Transcript Econ 420

Welcome to Econ 414
International Economics
Study Guide
Week Nine
Ending: Friday October 26
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Nontariff Barriers to Trade
(Chapter 7)
1. What are GATT and WTO and what is their
role in international trade?

There is little on WTO in you book
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Here is a little more information on
GATT (General Agreement on Tariff and
Trade)
• Was originally created by the Bretton Woods Conference as part
of a larger plan for economic recovery after World War II.
• The GATT's main objective was the reduction of barriers to
international trade.
• This was achieved through the reduction of tariff barriers,
quantitative restrictions and subsidies on trade through a series
of agreements.
• Originally, the GATT was supposed to become a full
international organization called the International Trade
Organization.
• However, the agreement was not ratified, so the GATT remained
simply an agreement.
• The functions of the GATT were taken over by the World Trade
Organization which was established during the final round of
negotiations in the early 1990s.
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What are Non-tariff barriers to trade and
how common are they?
The answer is in the book
• Problems:
1. These types of protection are
increasing as tariffs are decreasing.
2. They are less visible than tariff but in
many cases they are more restrictive
than tariffs.
•
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What are Quotas?
• A government policy that limits imports of a
product to a certain number of units.
• It is banned by the WTO but it still exists.
5
How common is quota?
• In 1955 Ireland suspended its import quota on
fertilizers.
• China's Grain and sugar import quotas remain
unchanged in 2008
• In 2002 the European Commission announced
plans to impose a wheat import quota of 2.3 million
tones a year
• In 2005 the European Union decided to increase
quotas for Chinese textiles
• In 1989 we learned that the sugar import
restrictions and the quota regime for imports,
maintained by the United States since 1982, has
been held by a three-member GATT panel to be
illegal in terms of U.S. obligations in GATT.
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Facts
1. Not all countries are members of the
WTO
2. Members of WTO are allowed to
maintain quotas for a specified period
of time.
•
Transition period
3. How much power does WTO have?
•
Some countries implement quotas defying
WTO rules.
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What are Multifibre
Arrangements?
•
•
Quota on textile
Uruguay Round negotiations of GATT
have led to phasing out of the MFA.
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What are Voluntary Export
Restraint (VER)?
•
•
•
•
It is an agreement by a country to limit its
exports to another country to a certain number
of units.
It differs from a quota because the exporting
country administers VER
Since it is “voluntary” it is legal under WTO
regulations.
VER is difficult to negotiate
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Examples of VERs
• In May 1981, Japanese car makers agreed to
limit exports of passenger cars to the United
States.
• In late 1970s, UK negotiated VERs restrictions
on the imports of two types of leather footwear.
• In 1991 a VER was established between the
European Union (EU) and Japan that
established “voluntary” quotas on Japanese cars
until 1999.
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Moving from no trade to free trade
World Price = 10, Domestic Price = 20
Imports = 50, CS goes up
Price of Cloth
S
E
20
10
D
20
70
Quantity of Cloth
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The Economic Effects of a Quota
Quota = 30
Supply curve shifts right by 30
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20
At P =10 there is a shortage of ______ Price goes up to ____
Price of Cloth
S
S+Q
CS goes
down by?
Who
gets a?
Who
gets c?
G
12
a
What is
b?
What
is d?
c
b
10
d
D
Quota
20
30
50
60
70
Quantity of Cloth
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Who gets c?
• In case of tariff c went to government.
• In case of quota:
1. Domestic license holders, if they buy 30 units
at p =10 and sell it at p = 12
2. Domestic government, if it sells licenses at $2
per unit of imported good.
3. Foreign producer, if this is VER.
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Suppose initially quota has the same
effect as tariff
Price of Cloth
The only
difference
may be in
who gets c
S
S+Q
12
c
Tariff
10
D
20
30
60
70
Quantity of Cloth
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Now domestic demand grows to D’
Under quota, at p
=12 there is a
shortage P up to
13, CS?
Under tariff, P is still 12,
import grows to 40, CS↑
Price of Cloth
S
S+Q
Quota is
more
restrictive
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12
a
Tariff
b
10
c
d
D’
D
20
30 35
60
70
65
Quantity of Cloth
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Other Nontariff Distortions
1. Industrial Policy
– Domestic regulations can distort international
trade.
– Regulations sometimes have the intent of
directly impacting trade.
– Regulation effects difficult to quantify.
•
Examples:
– Guaranteed low interest government loans for domestic
producers
– Tax advantage to exporting industries
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Other Nontariff Distortions
2. Government Procurement
– Laws that direct a government to buy
domestically-made products unless comparable
foreign products are substantially cheaper.
– Spending of public funds places restrictions on
funds.
– Justification that buying domestic is better for the
country.
• Similar to Mercantilist’s view
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Other Nontariff Distortions
– In countries where government owns industry
and has government procurement, trade is
severely restricted.
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Other Nontariff Distortions
3. Technical Barriers to Trade
– Laws that apply technical standards to goods or
services that may distort trade.
• Domestic country’s national standards for safety,
health, and product labeling
– They may require firms to produce two different
goods or packages to allow exports.
– Some goods must meet technical standards like
cars from the U.S. to the Ireland.
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Other Nontariff Distortions
4. Subsidies
– Governments subsidies distort trade flows.
• Such subsidies can be directly tied to exports, or more commonly
they are domestic subsidies that indirectly influence trade.
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Other Nontariff Distortions
5. Labor and Environmental Standards
– Countries differ in regulations for workers with
respect to safety and work conditions.
– Developed countries argue they cannot compete
with wages in countries with less strict labor
laws.
– Empirical evidence has not shown significant
effects on trade.
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Other Nontariff Distortions
– Labor standards
• Laws that apply labor standards to manufactured
products that may restrict imports.
– Pollution intensive industry feels
disadvantaged in countries with high pollution
regulations.
– Little of no empirical evidence of effects
– WTO ruled countries cannot impose
standards by limiting imports.
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Transportation Costs and Trade
• Transportation costs tend to reduce the
quantity of trade between countries by
raising the price of imported goods.
– A good will be traded internationally if
transportation costs are low enough so that it
is profitable to international trade the goods
between countries.
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Transportation Costs and Trade
Price of Cloth
Price of Cloth
SUS
SINDIA
E
PUS
P1
P*
P2
C
D
T
P*
P2
PINDIA
F
DUS
Q5 Q6
Q1 QUS Q2
U.S. Cloth Market
DINDIA
Q7 Q8
Quantity
of Cloth
Q3 QINDIA Q4
India’s Cloth Market
Quantity
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of Cloth
Assignment 4 (10 points)
Due: before 10PM on Friday, October 26
You will do this one in pre-determined teams of 2
• Is the following statement true or false?
Use a graph and a numerical example to
explain. “The American car producers will
prefer a new tariff on imported cars to an
equivalent amount of quota if the U.S
economy is predicted to be in recession in
the near future.” [Hint: during a recession,
the demand for cars drops]
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