Global

Deve ioping .ountry goveraftenls pi’i:lred fcr ;i
“development rcund” and vcvved to tlc inole
octivc in the riertotiat rrn;

-{ rn{jrii;e d 0n next P;lgtl

186 lnternational Economics – Vol. i

Part Two Ii.r,i. ii,li.r

A{ter much wrangling at the 2001 meet-
ing, the ministers agreed on the agenda and
iaunched the Doha Round of trade negotiations.
Each of the r*ajor players (the United States, the
European Union, and the developing countries)
campromised to reach the consensus. Key eie-
ments of the ambitious agenda include substan-
tia I liberal ization of agricultural trade, reductions
af tariffs on nonagricultural goods, liberalization
of trade in services, provision of assured acc€ss
by developing countrles to low-cost medicines
to protect public health, and refinement cf rules
governing variou: ltT8s’ (ln a separate agree-
ment reached in 2003, developing countries
gained the rigirt to import cheap generic versicns
of paterited drugs in health emergencies’)

.Ilre
Doha Round negotiationt have been

iniermittent and unproductive for more than a

decade. A meeting in ,ir-ily 2008 seemed to make
progress brut collapsed when some developing
countries, led by lndia and China, demanded a
“safeguard” process that v/ou;d allcw them to
easily increase tariffs on imBotts af agricultural
products if and when such inports increased’
It seems unlikely that an agreement would be
stymied by such a small issue if progress r’vith the
rest of the agreement had been strcng. lt ha: not.
The Unitecl states has resisted mearringful cutl in
its agricultural subsidies” The Eurelpean Union has
sought to limit lowering its barriers to agricul-
tural imports. {ndia, Brazi{, and other developing
rountries have bee n ‘unwitling io reduce tariffs
ancl to open up service sectors. 5inee 2008 nego-
tiations have been suspended, thouqh discussions
have continued at a iess formal level’

Quota versus Tariff for a Small Country
Tire ellects o1’a quota on bicyeles are portrayerl in i:igure 9.2 for a slllail in-ipo|t-
ilg connlry lacing a givelt rvorlcl price of 5300 pel’ bicycle , Recall that a cottntry is
..small” ilits ciectsions about hor.v rnuch to import o1’a proclttct have no ell’ect on the
going r.,,gr1-1 pricc of rhe procluct. That is. the fbleign sr-4rir1y of exports to this small

Ioutttrl,’is infinitely elastic at this price. In our example in Figure 9.2, the colltltl-Y
rvoulcl irlport I .0 ntil!ton bikes pe I year u’ith {l”e e trade.

‘fhe governlller}t fhen intpose s

a quota that linrits it:rports to a. smallet’quanfity” sa,v. 0.6 millicn btkes per -yeflr’
The cprora alters the available suppl),of bicycles withi;r thc importing eotrtttry. For

all dr:mestle prices at or itbove the rvorld price. tlre total {dotnestic pius inlport; sr-rpp1y

u,ifhin the coirntry ecl:als the clomestic strpply ctn’ve plrts the fixed quota qtlailtiry tq,i)
olirnpgrts. Ar th; dJmestic price of Si00 ther:e i,voiiid be excess demancl fbr bicycles
in the irnporting co1lltfrv.’fhe narket in the irtrporting countr-y rvill clear oirly ilt the

higher donrestii price oi533U, as shonn by thc– intersectiorl of the total avallable sttp-

olv cir1,c {S, -r g,.) ancl the rlotneslic detnand cut’ve (D,,) olt the le1t side of F-rgul”r:
b.i. 1,, tt.1* ,ion,*ilc price o{‘5330. the doiuestie tllr;tlltit}r supplied is 0.8 nliliioir’
the qualtity irrpol.tedis tlre quota qLrantitv of 0.6 ntillion, iittci the domestic cluautitv

clemandedls 1.4 milliot. (\tr”e can see the same eflect on domestic price by usirlg the
country’s rlentatrcl-for-ittlports cltrve sitorvn in the right side olthe flgure’ Ilthe qLlota

limits impor.ts to 0.6 niiliion. then the detnand litr irrtpr:rts indrcates a price ol53.l0.)

ho is 1ike1y to gain and who is likely to lose {ion]
i tarift-, r”nil explains conditions *nder ..^:ltich a rtalion eouLl end up better ofT fronr a
tarifl Chapfers 9 through I I wiil exlend tlie basic slory lold here.

A ?*riff, as the terrn is used in intelnational trade. is a tax on importing a good
n! \{r!’\ ire irrtn n {-{rulltv. rrsrrallr’ collctrtcd bv eustonls oflicials at the place of’etttrv.
‘farills come in two main types. A sfi*{*f;{ Xari’ff is stipulated as a money fiIilounl
per unit oi iinpr:rt, such as clollars per ton of steei bars, or dollars per eigirlcylinrier
rw.o-door sporr,s car. A-n eq-i v***r-er:: (on the velue) t*nlff is a percentage of the esti-
mated market value of tire goods *’hen they reach the importing counfry. \Are will not
pav much attention to this distinction, because it nrakes alnrost no difl-erence ic our
conc,lusirrls.
-iariffrates ilave treen cleclining, but they’are stiii intportant. Indeed” only one coun-
rry in the r.’,’orl4 Singapore, has na tariff.q. {ln adclition, two aufonomolls custoffis arsas,
l-{ong Kong and Macau, harre no tarilli}.
Iior th* ililustrialized eoLlntries. averagr tariff rales in the 1930s were about 60
p*r’ceni. in the aJtennath r:f the infarnous Smoot-Ffawley tarifli lhat fhe United States
enacie{ in 1930 and the increased rates adopted by othel coitntries in response ttl

