Tariffs
There is widespread agreement that the post World War II period has been characterized by a gradual strengthening of international economic interactions, evidenced by the presence of intense and increasing world trade in goods, services and flows of capital. This phenomenon of growing interaction has been accompanied by economic integration at the international level, intended as a process of tariff reduction.
Analysis of the data on trade and financial flows in the second half of the 20th century would seem to confirm the hypothesis of a high level of interaction at world level. World data show sustained trade growth in this period, exceeding growth in gross domestic product (GDP).
In addition, since the 1960s, the industrialized countries have achieved an increase of 50% on average, in degree of trade openness (Baldwin and Martin, 1999). Financial openness shows an average increase of around 70% in the industrialized countries over the same period, while world foreign direct investments (FDI) have increased by more than 14 times since the 1980s (UNCTAD, 2004) and declining trends for tariff barriers. This evolution is shown in figure 1.
Average of regional tariffs after World War II
Figure 1
Legend:
Asia: Burma, Ceylon, China, Egypt, India, Indonesia, Japan, the Philippines, Siam, Turkey
Core: France, Germany, UK
Euro periphery: Austria-Hungary, Denmark, Greece, Italy, Norway, Portugal, Russia, Serbia, Spain, Sweden
Latin America: Argentina, Brazil, Chile, Cuba, Colombia, Mexico, Peru, Uruguay
Offshoots: Australia, Canada, New Zealand
Source: Coatsworth and Williamson, 2002
We can identify an overall downward trend in average tariffs with the exception of the years between the two World Wars (Figure 2),
Average of world tariffs (1870-2000)
Figure 2 Source: Coatsworth and Williamson, 2002
Developed countries agreed to cut their tariffs on industrial products by 40% until the year 2000. Then about 44% of all products exported into developed countries will receive duty-free treatment. Besides this, 40 industrial countries agreed to eliminate their import duties on industrial products by the year 2000. All other WTO members also reduced their tariffs and lowered their quotas and cut subsidies and protection for agricultural products. Least developed countries do not have to cut their tariffs.
Tariffs, which are taxes on imports of commodities into a country or region, are among the oldest forms of government intervention in economic activity. T3hey are implemented for two clear economic purposes. First, they provide revenue for the government. Second, they improve economic returns to firms and suppliers of resources to domestic industry that face competition from foreign imports. Tariffs are widely used to protect domestic producers’ incomes from foreign competition. This protection comes at an economic cost to domestic consumers who pay higher prices for import competing goods and to the economy as a whole through the inefficient allocation of resources to the import competing domestic industry.
Therefore, since 1948, when average tariffs on manufactured goods exceeded 30 percent in most developed economies, those economies have sought to reduce tariffs on manufactured goods through several rounds of negotiations under the General Agreement on Tariffs Trade (GATT). Only in the most recent Uruguay Round of negotiations were trade and tariff restrictions in agriculture addressed. In the past, and even under GATT, tariffs levied on some agricultural commodities by some countries have been very large. When coupled with other barriers to trade they have often constituted formidable barriers to market access from foreign producers. In fact, tariffs that is set high enough can block all trade and act just like import bans. A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota.
The typical TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any imports that exceed that initial quantity. In a legal sense and at the WTO, countries are allowed to combine the use of two tariffs in the form of a TRQ, even when they have agreed not to use strict import quotas. In the United States, important TRQ schedules are set for beef, sugar, peanuts, and many dairy products. In each case, the initial tariff rate is quite low, but the over-quota tariff is prohibitive or close to prohibitive for most normal trade. Explicit import quotas used to be quite common in agricultural trade. They allowed governments to strictly limit the amount of imports of a commodity and thus to plan on a particular import quantity in setting domestic commodity programs.
Acceding countries were required to bind their import tariffs, i.e. to commit themselves to not setting tariffs above specified levels and to reducing bound tariff levels over an implementation period of mostly seven years from their accession to the WTO. Negotiations between applicants and incumbent members focus on the import-weighted average tariff level, the dispersion of tariff rates across products, the number of zero-rated products, and the number of tariff lines for which rates are not to be bound. The key demand by current WTO members has been that the major acceding economies (including China and Russia) bind their tariffs for industrial goods at roughly double the average rate for OECD countries (Anderson, 1997: 766; van der Geest, 1998: 104). This would imply an import-weighted average of bound rates of no more than 10 per cent.
Developed countries’ tariff cuts were for the most part phased in over five years from 1 January 1995. The result is a 40% cut in their tariffs on industrial products, from an average of 6.3% to 3.8%. The value of imported industrial products that receive duty-free treatment in developed countries will jump from 20% to 44%. There will also be fewer products charged high duty rates. The proportion of imports into developed countries from all sources facing tariffs rates of more than 15% will decline from 7% to 5%. The proportion of developing country exports facing tariffs above 15% in industrial countries will fall from 9% to 5%. The Uruguay Round package has been improved. On 26 March 1997, 40 countries accounting for more than 92% of world trade in information technology products, agreed to eliminate import duties and other charges on these products by 2000 (by 2005 in a handful of cases). As with other tariff commitments, each participating country is applying its commitments equally to exports from all WTO members (i.e. on a most favoured-nation basis), even from members that did not make commitments.
