International Economics Session 4 Trade Intervention Mechanism NonTariff

International Economics Session 4 : Trade Intervention Mechanism (Non-Tariff Barriers) Faculty: Prof. Sunitha Raju Session Date: 20. 05. 2012

EPGDIB(VSAT) 2011 -12 Non-Tariff Barriers (NTBs) International Economics/ Session: 4 1. Definition § Trade policy instruments, other than tariffs, that restrict market access or distort trade. 2. Reasons § § § To protect industry from competition Not amenable to disciplining or reduction Can be applied in a discriminatory manner

EPGDIB(VSAT) 2011 -12 Major Categories of Non-Tariff Measures International Economics/ Session: 4 i) Quantitative restrictions (Import quotas, export restrictions, Licensing, VER etc) ii) Non-tariff charges (Variable levies, Anti dumping duties, Countervailing duties etc) iii) Government participation in trade (State trading, Govt. procurement, competition policies etc) iv) Customs procedures (Customs valuation, customs classification, customs clearance) v) Technical barriers to trade (Health & sanitary regulations, safety standards, labelling etc)

EPGDIB(VSAT) 2011 -12 Market Effects of Import Quota: Small Country Sd PY International Economics/ Session: 4 Quota P 1 Y P 0 Y c e f E g C Dd O Y 1 Y 3 Y 2 Y 0 Y § Domestic prices higher than world prices § Quota increases domestic production and reduces domestic consumption üQuota rents captured by producers

EPGDIB(VSAT) 2011 -12 Market Effects of Import Quota: Large Country International Economics/ Session: 4 § Fall in consumption (imports) leads to fall in world price - Export price of Country B falls § Deadweight loss of exporting country equals § § quota rents of suppliers in importing country To reduce the negative welfare effects, countries employ VER allows the exporting country to capture quota rents

EPGDIB(VSAT) 2011 -12 Administration of Quota International Economics/ Session: 4 1. Auction (govt. earns revenue) 2. First come first serve (Nobody earns due to transactions costs)) 3. Historical basis (Producer gains) 4. Monopoly power (Importer/producer)

EPGDIB(VSAT) 2011 -12 Costs of U. S. Import Quotas, 1990 (Million $) International Economics/ Session: 4 Product Category (Tariff Equivalent) Redistribution Quota Rent Effect (Area c) Effect (Area f) Production and Consumption Effects (Areas e+g) Net Welfare Effect on U. S. (-[Area e+f+g]) Protected by import quotas: Dairy products (50%) $ 835 $244 $104 -$104 Peanuts (50%) 32 0 22 - 22 Sugar (66%) 776 396 185 - 581 1, 275 0 556 - 556 Maritime (85%)

EPGDIB(VSAT) 2011 -12 Tariff vs. Quota D´ P P 1 j P 4 f e P 2 P 3 International Economics/ Session: 4 S (Domestic Supply) t . c i d m q n P 1 = Equilibrium price t(P 3 – P 2) : tariff equivalent gh: import quota D’: New demand curve k r l D (Domestic demand) 0 a g h b Q § Under rising demand, tariff results in higher imports but quotas result in higher prices. § In tariff, government earns revenue. In quota, the rents are appropriated by the producers.

EPGDIB(VSAT) 2011 -12 What are the Effects of an Export Quota? International Economics/ Session: 4 a) Small-Country Case b) Large-Country Case PX P 1 X P 2 X P 0 E f g h j PX P 3 X Sd Dw P 1 X L X k P 2 Quota f g h M j Sd Dd + w X P 0 X Quota Dd +Quota Dd Dd 0 X 1 X 3 X 2 X 0 X

EPGDIB(VSAT) 2011 -12 Export Quotas International Economics/ Session: 4 1. Small Country § decreases domestic production, increases domestic consumption and reduces domestic prices 2. Large Country § decreases domestic production, increases domestic consumption, reduces domestic prices and increases world prices

EPGDIB(VSAT) 2011 -12 Voluntary Export Restraint International Economics/ Session: 4 (i) Definition § § Bilateral agreement between two countries wherein the exporting country limits exports to the importing country. Mainly done to forestall other trade restrictions (ii) Economic Effects of VER § § Same as import quota for importing country VER administered by exporting countries : rents captured by foreign exporters. (eg: Textiles, Steel, Automobiles)

EPGDIB(VSAT) 2011 -12 Export Subsidies International Economics/ Session: 4 § Payment made to a firm to export § Economic effects (inverse of a tariff) § raises prices in the exporting country § lower prices in importing country

EPGDIB(VSAT) 2011 -12 What are the Effects of an Export Subsidy? Exporting-Country Perspective International Economics/ Session: 4

