Non Tariff Barrier

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Introduction A nontariff barrier (NTB) is any policy used by the government to reduce or halt trade other than a simple tariff or we can define it more precisely as; “Any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income.” Although the term NTBs is widely used by experts and non-experts alike it presents a number of challenges in the context of trade policy. Four of them are highlighted here: The term denotes a residual category, i.e. all trade obstacles, which are not due to import or export duties (tariffs) are non-tariff ones. Since the number of measures dealt with in trade agreements has increased over time the list of NTBs has been extended as well. Various attempts at categorizing or classifying them have been made but there is no universally accepted solution. Contrary to tariff measures (duties) which are normally transparent, NTBs are often more difficult to detect because they can be “hidden” in rules and practices that have a perfectly legitimate objective. They also leave more discretion to administrators in applying them. Furthermore, NTBs can have more trade-restrictive effects than tariffs, which raise the cost of a given product, and go as far as excluding a good from a market altogether. Commentators thus agree that the economic effect of NTBs is very substantial. NTBs are quite frequent and can be found all over the world. They became more visible as a result of the lowering of 1 | Page

Transcript of Non Tariff Barrier

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Introduction

A nontariff barrier (NTB) is any policy used by the government to reduce or halt trade other than a simple tariff or we can define it more precisely as;

“Any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income.”

Although the term NTBs is widely used by experts and non-experts alike it presents a number of challenges in the context of trade policy. Four of them are highlighted here:

The term denotes a residual category, i.e. all trade obstacles, which are not due to import or export duties (tariffs) are non-tariff ones. Since the number of measures dealt with in trade agreements has increased over time the list of NTBs has been extended as well. Various attempts at categorizing or classifying them have been made but there is no universally accepted solution.

Contrary to tariff measures (duties) which are normally transparent, NTBs are often more difficult to detect because they can be “hidden” in rules and practices that have a perfectly legitimate objective. They also leave more discretion to administrators in applying them. Furthermore, NTBs can have more trade-restrictive effects than tariffs, which raise the cost of a given product, and go as far as excluding a good from a market altogether. Commentators thus agree that the economic effect of NTBs is very substantial.

NTBs are quite frequent and can be found all over the world. They became more visible as a result of the lowering of tariffs following the multilateral trade negotiations in the context of the General Agreement on Tariffs and Trade (GATT) and the conclusion of free trade agreements (FTAs). It appears that in some cases NTBs were also introduced in order to counter-balance the loss of protection in the wake of lower tariffs.

Most commentators agree that the main reason for the frequent use of NTBs can be found in the arena of internal politics of a country. Legislators and governments seem to find it easier to conceive of non-tariff measures against imports in times of economic difficulties or in the case of a struggling business sector than taking less popular measures of a domestic nature. In the absence of an effective domestic resistance against such decisions, which often hurt consumers, harmonization measures, the elimination of NTBs or outright counter measures in the context of international agreements are often the most effective ways of convincing governments to rescind such NTBs.

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Not all non-tariff measures impacting trade are necessarily illegal. Measures and decisions leading to complications, slowdowns, price increases and even prohibitions for imports and exports may be justified if they are needed to preserve the health and safety of animals and humans or protect the environment. For such cases, rules and guidelines had to be found that define the conditions under which such trade-restrictive measures are allowed.

Background History: Non Tariff Barriers in Multilateral Trade Negotiations

Despite a long history of non-tariff barriers (NTB) in international trade, the special attention they have got only in the early 70th when the discussion of the NTB was explicitly scheduled in the framework of Tokyo Round of the GATT negotiations. The understanding of importance of the NTB has appeared alongside with gradual reduction of tariff barriers and, consequently, expected growth in importance of the NTB. These barriers are less transparent, more flexible, and extremely variable. According to the United Nations Conference on Trade and Development (UNCTAD) classification, there are approximately one hundred different codes representing various nontariff measures. These characteristics made the NTB important substitutes for country’s tariff regime.

GATT Trade Rounds

Year Place/name Subjects covered Countries1947 Geneva Tariffs 231949 Annecy Tariffs 131951 Torquay Tariffs 381956 Geneva Tariffs 26

1960-1961

GenevaDillon Round

Tariffs 26

1964-1967

GenevaKennedy Round

Tariffs and anti-dumping measures 62

1973-1979

GenevaTokyo Round

Tariffs, non-tariff measures, “framework”agreements

102

1986-1994

GenevaUruguay Round

Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc

123

The multilateral trade negotiations dealing with non-tariff barriers are brief. Multilateral trade negotiations are conducted under the auspices of the General Agreement on Tariffs and Trade, which was created shortly after World War II. GATT, a term that encompasses the multilateral agreement governing international trade, the bodies administering the agreement, and all associated trade-related activities, has focused on the reduction of tariff rather than non-tariff

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barriers, To date, seven rounds of GATT negotiations have been completed, with the first six concerned almost exclusively with tariffs.

The Tokyo Round

The Tokyo Round, the most recently completed round lasting from 1973 to 1979, was a comprehensive effort to reduce trade obstacles stemming from tariffs and non-tariff measures. New or reinforced agreements called “codes,” were reached on the following non-tariff measures:

1) Subsidies and countervailing duties; 2) government procurement; 3) technical standards;4) Import licensing procedures; 5) customs valuation; and 6) antidumping

The code on subsidies and countervailing duties prohibits direct export subsidies, except under certain situations in agriculture. This code is noteworthy in extending GATT’s prohibition of export subsidies to trade in raw materials. Because nearly all governments subsidize domestic producers to some extent, the code established criteria to distinguish between a domestic and an export subsidy. Domestic subsidies that treat domestic and export activities identically are generally allowed.