Reasons why some countries still maintain tariffs or other trade barriers
Countries employ a variety of tools for limiting free trade: from tariffs to import quotas to voluntary export restraint agreements, and all the way to invisible, sometimes strange methods of discouraging a foreign producer of a good from selling in their country. Quotas and the latter group of barriers to free trade are called non-tariff barriers or NTBs, in the language of GATT.
Therefore, we are going to analyze the effects of imposing tariffs, import quotas, and briefly other non-tariff barriers. One important question is to consider why, with all the research including both analytical and empirical evidence pointing towards benefits of free trade, countries still hold on to their anti-free trade positions? Specifically, why do so many countries still maintain the policy of import tariffs? The set of arguments in favor of tariffs produced by policy makers reads as follows:
- Tariffs provide an important source of revenues for the government.
- The change of policy from limited to free trade hurts the income of particular groups within the economy
- There is a form of "market failure" in the form of an externality in the import competing industry. In other words, the positive externality of producing more of the good domestically outweighs the negative effects of a tariff imposed to protect domestic production. This is essentially a type of "infant industry" argument for protection of a domestic industry.
- Tariffs are used as a "retaliatory" tool against tariffs imposed by a trade partner or an act of "dumping" by a foreign firm. The latter are called anti-dumping duties.
- Tariffs are part of a "strategic trade policy" by some countries. This entails government involvement with promotion of sale of product or service by a large firm in an international oligopoly (or some form of imperfectly competitive market where price and production follow a strategic or game type behavior).
Among all the reasons and excuses put forward by policy makers against free trade, the only acceptable argument by an economist is that of a market failure (no. 3 above). As trade and exchange go synonymously with markets, if a market fails to provide the socially efficient level of output and a true evaluation (price) for the product, then some form of government intervention is necessary.
Regarding all other reasons for government intervention (including imposing tariffs), economic analysis provides a counter argument. With respect to no. 1 above, for example, economists argue that lack of ability of a government to have a workable tax revenue service to earn revenues through income tax is no good reason to meddle with the price allocation mechanism of free markets. In some countries, such as India, tariff revenues constitute nearly 40% of government revenues, so that adoption of a policy of free trade as required by the WTO would significantly hurt the government's budget. The suggestion by economists is for the government to work on instituting a workable income tax collection mechanism so it does not have to rely on border taxes for its revenues. With respect to the politically unacceptable income distribution effects of free trade (no. 2 above).
Potentially then, the losers can be compensated by the gainers (consumers with enhanced consumer surplus) and there will be still some net benefits of free trade left! Therefore, economists do not agree with imposition of tariffs to keep a particular interest group happy at the cost of the whole society. They advocate programs for retraining lay off workers who may have been hurt due to foreign competition and other direct income help to those negatively affected. The imposition of a tax on imports thereby raising the price of the importable good to protect the income of the scarce factor is a highly inefficient way to help the losers as it creates distortions in the price and hence the resource allocation mechanism of the economy. Below, we present a simple analysis of just such an argument: his welfare effect of a tariff in a small economy.
Analysis of a tariff in a "small" economy
The U.S economy is considered a small country in the sense that both consumers and producers in the U.S take the price of clothing as given by the larger international market. The trade or commercial policies of the U.S will not affect the world price of clothing. Here we produce a "partial equilibrium" analysis in that we only consider the market for the import good, clothing (the supply and demand or clothing) in the U.S. Below, we contrast the welfare effects of free trade in clothing with that of a "specific" tariff, i.e. a per unit tax on import of clothing (similar to tax on gasoline).
How do we illustrate the case of free trade in clothing on a supply and demand graph for clothing in the U.S.? Consider the domestic demand for clothing to be a linear downward sloping curve and the domestic supply of clothing to be a linear upward sloping curve, as shown in Graph 8.1 below.
As the graph indicates, at the free trade world price of clothing, PW, the quantity of clothing demanded by U.S. residents exceeds the domestic quantity supplied by the amount QS QD. This is indeed the volume of clothing imported at free trade price by the U.S.
Now suppose that for one of the reasons mentioned above, most appropriately for reason no. 2-protecting the income of labor- the government in the U.S. decides to impose a specific (percentage tax per unit value) import tariff of $t on clothing. The price of clothing inside the U.S. will rise to PW + t. How does this increase in price (inside U.S., not outside) affect the overall level of welfare in the U.S.?