EPGDIB(VSAT) 2011 -12 What are the Effects of an Export Subsidy? Importing-Country Perspective International Economics/ Session: 4

EPGDIB(VSAT) 2011 -12 Export Subsidies International Economics/ Session: 4 Country Subsidized Products Brazil Regional aircraft Canada Softwood lumber, dairy products China Textiles, steel, petrochemicals, machinery, copper, corn European Union Korea Pakistan Aircraft, aircraft engines Semiconductor chips, paper Wheat South Africa Textiles, clothing, autos Venezuela Coffee, cocoa, fruit, seafood Source: Data from U. S. Trade Representative, National Trade Estimate Report on Foreign Trade Barriers (Washington, D. C. )

EPGDIB(VSAT) 2011 -12 Effects of Alternative Trade Policies International Economics/ Session: 4 Tariff Export Subsidy Import Quota Voluntary Export Restraint Producer surplus Increases Consumer surplus Falls Increases Falls (government spending rises) No change (rents to license holders) No change (rents to foreigners) Ambiguous (falls for small country) Falls Ambiguous (falls for small country) Falls Government revenue Overall national welfare

EPGDIB(VSAT) 2011 -12 Production Subsidies International Economics/ Session: 4 § Subsidies given to promote a specific industry § Indirect effect on trade – Rise in production leads to rise in exports – If a large exporter, pushes down the world price – Net loosers are the producers in importing country and third country exporters.

EPGDIB(VSAT) 2011 -12 What are the Effects of a Production Subsidy? International Economics/ Session: 4

EPGDIB(VSAT) 2011 -12 Dumping International Economics/ Session: 4 i) Price-based Definition § When a good is sold in the foreign market at a price below that of the domestic market ii) Cost-based Definition § When a good is sold in the foreign market at a price below the cost of production

EPGDIB(VSAT) 2011 -12 Types of Dumping International Economics/ Session: 4 1. Sporadic Dumping 2. Persistent Dumping 3. Predatory Dumping

EPGDIB(VSAT) 2011 -12 Persistent Dumping as International Price Discrimination International Economics/ Session: 4

EPGDIB(VSAT) 2011 -12 Other NTBs International Economics/ Session: 4 1) Administrative and Technical standards 2) Domestic content requirements 3) Government Procurement Policies

EPGDIB(VSAT) 2011 -12 New Developments in NTB Policies International Economics/ Session: 4 1. Tariff Rate Quota 2. SPS and Technical standards 3. Trade Facilitation 4. Rules of Origin

EPGDIB(VSAT) 2011 -12 Quantifying the Effects of NTMs 1. Methodological Issues International Economics/ Session: 4 § Producer behaviour differs under Tariffs and NTMs. A competitive under Tariffs and as a monopolist under Quota. § A tariff and a NTM affecting the same product may or may not be additive. § Most NTMs are discriminatory, having differential effects. § The linkage between exchange rate and trade flows is strong. Exchange rate fluctuations can have potential effects on trade flows. Contd….

EPGDIB(VSAT) 2011 -12 Quantifying the Effects of NTMs International Economics/ Session: 4 2. Measurement § Inventory Approach (Coverage ratio) = Value of imports/exports subjected to NTB Total Imports/Exports § Modelling Approaches ( Price based econometric models, Quantity based econometric models, Simulation models) § Price wedge ( Tariff Equivalence) § Subsidy Equivalents (PSE)

EPGDIB(VSAT) 2011 -12 Methods for Analysing NTBs International Economics/ Session: 4 1. “Handicraft” Price Gap Method 2. Price based Econometric Methods 3. Quantity based Econometric Methods 4. Simulation methods

EPGDIB(VSAT) 2011 -12 Price Gap Method International Economics/ Session: 4 1. Compare the price before and after NTB to capture the mark-up or rent 2. Price difference to be corrected for non-NTB factors influencing prices 3. Factors that influence Price gap § § § Marginal cost vs. Ex-factory price f. o. b and c. i. f Price after customs clearing (includes tariff) Wholesale price (includes VAT & excise) Retail price 4. Challenge is to identify where NTB occurs and who benefits

EPGDIB(VSAT) 2011 -12 Nominal Protection Rates and Sources of Policy Distortion in China’s Agriculture, 2001 (Import Tariff Equivalent) International Economics/ Session: 4 Tariff Rate VAT NTB in China NPR Rice 1 13 3 17 Wheat 1 13 1 15 Maize 1 13 8 22 Other grains 1 13 1 15 Soybeans 3 13 1 17 Cotton 3 13 2 18 Oilseeds 13 13 21 47 Sugar crops 25 15 10 50 Beef 45 15 0 60 Poultry 20 15 0 35 Milk 50 17 0 67 Source: Huang, et al. (2005), Table 1, FED Working Paper Series No. FE 20050018