Countervailing duties, which are tariffs to offset a subsidy received by a foreign exporter, are prohibited unless the subsidized goods are shown to be causing (or threatening) “material” injury to a domestic producer. This code also allows a country to seek redress for cases in which another country’s subsidized exports displace its exports in third-country markets. The code on government procurement states that, for qualifying nonmilitary purchases, governments (including government-controlled entities) must treat foreign and domestic producers alike.

In addition to resolving disputes, the code establishes procedures for opening and awarding bids. The code on technical standards attempts to ensure that technical regulations and product standards such as labeling, safety, pollution and quality requirements do not create unnecessary obstacles to trade. The code does not specify standards; however, it establishes rules for setting standards and resolving disputes.The code on import licensing procedures, similar to the code on technical standards, is not spelled out in detail. Generally speaking, governments stated their commitment to simplify the procedures that importers must follow to obtain licenses. Reducing delays in licensing and paperwork are two areas of special interest.

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The code on customs valuation established a uniform system of rules to determine the customs value for imported goods. This code uses transaction prices to determine value and is designed to preclude the use of arbitrary values that increase the protective effect of a tariff rate. Finally, the anti-dumping code prescribes rules for anti-dumping investigations, the imposition of anti-dumping duties and settling disputes. The standards for determining injury are clarified. This code obligates developed countries to treat developing countries preferentially.

The Uruguay Round

The Tokyo Round codes have relied on good faith compliance, which has tended to undermine their effectiveness. Streamlining and resolving disputes is a priority during the current round of multilateral negotiations, the Uruguay Round. The Tokyo Round codes will be reviewed and possibly modified during the Uruguay Round. In particular, broadening the government procurement code to include service contracts will be discussed. Concerning the technical standards code, agreements dealing with the mutual acceptance of test data generated by other parties and the openness of the activities of standards bodies will be sought. A major issue in the anti-dumping code is how to handle input dumping (that is, export sales of products that contain inputs purchased at dumped prices).

The Uruguay Round, begun in September 1986, has and will discuss a number of nontariff barrier issues, many of which extend beyond the codes of the Tokyo Round. Trade issues involving agriculture and services (banking, construction, insurance and transportation) are of paramount importance. The United States has proposed the elimination of all trade- and production-distorting agricultural policies. While the major agricultural nations have agreed to the principle of liberalizing agriculture, the sweeping nature of the U.S. proposal has been resisted by some nations, especially the European Community.

With respect to services, the primary goal is to establish principles for extending GATT coverage to this trade. A recent study by the Congressional Budget Office (1987) predicts that the performance of the Uruguay Round will be judged largely on its handling of non-tariff barrier issues. GATT has not effectively combated rising non-tariff barriers for many reasons. Two reasons are that the effects of non-tariff barriers are less transparent than the effects of tariffs and, in many cases, non-tariff barriers are designed to satisfy a domestic rather than an international objective.

A major obstacle is determining at what point a national economic policy, whose international effects are somewhat uncertain, becomes an internationally unacceptable

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non-tariff barrier. These national economic policies have frequently resulted from the lobbying efforts of strong domestic constituencies such as agricultural interests. ‘Thus, major trade policy reform will be met with much resistance from these groups.

The Doha Round

The Doha Round is the latest round of trade negotiations among the WTO membership. Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. The work program covers about 20 areas of trade. The Round is also known semi-officially as the Doha Development Agenda as a fundamental objective is to improve the trading prospects of developing countries.

The Round was officially launched at the WTO’s Fourth Ministerial Conference in Doha, Qatar, in November 2001. The Doha Ministerial Declaration provided the mandate for the negotiations, including on agriculture, services and an intellectual property topic, which began earlier. In Doha, ministers also approved a decision on how to address the problems developing countries face in implementing the current WTO agreements.

Exporters often find that it is not only tariffs but other issues, such as customs rules or import standards, which block them from selling products in other countries.These so-called non-tariff barriers (NTBs) are so serious that they are specifically under negotiation within the World Trade Organization Doha Round. The aim is to ensure that such obstacles are subjected to effective rules and, where possible, reduced or eliminated.

The negotiations deal principally with pushing forward trade facilitation issues, such as clarifying or simplifying customs rules and procedures. In addition, the reduction or elimination of non-tariff barriers (NTBs) to trade in industrial and manufactured goods is a major part of the non-agricultural market access (NAMA) negotiations in the current WTO Doha Round.

New Zealand fully supports this objective, having found that these non-tariff barriers have cost exporters more than $1 billion annually. In some overseas markets, New Zealand trade officials spend a great deal of time and effort seeking to ensure that products can enter the market and compete fairly with domestic products.

The work being done on NTBs at the WTO provides an opportunity to encourage WTO members to find the least trade restrictive ways to meet their regulatory objectives. Although work to address NTBs has been underway for some time now – both by the general membership as well as by New Zealand – it has tended to take a back seat to the other NAMA issues, notably the negotiations around the formula for determining the size of tariff cuts.

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To some extent, this reflects the greater historical importance of tariff reductions to securing trade liberalization, but it also highlights the inherent difficulty in dealing with a broad range of often unrelated NTBs. One of the difficulties in dealing with NTBs is that they are often linked to legitimate public policy objectives such as health and safety or environmental protection. They may therefore be in place for valid regulatory reasons. At the same time, however, it is important to ensure that these NTBs do not become unnecessary obstacles to trade.

Classification of NTBs

Economists usually suggest the following classification with five categories.

A first broad category covers quantitative NTBs and similar restrictions. It includes import quotas and their administration methods (licensing, auctions, and other); export limitations and bans; voluntary export restraints, a limit on imports but managed by exporters; foreign exchange controls often based on licensing; prohibitions such as embargos; domestic content and mixing requirements forcing the use of local components in a final product; discriminatory preferential trading agreements and rules of origin; and countertrade, such as barter and payments in kind.