To answer this question, note that the import tariff has lowered consumer surplus, has partially enhanced the level of producer (of clothing) surplus, and has brought some revenues to the government. The net change in welfare is indeed the sum of all these losses and gains. To use the geometric areas of the graph that pertains to changes in consumer surplus:
- Decline in consumer surplus due to import tariff = a + b + c + d
- Increase in Producer surplus = a
- Increase in government surplus (tariff revenues) = c
- The net fall in welfare in the U.S. due to an import tariff is: a + b + c + d - (a + c) = b + d
The triangle "b" indicates the production inefficiency (dead weight loss) created by artificially raising the price of clothing, thereby shifting resources away from other sectors in the U.S. and towards clothing. The triangle "b" is also called the "production distortion loss". The triangle "d" indicates the consumption inefficiency (dead weight loss) created by artificially raising the price of clothing, thereby shifting consumption away from clothing in the U.S. This triangle is also called the "consumption distortion loss".
Note that the original intent of the tariff, as we claimed, was to help income of the scarce factor-labor-in the U.S. but its unintended consequences go far beyond: they make the consumer reduce its purchase of the good as well! The overall welfare effect of the tariff is negative.
We can infer that, as with free trade the welfare benefits exceed the income losses to the scarce factor, so with limiting free trade the welfare losses shall exceed any income benefits to labor (the scarce factor in the U.S. in a Heckscher–Ohlin model). In other words, the U.S. consumers have to pay a lot more than just keep labor income from declining in free trade.
How about terms of trade (TOT) effects of this tariff? There will be none as the U.S. is small enough not to be able to affect the world price. The world price stays at PW as before. What are the income distribution effects of this tariff? In an H-O world, where clothing uses the scarce factor - labor- relatively intensively, the Stolper-Samueslon effect indeed applies. That is, as the price of clothing rises with a tariff inside the U.S., the real income of labor will rise and that of the other factor (capital) will fall. This policy does indeed protect labor incomes in the model, or workers’ jobs if we allow for the possibility of unemployment.
Analysis of a tariff in a "large" economy
Now suppose U.S. has a trade partner like Mexico in an H-O world. U.S. and Mexico both produce two goods, clothing (relatively labor intensive) and software (relatively capital intensive). U.S. is the relatively capital abundant country so in free trade, it exports software to Mexico and imports clothing from that country. Here, we face the case of a "large" country analysis in the sense that the U.S. and Mexico, as each other's trade partners can influence the world price or TOT by their respective commercial policies.
While in each country, perfect competition in all sectors rules, in terms of cross border trade, these countries represent a form of monopoly seller and monophony buyer of each other's products. How does the tariff on the imports of clothing by the U.S. from Mexico affect the TOT, level of welfare, and the distribution of income in both countries? We can address the first two questions via a partial equilibrium (demand and supply) graphical analysis. Let's look at the supply and demand for clothing in both U.S. and Mexico. In free trade, the free trade world price of clothing is PW.
At world price of PW, U.S. imports QS QD from Mexico, which is the same amount of surplus production (at PW) of clothing in Mexico. Now suppose U.S. imposes a specific tariff $t per unit on the imports of clothing from Mexico.
The new equilibrium will have to be where at the new price, the amount that U.S. import from Mexico is the same as the volume exported by Mexico. This implies a change in the price of clothing in Mexico, or the world price.
As you can see from the diagram, the price in Mexico falls while the price of the same item rises inside the U.S.! The import tariff has reduced the amount of clothing demanded by the U.S. from Mexico; hence the world price falls to PW '. Due to the tariff, the domestic price of clothing in the U.S. increases. The difference between the new world price, PW ', and the new domestic price in the U.S is the level of tariff, $t per unit. Indeed the U.S. makes Mexico pay art of the tariff levied by the U.S. government in terms of earning lower price for its exports to the US.
Therefore the import price of clothing for the U S falls which represents an improvement in the TOT in U S. This also means that the TOT for Mexico declines.
How about the welfare effects of the tariff for both partners?
Let's use the same geometric analysis of net changes in welfare as before.
For the U.S.:
The decline in consumer welfare/surplus: a + b + c + d
The increase in producer welfare: a
The increase in government tariff revenues: c + e
The net decline in welfare = a+ b + c + d - (a + c +e) = b + d – e
Hence the decline in welfare in U.S. is indeed the algebraic sum of two different terms, the production and consumption distortion loss (b + d), and, the TOT improvement (rectangle e). If the TOT improvement for the U.S. is large enough to outweigh the efficiency losses, then the U.S. is indeed better off at the cost of making Mexico worse off! Of course, if e < b + d, then the U.S welfare falls as well.
In Mexico the only change is the lower TOT (the equivalent area of "e" in the graph for Mexico) and that only makes the economy of that country worse off! The tariff by the U.S. has indeed been laid partially on the shoulders of their trade partner. As both U.S. and Mexico are major partners of each other in trade, a lower import demand for clothing by the U.S due to tariff will indeed lower the price of this good for Mexico. This type of policy, on that hurts your trading partner, is called "beggar-thy-neighbor" policy. It upsets the relationship between a country and its trade partner and leads to retaliation by the hurt party.