.,{.58′,, lnternational Economics – Vol. 1
{44 Part Two Trude Poticl
,Duri*g the ,past f;5,:yeais., govgftr*ents: of
industr:ialized {ountf ie1:r€aehed . a ser:ies of glo-bal
agreernents’that hav€ r€du(ed tariff: ,on their
nonagric*ltural imports to very’Iow levels. How
did they accornplish this remarkable reduetion?
And, what is the position of the develoroing coun-
tries in,the process? To answer *hese questions, we
take up the topic of global governa4cfppp6l.ut
and institutions thet condition how national gov-
€rnments interafi with each other=–{vith a focus
on,international econamic issues like trade^
6ATT TO WfO
The story begins duriryg Woild War lJ, when the
United States, Britain, and the.alher allies began,
to discuss:how to ensure thatthe ecancmic syst€m
worked better after the war than”:it,had b€fore.
the war. For trade, the goal was to find a way to
avoid the virulent protedioniin that had taken
hold in many countri*s in the early 1930s; The,
United Statet Britairr. and their allies expected
the key institution to be the lnternatisnal’Trade’
Organization. Hcwev€r; it never cam€ into exis:’
tence becau:e;of oSposition, led ,by memberi of
the,U.5. Congress. to what many vievred as the
excessive breedth of the organizationt prroposed
ch arter.
lrJstead, a “provis!*nal{l atcord; thd.S*r:*r,al
*g,*f***r*t s*,, lxri#*,*ry*f .,!1ggt {*4:1; becarne
the tey institutlix.,;fh€ Ceff waisigne-d in 1947
by 23 .c*untri*g.and focused sguarely, on’:interna-
tionattrade isiues. The number of countries in the
cAl]’ rose to’38 in 1960, 77 in ,1970, 84.in 1980;
and 99 in 1390″ A new grobal agreqnrgnt in the
ea,rly 199$s led lgthecrcation,of the.
Organieation {Wf*l in January 1995. The WTO,
which subsumes and expands on the GAn, is’now
the organizatisn that ov€rsees: the global rules ‘cf
gsvernment policies tourard internaiional trade
4_11d provides tLlg, forum’for negotiating global
6greementgto:improvc’theserules. :” :
.l The lL\r{O {}ike the GATT before ir} espouses.
three major principles:
r ‘Reductions of barriers to trade. , ‘
.’Nsndiscri$ination”‘*ften called.the fiost-
{&vored aatiofi,tVFN)principie.,, : .,
*.:rl&,ggtair ead*qr-agement'{or’ expot’ts..’ .’
‘ .As of.’early , 20t l th€ .WTO had.’ 1S3,,.member
-countri**, in addi*on,. 30::{ountfieS, inelud.
‘ing Russia,’hava been negotiating to becorne
member:s. The WIO’s ‘headquarters, are in
:Geneva, Switzerfand,
NEGOTIATIOHS LOW€N TARIFFS .]:
ln the first, decades af its exi$tence’ rhe SAfi
focused on tariffs:’ln recent decades other {“non-
,tariffo) $31y”iers have received more,attention,
and these are taken up in the next chapter.
, Under ihe GATT; member eountrie$ pursued
eight rounds of nultitateral trade negotiations
.to lower barrierts. The first five .r+unds,focused
,on redu{tions in tariff retes,. uiing ftem-by-
item neg€tiations in ,which the largest trading
‘countries agreed to mutual reductions and then
extended there n€w{ow*r tariffs to a!l.rnembers.
foflowing the MFN nofidiscrimination principle,
This ‘meant that the’ aegotiationJ w€re con-
duc,ted *rn on g,the, la rgesi,i *d ustria l cou ntl”ies. I n
addilia* it was qu ickJy,recog nieed that lowering’
‘barriers to,trade in agriculturalr products would
.be,fraught with ccntroversy; s* the negotiations
focusedfn nonagricultwal pioducts.
, The first round, Geneva 1947, achieved sub-
stantial tariff reductlonr ffor instance,.the ,aver-
a ge, U.S”. tariff rate, was,reduced, by, 2 1 per:cent).
Th* nex three rounds,, Anfte{y, 1949, Torquay
1950-1’951. and Geneva .1956;,achieved,rnod-
est new reduciions; as’did the Dillon Round
t1 960: 1 961), which also took up the rreation of
a’common external tariff schedr.rle for the newly
,f ornle d, :Egropean . Economic.,, eomm u nity {now
the f.rropeAn Uninn).
To accompiish more :substantial:.{ariff reduc-
tions;’ ihe Kennedy Rcund’ {1963*1967} shifted
the”,procesr,so that the industrialized countries
began:with an agreem€nt to use e forrnula to
lower all’nonagricultural larjffs and the* negoti-
ated :Iim ited exeeptio!]E, i n w-hich .jsom e’ pl:od u{ts
had lesser tar.iff cuts. Ihis innovation worked*the
*veriige tarfff’reduction was,3€ per{ent for non-
agricultura I irnports’ i nto ind usrialized cou ntries.
The Tokyo Round {1973-1979) and’the i.}ruguay
Round, {1 9S6* 1 994)’eontinued the pracess using
{ermulas .for,cuts; xrith:,negotinted,’excep-tisns.,
, I *dustr.i alized., cou ntriesf nona g rieuf tu ra l’ taliffs