A second category covers fees other than tariffs and associated policies affecting imports. This category includes variable levies triggered once prices reach a threshold or target level; advanced deposit requirements on imports, anti-dumping and countervailing duties imposed on landing goods allegedly exported “below cost” or with the help of export subsidies provided by foreign governments; and border tax adjustment such as value-added taxes potentially imposed asymmetrically on imported and domestic competing goods.

A third category is extensive. It collects various forms of government policies, including a wide set of macro-economic policies. This category covers direct governmental participation and restrictive practices in trade, such as state-trading and state-sponsored monopoly; government procurement policies with domestic preferences; and industrial policy favoring domestic firms with associated subsidies and aids. In addition, the category extends to macro-economic and foreign exchange policies; competition policies; foreign direct investment policies; national taxation and social security policies; and immigration policies.

Two better-targeted categories deal with customs procedure and administrative practices, and technical barriers to trade, which are central to NTBs. The former covers custom valuation methods that may depart from the actual import valuation; customs classification procedures other than the international harmonized system of classification to levy further fees; and customs clearance procedures, such as inspections and documentation creating trading cost. Technical barriers to trade (TBT) relate to health, sanitary, animal welfare, and

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environmental regulations; quality standards; safety and industrial standards; packaging and labeling regulations and other media/advertising regulations.

Measurement and Quantification of NTBs

To address concerns related to the use and impacts of NTBs, quantification of NTBs is a must. The two broad measurement methods commonly identified are;

NTB specific Indirect consideration of NTBs

NTB-specific methods use direct information on NTBs to define their possible impact. But, obtaining the complete information set, even at the industry or sector level, is likely to be difficult and would require intensive and extensive data collection work. Even if exhaustive information were available, the construction of a general measure of NTBs could be tedious, as general equilibrium effects are likely to be excluded. Missing information could introduce a downward bias on the estimates of the trade impact of NTBs. Direct information, then, is an appropriate approach only when trying to assess NTBs’ impact at a quite disaggregated level, which should normally be avoided when dealing with a more general analysis. Nevertheless there exist arrays of more general approaches that are capable of addressing some of the shortcomings of direct approach. Like the frequency type measures based upon inventory listings of observed NTBs that apply to particular countries, sectors, or categories of trade; price-comparison measures calculated in terms of tariff equivalents or price relatives; quantity-impact measures based upon econometric estimates of models of trade flows; and measures of equivalent nominal rates of assistance.

General Methods for Measuring NTBs

One of the main questions in study of the NTB is a methodology of their measurement. The problems exist because of non-transparency of the NTB, their variety, and disparity in influences. There are several types of non-tariff barriers measurement: frequency measures, price-change measures, quantity measures, and indices deflators.

Frequency-Type Measures

This method is simply to measure the policies in terms of their numbers and trade coverage. It record the number, form, and trade coverage of non-tariff trade policies as determined from special, surveys, frequency of complaints by trading partners, and government reports. The data are derived from various official national publications and information supplied by governments to the GATT.

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Price-Comparison Measures

This measure provides direct measures of the price impacts of NTBs. This approach calculates the differential between the import price and the domestic price and the domestic price of each commodity at a disaggregated level and subtracts the tariff rate on the commodity from this differential. The result is treated as a NTB.

Quantity-Impact Measures

Jager and Lanjouw (1977) in an article ‘An Alternative Method for Quantifying International Trade Barriers’ argued that a quantity measure is preferable to a price measure since quantity measure tries to tell us what we really want to know about the effects of an NTB: that is, by how much it reduces trade. On the other hand, the price measures such as tariff equivalents fail to provide this information.

Indices deflators

This method of trade barriers estimation that could be applied both to tariff and non-tariffs was proposed by Anderson and nearly in 90th. The authors constructed two indices, mercantilist trade restrictiveness index and trade restrictiveness index, that are defined as deflators that if applied to undistorted prices produce the same trade volume (for mercantilist index) or same real income (for trade restrictiveness index) as the initial set of trade . These indices are very sound in terms of their theoretical background. However, their application suffers from same problems as price-based methods.

Forms of Non Tariff Barriers

At its most detailed level, the classification identified over 100 different types of NTBs at its most detailed level though it does not incorporate any measures applied to production or to exports. But we will discuss here some most important and frequently practiced by whole world.

1. Quotas

The best known nontariff barrier is quota or import quota. Quotas are government-imposed limits on the quantity or value of goods traded between countries. One way or another, the government gives out a limited number of licenses to import the quota quantity legally and prohibits importing without a license. As long as the quota quantity is less than the quantity that people would want to import without the quota, the quota has an impact on the market for this product.

There are several reasons why protectionists and government’s officials may favor using a quota instead tariff. For instance;

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A quota ensures that the quantity of imports is strictly limited; a tariff would allow import quantity to increase if foreign producers cut their prices or if our domestic demand increases.

A quota gives government officials greater power. These officials often have administrative authority over who gets the import licenses under a quota system, and they can use this power to their advantage (for instance, by taking bribes).

Types of Quota

An exporter may find that the foreign country restricts mostly imports not only by means of tariffs but also by qualitative measures.

These usually take the form of import quotas for each particular product. Once the quota for the period has been filled, no more import licenses are issued.

i. Unilateral Quotas

These are quotas set by a country without pervious consultation or negotiation with others. Such a quota may be global or allocated.

If it is global, the total volume of goods that may be imported is set regardless of the countries of origin or the importers and exporters involved.

If it is allocated, the permitted volume of imports is allocated among countries of origin and private traders in accordance with some previous pattern.

ii. Negotiated Quotas

In this case, the importing country, after negotiations with the government of each exporting country, or with groups of its exporters, allots shares of the quota to each country. Often, with a bilateral negotiated quota, the exporting country is given the responsibility for issuing licenses to its exporter.