What are the income distribution effects of tariff by the U.S.? These are similar to the previous section. In the U.S., due to Stolper- Samuelson effect, the real income of labor (the scarce factor used intensively in clothing production in the U.S.) rises while that of capital falls. The opposite is true for Mexico where labor loses and capital gains. Note the overall world welfare effect of a tariff: it is always negative! Even if U.S. makes itself better off, at the cost of its neighbor, the net world welfare change is b + d which represent loss of efficiency in the U.S.
The relationship between tariff and non-tariff measures
As tariffs have generally been subject to more stringent WTO disciplines and reduction commitments than NTMs, some observers have worried that countries might be tempted to replace declining tariff by more non-tariff protection. In this context, Fontagné and Mimouni (2001) found that countries that have relatively low agricultural tariff levels impose a large number of environmental measures on their imports. They suspect that in some cases stated environmental objectives are being abused for protectionist reasons. In order to evaluate whether the relationship between tariff and non-tariff measures is indeed one of substitution rather than complementarity, the information in the EU’s Market Access database on NTMs has to be matched with corresponding information on tariff levels. Estimates of average tariffs for a number of countries are contained in the GTAP database (Dimaranan and Dougall, 2002).
Table 2 reports on the correlation between NTMs and tariffs for a sample of twenty countries for which information is available from the GTAP database and that were represented with at least 10 entries in the inventory of business complaints. It turns out that the correlation is negative for standards and certification, in conformity with the findings by Fontagné and Mimouni, while it is positive for other categories of NTMs. However, the correlation coefficients are very low, so that, given the limited sample size, no firm conclusions seem to be warranted.
Table 2 Source: WTO Website
Table 2 also shows the correlation between the four categories of NTMs, i.e. core-NTMs, non-core border NTMs, standards and certification, and domestic governance, which is positive and generally very high. Complaints about standards and certification procedures, which appear to be only weakly related to the frequency of other types of NTM-impediments are the exception. Furthermore, the table shows the relationship between NTM prevalence and, respectively, per capita GDP in the partner country and EU export volume. In both cases the correlation is in general negative, indicating that there are relatively fewer NTM-complaints per billion dollars of exports in EU trade with richer countries and countries with which the EU trades intensively.
Again, standards and certification procedures do not conform to the overall pattern of NTM prevalence. For example, there is a positive correlation between complaints about standards and certification and per capita GDP. However, as in the case of the relationship between tariffs and NTMs, these results will need to be verified by careful econometric analysis, based on a larger sample of countries.
Analysis of Non-tariff measures (NTMs)
At a broad level NTMs can usefully be divided into three categories. A first category of NTMs are those imposed on imports. This category includes import quotas, import prohibitions, import licensing, and customs procedures and administration fees. A second category of NTMs are those imposed on exports. These include export taxes, export subsidies, export quotas, export prohibitions, and voluntary export restraints. These first two categories encompass NTMs that are applied at the border, either to imports or to exports. A third and final category of NTMs are those imposed internally in the domestic economy. Such behind-the-border measures include domestic legislation covering health/technical/product/labor/environmental standards, internal taxes or charges, and domestic subsidies.
Import Licenses
Import licenses have proved to be effective mechanisms for restricting imports. Under an import licensing scheme, importers of a commodity are required to obtain a license for each shipment they bring into the country. Without explicitly utilizing a quota mechanism, a country can simply restrict imports on any basis it chooses through its allocation of import licenses. Prior to the implementation of NAFTA, for example, Mexico required that wheat and other agricultural commodity imports be permitted only under license. Elimination of import licenses for agricultural commodities was a critical objective of the Uruguay Round of GATT negotiations.
Analysis of a quantitative restriction-import quota- in a small economy.
An import quota or a quantitative restriction on imports is another way to restrict the volume of imports from another country. Below, we will present the simple analysis of a quota in a small economy and contrast it with that of a tariff. We will see that quotas present a relatively inferior device for policy makers to protect the income of some group or another, at the cost of greater efficiency losses to the whole economy. An import quota by a government usually entails giving (or selling) a "license" to import a given volume of a good, say clothing, into the country. For a small country, the world price at which clothing is purchased by the import company is the same before and after quota (at the free world price of the good). If the quota is simply given out,
then the firm that is allowed to import this good will earn the quota "rents" as we shall see. Let's use a supply and demand diagram, , to analyze this problem. Suppose the U.S., a small country imports clothing at the free world price, PW from the rest of the world.
In free trade, the volume of imports is QS QD. Now suppose the government desires to reduce the volume of imports to just the amount QS'QD'. It can limit imports by setting up a quota, allowing only QS' QD' to be imported. This is a quantitative restriction on imports and requires some form of licensing of those firms or individuals who import clothing and sell it in the country.
What would be the equilibrium price of clothing inside the U.S.? It will rise to the dotted higher price line in the graph. Therefore, quotas and tariffs in small country under perfect competition have similar effects on price. In fact, the difference between the new domestic price and the world price is a "tariff equivalent quota rent". As such the welfare analysis of the two instruments of trade policy would be the same except for one thing: quota rents--rectangle "c"-- are not necessarily earned by government and may not be part of government revenues.
