Non-Tariff Barriers to Trade

Other restrictions that limit trade are either imposed by the government or practiced by the private sector but sanctioned by the government.

Potentially more restrictive than tariffs are import quotas. Such a quota is a maximum amount of a commodity that may be imported into the country during the course of a year. While very common in the past, today it is used mainly in the field of agriculture. The quota is set below the level of free-trade imports — otherwise there is no reason for the restriction.

Because it limits the amount of imports, a quota raises the domestic price of the commodity, providing protection to local producers. In doing so, its effects are similar to those of a tariff: higher domestic price; protection to the local industry so that domestic producers capture a greater share of the market; higher price of products that are produced out of the protected commodity, and cost spread over 330 million consumers, each paying a small and almost unnoticeable amount. A good example is the sugar import quota in the United States, which provided protection to the domestic industry and raised the prices of sugar and candy.

Import quotas are more harmful than a tariff. First, a tariff is a tax on imports, but once it is paid there is no limit to the quantity that can be imported, while a quota imposes an absolute limit on that quantity. Second, a tariff is a uniform tax levied on all sources of supply, while in imposing a quota, the government can discriminate between sources, thereby introducing harmful distortions into the global economy.

Both the U.S. and the E.U. employ a variety of trade restrictions on foreign farm products, making agriculture the most distorted field in the global economy. Consumers pay and domestic producers charge prices that exceed considerably those that would prevail under free trade.

Next, international commodity agreements govern trade in certain specific commodities where the main producing and consuming countries of each commodity agree on the amount traded, usually below the free trade level. Until year 2005, the biggest such agreement was world trade in textile and clothing. Under it, each importing country limited the quantity of textiles it imported from each exporting country. Although it was phased out, along with many quantitative restrictions, some textile quotas still exist.
International cartels are agreements between producing countries (or companies domiciled in different countries) to raise the price of the commodities, mainly by output restrictions. Availability of substitute products usually limits the effectiveness of such arrangements. Perhaps the most effective and best known was the oil cartel, under which the Organization of Petroleum Exporting Countries (OPEC) limited output and raised the price of crude oil. It was successful for many years primarily because oil had no good substitute in the short run. The case of other commodities was only partly successful. An example is cocoa, in which Ghana holds a large share of world output, and its price increase boosted the price of chocolate.

A final type of restriction is dumping and anti-dumping duties. Dumping occurs when exporters charge foreign buyers an export price either below the cost of production or below the price they charge at home. Although foreign consumers benefit from such a practice by paying a lower price, foreign producers complain of being undercut. And it is those producer groups that govern policy. As a result, the “dumped country” is allowed by international law to impose anti-dumping duties, to be calculated as the difference between the “home price” in the exporting country or the production cost on the one hand, and the export price charged in the foreign country on the other.

A special and important type of dumping occurs under government export subsidy. This happens when the government of the exporting country subsidizes the export of a certain commodity enabling the producer(s) to charge a lower price abroad than at home. In the case of the U.S., this is often done through the Export-Import Bank that offers cheap loans to foreign companies buying U.S. goods; other countries have similar arrangements. In such cases, the importing country is allowed to impose anti-dumping duty, except that in these cases it is called a counterveiling duty. The best known case that lasted for years is a dispute between the Boeing Corporation of the U.S. and Airbus Company of a few European countries, the main manufacturers of commercial jet aircrafts in the world. Each one claims that its main competitor is being subsidized by its respective government(s). After years of study, an international tribunal found that both companies were subsidized to the tune of billions of dollars.

The determination in dumping cases is a complex process that is said to be arbitrary and capricious. Often, even the threat by a company to take dumping action against a foreign competitor can prove very restrictive to trade.

Beyond all of that, countries employ a variety of administrative restrictions on trade in goods and services.

Share

Tags:

Mordechai E. Kreinin

Mordechai E. Kreinin

Mordechai Kreinin is a University Distinguished Professor of Economics, emeritus at Michigan State University and past President of the International Trade and Finance Association. He is the author of about 200 articles and books about economics, including the widely used text, International Economics. He can be reached at kreinin@msu.edu or by cell phone at (517) 488-4837

Advicoach Business Spotlight

Follow Us