem smalland rather insignificant in terms of cost. When taken together, however, the costs be-come substantial. Eliminating these costs by removing technical barriers to tradeprovided a major stimulus to the European Union’s efforts to develop a completelyopen market for trade among its members. However, loopholes for safety and envi-ronmental regulations allow member countries to continue many technical stan-dards that restrict trade even within the European Union.

7.9 How Can We Measure Nontariff Barriers?Nontariff barriers present major hurdles to analysts interested in measuring therange and magnitude of those barriers. As the discussion of technical barriers totrade makes clear, deciding exactly what should count as a nontariff barrier can bedifficult in itself. Once we decide which barriers to include, at least four differentmeasures can be calculated.

The most common empirical measure of NTBs is the coverage ratio, or the valueof imports subject to NTBs, divided by total imports. Consider a simple example.Country A imports $60 worth of good X and $40 worth of good Y, so A’s total im-ports equal $100. Imports of X are subject to a quota under which a maximum of$60 worth of X can be imported, and imports of Y are free of any NTBs. NTBs af-fect $60 out of the country’s $100 worth of imports, so country A’s NTB coverageratio equals ($60/$100) 5 0.6. The major problem with the coverage ratio is thatincipient trade, shut off by the trade restriction, is not counted. With no quota ongood X, perhaps country A would have imported $5,000 worth of X; but the loss ofthe additional $4,940 worth of trade does not enter the coverage-ratio calculation.

30Case Three in Chapter Eighteen examines the Kobe earthquake’s macroeconomic implications.



Another problem involves measuring changes in NTBs. Suppose, beginning with thesituation just outlined, country A tightens the quota on good X until no imports canenter, while good Y remains unrestricted. Now none of country A’s imports are cov-ered by NTBs, so the new coverage ratio is $0/$40 5 0. Counter-intuitively, tighten-ing the quota, by stopping all trade in the restricted good, lowered the NTB cover-age ratio!31

An alternative measure, called the implicit tariff, uses the equivalence betweentariffs and quotas (see section 7.4). The idea is to calculate the tariff rate that wouldhave the same effect on trade as the existing quota or other nontariff barrier. TheUruguay Round requires that countries calculate implicit tariffs in order to accom-plish the required tariffication, that is, switching their agricultural protection poli-cies from quotas to tariffs, which would then be cut according to the UruguayRound tariff-reduction timetable. Canadian quotas on agricultural products hadbeen so high that their implicit tariff rates, imposed in 1995, ranged up to 335 per-cent. Even after the Uruguay Round phased-in tariff reductions, Canadian tariffswould still be prohibitive—285 percent on imported chicken cuts, 187 percent oneggs, and 272 percent on yogurt.32 The United States filed a complaint under theNorth-American Free-Trade Agreement, arguing that the NAFTA required elimina-tion of all tariffs between Canada and the United States by 1998. Canada arguedthat its WTO tariffication obligation took precedence over the NAFTA tariff-elimination commitment. A NAFTA dispute-settlement panel ruled in favor ofCanada.

The most comprehensive measures of nontariff barriers are producer- andconsumer-subsidy equivalents. An industry’s producer-subsidy equivalent (PSE)measures the difference between the income industry producers receive with theirNTBs and the income producers would receive with no such barriers, and expressesthat difference as a percentage of the income-without-barriers figure. If producersearn $3 million with a quota but would earn only $2 million under free trade, theproducer-subsidy equivalent is ($3 million 2 $2 million)/$2 million 5 0.5 or 50 per-cent. Economists have calculated producer-subsidy equivalents for many agricul-tural products because those products are subject to so many NTBs. Table 7.5 re-ports one set of estimates that compares agricultural PSEs for several majoragricultural producers; Switzerland’s agricultural producers, for example, received76 percent more income in 1997 than they would have in the absence of governmentassistance to the industry, including price-support facilitated by import barriers.