EPGDIB(VSAT) 2011 -12 Econometric Methods International Economics/ Session: 4 1. Data Issues § Aggregation Problems § Trade price data (unit values) § Data reconciliation (differences in export & import values) 2. Price Based methods 3. Quantity Based methods § Gravity models (exporters’ GDP, Importers’ GDP and distance) § Trade Restrictiveness Index

EPGDIB(VSAT) 2011 -12 Estimated Tariff Equivalents of NTBs and Tariffs International Economics/ Session: 4 Country Simple Average AVE of NTMs Simple Average Tariffs Trade Restrictiveness Indices (Tariffs and NTBs) OTRI TRI Argentina 9. 13 13. 70 20. 4 31. 4 Australia 8. 20 4. 45 11. 6 27. 0 Brazil 16. 29 13. 72 26. 2 41. 1 Canada 4. 48 3. 92 6. 1 18. 6 China 5. 66 15. 51 19. 9 31. 4 European Union ** ** 12. 6 33. 1 Hong Kong 2. 89 0. 00 1. 4 9. 7 India 14. 39 32. 29 39. 9 50. 8 Indonesia 4. 72 6. 80 9. 8 23. 4 Japan 9. 95 5. 87 14. 3 47. 4 Contd….

EPGDIB(VSAT) 2011 -12 Estimated Tariff Equivalents of NTBs and Tariffs International Economics/ Session: 4 Country Simple Average AVE of Core NTMs Simple Average Tariffs Trade Restrictiveness Indices (Tariffs and NTBs) OTRI TRI Mexico 15. 94 16. 04 28. 7 44. 0 Norway 5. 26 8. 21 7. 5 35. 8 Poland 3. 77 11. 53 15. 2 28. 4 Russia 13. 28 10. 49 22. 6 35. 5 Saudi Arabia 5. 37 12. 89 10. 8 22. 1 South Africa 2. 73 8. 9 18. 2 Switzerland 4. 09 5. 76 9. 0 32. 0 Thailand 4. 37 18. 85 15. 3 25. 9 Turkey 5. 63 9. 41 11. 8 27. 3 United States 7. 47 3. 23 8. 2 21. 5 Source: Aapted from Kee, Nicita, and Olarreaga (2004 b; 2004 c) NB: OTRI is the overall trade restrictiveness index, the equivalent uniform tariff which keeps imports at their observed levels. TRI is the trade restrictiveness index (Anerson and Neary (1994)

EPGDIB(VSAT) 2011 -12 Estimated Effects of Improving National Trade Facilitation Indicators on Merchandise Trade International Economics/ Session: 4 (% increase) Percentage Increase in Export Percentage Increase in Import East Asia 24 16. 7 East Europe and Central Asia 30 19. 8 Latin America and Caribbean 20 16. 1 Middle Eat and North Africa 3. 3 6. 6 OECD 3. 8 6. 9 South Asia 40. 3 24. 4 Sub- Saharan Africa 10. 9 15. 2 Total, All Regions 9. 7 By Region Source: World Development Report, World Bank, 2008

EPGDIB(VSAT) 2011 -12 Estimated Effects of Improving National Trade Facilitation Indicators on Merchandise Trade By Measure International Economics/ Session: 4 ( % increase) Percentage Increase in Global Merchandise Trade Port Efficiency 2. 8 Of Importers 0. 6 Of Exporters 2. 2 Custom Environment 0. 8 Regulatory Environment Of Importers Of Exporters Service Sector infrastructure 2. 1 0. 6 1. 5 4 Of Importers 0. 9 Of Exporters 3 Total all Policy Measure Source: Adapted from Wilson, Mann, and Otsuki(2005) 9. 7

EPGDIB(VSAT) 2011 -12 Analysis of Trade Policy Measures International Economics/ Session: 4 1. Revealed Comparative Advantage (Developed by Bela Balassa for assessing a country’s comparative advantage for a certain commodity) 2. Trade Intensity Index 3. Export Specialisation Index 4. Export Diversification Index 5. Global Market Shares Changes 6. Growth rate of Exports/Imports

EPGDIB(VSAT) 2011 -12 Revealed Comparative Advantage Index International Economics/ Session: 4 § RCAij = (Xij/Xit)/(Xwj/Xwt) Xij = values of country i’s exports of product j Xit = country’s total exports Xwj = world exports of product j Xwt = world total exports § RCA value of less than one implies that the country has a revealed comparative disadvantage in the product. § RCA value more than one implies that the country has a revealed comparative advantage in the product