Indeed, if the permit to import--a quota license--is simply given by the government to an individual or company, the difference between international and the domestic price of clothing is simply a form of "economic rent", not part of or contributing to a productive economic activity. It is not a gain to the rest of the economy. Therefore, where the quota rents are earned by an importer, the net welfare decline resulting form the quota is: fall in the consumer surplus- increase in the producer surplus or areas a + b + c + d - (a) = b + c + d. The net welfare loss in this case is higher than that of a tariff by "c".
If the government engages in selling (or auctioning) the quota permits, then the maximum price an importer will be willing to pay is the difference between the price the importer pays at the border and the price it receives in the country. Therefore, the maximum value of a license to import one unit is the same as the domestic price minus the world price--the tariff equivalent quota premium. Of course the government earns this amount when it sells the quota permits. In this case, the effect of tariff and quota are one and the same, as the rectangle "c" is also earned by government as quota premium or tariff revenues. Therefore, the net welfare loss in this case is similar to tariff at b + d. Do countries usually auction off their import licenses? They did not use to.
The high rents earned from ownership of quotas are part of some notorious stories of corruption, influence peddling and nepotism in the government of many developing countries. This, among other reasons we shall leave out here (namely the presence of a domestic monopoly producer of a product under quota), indeed makes the import quota an inferior device of commercial policy. It creates greater distortion and allocational inefficiency than a tariff.
In the rules of the WTO, quotas are ruled out. All such quantitative restrictions are to be changed to tariffs and then phased out over a period of 10 years (up to about 2005).
Other non-tariff barriers (NTBs)
One of the reasons for lack of success of GATT and its replacement with a more legally solid structure of WTO in mid 1990s was the rise in the number of non-tariff barriers countries would impose to keep imports out. Policy makers in many countries, attempting to appear in compliance with GATT (to reduce tariffs) would find creative means of import control in the form of NTBs. One such tool is an import quota, which we already discussed in the previous section. Here, we mention and discuss some of the other means of reducing imports in order to protect an industry or the income of a particular factor of production.
Voluntary Export Restraint (VER):
This is also a quantitative import restriction. As its name suggests, it occurs by agreement between the importing and exporting country and implies a "large" country trade situation; that is, an agreement by one partner to limit its exports to the other. For a VER to be effective, the two countries involved need to be major trade partners of each other, at least for the good in question, hence the large country analysis. VERs share an uncanny similarity to quotas except for one seemingly mysterious difference: an import quota affects the exporting country negatively and hence creates much disagreement and distress between trade partners. A VER, on the other hand, meets with the agreement of the exporting country and indeed the exporting economy would "voluntarily" reduce the exports of its good to its partner.
Why such a difference? In a large country context, where the actions of one partner affects the world price and hence the TOT for the other, quotas lead to different welfare outcomes from VERs. Consider this point form the point of view of exporting country, say country A. If the importing country, B, imposes a quota on imports from A, the world price of A's export good falls (similar to analysis of tariff in a large country, in section 8.3 above). This implies that the welfare of the exporting country A falls as its TOT declines. In the case of a VER, however, the exporter is asked to voluntarily reduce its export supply of the good it exports to B. As the export supply falls, the price of the export good rises and so does the TOT of country A. All else being equal, the level of welfare in A rises and falls in B. Therefore, the exporting country would agree to a VER but object to a quota imposition. Of course the economy that gets hurt in the case of a VER is the home country, importer of the good in question.
It not only creates allocational inefficiency due to import restriction, it also suffers a lower TOT due to VER. A good example of such a voluntary export restraint agreement was the 1981 VER deal between U.S. and Japan. The Japanese car makers "voluntarily" reduced their shipment of cars to the U.S. The price of U.S. made cars rose alongside with the price of imported Japanese cars. The agreement was designed help protect and resurrect the car industry of the U.S
Local Content Requirements:
This form of NBT requires that some specified fraction of an import good to be produced or assembled locally. For example, a country may require that cars imported in to its borders arrive disassembled. A factory with employed local talent is to assemble the cars to their final form. Countries (such as Indonesia) use this rule to limit the imports of final goods and use the restriction to create some jobs and local income.
National Procurement Policies:
This policy amounts to disallowing foreign firms to bid for government's infrastructure projects. In the past, the government of Japan would keep U.S. firms from bidding on government projects
for building roads, schools, hospitals, etc. in Japan. The new rule of the WTO prohibits discrimination against foreign bidders except in matters of national security.
Banning of Imports due to hazardous Materials, Ingredients, and Chemicals.
This type of barrier looks appropriate as imports of hazardous chemicals and ingredients of production may compromise public health standards in a country. However, there are instances where such standards are used simply to keep out imports. They are termed a protectionist policy by the complaining trade partner. As an example, in 1994, the U.S. banned the import of gharga skirts from India with the argument that they are a fire hazard. Of course, according to Indian officials, the U.S. is using the argument as a protectionist policy to keep this type of skirts from the U.S. market.