Table 7.5 also reports the consumer-subsidy equivalent (CSE), which performs thesame exercise for an industry’s consumers. If, because of an import quota, consumersmust pay $5 million for a good they could get for $4 million without the quota, thequota’s consumer-subsidy equivalent is ($4 million 2 $5 million)/$4 million 5 20.25or 225 percent. Note the negative sign; the quota forces consumers to pay higherprices, hence in effect they receive a negative subsidy. Generally, protectionist policiesincluding NTBs affect producers and consumers in an industry in opposite ways.

31Average tariff measures exhibit the same weakness; see section 6.3 in Chapter Six.32U.S. International Trade Commission, The Year in Trade 1996 (Washington, D.C.: USITC, 1997), 88.



Therefore, the producer- and consumer-subsidy equivalents for an industry usuallyhave opposite signs. (Name a trade policy with a negative PSE and a positive CSE,and vice versa.)

Case One:Has Trade Policy Gone Bananas?

The members of the European Union have a long history of protectionism in the ba-nana market. Before the 1992 completion of Europe’s internal market, only Ger-many, the biggest per capita banana-consuming country in the world, allowed freetrade in bananas. Other EU members had two banana policies. They importedsmall, expensive bananas from a group of African, Caribbean, and Pacific (ACP) ex-porters, mostly former European colonies such as Cameroon and St. Lucia, througha special trade agreement with the European Union; these bananas paid no tariff andfaced no quotas. At the same time, all non-German EU members applied a 20 per-cent tariff on all so-called “dollar bananas”—larger, cheaper bananas grown in

Table 7.5 M Producer- and Consumer-Subsidy Equivalents in Agriculture, 1997

Producer-Subsidy Consumer-SubsidyEquivalent (Percent of Equivalent (Percent ofValue of Production) Value of Consumption)

Switzerland 76 253

Norway 71 250

Japan 69 246

Iceland 68 235

European Union 42 225

Turkey 38 234

Poland 22 220

Canada 20 214

United States 16 28

Hungary 16 29

Mexico 16 0

Czech Republic 11 24

New Zealand 3 26

Australia 9 25

Source: Data from Organization for Economic Cooperation and Development, Agricultural Policies inOECD Countries 1998 (OECD: Paris, 1998), pp. 30–33.



Latin America. France, Italy, Portugal, Spain, Greece, and the United Kingdom alsoapplied quotas against dollar bananas. As a result, banana prices varied widelywithin the EU, from $125 per ton in Portugal to $700 per ton in Spain. (Which pro-ducers do you think have a comparative advantage in bananas—the ACP producers,or the Latin American dollar-banana producers? Why?)33

The EU’s 1992 program required free movement of goods across the Union, aplan that would destroy the market for expensive ACP bananas, since dollarbananas could enter the EU through Germany and move on to other countries. TheUnion responded by replacing member countries’ national banana restrictions withan EU-wide policy. Germany took its case to the European Court of Justice, insistingon its right to free trade in bananas, but lost. The fight holds particular significancefor (former) East Germans, for whom access to bananas—unavailable during theCommunist years—became a symbol of new freedom. Since the fall of the BerlinWall, residents of former East Germany have consumed approximately 60 poundsof bananas per capita annually, almost three times the rate of U.S. consumption, de-spite having prices rise by 50 percent because of the EU’s import restrictions on dol-lar bananas.

Under the post-1992 European Banana Regime, up to 857,700 metric tons ofACP bananas could enter the EU tariff free each year; additional ACP bananas hadto pay a tariff of ECU750 per ton.34 The first 2 million metric tons of dollar bananaseach year owed a tariff of ECU100 per ton; additional dollar bananas faced anECU850 tariff. Also shut out of the EU market were countries such as Ghana which,as a new producer, was not entitled to an EU import license. The Banana Regime’scost to European consumers has been estimated at $2 billion per year.35

When dollar-banana producers Colombia, Costa Rica, Guatemala, Nicaragua,and Venezuela complained to the GATT, the organization ruled that the EU BananaRegime was illegal; but the EU blocked adoption of the report.36 The EU offered thefive countries a “Framework Agreement on Bananas,” which promised to increasetheir EU quota by 10 percent and lower the tariff against their banana exports by 25percent—in exchange for the countries’ dropping their complaint and promising notto challenge the EU Banana Regime in the future. The agreement also guaranteedthe signatories country-specific quotas and allowed the exporting countries to ad-minister the quotas, ensuring that they could capture the valuable quota rents. Thefive Latin American countries, except for Guatemala, accepted the terms of theFramework Agreement; but only Colombia and Costa Rica actually implemented itsterms.

