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					 Welcome to Econ 414
International Economics
        Study Guide
         Week Nine
  Ending: Friday October 26

                              1
         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




                                             2
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.

                                                                   3
    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.
                                                4
             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.
                                                        6
                      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.
                                                7
        What are Multifibre
          Arrangements?
•   Quota on textile
•   Uruguay Round negotiations of GATT
    have led to phasing out of the MFA.




                                          8
    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

                                                 9
          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.


                                                 10
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   11
   The Economic Effects of a Quota
  Quota = 30
  Supply curve shifts right by 30
                                         20                         12
  At P =10 there is a shortage of ______ Price goes up to ____                What
                                                                               is d?
   Price of Cloth
                                                             S

                                                                  S+Q
 CS goes
down by?                                                                        Who
                                                                               gets c?
 Who
gets a?                                          G
             12
                     a        b         c         d
What is      10
 b?                                                          D
                                       Quota


                         20       30             60   70   Quantity of Cloth     12
                                            50
               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.



                                                     13
 Suppose initially quota has the same
            effect as tariff
                                                        The only
                                                        difference
  Price of Cloth                                        may be in
                                             S
                                                        who gets c

                                                  S+Q




            12
Tariff                       c
            10
                                            D


                   20   30       60   70   Quantity of Cloth   14
    Now domestic demand grows to D’
                                                       Under quota, at p
    Under tariff, P is still 12,                       =12 there is a
    import grows to 40, CS↑                            shortage P up to
                                                       13, CS?

   Price of Cloth
                                                             S


 Quota is                                                             S+Q
  more
restrictive

                   13
              12
Tariff                  a          b       c    d
                   10                                            D’
                                                            D


                            20         30 35   60     70   Quantity of Cloth   15
                                                    65
          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                   16
          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
                                                       17
      Other Nontariff Distortions
– In countries where government owns industry
  and has government procurement, trade is
  severely restricted.




                                                18
        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.
                                                          19
          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.




                                                                    20
         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.
                                                   21
      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.               22
  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.



                                                     23
       Transportation Costs and Trade
Price of Cloth                                    Price of Cloth

                                 SUS                                                       SINDIA
                        E
 PUS

  P1
  P*
                 C            D         T            P*
  P2                                                 P2
                                                                     F
                                                  PINDIA

                                        DUS                                       DINDIA
                      Q5 Q6                                          Q7 Q8
                     Q1 QUS Q2         Quantity                    Q3 QINDIA Q4       Quantity
                                                                                          24
       U.S. Cloth Market               of Cloth            India’s Cloth Market       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]
                                                    25

				
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