Quantifying the Impact of NTMs on Trade
In light of the diversity of NTMs as described above, it should come as no surprise that quantifying the impact of NTMs on trade is a challenging exercise. For example, as the Executive
Summary of the OECD study described above observes:
....Not only do these measures take often non-transparent forms, analysis also has to take into account whether and how they are linked to non-trade policy objectives. Some NTBs serve important regulatory purposes and are legitimate under WTO rules under clearly defined conditions even though they restrict trade. For example, import licences may be used to control the importation of products carrying potential health risks. Countries may ban imports of farm products for food safety reasons or impose labelling requirements in response to consumer demands for information. The issue here is whether governments, in pursuing legitimate goals, are restricting imports more than is necessary to achieve those goals. Under multilateral rules, the objective is not to remove these measures but to ensure that they are set at an appropriate level to achieve legitimate objectives with minimum impact on trade. However, because legitimacy claims are typically associated with the introduction of these measures, they are hard to assess. All this makes the issues that arise in connection with determining the economic impact of NTBs very different from those surrounding the use of tariffs. As far as trade and the economic impact of NTBs are concerned, much depends on the specific circumstances of their application. To understand the effect of a specific measure requires a case-by-case examination..(OECD, 2005, p. 13).
The validity of these concerns notwithstanding, various attempts using different methodologies and data have been undertaken to estimate the impact of NTMs on imports, including frequency/coverage measures, price comparison measures and quantity impact measures, as well as residuals of gravity-type equations (see Deardorff and Stern, 1997, for a review). The most ambitious attempt to date, in terms of both theoretical grounding and country/tariff line coverage, is contained in Kee et al (2009), who seek a consistent measure of the trade-restrictiveness of NTMs that can be compared to tariffs. Kee et al motivate their approach as follows:
....trade policy can take many different forms: tariffs, quotas, non-automatic licensing, antidumping duties, technical regulations, monopolistic measures, subsidies, etc. How can one summarize in a single measure the trade restrictiveness of a 10% tariff, a 1000-ton quota, a complex non-automatic licensing procedure and a $1 million subsidy? Often the literature relies on outcome measures, e.g., import shares.
The rationale is that import shares summarise the impact of all these trade policy instruments. The problem is that they also measure differences in tastes, macroeconomic shocks and other factors which should not be attributed to trade policy. Another approach that is often followed is to simply rely on tariff data or collected customs duties and assume that all other instruments are positively (and perfectly) correlated with tariffs. These are obviously unsatisfactory solutions. A more adequate approach...is to bring all types of trade policy instruments into a common metric..(Kee et al, 2009, p. 173).
The approach taken by Kee et al is to estimate ad-valorem equivalents of NTMs for each country
at the tariff line level that can then be compared directly to (ad valorem) tariffs. Despite all of these difficulties in measurement, most estimates of the trade impacts of NTMs suggest that they can be substantial. For example, Kee et al (2009) find that for a majority of tariff lines the ad valorem equivalent of the NTMs in their sample of 78 countries is higher than the actual tariff. And the mechanism by which NTMs impact trade can be subtle: for instance, Staiger and Wolak (1994).
And that the mere .ling of US antidumping claims can significantly reduce trade flows during the period of investigation of these claims, even though no antidumping duties are in place over the period of investigation and even if the investigation ends in a finding of no dumping and no duties are ever imposed.
Deardorff (1987) suggests that non-tariff barriers are preferred to tariffs because policymakers
and demanders of protection believe that the effects of tariffs are less certain. This perception could be due to various reasons, some real and some illusory. For example, it may be much easier to see that a quota of I million limits automobile imports to 1 million than to demonstrate conclusively that a tariff of, say, $300 per car would result in imports of only I million automobiles. In part, doubts that tariffs will have the desired effect is based on the possibility of actions that could be taken to offset the effects of higher tariffs. For example, the imposition of a tariff may induce the exporting country to subsidize the exporting firms in an attempt to reduce the tariff’s effectiveness. The effects of quotas, on the other hand, are not altered by such subsidies
It is not only tariffs that hamper free trade: Evidences
Evidence 1: Non Tariff Bariers hampering trade in EU
Removing obstacles to trade between nations is not only important for exporters who can thus better penetrate foreign markets and make more money, but also for consumers who can enjoy a wider choice at better prices. Trade liberalisation in the last couple of decades has pushed tariffs down across the world, but other barriers to trade still present problems.
Tariffs have been lowered and so-called non-tariff barriers removed mainly in the framework of the World Trade Organisation (WTO) through: reciprocal tariff concessions (you lower yours, I lower mine); discipline on non-tariff barriers by limiting export subsidies and imposing strict rules on antidumping procedures, subsidies and standards; and dispute settlement, through which governments can "sue" countries that fail to abide by WTO rules.