33Banana production per acre is approximately three times as high in dollar banana countries as in theCaribbean; and the cost of producing a dollar banana is approximately half that of an ACP banana (“Expelled From Eden,” The Economist, December 20, 1997, 37).34Such policies are called tariff-rate quotas.35“Expelled From Eden,” The Economist, December 20, 1997, 36.36The ability of the “defendant” country to block unfavorable findings weakened the GATT dispute-settlement procedures. Important elements of this deficiency were remedied in the 1994 agreement thatchanged the GATT into the new WTO.



Chiquita and members of the Hawaii Banana Industry Association complained tothe U.S. Trade Representative, claiming that the new EU Banana Regime and Frame-work Agreement shut them out of their traditional role as banana ripeners and distribu-tors of dollar bananas to European markets and raised their costs because of restrictivequota allocations and licensing restrictions. In 1995 and 1996, the United States initi-ated a WTO dispute-settlement procedure, joined by Ecuador, Guatemala, Honduras,and Mexico. Caribbean (ACP) banana exporters claimed that elimination of their pref-erential access to EU markets would lead to the collapse of their banana-dependenteconomies and social unrest. The United States also began an investigation into the im-plications for U.S. companies of Colombia’s and Costa Rica’s implementation of theFramework Agreement, which restricted the role of U.S. firms such as Chiquita.

In 1997, the WTO ruled that the EU Banana Regime violated the Union’s WTOobligations; the EU appealed, but lost again. Meanwhile, a German national courtpetitioned the EU for a ruling on whether Germany could challenge the EU bananapolicy and allow free trade in bananas. A WTO-appointed arbitrator ruled that theUnion had until January 1, 1999 to bring its banana policy into line with its WTOobligations. The text of the WTO case and appeal runs to 383 pages! In June 1998,the EU finally made some minor changes to its Banana Regime. It abolished theregime’s licensing requirement but maintained the quota on dollar bananas. U.S.trade officials went “bananas” in response, claiming the EU Banana Regime stillviolates WTO rules and threatening trade sanctions in retaliation.

In December 1998, the U.S. government announced a list of 15 European ex-ports—from cashmere sweaters to coffee makers to pecorino cheese—on which theU.S. would impose 100 percent retaliatory import tariffs by March 1999, barringEU compliance with WTO rulings against the EU Banana Regime. The EU, on theother hand, hoped to stall by demanding a time-consuming WTO investigation ofthe minor changes made in the Regime after the initial WTO rulings. Most trade ex-perts agreed that the EU’s changes were not sufficient to bring EU Banana Regimepolicy into compliance with WTO obligations; but those same experts also agreedthat unilateral retaliation by the United States would be a dangerous step down thepath to a possible trade ware. In March 1999, the banana split remained unresolved.The United States imposed the threatened 100 percent retaliatory tariffs, althoughactual collection of the tariff revenue was postponed pending WTO permission.

Case Two:Operation Q-Tip

Through a series of bilateral agreements, the Multifiber Agreement37 assigns 46 de-veloping countries quotas on their textile and apparel exports to the United States.

37Technically, the Uruguay Round changed the name of the apparel and textile protection regime to theAgreement on Textiles and Clothing.



The biggest exporters are China and Hong Kong, Mexico, and Taiwan. From theviewpoint of those charged with administering the system of quotas, transshipment,or rerouting exports so they appear to come from another country, presents a majorproblem.