Sometimes a negotiated bilateral quota goes under the guise of a voluntary export quota - for example, the “voluntary" quotas that Japan places on its exports of man-made textiles to the United States. With a multilateral quota, the restriction is placed on the total amount of imports only, with no restriction as to source.

iii. Embargo

Quotas that entirely eliminate trade in a certain product are known as embargoes. Embargoes sometimes established as a form of economic sanction against the policies or practices of another country. Embargoes are sometimes established as a form of economic sanction against the

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policies and practices of another country. For instance, the United States has had an embargo on the export of most products from Cuba since 1962.

Sometimes countries will impose embargoes for national defense reasons. For instance, the NATO allies have an agreement that restricts exports of certain high tech goods to countries considered to be unfriendly. Despite these examples, embargoes are relatively scarce.

Rather quotas are most often set at levels greater than zero so that some, though limited, trade occurs. For a variety of reasons that it has been explored that quotas are more restrictive then tariffs. Perhaps as a result of this attitude, quotas on most manufactured products have long been prohibited by the international trade law administered by the World Trade Organization (WTO).

iv. Tariff Rate Quotas (TRQs)

TRQs are quota policies that allow a certain quantity of a good into a country at low (often zero) tariff rates, but then apply (often substantially) higher tariffs to quantities that exceed the quota. Despite the movement to replace them with these alternative forms of protection, quotas still exist.

Phase out of worldwide textile and apparel quotas is not scheduled to be completed until 2005. International trade law allows countries to impose quotas to provide temporary protection to aid locally distressed industries or when they have balance of payments problems.

Practical Implications of quotas

For example, as of 1995, the United States had import quotas on many types of textiles and apparel, and TRQs on milk, cream, cheese, butter, margarine, peanuts, sugar, various products containing sugar (including chocolate), cotton, and cotton waste.

In addition to formal restrictions, countries have found ways of imposing quotas indirectly by obtaining agreements from exporting countries to voluntarily limit exports. These latter agreements are also gradually being phased out under the auspices of the WTO.

From the point of view of government officials, quotas are very flexible tool of commercial policy. They may be imposed against all countries or used against only a few. For internal and external impact of the quota depends in part on how the policy is administered.

Sometimes countries announce an unallocated global quota. In these circumstances, custom officials are instructed to maintain a count of the imported product (in terms of value or quantity) as it arrives at docks from different foreign suppliers. Once the quota

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has been reached, no more of the product is allowed into the country. Thus, those foreign suppliers who get their product to domestic market first are able to sell their product. Latecomers are turned away.

Unallocated global quotas are relatively uncommon, especially among industrialized countries.

i. Because the system rewards those who import early in the quota period, ports of entry into the country tends to be clogged during some parts of the year and empty during other parts. This leads to considerable inefficiency in the use of cargo-handling facilities. In addition, under this type of quota scheme, it is often the case that imports of the product that reach the docks exceed the levels permitted by the quota.

ii. Quota does not discriminate between various potential sources of supply, some foreign producers may lose markets that had traditionally been theirs. This could lead to considerable friction between countries.

iii. Unallocated global quotas can lead to extraordinary profits for those lucky enough to be able to import the product into the country, government officials may want to ensure that certain groups (perhaps including themselves) become the beneficiaries of these policies.

Quota licenses provide the bearer with the right to import into the country a specific amount of the product during a specific period of time. Depending upon the quota scheme in force, licenses may be sold or given away. The recipients may be domestic or foreign.

Ways to Allocate Import Licenses

The quota license to import is a license to buy the product from foreign suppliers at the world price and resell these units at the domestic price. The quota results in mark up and who will get this mark up depend on how the licenses to import the quota quantity are distributed. Followings are some main ways to allocate import licenses:

i. The government allocates the licenses for free to importers using a rule or process that involves (almost) no resources costs.

ii. The government auctions off the licenses to the highest bidders.

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iii. The government allocates the licenses through application and selection procedures that require the use of substantial resources.

There are some other ways to examine who will get the mark up of imported goods and whether this affects the view of the inefficiency of the quota;

a. Fixed Favoritism

Import licenses adding up to the total quota can be allocated for free on the basis of fixed favoritism, in which the government simply assigns the licenses to the firms (and/or individuals) without competition, applications, or negotiation. In this case the importers lucky enough to receive the import license will get the mark up.

Each of them should be able to buy from some foreign exporters at the world price (playing different foreign exporters off against each other if any one of them tries to charge a higher price). They can resell the imports at the higher domestic price. The price difference is pure profit.

One common way of fixing the license recipients and amounts is to give the licenses to firms that were doing the importing before the quota was imposed, in the same proportion to the amounts that they had previously been importing. This is how the US government ran its oil import quotas between 1959 and 1973. Licenses to import were simply given to companies on the basis of the amount of oil they had imported before 1959.

There is a political reason for allocating import licenses in this way. The importers generally will be hurt by the imposition of quota, and they would then be a group opposing the quota. However, if they receive the valuable quota licenses, they are much less likely to oppose the quota. Although they will have a lower volume of import business, the importing that they do will be very profitable.

b. Auction

The government can run an import-license auction, selling import license on a competitive basis to the highest bidders. Importers will be willing to pay something to buy a quota license because the right to acquire imports at the low world price and sell these imports at the higher domestic prices is valuable. In this case, government will get all of the mark up in the form of auction revenues. The auction revenues to government will be (almost) equal to the revenues that the government would instead collect with the equivalent tariff.

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Public auctions of import license auctions are rare. They were used in Australia, New Zealand, and Colombia in the 1980s. In New Zealand, once or twice a year the government auctioned the rights to import over 400 different goods.