lnternational Economics, 1 5th Edition 159
ChaPlerB \’r,,,”ir’ i 1..’:’
,s*.
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fell by ail average of 33 percent and 38 percent,
respective lY.
DEVELOPING COUNTRIES
Lnrhile the indusrrialized couniries have negoti-
ated tariff reductions, what has been ihe role of
develcping tountries? O{ tne 23 founding mem-
bers of GAil, 13 were developing countries, and
riovv trlost wTo members ar€ developing ccun-
tries. Hovve’rer, until recentiy, develaping coun-
tries piayeci little role in the nrultilateral tracle
negotiations. lje<.aule Litey were seiciom rnajoi exporteri or importerE of specific rionagricultural prodLrcts, they were nci active irr ihe negotiations ,rf tha firct {irrp vnrrn.l( In thF Kerrnedv ROund ilrerL' rrras forrnal recognition that developing rounlries did not rreed to offer tariff cuts even though tirey benefited from the tariff reductions iry the ir:eJustrialized coLintries. The Tokyo Rounri irontiilued the apprr:ach. forrnalizing "special and di{fe rential" lreatfi}ent for developing ccuir- tries. in fact, nrr:st ciet;eloping courrities had noi even agreed ro maxiixufn bound tariffs for niost producls, so they were free to raise their tariffs if they u,'anted to. while the cievelaBinE counlries benefited from tlre tari*f reductions by industrialized cquntries, they wei'e rrot able to infiuence l'row the industrialized countries wers lower- ing tariffs, because they were not involved in the give-and-take of negotiating over muiuai recluctions. lnduslrialized couniries siried frorri lowering tariff: on "sensitive" products, which ru",ere cftt-:n the labor-iniensive nonagricultural prcc!ucts lh*t were the nrast pronisit'rg prcdur-ts for expanding deveicping counl.ries' manufac- iured exports" ln the 'i 9BOs mariy de,veloping countries shifteri toward a more culward-oriented strat- *gy for develr-rpment (see Chapter 'l 4 for further rl iscr-rssio i.:). M any r-rn i I atera i ly lowered th ei r ta riff rates. ihey ais{i became more invciveci in the rregotiations of the Uruguay Rclund, althcurllt ultimately the conclusiun of the round stiil laras r{nn!l:lqr'{ hrr nannli:tinnq ;l!1.}nnrt the irtdUS-\, !/ IrlyvL'q$vMy - * "" trialized currrtries, especially the Uniieci States and the Ii:rofiean Unir:n. A5 part of the Urugu..ly Roi;nrl, inariy developinc; cr:liniries agreed to adopt bound rates for most of their tariffs, thaugh these bound rates often rernain aL:cve their actual rates. For example, Mexico has rto*r bound mcst of its rates. but Mexico's average ariual taiiff raie of i2 p€rceni is rrvell bei*',ru il: average bor,tnd rate of 36 percent. RECENT PROGRTSS Under the WTO, reduction of tarif{ barriers (ontlrrues. First. a special negotiation led to the infarmation Technology Agreement of 1996' iach country to the agreemen{ {inltially 29 coun- tries) ccmmits to eiiminate tariffs on impcrts of infcrrnation technoiogy goods {computers, 'telerommunicaiions equiprrrent, 5emiconductors, serniconductor nranuf.liturin5; equipment, and related iilstrumenis and parts) and software. By 2011, 73 countries had adopted ihe agreement, so thai 97 percent cf glotlai irarje in these infor- rnation technology products is {or soorr wilt be) tariff-free. SeconC, the derveloping counffles that i"lave jcined ihe WTO since 1995 have g*oneraily lttw- ered their actual tariff rates as a conditicn for joining and accepted bound rates equal to or very close to their actual rates. For instance, the average tariff raie *f China, which ioined the WTO in 2001, fell from 17 percelit in 20{j0 t$ 1 1 per.ent in 2003' Third, reducing r'ariffs is an important part of the agenda far ihe (urrent Dcha Round of trade negotiatians, a ,r,,r.-.:ll L=^ ^..--*i^^J 1...+h^. i,. r}-',\ '\^wttOplC l-l1dt VVlll Ue cxdrlllllYu rur lrrer rrr tilc rrt^( th apter. Overali, the liberalizatir:n prcceelures set up r:nr-ler the G/\TT and continuecJ under tl":e WTO have been remarkably sucressful irr low'- erinq industrialized countries' tariffs on non- agriculturai products. ln part tir* multilateral ilegotiatiorls have succeeded because each courr- try's government is able to defend iis tariff- cutting "concessions" against the protests of don:estic iirotectionists as the pi ice ihe cour!ii'v- murt pay to qive its exparters betler sccess to other rnarkets. This rnerarrtiiist logic is bad economics*-rv-e know instead thet imports aie something the country gains and exports aie s{)rnething lhe ccr-inti'y gives up-Lrtrt the logic qeem5 io be Lrseful P0liti(s. I6{} lnternational Economics - Vol. 1 ::: Part Two Jiutlc I'iriirr the irigher U.S. tariffs. Negotiated a[Jreements since then have dropped most taritTs on nonagriculturai products ir: these countrtes to very 1ow ler,eis. T'he key roie of the Ceneral Agreerlent on Tariffs and Tracie (CAl-f ), rvhicir is no-,v lolded itto the World Tt'ade Organization {WTO), as a fbrui}r for these multilateral trade negotiations is descri'neci in the box "WTO and GAIT: TarifT Silccess." in 2009. taritT rates averaged 2.5 to 4.0 percent on nottagricultural prodlicts irnportecl into the L;nited States, Canada, the European Unt'on" and.lapan. But tarifJi on solne nonagricuitural prodLrcis are much higher" up to 60 perceilt in ihe Uniled States. 25 percent in Canada. 26 percent in lhe Er-iropean Union. and 384 perceilt in .lapan. l"arilT rates for agrrcultural products are higher for man,v indrrstrialized coLtnfies. q,ith average taritft of 5 percent ior the United Siaies (liighest i'ate 350 petcegt). avel"age 1 l percelt ior Canada (highest 539 percent), average 14 percent for the European Union (higitest 166 percent), and average 21 percent for Japan {highesi 641 perceni). Average tariff rates are higher in most developing collntries. For exantple. for Cirlna, itr 20091he average tarilf rale on nonagricultural imports was 9 percent, rvith a maximum raie oi'50 percent, and the avelage tariff raie an agricrtltural imports 'was 1 6 percent. with a high rate af 65 percent. For Mexico, the average atrrl maximlim tar- iffiates were 10 percent and -50 percent for nonagricultural products and22 and254 pel'ccni l'or agriculrural piodticts. Our exploration of the pros and cons of a tadlT rvil1 be detailed enough lo rvarrant listing its main conclusions lrere at the oritset. This chaptel and fihapters 9 antl I0 will ciiscirss horv ', A taritTalruost ah.lays lowers rvorld well-beittg. ." A tariff r-lsually lower-c the well-being oleach nation. ineluding the ttation itttprlsitrg the tarift'. ' As a genc'ral mle. rvhatever a tarifT can do for the nation, sonrethin-t else can do There are exceptiotis to the case for free trade: a. 'fhe fir:st exception is the '"nationaily optimai" tariff discussed near the end of this ciraprer. When a nation can afieci the prices at which it trades with foreigners. it can gain fronr its orvn tarifT. {The rvorld as a whole loses. howe'ver. ) 7;. Chapler'10 presents solne "second-best" arguments for a tariff: ln cases where r:ther incurable distortions exist in the econon:ry, imposing a taritTmay be better than doing nolhing. r'. in a narrow range of cases tvith ciistortions tirat are specific to internatiotrai trade jtself" a tariff cau be better than any other polic-r,. and not just better than doing nothing. ' A tariff absoluteiy helps those grollps tied closely to the production of import sub- stitutes" even when the tarillis bad firr tlte nation as a rvhole. lnternational Economics, 1 5th Edition . -,.,.... :---..,.--, -,..--., ChaPter I AnirlYris of u1'ar{f 16? you mav wish to review these overall conclusions after we have completed tlre analysis oi i*p*, barriers in this and the next two chapters' TT{H fiFFfrCT L}F A TA$IIFF *N ffi#TdfiSTii F}ft#*UTTffiS lntuitron suggests that donrestic pt'oducers which compete against 'TOo.tt:,*tt-l ?:T:t]t; ; bri#:If the government piaces a tax on imports.of the product. the domestrc ;;; ;i C ;r;#; o'"o.," roitt lrt. Domestic-producers can then e1rynd their ;;;-fi;;d#u*J ruies, or raise the price thev gharqe' or both. The tariff, bv tax- ing imporls to make *potrt less competitive in the domestic market, should make domestic producers bettsr off' :rr- -_.--:.^a-_ The demand ""a u.,pplv.ralysis of a tariffagrees with our intuition' It goes beyond i"t;ii*., ifr"rifr, r-V .ii'"ti'irg us ro calculate ju-st how much a tariffbenefits domestic producers. "'"ri[J-gi" with a demand-suppg_view:f th* U.S. market for bicycles without anv tarjff. For most of this chapter, we Ae* with the simple case in r'vhich o-ur nation is a ;d{.1;il1;;;-i,gJi in ttt. u'orld markets for the products we trade' This is the same s*tall **.r,ntry- tftat we defined in Chapter ?' Fo1 a.small coYnt"rY, th- ,gtl:: ll:l the country must palithe foreign sellers is not affected by how much the small counffy imports of the product. In the free-trade situation shown in Figure 8-1, bicycles are impcrled lreely at the gir*;;dd il;;;i$tgO. At this price clnsun:ers buy 'lo bikes a vear fi'orn do'restic F:**ilJ*s s.t The U.S. Market foi' Bicycles with Free Tracle Price f S ptr b,kr,') 54 (domestic suPPIY curve) World price 5o-0.6 Dq= 1.6 krwqsw# lmports Mo=1-A D6 (domestic demand curve) Quantity -",; 'tli: : , 'l \ ': fi tf't" ,rotfO price is $300 per bike, with free trade the courtryb consumers. buy 1.6 million Uites, anO its local firms produce 0.6 million bikes' so 1'0 million bikes are imported. With free trade damestic producer surplus is area CBA and domestic consrimer swplus is area FEC, lnternational Economics, 1 5th Edition Fls{Jfir *.} The Effect ot a tar1ff on Domestic Producers Chapter 8 Arx;lY.sis ol uTxnff 1a* Price {$ **r i:ike} 540 56 (domestic suPP|Y curve or marginal cost curve) 330 300 . 210 Domestic Price with tariff A rrri{{ J3 World Price Da (domestic demand curve) 0 5g* 0'6 5r = 0.8 tr1 Do !@q;!e# : M1 Quantity rr*iiiii:rrs *i L'il{}t i}ijl' {q*i:} Mo, Shaded,area a=,Producerrs gain from tariff = $2t mi[lion Th. $30 ;.;tf on imports allows domestic ploducers toexpand their prodtrclion fro1,'ft to 5r The S30 bike tariffgives dornesiic producers extra surpius cn all the bikes they wquld have produced even with-out the tariff{an exhra $30 X So) plus smalief net gains on additional sales fgainequaling % x $30 x (S, - q)]. We can think of this as conlposed of t\rvo pieces. First, the rectangular part of area d covering the first 0.6 miilion bikes refleits the higher price received on r-rnits that are suppli;d even if ttrere is no tariff. Second" the triangle at the right-hand end of arca a'ieflects the additional producer surylus earned on the exfa 0.2 million bikes supplied. YMffi XTPffiCY #F A T&ffi,l$r #rd ffi#re4ffi$T'$fl t*P*$UPJ*HffiS Intuition also suggests that buyers of a good.rmported from ab.roaf wi1lte hu*by a tariff. Domestic iinsumers end up paying a higher price, or buying less of the product, or both. Again, we can use delnand'anA supply analysis to calculate the consumer los.s' First, le-t's ,ut r* to the free-trade situa-tion {before the tariff is imposed) Shown in Fi;;; "8.;. Witrr ;."" trade domesfic consumers b1y D, bikes at ttre rvorld price of gi?0. *r6i itot" ifrupter 2 that {silslrl!?€r 5$r$l.t{5 is the amount that consumers gain from being able to tuy bikes at the going market price. Graphicaily, consumef ffirut ii trt* aiea below the deman'd curve and abov? the market price iine'.ro 13e thii. recall that the demand curve tells us the highest price that some consumer: is will- ing to pay for each additional bike. Thus. accorcling to the demand citrve in Figure 8' I , :::;.,.':;!@[.1;:, ! lnternational Economics - Vol. 1 15* Part Two Tia.de Policr * F**tiRE S.3 The E{Iect ofa Tariff on Domestic Consumers some consuner is,wiiling to pay $540 forthe first6ike (atpolntF), This consuner can buy the bike at the irarkeiprice of $300, so the consumer receives a net gain (consumer surplus)of $240 on tl'lat first unit. As we go down the demand curve frortl point F to point E, we find that the vertical distances befween the demand curve and the world price of $300 show us the bargains that these consumers are getting. These consumers pay less for bikes than the maximum amount they would have been rvilling to pay. By summing the net gain on each unit purchased we sec that the entire area (FEC) between the dernancl curve and the S300 pnce line tells us the total anrourtt of collsumer surplus. Now the govemmenl imposes a tariff of 10 percent on imported bikes. Figure 8.3 shows the consumers?view of the bicycle market with the tariff The tariffraises the price that consunrers must pay for bikes (both imported and domestically produced) to $330. By raising the price to $330, the tanff forces consumers who were buying the I.6 million bikes to make a decision; ' Some will continue to buy bikes, paying $30 more per bike. " Sorne will decide that a bike ls not worth $330 to thenr, so they will not buy at the higher price. Price {$ pe:"*;k*l s40].r 330 3*0 ; - ' .;,Domestic Prke with tari{f{ t anTT World price 5,q (domestic suPPlY curve) Da (domestic demand curve) ' , QuantitY {rr'rilliant *f .Lrik*:; $*rt y*l"i} M1 L"e"d"*.@l4 Mo , shaded area i:Cost.of thetarifJ to cons*mers -$45 million no i*porr tariffof $30 raises the price that dcmesticconsumel'1;Tust.pay for imported and domestic bikes. Quantity demanCed fal1s fron Do to D,' The tariff costs consumers botir the fu|1 $30 on every bike tbey cootinue to tluy (a loss of $30 X D,) and the net en1o1'rnent on ;;;;;t;""i6 troo* lought at the loweitariff-free price but do not buy at the higher pti.* in ioai"g the tariff [air additional ioss of % x $30 x i'0 * Dl)]' :r' 18,11'r'.lnternational Economics, 1 5th Edition I.{ontariff Barriers to I*ports , Ilr*tectin$'doniesti c pro*Lrcers aga i nst i inport conrpetiti on '' ClearlY helPs those Producers. - Harlns i-lomestic c()nsumers of the products' u Fn:babiy hurts the importi-ng nation as a u'iroie' Altnost surelv hurts lne uorld as a wliolc' d,, So ir is with a typicai tariffbarrier as sr.rggested in Chapler 8. and so- it is witlr other kincls or barners agait-tst inrports that r.vc- u,ill anaiyze in tlds chapter" In t-act' as tari{f rates have iieclined in indusinalized countries and rnarry deveioping cormfries, the use ,;il;;;';';;-;;;;il"'d*;;"t*;; t; *o**"ti' p""r''"" has iicreased - The niajor purpose of tli chapter is to exarnine various kinds of nontariffbarriers t* imports and their etflects. We aiso look at horv large are deadrveigltt losses froln pr:otection. in relation to the size of th,e who11"11tional e."::1t.y^ i:.: '!t :_lLi l'l; rlucer treitefits created by the protection. In addition. we continue our exalnlnfltioil or tt; -;;;;i*; ;iA; lvo.l* i'uo. organization. first in a bax that looks at wro rr'rles ofr*tr nonturitrlairiers unJ ur the Jurrent Duha Round clmultilateral trade negotia- tionu, anO then in a section at the end of the chapter that examines liow irade disputes hetween couutdes can be resolved. ,?l$J$--'. r,]ir h,i3{\l irr:-iilt cii-it-'h,qi;Ft5 T1. t,,.,'ryflrii 1l, A r"ri:,ir;r-+rlif !:r;siriqrr ir:irlj;? to inports is an-v policy used by the goverrutrent to reduce trnports. other than a sirnple tanflon importi. Nontariff barriers can take many forn-rs- inciuding inrporl quiltas, biscriminatorv procluct t:1li:1i.?:Y:1iT- rules for gov- *rn**ntlur*1upr. atd alirninisuative red tape to harass imp_oners of.foreign.products' n" Nig reduces irnports through one or more of the follorving direct efl'ects: " I-imitlng the quantity of imports. " ]ncreasing the cost of getting imports inlo tire market' ,, Creating uncertaiptl, about thc conditions under whicit intports will 'ne perrnittecl' 16r :.-'.! lnternational Economics -Vol. 1 lSS Part Two TradePalicl Covernment Procurement TyPe: lmpon quota . l Vof untarir expo'rr restr*int S/lR) Tariff quota Direct:sftsct{r} ' , QuanJhy .r .' , , . ":" , Q-u;ntiqr' ,i" . ,,. i' Quantity (if the tariff for potentiaf :imports above the specitied quantity is so high tha"t it is prohibitive, so that there are no imPorts above the specif ied quant'itY) Quant {for instance, an outright prohibition) Cost of importing (for instance, special procedures for imports) QnantitY.' ', '' '1"', ', ' ' : Cost {to conforrn to slandards or demonstrate comPltance) Uncertainty (if apProval proc*dures ai'e t;nclear) Cost (forgone interesO Desription Quantitative limrit o* impcrts ' ' , , Quantita.tive'limit'on, foleign exports {based,on rhreat of import restriction). Allows imporls to enter the country at a.low or zgi:o tariff up to a speeified quantity impo:es a lrigher tariff on ' impons above this.QLentitY, : ,, " Laws: and qovernment rules that fa,vor local prsducts when.the qovernm€nt* 1s the buyer ' ' ' Require specified use o{ local labor, miterials;,o-tr other produc.ts ' , , Diserirninale against' imports by wriiing or enf6rci.ng standards in a way that' adversely;ffe(ts improrts more than donresticprodu{ts .', Requir€ssomeoJ:thevalue' .:':' of, ifiten'ded imaorts to be deposited' . ' with the governrnent,:and allows, the qovernment to PaY {ow or ' zero interest on these dePosits Requires importers to apply for and , receiw. apProval foi intended inports Affect the anlotrn-t of tariff,dutie5 owed or the quota limit applied'''' :' 'proiedures can be'ilow or costlY Figure 9.1 provides a listing of major rypes of NTBs and indicates the main way that ea;h affects imports. Although antidumping duties and countervailing duties are not listed in the figure, they are also oflen considered NTBs. Because governments claim that they impo-se thess kinds of measures in response to unfair practices by_foreign expofie;s, we defer an in-depth discussion of antidumping ryd countervai.ling duties 1o Chapter t 1. Here we will eximine careiirlly several types of NTBs. listed in Figure 9.1' Fiow much protection do NTBs provide? Kee et al. (2009) estimate that NTBs are mor;im;;fiuni thun tariffs in restricting world trade. One way to summarize.the size of NTBs on a product is to estimate the equivalent tariffthat would lead !o the same reduction in import quantity as does the set of NTBs. {We will se,e explicitly what this means when we anaiyze the import quota in the next section.) Using this approach, fi*{J}q$r 9.Y MajorTypes ofNTBs , .,.....-.-.-- Local ccntent a,nd' '- , mixinq requirements Technical and Product standards. Advance deposit lmporl licensing Other eustoms Procedures (classif ication of product, valuation of product, procedures for clearing) 9651 (of applicati$n Proced ure) 'Uncertainlyli:f'basjs *or ,' apprpvaljs'unelear)','': Cost., .' : . " Uncertainty lnternational Economics, 1 5th Edition 183 Chapter 9 Ni.'r:trri'rlJ lliiili(r rir .lllll)r'iJ I and averaging across products. Kee et al. esiimaie ihat the couniry's NTBs create prc'- tection against irnports that is the equivalent olall avetage tariffof 5'5 percertt for tlte Unite

