Trade Barriers Ing. Mansoor Maitah Ph.D. et Ph.D.
Economic Basis for Trade Distribution of Economic Resources Different Technologies Goods are Differentiated as to Quality and other Non - price Attributes Labor-Intensive Goods Land-Intensive Goods Capital-Intensive Goods
Trade Barriers What is a Trade Barrier Import duties Import quotas Import licenses Tariffs Export licenses Subsidies Non-tariff barriers to trade Voluntary Export Restraints
Trade Restrictions Arguments for Trade Restrictions National Defense Certain industries need protection Imports may not be available during wartime. Domestic production essential to provide war materials. Prevent valuable technologies from being used to strengthen competition, especially militarily National Security Is threatened by trade. Sanctions to Punish Offending Nations Inflict economic damage to encourage, to modify behavior Protect Infant or Dying Industry In the long run will have a comparative advantage Special Industries with Unique and Substantial Economic Potential will not mature without Protection from Trade.
Trade Restrictions Arguments for Trade Restrictions - Jobs are destroyed by trade. Protect Domestic Jobs from Cheap Foreign Labor. - Worker wages are hurt by Trade. Greatest problem for low-skilled workers. - Infant Industry Argument: Special Industries with Unique and Substantial Economic Potential will not mature without Protection from trade.the contention that tariffs should be imposed to protect from import competition an industry that is trying to get started. After the industry becomes technologically efficient, the tariff can be lifted. -Unfair competition undermines the Benefits of Trade. Fair competition brings cost of imported goods up to domestically produced goods to prevent unfair advantage
Trade Restrictions Protection to Reduce Trade Deficit Deficits due to Macroeconomic imbalance national saving < national investment. Direct effect of protection is lower imports, but also appreciates currency exports fall, imports rise no reduction in trade deficit! Protection as Bargaining Device Trade barriers as bargaining chip in trade negotiations. Gains from unilateral liberalization More threats, but how much trade liberalization?
Trade Restrictions Retaliation Import restrictions placed by another country may result in similar restrictions by domestic government. (EU ban on hormone treated U.S. beef).
What is Dumping? Normal Value in the Exporting Market Export Price If a product is exported at a price (Export Price) lower than the price (Normal Value) it normally charges on its own home market, it constitutes dumping
Reasons for Retaliation Dumping is the selling of a product abroad for less than The average cost of production in the exporting nation The market price in the exporting nation The price to third countries Result of Excess production Cyclical or seasonal factors Attempt to force domestic producers out of business
The Impact of dumping Loss of Sales Reduced Profits Loss of market share Reduced returns on investments Decline in output Under utilization of capacity Adverse Effect On Cash flow Inventories Employment Wages Growth New Investment Ability to raise capital
Sanctions Justified Dumping for which sanctions are considered justified Social dumping Lower labor costs and poorer working conditions Environmental dumping Lax environmental standards Financial services dumping Low requirements for bank capital/asset ratios Cultural dumping Cultural barriers aid local firms Tax dumping Differences in corporate tax rates or special breaks
Other Reasons for Retaliation Subsidies Government provides to domestic firm to encourage exports or protect from imports Can be Cash payment Government participation in ownership Low-cost loans Preferential tax treatment Countervailing Duties Set by importing nation to offset effects of subsidy Equal to the subsidy amount
Types of Restrictions - Tariffs Ad Valorem Percentage of invoice value Specific Fixed sum of money per unit Compound duty Combination of the above
Types of Restrictions - Tariffs Official Prices Minimum import duty regardless of invoice price Variable Levy Calculated daily based on world market price Lower Duties for Local Input Encourages some local production
Types of Restrictions - Nontariff Quantitative Quotas Voluntary Export Restraints Orderly Marketing Arrangements Nonquantitative Nontariff Direct government participation in trade Customs and other administrative procedures Government and private standards
Quota System A government-imposed restriction on the quantity of a specific good that another country is allowed to sell in the Czech Republic In other words, quotas are restrictions on imports, usually applied to one or several specific countries.
Quotas Quota is a set maximum on imports in volume or value terms. Similarities to tariff that results in same level of imports: increase domestic sale price and production; reduce consumption. transfer from consumer to producer. Quotas do not generate any tariff revenue! quota rent domestic sale price in excess of cost of imports. Quota rent is pure profit. Quotas likely welfare inferior to tariff due to lost quota rent. wasted in costly lobbying for quota licenses. given to foreign governments.