There is an informal variant of a quota auction that is probably more prevalent. Corrupt government officials can do a thriving business by selling import licenses under the table to whoever pays them the highest bribes. As with other forms of corruption, this variant of the auction entails some social costs that go beyond economic market inefficiency. Persistent corruption can cause talented persons to become bribe-harvesting officials instead of pursuing productive careers. Public awareness of corruptions also raises social tensions over injustice in high places.

c. Resource-Using Procedures

Instead of holding an auction, the government can insist that firms (and/or individuals) that want to acquire licenses must compete for them in some way other than simple bidding or bribing. Resource-using application procedures include allocating quota license on a first-come, first-served basis; on the basis of demonstrating need or worthiness; or on the basis of negotiations.

With first-come, first-served allocation, those seeking the licenses use resources to try to get to and stay at the front of the line. An example of allocation by worthiness is awarding quota licenses for materials and components based on how much production capacity firms have for producing the products that use these inputs. An example of resource wastage from negotiation is the time and money spent on lobbying with government officials to press each firms’ case for receiving quota licenses.

It would be rational for the firms to use resources up to the value of the licenses themselves i.e. up to the value of mark up. Using resources in this way is privately sensible for each individual firm seeking to get the economic created by the licenses. But, from the point of view of the entire country, these resources used up in the rent-seeking activities are being wasted (compared to the other two ways of allocating quota licenses, or compared to having no quota at all).

The equivalence or non equivalence of Tariffs and Quotas

So far, similarities between quotas and tariffs have been discussed that both of them are similar in their effects on prices, output, and imports. Now we will highlight the main differences existing between tariffs and quotas;

One principal difference between Tariffs and quota concerns the effects of these alternatives policies on the behavior of the protected industry. Suppose, for instance, that

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the domestic industry is a monopoly. With a tariff, the domestic monopolist can charge no more than the world price plus the tariff. Because monopolist faces potential competition from suppliers in other countries, he or she is unable to exploit his or her domestic monopoly power.

This is not the case with quota protection. Under a quota, the monopolist knows that his or her competition is limited to a specific amount of imports. Thus, he or she merely subtracts the amount of quota-restrained imports from overall market demand and is then free to exercise his or her market power over the remaining part of the domestic market. If the domestic firm has market power in its own market, then it will charge higher prices and produce less under quota protection than under tariff protection.

Tariff and quota protection can also be different if market forces change over time. Suppose that domestic demand increases. With tariff protection, internal price remains the world price plus the tariff. The increased demand will be met by a rise in imports. With quota protection, no new imports are allowed in. the only way the market can reach the equilibrium is for the price to adjust. And with higher the domestic prices come greater deadweight costs.

They can also be different in administration difficulties. It has already been cleared that the welfare impact of a quota depends in part on which of many interested parties obtains the quota rights and whether or not the rights are sold by government. There is no clear cut answer as to why so few governments auction off quota rights.

Some economists argue that it is because politicians don’t want consumers to know what individuals would be willing to pay for the quota rights. Such information would provide a clear signal of the consumer cost of the quota. Others have argued that in the cases where the goal of protection is temporary shelter from foreign competition, governments would later be reluctant to drop quotas because of the loss in revenues. Less cynical commentators note that in many cases the value of the quota rents may be relatively low, especially when compared with the bureaucratic costs of holding an auction.

The final difference is that relative to tariffs, quota protection encourages much more graft and corruption. Because of the arbitrary nature of the disposition of the quota rights, there is an incentive to bribe authorities to make particular decisions.

Moreover, even when authorities are known to resist bribes, potential beneficiaries will devote considerable sums of money on legal methods of persuasion, such as campaign contributions and expensive dinners or weekend vacations with lobbyists. The chase for these valuable quota rents leads, then, to an expenditure of resources. This expenditure

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brings about no new production of goods generally valued for consumption purposes, and it is expenditure, therefore, that is considered by many to be economic waste.

2. Voluntary Export Restraints (VERs)

A voluntary export restraint is an odd-looking trade barrier in which the importing country government forces the foreign exporting country to agree voluntarily to restrict its exports to his country that’s why it is also called as Protection with integrity. The export restraint usually requires that foreign exporting firms act like a cartel, restricting sales and raising prices. Through VERs the importing country actually gives foreigners monopoly power, forces them to take it, and call their compliance voluntary.

Characteristics of Voluntary Export Restraints

VER is used by large countries as a rear-guard action to protect their industries that are having trouble competing against a rising tide of imports.

For instance, the since early 1960s the United States, the European Union, and some other industrialized countries have forced most developing countries to impose export quotas on most kinds of textile and clothing. This set of VERs is called the Multi-Fiber Arrangement. The export quotas were initially impose as temporary restraints in response to the protectionists pleas from import-competing firms that they needed time to adjust to the rising foreign competition. As part of the Uruguay Round agreement, the industrialized countries have agreed to phase out these quotas by 2005, but they will probably be replaced (at least for some products) by other forms of protection.

With the VERs, the exporting country’s government usually distributes licenses to export specified quantities to its producers. The export producer should realize that there is much less incentive to compete among themselves for export sales. Instead, they should act like cartel that has agreed to limit total sales and to divide up the market.

The key differences between import quota and VER are the effects on the export price and who gets the price mark up or economic rent created by the quantitative limit on trade. In import quota, importer will be given quota rights such as if foreign export is competitive, these importers should be able to buy at the world price and sell these imports domestically at higher price and price markup will stay within the importing country.

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But in VERs, faced with limited export quantity, the exporters should charge the highest price that the market will bear. Therefore, the foreign exporters now get the price mark up as additional revenue on the VER-limited quantity of exports.

In comparison with import quota, the VER causes a loss of the price mark up that has to be paid to the foreign exporters rather than kept within the importing country. It can also be viewed as national loss due to the deterioration in the importing country’s terms of trade (the higher price paid to the foreign exporters) because of the VER.

Another important characteristic of VER is that for many products foreign producers can adjust the mix of varieties or models of the products that they export, while remaining within the overall quantitative limit. Usually, the profit margin on higher-quantity varieties is larger, so the exporters shift towards exporting these varieties and this process is called as quality upgrading.

