Chapter 9
Nontariff Barriers to Imports
Overview
This chapter has four major purposes:
1. Present analysis of an import quota and a voluntary export restraint (VER), for both a small
importing country and a large one.
2. Provide an overview of other nontariff barriers (NTBs) to imports.
3. Explore the relative sizes of the economic costs of tariffs and nontariff barriers.
4. Continue the discussion of the World Trade Organization (WTO), including its role in
liberalizing NTBs and its role in the settlement of international trade disputes.
Governments use a variety of other barriers to imports in addition to tariffs. The chapter begins
with examples of nontariff barriers to imports and several kinds of effects that they can have.
NTBs lower imports by directly limiting the quantity of imports (e.g., import quota, VER,
government procurement policies that prohibit or limit government purchasing of imports),
increasing the costs of getting imports into the market (e.g., product standards and testing
procedures), and creating uncertainty about whether imports will be permitted (e.g., arbitrary
licensing procedures).
Early in the chapter the second in the series of boxes on Global Governance examines the role of
the WTO in limiting and reducing NTBs. Recent rounds of multilateral trade negotiations have
included NTBs, but with less success in lowering them than the WTO has had with tariffs. The
box also discusses how the WTO has extended into nontraditional areas. The Uruguay Round,
completed in 1993, began the process of liberalizing trade in agricultural products, established
rules about protecting patents, copyrights, and trademarks, and began the process of setting rules
for trade in services. The box concludes by examining the goals of the Doha Round and the
problems that have thwarted completion of this round (as of 2014). (Later in the chapter, another
box looks at “Chinain the WTO.”)
Also early in the chapter, the box “Dodging Protectionism,” the second in the series on the global
financial and economic crisis, contrasts the big increase in protectionism during the Great
Depression of the 1930s with the remarkably small increase in import barriers during the recent
crisis.
After describing the types of nontariff barriers to imports, the text of the chapter develops the
analysis of an import quota. If both the domestic industry and the foreign export industry are
perfectly competitive, then the effects of a quota are almost all the same as the effects of a tariff
that permits the same quantity of imports. For a small importing country, the increase in
domestic price, the increase in domestic production, the decrease in domestic consumption, the
increase in domestic producer surplus, the decrease of domestic consumer surplus, the
consumption inefficiency, and the production inefficiency are the same. The possible difference
is what happens to the amount that would be government revenue with a tariff. With an import
quota this is the amount that is the difference between the cost of imports purchased from foreign
exporters at the world price and the value of these quota-limited imports when sold in the
domestic market at the higher domestic price. (We presume that the holders of the import quota
rights are domestic and can continue to buy at the world price. If any foreign exporter tried to
charge more, the importers would turn to other export suppliers who would sell at the going
world price.)
If the government gives away these quota rights to import with no application procedure (fixed
favoritism), then the import price markup goes as extra profits to whoever is lucky enough to
receive the rights. If the government auctions the quota rights (import-license auction), then the
government gains the markup as auction revenues because bidders vie for these valuable import
rights. If the government uses elaborate applications procedures (resource-using application
procedures), then some of the markup amount is lost to resource usage in the application process,
leading to a larger net national loss because of the extra resource costs of the quota process.
For the large-country case, again the effects of imposing a quota are nearly all the same as the
equivalent tariff, except for what happens to what would be tariff revenue. Specifically, the
importing country can benefit from imposing an import quota, if the rectangle of gain from the
lower price paid to foreign exporters for the quota quantity imported is larger than the triangle of
losses from distorting domestic production and consumption.
If the domestic industry is a monopoly, then the effects of imposing a quota are different from the
effects of imposing a tariff. The box “A Domestic Monopoly Prefers a Quota” explains that a
quota cuts off foreign competition, so the quota permits the domestic firm to use its monopoly
power. The quota leads to a higher domestic price and greater net national losses.
The VER is usually not voluntary, but it is an export restraint. Because the government of the
exporting country must organize its exporters into a kind of cartel, they should realize that they
should raise the export price. If the exporters do raise the export price, then the exporters get the
amount that otherwise would be government revenue with a tariff, or the price markup with an
import quota. The net national loss is larger for the importing country with a VER because of this
additional rectangle loss. The box “VERs: Two Examples” discusses (1) the costs to the United
States of the VER on imports of Japanese automobiles and (2) the web of export restraints that
developed to limit international trade in textile and clothing products.
The chapter then examines three other NTBs based on product standards, domestic content
requirements, and government procurement. Product standards can be worthy efforts to protect
health, safety, and the environment. But they can also be written to limit imports and protect
domestic producers. Domestic content requirements mandate that a minimum percentage of the
value of a product produced or sold in a country be local value added (wages and domestically
produced components and materials). They can limit imports that do not meet the requirements,
and they can limit the import of components and materials used to produce the product.
Government purchasing practices are often an NTB because they are often biased against buying
imported products.
How relatively large are the economic costs of tariffs, quotas, VERs, and other nontariff barriers
to imports? The chapter shows that the net national loss is probably a small fraction of the value
of domestic production (GDP), for a country like the United States that has moderate import
barriers and is not highly dependent on imports, if the only national losses are the
deadweight-loss triangles. The true cost is probably larger than this basic analysis indicates,
because of foreign retaliation and losses in export industries, the resource costs of enforcing
import barriers, the resource costs of rent-seeking activities like lobbying for import protection,
the losses from such barriers as VERs when foreign exporters raise their prices, and the losses
from reduced pressures to innovate. The chapter also presents a second way to look at the
relative size of the costs of protection, per dollar of increase in domestic producer surplus.
The final section of the chapter examines international trade disputes and how they can be
resolved. The GATT had a dispute settlement procedure, but it was weak and became
increasingly ineffective. The United States moved outside of the GATT by enacting Section 301
of the U.S. Trade Act of 1974, which aims to lower foreign barriers to U.S. exports by
threatening to raise U.S. barriers to the foreign country’s exports if the foreign country does not
change its policies. Other countries have resented such a heavy-handed unilateral approach, and
well-being for both countries would probably decline if the U.S. government carries out the
threat. Fortunately, the United States has decreased its use of Section 301; the U.S. government
is more likely to send its complaints about unfair foreign trade practices to the WTO for
resolution.
A key advance of the WTO over the GATT is that the WTO has a stronger dispute settlement
process. The WTO dispute settlement procedures generally have been successful, with most
disputes resolved by negotiations or after a WTO ruling. As a last resort, member countries that
are harmed by another member country’s policy that has been found to violate WTO rules are
permitted to retaliate if the offending government does not bring its policy in line with the rules.
Actual retaliation would lower world well-being, so it is fortunate that it happens infrequently.
Tips
Many of the tips for Chapter 8 also apply to this chapter. We strongly recommend showing the
effects of quotas and VERs using both words and diagrams.
The material of Chapter 9 can be supplemented with outside readings on the WTO or news items
on current trade policy issues. One area of interest is the outcomes of recent cases that have gone
through the WTO’s dispute settlement process. Students appreciate seeing how the concepts and
analyses connect to real issues, and governments are usually accommodating in serving up fresh
examples.