Welcome to Econ 414 International EconomicsNontariff Barriers to Trade (Chapter 7)Here is a little more information on GATT (General Agreement on Tariff and Trade)What are Quotas?How common is quota?FactsWhat are Multifibre Arrangements?What are Voluntary Export Restraint (VER)?Examples of VERsMoving from no trade to free tradeThe Economic Effects of a QuotaWho gets c?Suppose initially quota has the same effect as tariffNow domestic demand grows to D’Other Nontariff DistortionsSlide 17Slide 18Slide 19Slide 20Slide 21Slide 22Transportation Costs and TradeTransportation Costs and TradeAssignment 4 (10 points) Due: before 10PM on Friday, October 26 You will do this one in pre-determined teams of 21Welcome to Econ 414 International EconomicsStudy GuideWeek NineEnding: Friday October 262Nontariff Barriers to Trade(Chapter 7)1. What are GATT and WTO and what is their role in international trade?There is little on WTO in you book3Here is a little more information on GATT (General Agreement on Tariff and Trade)•Was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. •The GATT's main objective was the reduction of barriers to international trade. •This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreements. •Originally, the GATT was supposed to become a full international organization called the International Trade Organization. •However, the agreement was not ratified, so the GATT remained simply an agreement. •The functions of the GATT were taken over by the World Trade Organization which was established during the final round of negotiations in the early 1990s.4What are Non-tariff barriers to trade What are Non-tariff barriers to trade and how common are they?and how common are they?• The answer is in the bookThe answer is in the book• Problems:Problems:1.1.These types of protection are These types of protection are increasing as tariffs are increasing as tariffs are decreasing.decreasing.2.2.They are less visible than tariff They are less visible than tariff but in many cases they are more but in many cases they are more restrictive than tariffs.restrictive than tariffs.5•A government policy that limits imports of a product to a certain number of units.•It is banned by the WTO but it still exists. What are Quotas?6How common is quota?•In 1955 Ireland suspended its import quota on fertilizers.•China's Grain and sugar import quotas remain unchanged in 2008•In 2002 the European Commission announced plans to impose a wheat import quota of 2.3 million tones a year •In 2005 the European Union decided to increase quotas for Chinese textiles•In 1989 we learned that the sugar import restrictions and the quota regime for imports, maintained by the United States since 1982, has been held by a three-member GATT panel to be illegal in terms of U.S. obligations in GATT.71. Not all countries are members of the WTO2. Members of WTO are allowed to maintain quotas for a specified period of time.•Transition period3. How much power does WTO have?•Some countries implement quotas defying WTO rules.Facts8•Quota on textile•Uruguay Round negotiations of GATT have led to phasing out of the MFA.What are Multifibre Arrangements?9•It is an agreement by a country to limit its exports to another country to a certain number of units.•It differs from a quota because the exporting country administers VER•Since it is “voluntary” it is legal under WTO regulations.•VER is difficult to negotiateWhat are Voluntary Export Restraint (VER)?10Examples of VERs•In May 1981, Japanese car makers agreed to limit exports of passenger cars to the United States.• In late 1970s, UK negotiated VERs restrictions on the imports of two types of leather footwear.•In 1991 a VER was established between the European Union (EU) and Japan that established “voluntary” quotas on Japanese cars until 1999.11SDEPrice of ClothQuantity of Cloth20702010Moving from no trade to free trade World Price = 10, Domestic Price = 20Imports = 50, CS goes up12SDPrice of ClothQuantity of ClothabcdG60 7030201012S + QQuotaThe Economic Effects of a QuotaQuota = 30Supply curve shifts right by 30At P =10 there is a shortage of ______ Price goes up to ____ CS goes down by? Who gets a?What is b?What is d?Who gets c?50201213Who gets c?•In case of tariff c went to government.•In case of quota:1. Domestic license holders, if they buy 30 units at p =10 and sell it at p = 122. Domestic government, if it sells licenses at $2 per unit of imported good.3. Foreign producer, if this is VER.14Suppose initially quota has the same effect as tariffSDPrice of ClothQuantity of Cloth60 7030201012S + QTariffThe only difference may be in who gets cc15Now domestic demand grows to D’SDPrice of ClothQuantity of Clothbcd60 7030201012S + QTariffD’13Under tariff, P is still 12, import grows to 40, CS↑Under quota, at p =12 there is a shortage P up to 13, CS?3565aQuota is more restrictive161. Industrial Policy–Domestic regulations can distort international trade.–Regulations sometimes have the intent of directly impacting trade.–Regulation effects difficult to quantify.•Examples:–Guaranteed low interest government loans for domestic producers–Tax advantage to exporting industriesOther Nontariff Distortions172. Government Procurement–Laws that direct a government to buy domestically-made products unless comparable foreign products are substantially cheaper.–Spending of public funds places restrictions on funds.–Justification that buying domestic is better for the country.•Similar to Mercantilist’s viewOther Nontariff Distortions18–In countries where government owns industry and has government procurement, trade is severely restricted.Other Nontariff Distortions193. Technical Barriers to Trade–Laws that apply technical standards to goods or services that may distort trade.•Domestic country’s national standards for safety, health, and product labeling–They may require firms to produce two different goods or packages to allow exports.–Some goods must meet technical standards like cars from the U.S. to the Ireland.Other Nontariff Distortions204. Subsidies–Governments subsidies distort trade flows.•Such subsidies can be directly tied to exports, or more commonly they are domestic subsidies that indirectly influence trade.Other Nontariff