The U.S. Customs Service conducted a large-scale investigation, “Operation Q-Tip,” in 1991 following allegations that China exceeded its apparel quotas bytransshipping through Egypt, Macao, Honduras, Hong Kong, the Philippines, andSingapore. Analysts estimated transshipped Chinese textiles and apparel at about $2billion annually. China’s 1991 quota was $4.6 billion per year, so the alleged illegalgoods represented a 40 percent increase in China’s exports to the United States.

Since 1994, the U.S.-China bilateral quota agreements have included clauses de-signed to deter and punish transshipment. In particular, the agreements give theUnited States the right to reduce future Chinese quotas by up to three times theamount of any transshipped goods. The agreements have also become more restric-tive on other margins. Prior to 1994, the agreement in place allowed Chinese ship-ments to the United States to grow by an average of 4.4 percent per year. The newthree-year agreement reached in 1994 limited growth to zero percent, 1 percent, and1 percent for the three years, in addition to covering silk and silk-blend apparel, pre-viously exempt from the quotas.

The United States applied sanctions to trade with China three times under the1994 agreement for alleged transshipment violations through Hong Kong, Mongo-lia, Fiji, and Turkey, including one resort to the triple-charge punishment. Most ofthe alleged violations involved clothes marked “Made in Hong Kong.” For a typicalman’s shirt, the collar, collar band, cuffs, sleeves, and front placket are made inChina, where the buttons are also attached. In Hong Kong, the fabric is cut to shape,cuffs are attached to the sleeves, and the yoke, front, and back are sewed together.Under old (pre-July 1, 1996) U.S. Customs rules, such a shirt would have been“Made in Hong Kong” because the cutting occurred there. Under new U.S. rules,the country of origin is the country of assembly; such rules are called “fabric for-ward” ones.38 This rule change redefined the typical shirt just described from“Made in Hong Kong” to “Made in China.” The new fabric-forward rules also ren-dered many luxury goods, previously “European,” suddenly “Chinese.” Most Euro-pean designer scarves and ties are made from Chinese silk that is bleached, shrunk,dyed, and printed in France or Italy. The Europeans’ outcry over the rule changeearned them an exemption from the new U.S. protectionism.

In early 1997, the United States and China reached a new four-year agreementthat limits China’s textile and apparel exports to the United States, pledges China’sdetermination to end mislabeling and transshipment, and provides access to the Chi-nese market for U.S.-made textiles (primarily home-furnishing products and high-tech fabrics). The quotas themselves remain largely unchanged from the 1994 agree-ment, except for cuts in 14 product categories as punishment for earliertransshipment violations and elimination of quotas on silk products, which can nowenter the United States quota free.

38NAFTA rules of origin employ a stricter “yarn forward” rule.



As part of the Uruguay Round Agreement, WTO member countries agreed thatthe quota system covering textiles and apparel would be phased out over a ten-yearperiod, ending in 2005. The textile and apparel sectors then will be covered bynormal WTO rules; but the quota system will continue for non-WTO members.

Case Three:Photo of a Trade Dispute: Kodak Versus Fuji

Kodak and Fuji compete in the markets for film and for the paper and chemicals usedin film processing. In 1993, Kodak filed a case charging Fuji with dumping photo-graphic paper and chemicals in the U.S. market, using its monopoly on sales in Japanto finance lower prices on its U.S. sales. Kodak sought a 275 percent antidumpingduty. Fuji already had a new South Carolina plant under construction, and produc-tion there would escape any U.S. tariffs. The Department of Commerce issued a pre-liminary finding recommending antidumping duties of 361 percent, much higher thaneven Kodak had asked. Fuji responded by entering a suspension agreement, that is, byagreeing to charge higher prices to U.S. consumers to avoid the tariffs. Kodak hadsucceeded in forcing a rival to raise its prices, making the photographic-film marketless competitive at the expense of U.S. picture-taking consumers. But the Kodak-Fujisaga was only beginning.