” ClearlY helPs those Producers.
– Harlns i-lomestic c()nsumers of the products’
u Fn:babiy hurts the importi-ng nation as a u’iroie’
Altnost surelv hurts lne uorld as a wliolc’
d,,
So ir is with a typicai tariffbarrier as sr.rggested in Chapler 8. and so- it is witlr other
kincls or barners agait-tst inrports that r.vc- u,ill anaiyze in tlds chapter” In t-act’ as tari{f
rates have iieclined in indusinalized countries and rnarry deveioping cormfries, the use
,;il;;;’;’;;-;;;;il”‘d*;;”t*;; t; *o**”ti’ p””r””” has iicreased
–
The niajor purpose of tli chapter is to exarnine various kinds of nontariffbarriers
t* imports and their etflects. We aiso look at horv large are deadrveigltt losses froln
pr:otection. in relation to the size of th,e who11″11tional e.”::1t.y^ i:.: ‘!t :_lLi l’l;
rlucer treitefits created by the protection. In addition. we continue our exalnlnfltioil
or
tt; -;;;;i*; ;iA; lvo.l* i’uo. organization. first in a bax that looks at wro rr’rles
ofr*tr nonturitrlairiers unJ ur the Jurrent Duha Round clmultilateral trade negotia-
tionu, anO then in a section at the end of the chapter that examines liow irade disputes
hetween couutdes can be resolved.
,?l$J$–‘. r,]ir h,i3{\l irr:-iilt cii-it-‘h,qi;Ft5 T1. t,,.,’ryflrii 1l,
A r”ri:,ir;r-+rlif !:r;siriqrr ir:irlj;? to inports is an-v policy used by the goverrutrent to reduce
trnports. other than a sirnple tanflon importi. Nontariff barriers can take many forn-rs-
inciuding inrporl quiltas, biscriminatorv procluct t:1li:1i.?:Y:1iT- rules for gov-
*rn**ntlur*1upr. atd alirninisuative red tape to harass imp_oners of.foreign.products’
n” Nig reduces irnports through one or more of the follorving direct efl’ects:
” I-imitlng the quantity of imports.
” ]ncreasing the cost of getting imports inlo tire market’
,, Creating uncertaiptl, about thc conditions under whicit intports will
‘ne perrnittecl’
16r