How non-tariff barriers are hurting EU companies
A report by British Conservative Robert Sturdy on the negative impact of non-tariff barriers on EU companies was discussed in plenary on 12 December. Among the examples, the report says the EU steel sector is paying more for vital raw materials because Russia has raised export duties on copper and nickel, meaning Russian exporters have to pay higher duties to the Russian government, which means higher prices for EU buyers.
Because of how the US treats the names of European wines including "champagne" it is hard for EU exporters to register and defend geographical indications on their products, causing damage to the reputation of their goods and loss of market share.
Call for clear distinction on NBTs
The report says it is almost impossible to register European cosmetics containing new ingredients for more than a year in China, because China lacks the necessary regulatory procedures. Non registration of cosmetic products because they can't be properly evaluated can be justified on health protection grounds. Therefore the EP is calling on the Commission to establish a "clear distinction between those NTBs, which give rise to unfair distortions of competition and those which reflect legitimate public-policy aims" such as health and environmental protection.
"Reducing unjustified NTBs and other regulatory obstacles applied by the EU's key strategic partner countries by means of regulatory dialogue should be one of the key regulatory priorities of the new EU trade policy," says the report.
Evidence 2: Their Prevalence of Non-Trading Barriers (NTBs) and Relevance for African Countries
A study carried by Andrew Mold (2005) for the African Trade Policy Centre reported that meaningful market access requires a reduction in all kinds of barriers to trade. In this context, it is commonly argued that ‘core’ non-tariff barriers (NTBs) to trade fell considerably in the aftermath of the Uruguay Round of the GATT negotiations, ‘core’ NTBs referring to the use of non-automatic licensing, quotas and tariff quotas, voluntary export restraints and price control measures. In recent years, however, there has been a resurgence of concern about the application of NTBs, especially regarding the use of a ‘new generation’ of import controls by the industrialized nations, such as antidumping measures and phytosanitary, labour and environmental standards.
There is a parallel concern that the target of these new generation NTBs is no longer essentially other industrialized nations - now the target would seem to be increasingly developing nations. This is certainly the case with the Newly Industrialising Countries (NICs) and developing countries with enormous export capacity, like China and India. But from the evidence surveyed in this study, it is also increasingly true for the African continent. The objective of this paper is to outline the most important NTBs facing African countries, describe ways of quantifying them, and summarise the empirical evidence. Policy advice is subsequently drawn on the need for African countries to be more vigilant on these issues in future negotiations of the World Trade Organization (WTO).
The increasingly strict standards applied in Organization of Economic Cooperation and Development (OECD) countries are often justified as a response to growing consumer pressure for safer goods. This paper argues that it is difficult to square such arguments with the tendency in many industrialized countries of poor enforcement and in some cases, actual relaxation of domestic food and environmental safety standards. Regarding anti-dumping measures, sub-Saharan African (SSA) countries have suffered tremendously from the impact of dumping by firms based in Quad countries (Quad countries are Canada, the European Union, Japan and the United States), exporting subsidized products to their markets.
Yet, with the exception of South Africa, not a single case of dumping has been brought against a Quad country for these practices. This suggests that the WTO anti-dumping legislation does not function properly. A number of suggestions are made to make anti-dumping law more effective and less biased towards the interests of developing countries.
Developing countries are also increasingly facing labour or environmental standards imposed from outside, particularly those linked to trade and market access agreements. The key challenge for African countries is to strike a balance between adequate national legislation and avoiding covert protectionism through excessive regulation. On the rules of origin, the paper reviews a number of recent studies which show how the effectiveness of preferential market access agreements are undermined by the inclusion of strict rules of origin.
Finally, African countries are not only victims of the growing prevalence of NTBs – they are also prone to using NTBs themselves to keep out exports of other African countries. The paper argues that African countries apply NTBs in a way that deeply damages the prospects for intra-regional trade. The paper will thus explore these two dimensions to NTBs in Africa – those that threaten African exports to the industrialized countries, and those that impede trade among regional groupings within Africa.
Evidence 3: Non-Tariff Measures Affecting EU Exports
The European Commission’s Market Access Database provides information on exporting from the European Union (EU) into non-EU countries. One part of this database consists of a listing of trade barriers that have been brought to the attention of the Commission by businesses. The aim of this inventory is to improve transparency in trade relations and inform exporting companies about impediments that other exporters have encountered when trying to enter particular markets. The material might also serve as background information for trade negotiations.
The recorded business complaints give indications of the type of the NTM, as well as the product
category and country in which they were encountered, and sometimes include information on the
procedural problems that have arisen. They do not contain information about the trade impact of particular measures or the costs associated with overcoming a barrier. However, the existence of a complaint suggests that some economic agents have perceived the measures to be unduly trade-restrictive.
Prevalence of non-tariff measures
The inventory as of April 2000 registered a total of 1708 business complaints about non-tariff measures in goods sectors. Complaints by EU businesses referred to NTMs in 46 different countries, with about 39 per cent of NTM-complaints concerning high-income countries and 61 per cent developing countries. More than 40 per cent of all NTMs were encountered by exporters trying to sell into East Asian and Pacific markets, followed by complaints about market access in Eastern Europe and Central Asia (23 per cent) and North America (14 per cent).