In 1995, Kodak charged that Japan’s Ministry of Trade and Industry (MITI) andFair Trade Commission tolerated, actively encouraged, and reinforced anticompeti-tive practices by Fuji in the Japanese market, especially exclusive-dealing agreementsbetween Fuji and four distributors (tokuyakuten) that handled almost 70 percent ofphotographic products sold in Japan. Kodak alleged that the exclusive-dealingagreements forced the tokuyakuten to stop handling Kodak products. The firm esti-mated that the Japanese firms’ and government’s practices had cost Kodak $5.6 bil-lion in sales since the mid-1970s. However, Kodak had almost as large a share of theJapanese market (9 percent) as Fuji did of the U.S. one (12 percent); the UnitedStates imposed tariffs (3.7 percent) on imported photographic supplies, while Japanno longer did; and Kodak and Fuji held almost identical market shares (70 percent)in their respective home markets. U.S. firm Polaroid had 70 percent of the Japanesemarket in instant film, compared with Fuji’s 30 percent share. Careful readers of Ko-dak’s case pointed out that many of their specific allegations concerned behaviorfrom the 1960s and 1970s. Also, Fuji’s rebuttal to Kodak’s charges pointed out thatKodak engaged in the same practices of which it accused Fuji, except without the al-leged government involvement. In particular, Kodak (until 1994 still under 1921and 1954 consent decrees with the Justice Department that limit its business prac-tices to prevent it from monopolizing the U.S. photographic market) paid retailers tocarry its film exclusively. Fuji and other analysts also pointed out Kodak’s sloppymarketing in Japan and its failure to keep up with Fuji’s technical innovations suchas single-use cameras and high-speed ISO 400 film.



Japan claimed Kodak should take its case to Japan’s Fair Trade Commission, thegovernment agency responsible for competition and antitrust policy. This path wasrejected by Kodak, which claimed that Japan’s FTC had actually supported Fuji’s al-leged anticompetitive behavior. Kodak wanted the United States to act unilaterallyby imposing tariffs on Fuji or forcing the company to accept a settlement; but, in-stead, policy makers forwarded the complaint to the WTO for dispute settlement.The WTO verdict rejected all 21 of Kodak’s claims. But Kodak didn’t give up. Soonafter the WTO announcement, the U.S. Trade Representative said that office wouldrely on Kodak to collect data on the Japanese photo market, after which the officewould decide whether to pursue unilateral sanctions.

SummaryIn this chapter, we examined the effects of import quotas, voluntary export restraints,export subsidies and countervailing duties, dumping, voluntary import expansions,domestic-content rules and rules of origin, government procurement policies, andtechnical standards. For a variety of reasons, these restrictions have been much moredifficult to deal with in the context of international negotiations than the tariffs dis-cussed in Chapter Six. Economists have dubbed the failure to eliminate these barriersto trade and increased reliance on nontariff forms of trade restriction the new protec-tionism, which restricts trade in goods ranging from supercomputers to honey.

Looking AheadDespite arguments that unrestricted trade maximizes welfare for the world as awhole, pursuit of free trade as a policy clearly is the exception rather than the rule.The effect of trade on the distribution of income and the adjustment costs incurredwhen resources must move from a comparative-disadvantage industry to one ofcomparative advantage provide two explanations for the existence of trade restric-tions. In Chapter Eight, we examine in more detail arguments presented in favor oftariffs, quotas, and other barriers to trade.

Key Termspredatory dumpingantidumping dutyvoluntary import expansion (VIE)domestic-content requirementsoutsourcingrules of origingovernment-procurement policiesbuy-domestic requirementstechnical barriers to tradecoverage ratioimplicit tariffproducer-subsidy equivalent (PSE)consumer-subsidy equivalent (CSE)

nontariff barrier (NTB)new protectionismquotaquota rentsvoluntary export restraint (VER)equivalence of tariffs and quotasexport subsidycountervailing duty (CVD)dumpingsporadic dumpingpersistent dumpingprice discriminationdumping margin



Problems and Questions for Review

1. Imports of peanuts into the United States are subject to a quota, currently set atabout 1.7 million pounds per year.a. Illustrate the free-trade equilibrium in the market for peanuts. Then show the

quota’s effects on domestic consumption, domestic production, imports, andprice. Label carefully.