:.-‘.! lnternational Economics -Vol. 1
lSS Part Two TradePalicl
Covernment Procurement
TyPe:
lmpon quota . l
Vof untarir expo’rr restr*int S/lR)
Tariff quota
Direct:sftsct{r} ‘ ,
QuanJhy .r .’ , , . “:” ,
Q-u;ntiqr’ ,i” . ,,. i’
Quantity (if the tariff for
potentiaf :imports above the
specitied quantity is so high
tha”t it is prohibitive, so that
there are no imPorts above
the specif ied quant’itY)
Quant {for instance, an
outright prohibition)
Cost of importing (for instance,
special procedures for imports)
QnantitY.’ ‘, ” ‘1″‘, ‘, ‘ ‘ :
Cost {to conforrn to slandards
or demonstrate comPltance)
Uncertainty (if apProval
proc*dures ai’e t;nclear)
Cost (forgone interesO
Desription
Quantitative limrit o* impcrts ‘ ‘ , ,
Quantita.tive’limit’on, foleign exports
{based,on rhreat of import restriction).
Allows imporls to enter the country
at a.low or zgi:o tariff up to a speeified
quantity impo:es a lrigher tariff on ‘
impons above this.QLentitY, : ,, ”
Laws: and qovernment rules that fa,vor
local prsducts when.the qovernm€nt*
1s the buyer ‘ ‘ ‘
Require specified use o{ local labor,
miterials;,o-tr other produc.ts ‘ , ,
Diserirninale against’ imports by wriiing
or enf6rci.ng standards in a way that’
adversely;ffe(ts improrts more than
donresticprodu{ts .’,
Requir€ssomeoJ:thevalue’
.:’:’
of, ifiten’ded imaorts to be deposited’ . ‘
with the governrnent,:and allows,
the qovernment to PaY {ow or ‘
zero interest on these dePosits
Requires importers to apply for and
, receiw. apProval foi intended inports
Affect the anlotrn-t of tariff,dutie5
owed or the quota limit applied”” :’
‘proiedures can be’ilow or costlY
Figure 9.1 provides a listing of major rypes of NTBs and indicates the main way that
ea;h affects imports. Although antidumping duties and countervailing duties are not
listed in the figure, they are also oflen considered NTBs. Because governments claim
that they impo-se thess kinds of measures in response to unfair practices by_foreign
expofie;s, we defer an in-depth discussion of antidumping ryd countervai.ling
duties 1o
Chapter t 1. Here we will eximine careiirlly several types of NTBs. listed in Figure 9.1′
Fiow much protection do NTBs provide? Kee et al. (2009) estimate that NTBs are
mor;im;;fiuni thun tariffs in restricting world trade. One way to summarize.the size
of NTBs on a product is to estimate the equivalent tariffthat would lead !o the same
reduction in import quantity as does the set of NTBs. {We will se,e explicitly what this
means when we anaiyze the import quota in the next section.) Using this approach,
fi*{J}q$r 9.Y MajorTypes ofNTBs , .,…..-.-.–
Local ccntent a,nd’ ‘- ,
mixinq requirements
Technical and Product
standards.
Advance deposit
lmporl licensing
Other eustoms Procedures
(classif ication of product,
valuation of product,
procedures for clearing)
9651 (of applicati$n Proced ure)
‘Uncertainlyli:f’basjs *or ,’
apprpvaljs’unelear)’,”:
Cost., .’ : . ”
Uncertainty

lnternational Economics, 1 5th Edition 183
Chapter 9 Ni.’r:trri’rlJ lliiili(r rir .lllll)r’iJ I
and averaging across products. Kee et al. esiimaie ihat the couniry’s NTBs
create prc’-
tection against irnports that is the equivalent olall avetage tariffof 5’5 percertt for tlte
Unite

A ?*riff, as the terrn is used in intelnational trade. is a tax on importing a good
n! \{r!’\ ire irrtn n {-{rulltv. rrsrrallr’ collctrtcd bv eustonls oflicials at the place of’etttrv.
‘farills come in two main types. A sfi*{*f;{ Xari’ff is stipulated as a money fiIilounl
per unit oi iinpr:rt, such as clollars per ton of steei bars, or dollars per eigirlcylinrier
rw.o-door sporr,s car. A-n eq-i v***r-er:: (on the velue) t*nlff is a percentage of the esti-
mated market value of tire goods *’hen they reach the importing counfry. \Are will not
pav much attention to this distinction, because it nrakes alnrost no difl-erence ic our
conc,lusirrls.
-iariffrates ilave treen cleclining, but they’are stiii intportant. Indeed” only one coun-
rry in the r.’,’orl4 Singapore, has na tariff.q. {ln adclition, two aufonomolls custoffis arsas,
l-{ong Kong and Macau, harre no tarilli}.
Iior th* ililustrialized eoLlntries. averagr tariff rales in the 1930s were about 60
p*r’ceni. in the aJtennath r:f the infarnous Smoot-Ffawley tarifli lhat fhe United States
enacie{ in 1930 and the increased rates adopted by othel coitntries in response ttl