Equilibrium with restrictions Equilibrium without restrictions
Quotas additional considerations Suppose domestic demand increases: tariff: imports increase, no change in price. quota: domestic price increases, no change in imports Quotas reduce price competition. foreign firms cannot increase sales by lowering price, so don t compete on basis of price domestic firms end up with more market power. reduced economies of scale Quotas and/or VERs common in textiles, iron/steel, autos, agriculture
Voluntary quotas Voluntary Restraint Agreement (VRA) An official agreement with another country that voluntarily restricts the quantity of its exports. Rents definitely go to foreigners. More politically reasons than formal barriers to trade. Voluntary Import Expansion (VIE) An official agreement with another country in which it agrees to import more from the Czech Republic.
Ways to Restrict Foreign Trade Tariffs Tax on imported goods Benefits import-competing industries Harms consumers by raising prices Tariff Revenue Decline in Imports Increased Domestic Production Increased Domestic Production
Other Barriers to Trade, cont Government Procurement Policies Administrative Classification Health and Safety Standards Social Policies Performance Requirements (typically applying to foreign direct investment)
Levels of Economic Development Developed Classification for all industrialized nations, which are mostly technologically developed. Developing Classification for world s lower income nations, which are less technically developed. Newly Industrialzing Countries (NICs) Fast-growing, middle-income or higher economies Heavy concentration of foreign investment Exported large quantities of manufactured goods, including high-tech products
Levels of Economic Development Newly Industrialized Economies (NIEs). Primarily used to refer to the four tigers Taiwan, Hong Kong, Singapore, South Korea IMF combines NIEs with Industrialized Nations to form advanced economies Emerging Market Economies Chile, Malaysia, China, Thailand, Indonesia Transition Countries or Eastern Europe Former communist countries
Anti-Dumping and Countervailing Duties Anti-Dumping and Countervailing Duties in response to foreign firms unfairly selling goods in the U.S. at less than fair value. Countervailing duty meant to offset foreign subsidies. Dumping: 1) selling in U.S. at price lower than in home market, or 2) at price below cost. system biased in favor of finding of unfair pricing Restrictions on Services aircraft landing rights; sea transport restrictions; insurance Domestic Content Provisions particularly important in Preferential Trade Areas, e.g., NAFTA
Current Trade Sanctions Burma (Myanmar) Cuba Diamond Trading Iran Iraq Liberia Libya Nonproliferation North Korea Sudan Syria Zimbabwe
Regional Trade Bloc A group of nations that grants members special privileges. Examples include the European Union, NAFTA, and the Association of Southeast Asian Nations. Preferential Trade Areas
Levels of Regional Integration Political Union Economic Union Common Market Customs Union Free-Trade Area Coordinate aspects of members economic and political systems Remove barriers to trade, labor, and capital; set a common trade policy against nonmembers; and coordinate members economic policies Remove all barriers to trade, labor, and capital among members; and set a common trade policy against nonmembers Remove all barriers to trade among members, and set a common trade policy against nonmembers Remove all barriers to trade among members, but each country has own policies for nonmembers
Regional Economic Integration
Previous enlargements 1951 ECSC (European Coal and Steel Community): France,Italy, Germany, Belgium, The Netherlands, Luxembourg 1973: Denmark, Ireland, and UK 1981: Greece 1986: Spain and Portugal 1995: Austria, Finland and Sweden 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia. 2007 Romania and Bulgaria
The European Union on the map New Member States (2007) Bulgaria, Romania Candidate Countries Croatia; (Former Yugoslav Republic of Macedonia) - Negotiations not yet started; Turkey Potential Candidate Countries Albania, Bosnia and Herzegovina, Montenegro, Serbia
International Trade Organizations General Agreement on Tariffs and Trade (GATT) An international agreement established in 1947 to further world trade by reducing barriers and tariffs. Several Rounds of Liberalization. first few on tariff reductions, admitting new members; many quotas eliminated. GATT was replaced by the World Trade Organization in 1995.
International Trade Organizations World Trade Organization (WTO) Reductions in Tariffs Worldwide - Trade Liberalization New Rules to Promote Trade in Services Reduction in Agricultural Subsidies Intellectual Property Protections Phasing Out Textile Quotas and Tariffs Principles of the Multilateral Trading System (Applies to Goods) Non-Discrimination Treat members no worse than any other member. National Treatment: treat imports no worse than domestic goods once inside border. Reciprocity Mutual, reciprocal, equivalent trade concessions. Negotiated reductions in trade barriers. Limits free riding; overcomes Protectionist Bias.
International Trade Blocs International Trade Blocs
The cost of protecting The cost of protecting U.S. jobs Restrictions on textiles and apparel goods cost U.S. consumers $9 billion a year. Cost $50,000 a year for each $20,000 job saved Restriction on imports of Japanese cars Cost $160,000 per year for each job saved in the auto industry
The cost of protecting The cost of protecting U.S. jobs Glass industry restrictions Cost $200,000 per year per job saved Steel industry restrictions Cost $750,000 per year per job saved
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