Other Examples of Non Tariff Barriers

In addition to Quotas and VERs, there are many other kinds of nontariff import barriers. Indeed, we should be impressed with government’s creativity in coming up with new ways to discriminate against imports. We will discuss some important types of nontariff barriers here;

i. Export Subsidy

“An export subsidy is a direct (or indirect) payment from a country’s government to one or more of its export industries that leads to an expansion of exports by that industry. The legal means for dealing with export subsidies is to impose a tariff on the subsidized exports in order to offset the subsidy and raise the price of the product to the presubsidy price and the tariff imposed is known as countervailing duty.”

This payment is usually related to the level of exports, and thereby enables exporters to charge a price that is lower than would otherwise be charged. With lower prices, exporters are able to gain a larger share of the world market. Like quotas, export subsidies on manufactured goods are outlawed by the WTO. Foreign export subsidies are also against U.S. law. The WTO does permit subsidies on primary (i.e. non manufactured) products, and the U.S. is one of many countries that subsidizes the export of at least some of its agricultural products.

The economic effects of export subsidies are symmetrical with those of import tariffs. Just as tariff cause production to expand in the import-competing sector, export subsidies lead to a greater level of output of exportables than would otherwise occur. Resources are drawn from

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import-competing sectors. Economic waste is created because the cost of increasing output to expand export sales exceed the revenue earned from these sales in the international market.

Export subsidies take on many forms in the real world. These includes tax rebates, subsidized loans to foreign purchasers, insurance guarantees., government funding for research & development, guarantee against losses, and direct grants or subsidized loan. The fact that tariff protection is the chosen means to offset foreign subsidies provides domestic industry with an incentive to allege the existence of foreign subsidization. Such allegations are often aimed at practices that may have only very indirect links to exports.

i. Government Procurement Policies

When governments (federal, state, and local) purchase goods and services, they are often constrained by legislative mandate to purchase from domestic producers. Governments are major purchasers of goods and services. One estimate is that government purchases of products that could be traded internationally amounts to close to one-tenth of all product sales in the industrialized countries.

Government procurement practices can be a nontariff barrier to imports, if the purchasing processes are biased against foreign products, as they often are. In many countries, the governments buy relatively few imported products and instead buy mostly locally produced products.

In the U.S. the Buy American act of 1933 is the basic law that mandates that government-funded purchases favor domestic products. For different types of purchases the bias takes different forms, including prohibitions on buying imports, local content requirements, and mandating that domestic products be purchased unless imported products are priced much lower (for instance, at least one-third lower). More than half of the states and many cities and towns also have Buy American or Buy Local rules for purchases by their governments. Many other countries have similar rules and practices.

ii. Domestic Content Requirement

A domestic content requirements mandates that a product produced and sold in a country must have a specified minimum amount of domestic production value, in the form of wages paid to local workers or materials and components produced within the country. Domestic content requirements can create import protection at two levels;

They can be barrier to imports of the products that do not meet the content rules. And they can limit the import of materials and components that otherwise would have

been used in domestic production of the products.

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For instance, local content requirements for automobiles, used by Malaysia and other countries, force local auto manufacturers to use more domestically produced automobiles components and parts ( e.g. sheet metals or seat covers). If domestic content requirement set high enough, it can force domestic production of such expensive parts as engines or transmissions.

A closely related NTB, sometimes called as mixing requirements, stipulates that an importer or import distributor must buy a certain percentage of the product locally. For example, the Philippines government requires that certain retail stores in the country must source at least 30 percent of their inventory in the Philippines.

Such mixing requirements have also been used to restrict imports of foreign entertainment. Canada has often imposed “Canada time” requirements on radio and TV stations, forcing them to devote a certain share of their air time to songs and shows recorded in Canada. The gain on the price markups are captured by the protected home-country sellers of the protected products. These requirements create the usual deadweight losses because the protected local products are less desired or more costly to produce.

iv. Failure to Protect Intellectual Property Rights

Intellectual property is defined as the innovative or creative ideas of inventors, artists, or authors. Patent, copyright, and trademark laws exist to provide incentives to create intellectual properties by ensuring that the owners of the intellectual properties maintain exclusive control over ideas, at least for a certain period of time.

For instance, patents allow inventors the opportunity to recover their investment and the costs of creating and marketing inventions. Copyrights give authors control over the reproduction, dissemination, and public performance of their work. Trademarks assure consumers about product characteristics, such as quality.

Different countries provide different levels of intellectual property protection, and this can have significant effects on international trade. For instance, the U.S. computer software industry estimates that 49 out of 50 software programs used in China are pirated and calculates its lost export sales to China to stand at $500 million annually. U.S. government measures aimed at Chinese copyright piracy in 1996 almost led to a trade war between the two countries.

Similarly, a growing problem in international trade is counterfeit goods. Such goods are sold in international markets with fraudulent (or counterfeit) trademarks. Firms with valid trademarks lose more than sales due to counterfeit goods. Fraudulent copies are often

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substandard and perform poorly. Legitimate manufacturer may be blamed for this performance and thereby lose their reputation and further sales of these and other products.

v. Health and Safety Standard

Governments often regulate the production and distribution of products deemed to be hazardous to the health and safety of their citizens. Sometimes, however, such standards are established merely to provide a mechanism for protecting domestic producers from foreign completion, many such examples exist.

Standards that accomplish these goals need not discriminate against imports. But, if a government is determined to protect local producers, it can always write rules that can be met more easily by local producers than by imported products. For instance, the standards can be tailored to fit local products, but to require costly modifications to foreign producers. Or, the standards can be higher for imported products or enforced more strictly. Or, the testing and certification procedures can be more costly, slower, or more uncertain for foreign products.