.,{.58′,, lnternational Economics – Vol. 1
{44 Part Two Trude Poticl
,Duri*g the ,past f;5,:yeais., govgftr*ents: of
industr:ialized {ountf ie1:r€aehed . a ser:ies of glo-bal
agreernents’that hav€ r€du(ed tariff: ,on their
nonagric*ltural imports to very’Iow levels. How
did they accornplish this remarkable reduetion?
And, what is the position of the develoroing coun-
tries in,the process? To answer *hese questions, we
take up the topic of global governa4cfppp6l.ut
and institutions thet condition how national gov-
€rnments interafi with each other=–{vith a focus
on,international econamic issues like trade^
6ATT TO WfO
The story begins duriryg Woild War lJ, when the
United States, Britain, and the.alher allies began,
to discuss:how to ensure thatthe ecancmic syst€m
worked better after the war than”:it,had b€fore.
the war. For trade, the goal was to find a way to
avoid the virulent protedioniin that had taken
hold in many countri*s in the early 1930s; The,
United Statet Britairr. and their allies expected
the key institution to be the lnternatisnal’Trade’
Organization. Hcwev€r; it never cam€ into exis:’
tence becau:e;of oSposition, led ,by memberi of
the,U.5. Congress. to what many vievred as the
excessive breedth of the organizationt prroposed
ch arter.
lrJstead, a “provis!*nal{l atcord; thd.S*r:*r,al
*g,*f***r*t s*,, lxri#*,*ry*f .,!1ggt {*4:1; becarne
the tey institutlix.,;fh€ Ceff waisigne-d in 1947
by 23 .c*untri*g.and focused sguarely, on’:interna-
tionattrade isiues. The number of countries in the
cAl]’ rose to’38 in 1960, 77 in ,1970, 84.in 1980;
and 99 in 1390″ A new grobal agreqnrgnt in the
ea,rly 199$s led lgthecrcation,of the.
Organieation {Wf*l in January 1995. The WTO,
which subsumes and expands on the GAn, is’now
the organizatisn that ov€rsees: the global rules ‘cf
gsvernment policies tourard internaiional trade
4_11d provides tLlg, forum’for negotiating global
6greementgto:improvc’theserules. :” :
.l The lL\r{O {}ike the GATT before ir} espouses.
three major principles:
r ‘Reductions of barriers to trade. , ‘
.’Nsndiscri$ination”‘*ften called.the fiost-
{&vored aatiofi,tVFN)principie.,, : .,
*.:rl&,ggtair ead*qr-agement'{or’ expot’ts..’ .’
‘ .As of.’early , 20t l th€ .WTO had.’ 1S3,,.member
-countri**, in addi*on,. 30::{ountfieS, inelud.
‘ing Russia,’hava been negotiating to becorne
member:s. The WIO’s ‘headquarters, are in
:Geneva, Switzerfand,
NEGOTIATIOHS LOW€N TARIFFS .]:
ln the first, decades af its exi$tence’ rhe SAfi
focused on tariffs:’ln recent decades other {“non-
,tariffo) $31y”iers have received more,attention,
and these are taken up in the next chapter.
, Under ihe GATT; member eountrie$ pursued
eight rounds of nultitateral trade negotiations
.to lower barrierts. The first five .r+unds,focused
,on redu{tions in tariff retes,. uiing ftem-by-
item neg€tiations in ,which the largest trading
‘countries agreed to mutual reductions and then
extended there n€w{ow*r tariffs to a!l.rnembers.
foflowing the MFN nofidiscrimination principle,
This ‘meant that the’ aegotiationJ w€re con-
duc,ted *rn on g,the, la rgesi,i *d ustria l cou ntl”ies. I n
addilia* it was qu ickJy,recog nieed that lowering’
‘barriers to,trade in agriculturalr products would
.be,fraught with ccntroversy; s* the negotiations
focusedfn nonagricultwal pioducts.
, The first round, Geneva 1947, achieved sub-
stantial tariff reductlonr ffor instance,.the ,aver-
a ge, U.S”. tariff rate, was,reduced, by, 2 1 per:cent).
Th* nex three rounds,, Anfte{y, 1949, Torquay
1950-1’951. and Geneva .1956;,achieved,rnod-
est new reduciions; as’did the Dillon Round
t1 960: 1 961), which also took up the rreation of
a’common external tariff schedr.rle for the newly
,f ornle d, :Egropean . Economic.,, eomm u nity {now
the f.rropeAn Uninn).
To accompiish more :substantial:.{ariff reduc-
tions;’ ihe Kennedy Rcund’ {1963*1967} shifted
the”,procesr,so that the industrialized countries
began:with an agreem€nt to use e forrnula to
lower all’nonagricultural larjffs and the* negoti-
ated :Iim ited exeeptio!]E, i n w-hich .jsom e’ pl:od u{ts
had lesser tar.iff cuts. Ihis innovation worked*the
*veriige tarfff’reduction was,3€ per{ent for non-
agricultura I irnports’ i nto ind usrialized cou ntries.
The Tokyo Round {1973-1979) and’the i.}ruguay
Round, {1 9S6* 1 994)’eontinued the pracess using
{ermulas .for,cuts; xrith:,negotinted,’excep-tisns.,
, I *dustr.i alized., cou ntriesf nona g rieuf tu ra l’ taliffs