b. What are the quota’s welfare effects, including both the distributional effectsand the overall (net) effect on the United States? Relate the effects to your di-agram in part (a).

c. In 1990, a severe drought hit Georgia, where most U.S. peanuts are grown. Il-lustrate the effects of the drought, assuming policy makers do not change thequota. What happens to domestic production, domestic consumption, im-ports, and price as a result of the drought?

d. Assume the United States is a small country in the peanut market. Now sup-pose that the peanut market is subject to an import tariff instead of the quota.The tariff is set at a level that results in the same pre-drought level of produc-tion, consumption, and price as under the quota in part (a). Illustrate the ef-fects of the tariff before the drought.

e. Compare the effects of the drought under the tariff with those under thequota. What are the similarities and differences?

2. This question asks you to address several issues related to dumping, using as anexample U.S. accusations that Japanese firms dumped laptop-computer screensin the United States in 1991.a. A lawyer for Compaq, a U.S. computer manufacturer, was quoted in The

Wall Street Journal (February 11, 1991), asserting, “There are no U.S. suppliers for these products [the screens for laptop computers], and there-fore there can be no dumping.” Is the lawyer correct or incorrect, and why?

b. According to The Wall Street Journal, the U.S. Department of Commerce has“decided that display prices set by Japanese companies in their home marketmay be artificially low. Rather than comparing U.S. prices with Japaneseprices, Commerce is now coming up with its own ‘fair’ price based on a for-mula accounting for the costs of materials, research, and return on invest-ment.” Do you think this procedure is more or less likely to result in imposi-tion of antidumping duties than one in which prices charged for Japanesedisplays in the United States are compared with actual prices for the same dis-plays in Japan? Why? As an economist, which procedure would you prefer tosee used? Why?

3. Country A is a small country with a comparative advantage in good X. The government of country A provides X producers with a subsidy of $10 for each unit of X exported. The governments of all other X-exporting coun-tries also subsidize exports of X by $10 per unit. Evaluate the following state-ment: “Producers of good X in country A don’t really gain from the sub-sidy. Nevertheless, they are unwilling to have their government stop the sub-sidy.”



4. Do you agree or disagree with the argument in the following “letter to the edi-tor” from The Wall Street Journal (February 14, 1985)? Support your answerwith a brief economic analysis. You may take the numbers reported in the letteras factual for purposes of your argument.

[A recent letter to the editor] claims that the [United Auto Workers’] request forcontinued auto restraints on the part of Japanese auto manufacturers is protec-tionist and anti-competitive. At present, the UAW wants to limit imports ofJapanese autos to 17 percent of the U.S. market. This seems fair enough after oneexamines auto sales in Japan during 1984. According to The Japan Times,5,471,982 cars were sold in Japan last year, of which only 41,982 were foreign.American auto sales totaled 2,382—or less than one-half of 1 percent! These fig-ures show that a much higher degree of protectionism exists in Japan than in theU.S., a fact that should be remembered by both American policy makers andJapanese who accuse the U.S. of being anti-competitive and protectionist.

5. What is the major weakness of the coverage ratio as an empirical measure ofnontariff trade barriers? Explain the concept of a producer-subsidy equivalent.

6. This question continues problem 7 from Chapter Six. The country of Usia has aprohibitive export tax on logs. Both Usia and Themia export lumber made fromlogs. Usia files a complaint against Themia alleging that the government ofThemia subsidizes lumber exports and that Themia’s subsidized exports stealmarkets from Usia’s lumber producers. The government of Themia is angered byUsia’s accusation and counter-charges that Usia’s prohibitive export tax on logsamounts to an export subsidy for Usia’s lumber producers. Briefly evaluateThemia’s charge.

7. Protectionist responses in dumping cases include antidumping duties and sus-pension agreements, which act like VERs. Compare the implications of the twofor net domestic welfare. [Hint: Who is likely to capture the tariff revenue orquota rent in each case?]