For instance, in the mid eighties, the government of Japan announced that foreign-made skis would not be allowed into Japan because they were unsafe. The reason cited for this regulation was a claim (no doubt encouraged by local manufacturers) that Japanese snow differed from snow in Europe or in United States. After protest from foreign governments, the ban was rescinded.

Product standards usually do not raise tariff or tax revenue for the importing country’s government. On the contrary, enforcing these rules up government resources (and businesses must use resource to meet the standards). The standards can bring a net gain in overall well-being to the extent that they truly protect health, safety, and the environment. Yet it is easy for government to disguise costly protectionism in virtuous clothing.

vi. Technical Barriers to Trade

All countries impose technical rules about packaging, product definitions, labeling, etc. In the context of international trade, such rules may also be used as non-tariff trade barriers. For example, imagine if Korea were to require that oranges sold in the country be less than two inches in diameter. Oranges grown in Korea happen to be much smaller than Navel oranges grown in California, so this type of “technical” rule would effectively ban the sales of California oranges and protect the market for Korean oranges.

Such rules violate WTO provisions that require countries to treat imports and domestic products equivalently and not to advantage products from one source over another, even in indirect ways. Again, however, these issues will likely be dealt with through bilateral and

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multilateral trade negotiations as such, will not likely be a major issue for the 2002 Farm Bill. There have been many calls in recent congressional testimony, however, to offset the negative impacts caused by a strengthening US dollar with counter-cyclical payments to export dependent agricultural products.

vii. Red Tape

This is another method by which governments try to restrict imports into their countries. For example the government may designate a port with only a small opening into the sea to allow the import ships to duck. This may restrict the import of large items such as cars and trucks. Some of these items may simply have to be brought in smaller parts only to be assembled in a factory inside the importing country. In other cases, customs officials of a country may take samples of imported food items for "testing" that may take forever.

One such claim was made by a wine official from California, charging that the Korean customs' officials have kept their wine at the border warehouses in S. Korea and have taken bottles of wine for testing. After a few months and an inquiry by the exporters, they claimed they were still testing the wine!

viii. Import Restrictions to Preserve Local or National Culture

The French and Spanish trade officials had imposed restrictions on the amount of entertainment services (movies and songs) imported into those countries from the U.S.

These countries are quite worried about the "cultural imperialism" of the U.S. with its commercial big budget films. They charge that their own smaller, more innovative movie and entertainment industries are in danger of collapsing in view of invasion of American films and music. To some extent this fear may be justified as these countries fear their young (and possibly old) populations are being culturally Americanized. Nonetheless, it is considered a form of non-tariff barrier.

ix. Anti-Dumping Import Duties

This type of duty is of course allowed under WTO if the country can prove--with reasonable data and facts-- that another country's firm is dumping its good there. The trouble is that dumping cases are very hard to prove. In many cases, the foreign firm may have indeed a cost advantage over domestic firm and the dumping charge could be used primarily as a protectionist measure. Much like a tariff, the antidumping duty maybe used in order to protect the local industry from foreign imports.

Effects of Non Tariff Barriers on International Trade

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Non-Tariff Barriers seriously affect many exporting countries. As discussed in types of NTBs, developing countries exports to developed countries face considerable NTBs. In several cases, the impact is very severe. For example, the VER covering the tapioca exports of Thailand to the European Community, established in 1982, caused its tapioca exports to decline by 40 per cent and its export earnings fell by about $ 300 million (representing over 10 per cent of Thailand's total export earnings from the EC). However, such draconian VERs which not only reduces the growth rate but also the level of exports has not been widely applied to non-apparel exports of developing Asian countries other than South Korea.

An Asian Development Bank study has brought out that with the reduction of the average tariff levels in the industrial countries, non-tariff barriers to imports of manufactures have increased in relative importance in these countries, including in categories of labor intensive and other products for which less developed countries have a strong comparative advantage. This study has also observed that through the exercise of various forms of administrative protection non-tariff barriers have increased in importance in absolute terms and have been applied with increasing discrimination, causing bilateral trade arrangements in many cases to reign over more globally efficient multilateral trade arrangements and threatening the gains, especially to less developed countries of negotiated tariff reductions.

Apparel exports of the developing countries are the most affected because of such barriers. This has been mostly via the Multi-Fiber Arrangement (MFA) which "constitutes a restrictive system, imposing economic costs on the economies of the developing as well as industrial countries. Several country studies cite instances of lost apparel exports, declining production and employment due to reporting, certification and other problems involved in administering bilateral MFA agreements, whereby the system of administrative controls creates such uncertainties, especially for new exporters or financially weak firms, that export production must be curtailed or abandoned by many firms.

Another important cost of the MFA is rent seeking i.e., established exporters tend to enjoy greater than perfectly competitive returns from their exports sales since quota rights enable them to sell in protected markets.

Non-Tariff Barriers also cause diversion of production and exports. For example, some Indian textile and apparel firms decided to set up manufacturing facilities in Nepal in order to circumvent MFA quota controls of their exports from India and to avoid the local costs of purchasing added quota rights. Similarly, exporters have attempted to diversify their exports to non-quota countries.

Role of Home Government in Reducing NTBs in Export Market

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Governments can utilize various methods to remove or reduce nontariff trade barriers for their exporters. Some of the primary tools are active engagement in multilateral and bilateral negotiations, recourse to international legal proceedings to resolve disputes, and aggressive trade advocacy. These are just some of the key components of a government’s toolkit for dealing with trade barriers. However, before directly addressing barriers, governments usually develop their strategy in close consultation with various national actors, offering an opportunity for firms, including SMEs, to actively influence priorities and objectives.

International Negotiations

Governments can address trade barriers by organizing and participating in multilateral (WTO), regional or bilateral trade negotiations. Governments in consultations with private sector representatives identify key objectives and subsequently enter into negotiations with trading partners to seek compromises that reduce or eliminate trade barriers. In addition, governments may attempt to negotiate specific agreements to reduce tariffs and nontariff barriers sector wise (such as the WTO Information Technology Agreement) or enter into cooperative regulatory relationships to reduce excessive compliance costs, (such as the US-EU Regulatory Cooperation Agreement).