lnternational Economics, 1 5th Edition 159
ChaPlerB \’r,,,”ir’ i 1..’:’
,s*.
$ffi
ffi
;*5*
$l
.l
i:,
ir,
i&
‘.*
i
$
it
.
6
s
s
.$,
1e;
&l
.i..
$,
sl
E
?:
1
,t
i
!’i
iil
l
i
:.
‘{.i
Fl
:,
‘!
t
ii
F
fell by ail average of 33 percent and 38 percent,
respective lY.
DEVELOPING COUNTRIES
Lnrhile the indusrrialized couniries have negoti-
ated tariff reductions, what has been ihe role of
develcping tountries? O{ tne 23 founding mem-
bers of GAil, 13 were developing countries, and
riovv trlost wTo members ar€ developing ccun-
tries. Hovve’rer, until recentiy, develaping coun-
tries piayeci little role in the nrultilateral tracle
negotiations. lje<.aule Litey were seiciom rnajoi exporteri or importerE of specific rionagricultural prodLrcts, they were nci active irr ihe negotiations ,rf tha firct {irrp vnrrn.l( In thF Kerrnedv ROund ilrerL' rrras forrnal recognition that developing rounlries did not rreed to offer tariff cuts even though tirey benefited from the tariff reductions iry the ir:eJustrialized coLintries. The Tokyo Rounri irontiilued the apprr:ach. forrnalizing "special and di{fe rential" lreatfi}ent for developing ccuir- tries. in fact, nrr:st ciet;eloping courrities had noi even agreed ro maxiixufn bound tariffs for niost producls, so they were free to raise their tariffs if they u,'anted to. while the cievelaBinE counlries benefited from tlre tari*f reductions by industrialized cquntries, they wei'e rrot able to infiuence l'row the industrialized countries wers lower- ing tariffs, because they were not involved in the give-and-take of negotiating over muiuai recluctions. lnduslrialized couniries siried frorri lowering tariff: on "sensitive" products, which ru",ere cftt-:n the labor-iniensive nonagricultural prcc!ucts lh*t were the nrast pronisit'rg prcdur-ts for expanding deveicping counl.ries' manufac- iured exports" ln the 'i 9BOs mariy de,veloping countries shifteri toward a more culward-oriented strat- *gy for develr-rpment (see Chapter 'l 4 for further rl iscr-rssio i.:). M any r-rn i I atera i ly lowered th ei r ta riff rates. ihey ais{i became more invciveci in the rregotiations of the Uruguay Rclund, althcurllt ultimately the conclusiun of the round stiil laras r{nn!l:lqr'{ hrr nannli:tinnq ;l!1.}nnrt the irtdUS-\, !/ IrlyvL'q$vMy - * "" trialized currrtries, especially the Uniieci States and the Ii:rofiean Unir:n. A5 part of the Urugu..ly Roi;nrl, inariy developinc; cr:liniries agreed to adopt bound rates for most of their tariffs, thaugh these bound rates often rernain aL:cve their actual rates. For example, Mexico has rto*r bound mcst of its rates. but Mexico's average ariual taiiff raie of i2 p€rceni is rrvell bei*',ru il: average bor,tnd rate of 36 percent. RECENT PROGRTSS Under the WTO, reduction of tarif{ barriers (ontlrrues. First. a special negotiation led to the infarmation Technology Agreement of 1996' iach country to the agreemen{ {inltially 29 coun- tries) ccmmits to eiiminate tariffs on impcrts of infcrrnation technoiogy goods {computers, 'telerommunicaiions equiprrrent, 5emiconductors, serniconductor nranuf.liturin5; equipment, and related iilstrumenis and parts) and software. By 2011, 73 countries had adopted ihe agreement, so thai 97 percent cf glotlai irarje in these infor- rnation technology products is {or soorr wilt be) tariff-free. SeconC, the derveloping counffles that i"lave jcined ihe WTO since 1995 have g*oneraily lttw- ered their actual tariff rates as a conditicn for joining and accepted bound rates equal to or very close to their actual rates. For instance, the average tariff raie *f China, which ioined the WTO in 2001, fell from 17 percelit in 20{j0 t$ 1 1 per.ent in 2003' Third, reducing r'ariffs is an important part of the agenda far ihe (urrent Dcha Round of trade negotiatians, a ,r,,r.-.:ll L=^ ^..--*i^^J 1...+h^. i,. r}-',\ '\^wttOplC l-l1dt VVlll Ue cxdrlllllYu rur lrrer rrr tilc rrt^( th apter. Overali, the liberalizatir:n prcceelures set up r:nr-ler the G/\TT and continuecJ under tl":e WTO have been remarkably sucressful irr low'- erinq industrialized countries' tariffs on non- agriculturai products. ln part tir* multilateral ilegotiatiorls have succeeded because each courr- try's government is able to defend iis tariff- cutting "concessions" against the protests of don:estic iirotectionists as the pi ice ihe cour!ii'v- murt pay to qive its exparters betler sccess to other rnarkets. This rnerarrtiiist logic is bad economics*-rv-e know instead thet imports aie something the country gains and exports aie s{)rnething lhe ccr-inti'y gives up-Lrtrt the logic qeem5 io be Lrseful P0liti(s. I6{} lnternational Economics - Vol. 1 ::: Part Two Jiutlc I'iriirr the irigher U.S. tariffs. Negotiated a[Jreements since then have dropped most taritTs on nonagriculturai products ir: these countrtes to very 1ow ler,eis. T'he key roie of the Ceneral Agreerlent on Tariffs and Tracie (CAl-f ), rvhicir is no-,v lolded itto the World Tt'ade Organization {WTO), as a fbrui}r for these multilateral trade negotiations is descri'neci in the box "WTO and GAIT: TarifT Silccess." in 2009. taritT rates averaged 2.5 to 4.0 percent on nottagricultural prodlicts irnportecl into the L;nited States, Canada, the European Unt'on" and.lapan. But tarifJi on solne nonagricuitural prodLrcis are much higher" up to 60 perceilt in ihe Uniled States. 25 percent in Canada. 26 percent in lhe Er-iropean Union. and 384 perceilt in .lapan. l"arilT rates for agrrcultural products are higher for man,v indrrstrialized coLtnfies. q,ith average taritft of 5 percent ior the United Siaies (liighest i'ate 350 petcegt). avel"age 1 l percelt ior Canada (highest 539 percent), average 14 percent for the European Union (higitest 166 percent), and average 21 percent for Japan {highesi 641 perceni). Average tariff rates are higher in most developing collntries. For exantple. for Cirlna, itr 20091he average tarilf rale on nonagricultural imports was 9 percent, rvith a maximum raie oi'50 percent, and the avelage tariff raie an agricrtltural imports 'was 1 6 percent. with a high rate af 65 percent. For Mexico, the average atrrl maximlim tar- iffiates were 10 percent and -50 percent for nonagricultural products and22 and254 pel'ccni l'or agriculrural piodticts. Our exploration of the pros and cons of a tadlT rvil1 be detailed enough lo rvarrant listing its main conclusions lrere at the oritset. This chaptel and fihapters 9 antl I0 will ciiscirss horv ', A taritTalruost ah.lays lowers rvorld well-beittg. ." A tariff r-lsually lower-c the well-being oleach nation. ineluding the ttation itttprlsitrg the tarift'. ' As a genc'ral mle. rvhatever a tarifT can do for the nation, sonrethin-t else can do There are exceptiotis to the case for free trade: a. 'fhe fir:st exception is the '"nationaily optimai" tariff discussed near the end of this ciraprer. When a nation can afieci the prices at which it trades with foreigners. it can gain fronr its orvn tarifT. {The rvorld as a whole loses. howe'ver. ) 7;. Chapler'10 presents solne "second-best" arguments for a tariff: ln cases where r:ther incurable distortions exist in the econon:ry, imposing a taritTmay be better than doing nolhing. r'. in a narrow range of cases tvith ciistortions tirat are specific to internatiotrai trade jtself" a tariff cau be better than any other polic-r,. and not just better than doing nothing. ' A tariff absoluteiy helps those grollps tied closely to the production of import sub- stitutes" even when the tarillis bad firr tlte nation as a rvhole. lnternational Economics, 1 5th Edition . -,.,.... :---..,.--, -,..--., ChaPter I AnirlYris of u1'ar{f 16? you mav wish to review these overall conclusions after we have completed tlre analysis oi i*p*, barriers in this and the next two chapters' TT{H fiFFfrCT L}F A TA$IIFF *N ffi#TdfiSTii F}ft#*UTTffiS lntuitron suggests that donrestic pt'oducers which compete against 'TOo.tt:,*tt-l ?:T:t]t; ; bri#:If the government piaces a tax on imports.of the product. the domestrc ;;; ;i C ;r;#; o'"o.," roitt lrt. Domestic-producers can then e1rynd their ;;;-fi;;d#u*J ruies, or raise the price thev gharqe' or both. The tariff, bv tax- ing imporls to make *potrt less competitive in the domestic market, should make domestic producers bettsr off' :rr- -_.--:.^a-_ The demand ""a u.,pplv.ralysis of a tariffagrees with our intuition' It goes beyond i"t;ii*., ifr"rifr, r-V .ii'"ti'irg us ro calculate ju-st how much a tariffbenefits domestic producers. "'"ri[J-gi" with a demand-suppg_view:f th* U.S. market for bicycles without anv tarjff. For most of this chapter, we Ae* with the simple case in r'vhich o-ur nation is a ;d{.1;il1;;;-i,gJi in ttt. u'orld markets for the products we trade' This is the same s*tall **.r,ntry- tftat we defined in Chapter ?' Fo1 a.small coYnt"rY, th- ,gtl:: ll:l the country must palithe foreign sellers is not affected by how much the small counffy imports of the product. In the free-trade situation shown in Figure 8-1, bicycles are impcrled lreely at the gir*;;dd il;;;i$tgO. At this price clnsun:ers buy 'lo bikes a vear fi'orn do'restic F:**ilJ*s s.t The U.S. Market foi' Bicycles with Free Tracle Price f S ptr b,kr,') 54 (domestic suPPIY curve) World price 5o-0.6 Dq= 1.6 krwqsw# lmports Mo=1-A D6 (domestic demand curve) Quantity -",; 'tli: : , 'l \ ': fi tf't" ,rotfO price is $300 per bike, with free trade the courtryb consumers. buy 1.6 million Uites, anO its local firms produce 0.6 million bikes' so 1'0 million bikes are imported. With free trade damestic producer surplus is area CBA and domestic consrimer swplus is area FEC, lnternational Economics, 1 5th Edition Fls{Jfir *.