8. In 1996, potato growers in northern Maine suffered their third year of bad har-vests. They did, however, expect prices for their potatoes to rise as a result. In-stead, imports of Canadian potatoes rose.a. Illustrate in a demand-and-supply diagram why, in the absence of imports, a

bad domestic harvest would have boosted domestic potato prices.b. Also illustrate why the possibility of Canadian imports prevents the price in-

crease. [You may assume that the United States is a small country in thepotato market.]

c. In which case is the sum of U.S. producer and consumer surplus greater, thecase with no imports, or the case with imports?

d. How would you expect Maine potato growers to react to the increased im-ports?39

39The NAFTA prevented Maine potato growers from getting the quota or tariff protection they wanted.However, they did convince U.S. officials to begin around-the-clock rigorous inspections of all Canadianpotato imports. Inspectors rejected approximately 20 percent of imports based on faulty labeling or grad-ing. See “Big Potatoes,” The Economist, January 20, 1996.



References and Selected Readings

Bhagwati, Jagdish, and Robert E. Hudec, eds. Fair Trade and Harmonization, Volumes 1 and 2. Cam-bridge, Mass.: MIT Press, 1996.

Collection of papers on NTBs. Level of papers varies.

Congressional Budget Office. How the GATT Affects U.S. Antidumping and Countervailing Duty Poli-cies. Washington, D.C.: Congressional Budget Office, 1994.

Excellent survey of U.S. law and policy related to dumping and export subsidies.

Deardorff, Alan V., and Robert M. Stern, eds. Analytical and Negotiating Issues in the Global TradingSystem. Ann Arbor, Mich.: University of Michigan Press, 1994.

Collection of papers on many NTBs; for intermediate and advanced students.

Deardorff, Alan V., and Robert M. Stern. Measurement of Nontariff Barriers. Ann Arbor, Mich.: Univer-sity of Michigan Press, 1998.

Comprehensive examination of measurement issues related to NTBs.

Feenstra, Robert C. “Estimating the Effects of Trade Policy.” In Handbook of International Economics,Vol. 3, edited by G. M. Grossman and K. Rogoff, 1553–1596. Amsterdam: North-Holland, 1995.

Advanced, up-to-date survey of the empirical literature on the economic effects of various trade policies.

Finger, J. Michael, ed. Antidumping. Ann Arbor, Mich.: University of Michigan Press, 1993.Collection of papers on dumping and antidumping policies; level of papers varies.

Graham, Edward M., and J. David Richardson, eds. Global Competition Policy. Washington, D.C.: In-stitute for International Economics, 1997.

Excellent, accessible overview of countries’ competition policies and their international implications.

Hindley, Brian, and Patrick A. Messerlin. Antidumping Industrial Policy. Washington, D.C.: AmericanEnterprise Institute, 1996.

Brief, accessible overview of the current state of antidumping policy and suggested reforms.

Hufbauer, Gary C., and Kimberly A. Elliott. Measuring the Costs of Protection in the United States.Washington, D.C.: Institute for International Economics, 1994.

Estimates the costs of protection to the U.S. economy; for all students.

Hufbauer, Gary Clyde, and Jeffrey J. Schott. NAFTA: An Assessment. Washington, D.C.: Institute for In-ternational Economics, 1993.

Comprehensive and readable survey of the North-American Free-Trade Agreement; for all students.

Irwin, Douglas A. Managed Trade: The Case Against Import Targets. Washington D.C.: American En-terprise Institute, 1994.

Accessible analysis of the protectionist effects of voluntary import expansions.

Jackson, John H. The World Trading System: Law and Policy of International Economic Relations, 2nded. Cambridge, Mass.: MIT Press, 1997.

Excellent and readable treatment of legal aspects of trade, including subsidies and dumping.

Jones, Kent A. Export Restraint and the New Protectionism. Ann Arbor, Mich.: University of MichiganPress, 1994.

Analysis of negotiated export-restraint agreements; intermediate.