EPGDIB(VSAT) 2011 -12 Revealed Comparative Advantage Values (Some Examples) International Economics/ Session: 4 Code 2000 2001 2002 2003 2004 2005 2006 Tea and Spices 90111 7. 50 6. 50 8. 20 7. 90 8. 90 9. 50 5. 80 90240 10. 09 6. 05 8. 06 7. 02 8. 18 7. 58 7. 94 90230 17. 04 8. 94 5. 85 5. 39 4. 77 3. 34 5. 69 90420 7. 13 6. 77 7. 50 7. 77 8. 11 7. 16 12. 11 90620 0. 00 0. 02 0. 01 0. 19 100630 7. 85 7. 67 11. 42 7. 48 10. 07 8. 10 7. 45 100510 0. 14 0. 46 0. 32 1. 15 2. 16 0. 39 0. 50 100590 0. 02 0. 07 0. 04 0. 26 0. 49 0. 30 0. 35 100640 0. 09 0. 62 1. 07 0. 27 2. 70 3. 31 3. 67 100820 2. 81 3. 73 3. 33 5. 08 6. 31 5. 12 9. 39 Cereals Source: Raju et. al, 2009

EPGDIB(VSAT) 2011 -12 Export Specialization Index International Economics/ Session: 4 ES = (Xij/Xit)/(Mkj/Mkt) Xij = export values of country i in product j § Mkj = import values of product j in market k The ES is similar to the RCA. If the value of the index is less than unity, it indicates a comparative disadvantage and a value above unity represents specialisation in this market.

EPGDIB(VSAT) 2011 -12 Changes in Global Market Share of Major Exports International Economics/ Session: 4 § CDj = (Sit – Sio)*Mgt Where Sio and Sit represent a country’s global market share for product I in base year 0 and end year t and Mgt is global imports of the traditional product in year t. § The index indicates the dollar value of export gains or § losses associated with a country’s market share changes. Summing over all traditional products will indicate whether the country’s competitive position improved or worsened and what was the magnitude of the associated change in the value of exports

EPGDIB(VSAT) 2011 -12 Export Diversification (or Concentration) Index International Economics/ Session: 4 § DXij = (sum hij – xi )/2 Where hij is the share of commodity i in the total exports of country j and hi is the share of the commodity in world exports. The related measure used by UNCTAD is the concentration index or Hirschman (H) index.

EPGDIB(VSAT) 2011 -12 Trade Intensity Index International Economics/ Session: 4 § Tij = (xij/Xit)/(Xwj/Xwt) xij = values of country i’s exports to country j Xit = country i’s total exports Xwj = world exports to country j Xw = total world exports § An index of more (less) than one indicates a bilateral trade flow that is larger (smaller) than expected, given the partner country’s importance in world trade.

EPGDIB(VSAT) 2011 -12 Trade Intensity Index (Some Examples) International Economics/ Session: 4 Codes/Major Markets TII Values 2003 Codes/Major Markets TII Values 2006 030379 (Frozen Fish) China 2. 3 Chile 12. 7 Hong Kong, China 4. 4 China 1. 5 Japan 0. 6 Hong Kong, China 5. 5 United States 0. 8 Japan 0. 6 Korea, Rep. 0. 3 United States 1. 0 Japan 6. 9 Japan 10. 0 Argentina 39. 7 United Arab Emirates 20. 5 United Kingdom 9. 0 Italy 2. 3 United Arab Emirates 9. 7 Singapore 33. 5 United States 0. 1 Hong Kong, China 8. 1 030612 (Lobsters) Contd.

EPGDIB(VSAT) 2011 -12 Trade Intensity Index (Some Examples) International Economics/ Session: 4 Codes/Major Markets TII Values 2003 Codes/Major Markets TII Values 2006 030613 (Shrimps & Prawns) United States 1. 4 United States 0. 9 Japan 1. 1 Japan 1. 3 Belgium 1. 8 Belgium 3. 6 United Kingdom 1. 8 United Kingdom 2. 6 Vietnam 5. 1 Canada 2. 3 Singapore 14. 8 Singapore 9. 5 Thailand 24. 7 Thailand 13. 4 Hong Kong, China 2. 4 Hong Kong, China 1. 5 Malaysia 4. 4 United Arab Emirates 8. 7 Korea, Rep. 0. 3 Malaysia 3. 2 030624 (Crabs) Source: IIFT Note: TII value in Major Indian Markets

EPGDIB(VSAT) 2011 -12 Relative Growth Rates of Merchandise Exports and Imports International Economics/ Session: 4 § Gi = (X 12/X 11) (1/n-1) *100 Where X 11 and X 12 are the trade values of product i in the beginning period and the end period respectively, and n is the number of years