} The Effect ot a tar1ff on Domestic Producers Chapter 8 Arx;lY.sis ol uTxnff 1a* Price {$ **r i:ike} 540 56 (domestic suPP|Y curve or marginal cost curve) 330 300 . 210 Domestic Price with tariff A rrri{{ J3 World Price Da (domestic demand curve) 0 5g* 0'6 5r = 0.8 tr1 Do !@q;!e# : M1 Quantity rr*iiiii:rrs *i L'il{}t i}ijl' {q*i:} Mo, Shaded,area a=,Producerrs gain from tariff = $2t mi[lion Th. $30 ;.;tf on imports allows domestic ploducers toexpand their prodtrclion fro1,'ft to 5r The S30 bike tariffgives dornesiic producers extra surpius cn all the bikes they wquld have produced even with-out the tariff{an exhra $30 X So) plus smalief net gains on additional sales fgainequaling % x $30 x (S, - q)]. We can think of this as conlposed of t\rvo pieces. First, the rectangular part of area d covering the first 0.6 miilion bikes refleits the higher price received on r-rnits that are suppli;d even if ttrere is no tariff. Second" the triangle at the right-hand end of arca a'ieflects the additional producer surylus earned on the exfa 0.2 million bikes supplied. YMffi XTPffiCY #F A T&ffi,l$r #rd ffi#re4ffi$T'$fl t*P*$UPJ*HffiS Intuition also suggests that buyers of a good.rmported from ab.roaf wi1lte hu*by a tariff. Domestic iinsumers end up paying a higher price, or buying less of the product, or both. Again, we can use delnand'anA supply analysis to calculate the consumer los.s' First, le-t's ,ut r* to the free-trade situa-tion {before the tariff is imposed) Shown in Fi;;; "8.;. Witrr ;."" trade domesfic consumers b1y D, bikes at ttre rvorld price of gi?0. *r6i itot" ifrupter 2 that {silslrl!?€r 5$r$l.t{5 is the amount that consumers gain from being able to tuy bikes at the going market price. Graphicaily, consumef ffirut ii trt* aiea below the deman'd curve and abov? the market price iine'.ro 13e thii. recall that the demand curve tells us the highest price that some consumer: is will- ing to pay for each additional bike. Thus. accorcling to the demand citrve in Figure 8' I , :::;.,.':;!@[.1;:, ! lnternational Economics - Vol. 1 15* Part Two Tia.de Policr * F**tiRE S.3 The E{Iect ofa Tariff on Domestic Consumers some consuner is,wiiling to pay $540 forthe first6ike (atpolntF), This consuner can buy the bike at the irarkeiprice of $300, so the consumer receives a net gain (consumer surplus)of $240 on tl'lat first unit. As we go down the demand curve frortl point F to point E, we find that the vertical distances befween the demand curve and the world price of $300 show us the bargains that these consumers are getting. These consumers pay less for bikes than the maximum amount they would have been rvilling to pay. By summing the net gain on each unit purchased we sec that the entire area (FEC) between the dernancl curve and the S300 pnce line tells us the total anrourtt of collsumer surplus. Now the govemmenl imposes a tariff of 10 percent on imported bikes. Figure 8.3 shows the consumers?view of the bicycle market with the tariff The tariffraises the price that consunrers must pay for bikes (both imported and domestically produced) to $330. By raising the price to $330, the tanff forces consumers who were buying the I.6 million bikes to make a decision; ' Some will continue to buy bikes, paying $30 more per bike. " Sorne will decide that a bike ls not worth $330 to thenr, so they will not buy at the higher price. Price {$ pe:"*;k*l s40].r 330 3*0 ; - ' .;,Domestic Prke with tari{f{ t anTT World price 5,q (domestic suPPlY curve) Da (domestic demand curve) ' , QuantitY {rr'rilliant *f .Lrik*:; $*rt y*l"i} M1 L"e"d"*.@l4 Mo , shaded area i:Cost.of thetarifJ to cons*mers -$45 million no i*porr tariffof $30 raises the price that dcmesticconsumel'1;Tust.pay for imported and domestic bikes. Quantity demanCed fal1s fron Do to D,' The tariff costs consumers botir the fu|1 $30 on every bike tbey cootinue to tluy (a loss of $30 X D,) and the net en1o1'rnent on ;;;;;t;""i6 troo* lought at the loweitariff-free price but do not buy at the higher pti.* in ioai"g the tariff [air additional ioss of % x $30 x i'0 * Dl)]' :r' 18,11'r'.lnternational Economics, 1 5th Edition I.{ontariff Barriers to I*ports , Ilr*tectin$'doniesti c pro*Lrcers aga i nst i inport conrpetiti on '' ClearlY helPs those Producers. - Harlns i-lomestic c()nsumers of the products' u Fn:babiy hurts the importi-ng nation as a u'iroie' Altnost surelv hurts lne uorld as a wliolc' d,, So ir is with a typicai tariffbarrier as sr.rggested in Chapler 8. and so- it is witlr other kincls or barners agait-tst inrports that r.vc- u,ill anaiyze in tlds chapter" In t-act' as tari{f rates have iieclined in indusinalized countries and rnarry deveioping cormfries, the use ,;il;;;';';;-;;;;il"'d*;;"t*;; t; *o**"ti' p""r''"" has iicreased - The niajor purpose of tli chapter is to exarnine various kinds of nontariffbarriers t* imports and their etflects. We aiso look at horv large are deadrveigltt losses froln pr:otection. in relation to the size of th,e who11"11tional e."::1t.y^ i:.: '!t :_lLi l'l; rlucer treitefits created by the protection. In addition. we continue our exalnlnfltioil or tt; -;;;;i*; ;iA; lvo.l* i'uo. organization. first in a bax that looks at wro rr'rles ofr*tr nonturitrlairiers unJ ur the Jurrent Duha Round clmultilateral trade negotia- tionu, anO then in a section at the end of the chapter that examines liow irade disputes hetween couutdes can be resolved. ,?l$J$--'. r,]ir h,i3{\l irr:-iilt cii-it-'h,qi;Ft5 T1. t,,.,'ryflrii 1l, A r"ri:,ir;r-+rlif !:r;siriqrr ir:irlj;? to inports is an-v policy used by the goverrutrent to reduce trnports. other than a sirnple tanflon importi. Nontariff barriers can take many forn-rs- inciuding inrporl quiltas, biscriminatorv procluct t:1li:1i.?:Y:1iT- rules for gov- *rn**ntlur*1upr. atd alirninisuative red tape to harass imp_oners of.foreign.products' n" Nig reduces irnports through one or more of the follorving direct efl'ects: " I-imitlng the quantity of imports. " ]ncreasing the cost of getting imports inlo tire market' ,, Creating uncertaiptl, about thc conditions under whicit intports will 'ne perrnittecl' 16r :.-'.! lnternational Economics -Vol. 1 lSS Part Two TradePalicl Covernment Procurement TyPe: lmpon quota . l Vof untarir expo'rr restr*int S/lR) Tariff quota Direct:sftsct{r} ' , QuanJhy .r .' , , . ":" , Q-u;ntiqr' ,i" . ,,. i' Quantity (if the tariff for potentiaf :imports above the specitied quantity is so high tha"t it is prohibitive, so that there are no imPorts above the specif ied quant'itY) Quant {for instance, an outright prohibition) Cost of importing (for instance, special procedures for imports) QnantitY.' ', '' '1"', ', ' ' : Cost {to conforrn to slandards or demonstrate comPltance) Uncertainty (if apProval proc*dures ai'e t;nclear) Cost (forgone interesO Desription Quantitative limrit o* impcrts ' ' , , Quantita.tive'limit'on, foleign exports {based,on rhreat of import restriction). Allows imporls to enter the country at a.low or zgi:o tariff up to a speeified quantity impo:es a lrigher tariff on ' impons above this.QLentitY, : ,, " Laws: and qovernment rules that fa,vor local prsducts when.the qovernm€nt* 1s the buyer ' ' ' Require specified use o{ local labor, miterials;,o-tr other produc.ts ' , , Diserirninale against' imports by wriiing or enf6rci.ng standards in a way that' adversely;ffe(ts improrts more than donresticprodu{ts .', Requir€ssomeoJ:thevalue' .:':' of, ifiten'ded imaorts to be deposited' . ' with the governrnent,:and allows, the qovernment to PaY {ow or ' zero interest on these dePosits Requires importers to apply for and , receiw. apProval foi intended inports Affect the anlotrn-t of tariff,dutie5 owed or the quota limit applied'''' :' 'proiedures can be'ilow or costlY Figure 9.1 provides a listing of major rypes of NTBs and indicates the main way that ea;h affects imports. Although antidumping duties and countervailing duties are not listed in the figure, they are also oflen considered NTBs. Because governments claim that they impo-se thess kinds of measures in response to unfair practices by_foreign expofie;s, we defer an in-depth discussion of antidumping ryd countervai.ling duties 1o Chapter t 1. Here we will eximine careiirlly several types of NTBs. listed in Figure 9.1' Fiow much protection do NTBs provide? Kee et al. (2009) estimate that NTBs are mor;im;;fiuni thun tariffs in restricting world trade. One way to summarize.the size of NTBs on a product is to estimate the equivalent tariffthat would lead !o the same reduction in import quantity as does the set of NTBs. {We will se,e explicitly what this means when we anaiyze the import quota in the next section.) Using this approach, fi*{J}q$r 9.Y MajorTypes ofNTBs , .,.....-.-.-- Local ccntent a,nd' '- , mixinq requirements Technical and Product standards. Advance deposit lmporl licensing Other eustoms Procedures (classif ication of product, valuation of product, procedures for clearing) 9651 (of applicati$n Proced ure) 'Uncertainlyli:f'basjs *or ,' apprpvaljs'unelear)','': Cost., .' : . " Uncertainty lnternational Economics, 1 5th Edition 183 Chapter 9 Ni.'r:trri'rlJ lliiili(r rir .lllll)r'iJ I and averaging across products. Kee et al. esiimaie ihat the couniry's NTBs create prc'- tection against irnports that is the equivalent olall avetage tariffof 5'5 percertt for tlte Unite