Machinery, food products, and chemicals are the sectors in which NTM-complaints are most prevalent. These three product groups account for 43 per cent of all inventory entries. In addition, a significant share of the complaints that do not mention any specific product group is likely to concern these three sectors. The absolute number of complaints is, of course, an imperfect measure of importance of NTMs across sectors, as the latter vary in economic size. If the number of complaints is related to sectoral export value, the agriculture and food sectors turn out to be the ones with the largest number of NTM-complaints in relative terms, followed by mining and textiles. In other words, exporters of natural resource-related products seem relatively frequently confronted with NTMs.
Source: EU market access database.
Source: EU market access database
Conclusion
According to the traditional theory, while opening up to trade is mutually beneficial, the distribution of its benefits among trading partners is indeterminate, susceptible to being influenced, inter alia, by power, intra- or extra-market. Certainly there is considerable power play in current negotiations in the WTO.
Despite the adverse national consequences, the use of non-tariff barriers has increased sharply in recent years. The chances for a reversal of this trend appear to be small. The variety of non-tariff measures, the difficulties of identifying and measuring their effects and the benefits received by specific groups combine to make a significant reduction of non-tariff barriers in the ongoing Uruguay Round negotiations unlikely. The original mission of GATT, which has been largely achieved, was to reduce tariffs. The question, however, of why policymakers have preferred to use non-tariff barriers rather than tariffs in recent years remains. The more certain protective effects of non-tariff barriers is one plausible explanation.
A second explanation, which focuses on the distribution of the benefits, is that the benefits of non-tariff barriers can be captured by foreign producers and domestic politicians. Such an allocation of benefits increases the probability that the political process generates larger amounts of non-tariff barriers relative to tariffs. A final explanation is that their adverse effects are generally less obvious to consumers than the effects of tariffs.
Appendix
Wto members
Tariff binding coverage
Box 1
Some of the main texts of the WTO Agreement
Agreement Establishing the WTO (Marrakesh Agreement)
General Agreement on Tariffs and Trade (GATT)
Agreement on Agriculture (AoA)
Agreement on Technical Barriers to Trade (TBT Agreement)
Agreement on Trade-related Investment Measures (TRIMs)
Agreement on Anti-Dumping
Agreement on Subsidies and Countervailing Measures
General Agreement on Trade in Services (GATS)
Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs)
Understanding on Rules and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding, DSU)
Trade Policy Review Mechanism
Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries
Decision on Trade and Environment
BRIEF OF EVENTUAL ROUNDS
1995 - The World Trade Organization is created in Geneva.
1999 - At least 30,000 protesters disrupt WTO summit in Seattle, US; New Zealander Mike Moore becomes WTO director-general.
2001 November - WTO members meeting in Doha, Qatar, agree on the Doha Development Agenda, the ninth trade round which is intended to open negotiations on opening markets to agricultural, manufactured goods, and services.
2001 December - China formally joins the WTO. Taiwan is admitted weeks later.
2002 August - WTO rules in favour of the EU in its row with Washington over tax breaks for US exporters. The EU gets the go-ahead to impose $4bn in sanctions against the US, the highest damages ever awarded by the WTO.
2002 September - Former Thai deputy Prime Minister Supachai Panitchpakdi begins a three-year term as director-general. He is the first WTO head to come from a developing nation.
2003 September - WTO announces deal aimed at giving developing countries access to cheap medicines, hailing it as historic. Aid agencies express disappointment at the deal.
2003 September - World trade talks in Cancun, Mexico collapse after four days of wrangling over farm subsidies, access to markets. Rich countries abandon plans to include so-called "Singapore issues" of investment, competition policy and public procurement in trade talks.
2003 December - WTO rules that duties imposed by the US on imported steel are illegal. US President Bush repeals the tariffs to avoid a trade war with the EU.
2004 April - WTO rules that US subsidies to its cotton farmers are unfair.
2004 August - Geneva talks achieve framework agreement on opening up global trade. US and EU will reduce agricultural subsidies, while developing nations will cut tariffs on manufactured goods.
2005 March - Upholding a complaint from Brazil, WTO rules that US subsidies to its cotton farmers are illegal.
2005 May - WTO agrees to start membership talks with Iran.
2005 September - Frenchman Pascal Lamy takes over as WTO director-general. He was formerly the EU's trade commissioner.
2005 October - US offers to make big cuts in agricultural subsidies if other countries, notably EU do the same. EU responds, but France opposes more concessions.
2005 November - WTO approves membership for Saudi Arabia.
2005 December - World trade talks in Hong Kong begin amid widespread belief that they will not succeed in making a breakthrough.
2007 July - US "fast track" authority expires in Congress. Under this provision Congress waives the right to amend any trade deals negotiated by the US President. Many experts believe Congress will not renew this provision, setting a deadline for reaching a trade deal.
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