Legal Proceedings

Governments may raise perceived foreign-country trade barriers or other issues considered to be inconsistent with international obligations before the WTO Dispute Settlement Body (DSB) or similar regional. Such steps are usually taken after diplomacy has failed to resolve the issue. In general, these proceedings concern major trade policy issues and involve complex, legal questions that may be too costly and time-consuming for individual SMEs to become involved.

Trade Advocacy

Governments also pursue trade policy advocacy as a means to remove trade barriers. Many governments catalogue trade barriers cited by their exporters in foreign markets and periodically issue reports (such as the U.S. National Trade Estimate Report or the Report on the WTO Inconsistency of Trade Policies by Major Trading Partners issued by the Japanese Ministry of Economy, Trade and Industry).

Moreover, home-country governments can play an active role in assisting exporters overcome trade barriers by directly interceding on exporters’ behalf with foreign government officials. This can entail various actions including active in-market representation by consular staff, meetings by high-level government officials or discussion in multilateral forum.

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Conclusions

Despite all the talk of globalization, the world economy is still far from the textbook model of unfettered trade, of a global market place without barriers. While tariffs have been already brought down substantially in the Uruguay Round, the future efforts are more likely to concentrate on the non-tariff issues. As far as trade in goods is concerned, non-tariff barriers at and behind the border have been lowered significantly in the course of successive trade negotiations, but more can be done.

Estimates of the costs of protection, for both policy makers and economists who conduct applied commercial trade-policy research, depend on reliable estimates of the price or quantity distortions caused by trade barriers. In the case of tariffs, the estimates are straightforward and readily available; however, in the case of nontariff barriers, estimates of the corresponding price or quantity distortions are difficult to construct because of the lack of good data and often contain substantial methodological flaws.

Researchers have used a number of frequency measures to capture the scope and potential effects of NTBs across countries and industries as well as over time. Researchers have also used econometric techniques and developed various computational models (partial and general equilibrium) to estimate the effects of NTBs. But a complete review of all of the issues associated with the estimation of the economic effects of NTBs is beyond the scope of my Assignment due to the time and data sources constraints.

It is not true that the non-tariff measures are entirely unnecessary. The WTO Agreements permit the Members to take measures to protect human, animal or plant life or health, to conserve natural resources or to ensure the quality of goods finding an access in their markets. Members can also in certain circumstances take specified action to protect their domestic industry. The non-tariff measures act as barriers if they are applied as protectionist measures in a disguise. The non-tariff measures need, therefore, to be examined for their consistency with the WTO disciplines and whether they are applied as a protectionist measures in a disguised form or manner. 

If a country feels that non-tariff measures taken against its exports are inconsistent with the WTO provisions, it may take the matter to the WTO dispute settlement mechanism, besides seeking bilateral consultations. WTO provisions, however, do not cover all areas and, therefore, some difficulties may be experienced where WTO provisions do not exist. Even where the measures are consistent with the WTO provisions, most of the agreements envisage special and preferential treatment for the developing country members. Bilateral consultations can perhaps help a lot in this regard.

Recommendations

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Some of the non tariff barriers can be tackled by the exporters themselves by ensuring that they adhere to quality and standards requirements of the importing countries. For this purpose they need to plan production and packaging methods especially for the export markets. 

The manufacturing techniques used must be carefully selected so as to ensure that the resultant products do not cause any harm to human, animal or plant life or health. 

The exporters need to carefully study the laws and regulations of the importing countries and their likely impact on the exports. Similarly they should also carefully examine the notices or notification made by the importing countries under the Agreement on Application of Sanitary and Phytosanitary measures and the Agreement on Technical Barriers to Trade.

The exporters should maintain an effective interaction with their counterpart associations etc in the importing countries. Any difficulties due to technological or economical limitations must be adequately brought forward to the notice of the Government.  Most of the WTO Agreements envisage special and preferential treatment to developing countries. Specific problems being faced and the favor required should therefore, be identified. This may help the Government to have effective bilateral consultations with the concerned countries and to seek specific dispensation.

Since any dispute in the WTO can be raised by the Governments only, the exporters will do well to fully cooperate with their Government and to provide it with all the necessary information through their association etc.

References

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Steven Husted, Micheal Melvin. International Economics, 4th edition, McGraw Hill International Edition.

Robert J. Carbaugh. International Economics, South-Western, 1995.

Thomas A. Pugel, Peter H. Lindert. Internal Economics, 11th edition, International Edition.

John C. Beghin (December 2006). Nontariff Barriers. Working Paper 06-WP 438. Ames, Iowa 50011-1070, [ONLINE] available at www.card.iastate.edu.

Pranav Kumar, Chandan Mukherjee and Simi TB (2007). Negotiations on Non-Tariff Barriers under NAMA The Major South Asian Concerns. SAFIT-II 5/2007, Cuts International.

Deardorff A. V. and R. M. Stern (1997). “Measurement of Non-Tariff Barriers”, OECD Economics Department Working Paper No.179.

Marco Fugazza, Jean-Christophe Maur (2008). NON-TARIFF BARRIERS IN COMPUTABLEGENERAL EQUILIBRIUM MODELLING. Interanational Trade and Commerce study Series No. 38.

Jimmye S. Hillman (March1996). Nontariff Agricultural Trade Barriers Revisited, Working Paper #96-2, International Agricultural Trade Consortium.

Edward D. Mansfield, Marc L. Busch (Autumn 1995). The Political economy of nontariff barriers: a cross-nations analysis. International Organization 49, 4, pp. 723-49, IO Foundation and the Massachusetts Institute of Technology.

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