Leidy, Michael. “Antidumping: Unfair Trade or Unfair Remedy?” Finance and Development 32 (March1995): 27–29.

Introductory overview of the protectionist effects of antidumping policies.

Niels, Gunnar, and Adriaan ten Kate. “Trusting Antitrust to Dump Antidumping.” Journal of WorldTrade (December 1997): 29–43.

Analyzes the potential of competition or antitrust policy to replace antidumping policy; for all students.

Organization for Economic Cooperation and Development. Indicators of Tariff and Non-Tariff TradeBarriers. Paris: OECD, 1997.

Good source of data on OECD members’ trade barriers.



Rodrik, Dani. “Political Economy of Trade Policy.” In Handbook of International Economics, Vol. 3,edited by G. M. Grossman and K. Rogoff, 1457–1494. Amsterdam: North-Holland, 1995.

Advanced, up-to-date survey of the literature on distributional aspects of trade policy and their implica-tions for the policy process.

Rosendorff, B. Peter. “Voluntary Export Restraints, Antidumping Procedure, and Domestic Politics.”American Economic Review (June 1996): 544–561.

Advanced political-economic analysis of how governments choose between antidumping duties andVERs to protect a domestic industry.

Sazanami, Yoko, Shujiro Urata, and Kiroki Kawai. Measuring the Costs of Protection in Japan. Wash-ington, D.C.: Institute for International Economics, 1995.

Attempt to quantify the cost to Japanese consumers and the Japanese economy as a whole of the struc-ture of protection. Intermediate.

Schott, Jeffrey J. The Uruguay Round: An Assessment. Washington, D.C.: Institute for International Eco-nomics, 1994.

Excellent, accessible survey of the issues and results of the Uruguay Round.

Staiger, Robert. “International Rules and Institutions for Cooperative Trade Policy.” In Handbook of In-ternational Economics, Vol. 3, edited by G. M. Grossman and K. Rogoff, 1495–1552. Amsterdam:North-Holland, 1995.

Advanced, up-to-date survey of the literature on how rules and institutions at the international level af-fect national trade policies.

Staiger, Robert W., and Frank A. Wolak. “Measuring Industry-Specific Protection: Antidumping in theUnited States.” Brookings Papers on Economic Activity: Microeconomics (1994): 51–118.

Empirical investigation of the purposes and effects of dumping cases; advanced.

Stiglitz, Joseph E. “Dumping on Free Trade: The U.S. Import Trade Laws.” Southern Economic Journal(1997): 402–424.

Argues for a larger role for national welfare in determining policy toward imports; for all students.

Sykes, Alan O. Product Standards for Internationally Integrated Goods Markets. Washington, D.C.: TheBrookings Institution, 1995.

Excellent treatment of the role for and protectionist potential for product standards.

Trebilcock, Michael J., and Robert Howse. The Regulation of International Trade. London: Routledge,1995.

Accessible survey of the legal aspects of trade restrictions.

Trefler, Daniel. “Trade Liberalization and the Theory of Endogenous Protection.” Journal of PoliticalEconomy 101 (February 1993): 138–160.

Empirical study of the determinants and effects of U.S. import restrictions; advanced.

United States International Trade Commission. The Year in Trade. Washington, D.C.: USITC, annual.Excellent survey of current trade issues for all students.

United States Trade Representative. National Trade Estimate Report on Foreign Trade Barriers. Wash-ington, D.C.: USTR, annual.

Annual summary of foreign countries’ trade barriers that restrict U.S. exports.

Westhoff, Frank H., Beth V. Yarbrough, and Robert M. Yarbrough. “Harassment versus Lobbying forTrade Protection.” International Trade Journal 9 (Summer 1995): 203–224.

Examines use of protection, especially antidumping and countervailing duty policy, to harass foreign pro-ducers; intermediate.

World Trade Organization. Annual Report, Volumes I and II. Geneva: WTO, annual.Excellent source on current international trade and trade-related issues for all students.


nontariff barriers and the new protectionism

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