Trade policy instruments - Non-tariff measures

Question 1

What are non-tariff measures?

Answer 1

Policy measures, other than tariffs that can potentially affect trade in goods and services.

EX: Licenses, quotas, technical barriers, rules of origin, etc.

Question 2

What are the main motives for NTM?

Answer 2

There are two:

Interventions aimed at increasing national welfare
- Correcting for market failure
- Exploiting market power (of a country or of a firm)
- National security

Interventions motivated by political economy goals
- Response to a particular interest group
- Producers (protection)
- Consumers (health and safety)
- Non-governmental organizations (environement)

Question 3

How to correct for market failure from information asymmetry?

Answer 3

Use of standards or quality labels

Question 4

How to correct for market failure from infant industries?

Answer 4

Use production subsidies, to compensate for losses during the initial learning phase of a new industry.

Question 5

How to correct for market failure caused by network externalities?

Answer 5

Certain products or services are more valuable when more consumers use the same product or service, known as “network effects/externalities”.

Use common standards. This helps firm sell products abroad and increase price (because WTP should increase the more people buy the good)

Question 6

How to correct for market failure caused by monopoly power?

Answer 6

Use price ceiling to alleviate high prices, or use import subsidies to alleviate low quantity.

Question 7

What are the trade and welfare effects of introducing a quality measure (TBT)?

Answer 7

see p. 62

Question 8

What are the trade and welfare effects of quotas?

Answer 8

see p. 53

Question 9

What are the trade and welfare effects of export subsidies?

Answer 9

see p. 66

Question 10

What is the difference between harmonization and mutual recognition?

Answer 10

Harmonization create a common technical standard
Mutual recognition recognize each other’s technical standards. It is applied in EU, so for instance what is acceptable to be sold in one member country, is also in all others.

Harmonization is expected to boost trade more than mutual recognition due to homogenous products, reduced home-bias, lower information costs, enhanced communication effectiveness, and compatibility between imported and domestically produced products.

Question 11

What is the effect of harmonization and mutual recognition of standards for insiders?

Answer 11

Potentially increase trade even further by making products more alike. Potential for substituting consumption from one producer to the other.

Costs of aopting harmonized standard might differ across country. Might benefit some firms/countries more than others

Question 12

What is the effect of harmonization and mutual recognition of standards for outsiders?

Answer 12

Harmonization: comply with only one standard for the region. This might be benefical, unless standard is very high.

Mutual recognition: depending on RoO, it might lead to trade deflection (enter the area through the country with the lowest standard)

Question 13

Explain the two broad motives behind NTM

Answer 13

two broad motives behind the use of non-tariff measures (NTMs) by governments: economic motives and political economy motives.

Economic motives are those aimed at increasing national welfare and can be divided into two subcategories:
- Interventions to correct market failures: aimed at addressing inefficiencies in markets, such as negative externalities or information asymmetry, and aim to enhance the overall efficiency of the market.
- Interventions to exploit market power: aimed at exploiting a country’s or a firm’s market power by manipulating the terms of trade and shifting profits. However, these interventions come at the expense of one’s trade partners and can be considered beggar-thy-neighbor practices.

Political economy motives reflect the response of political officials to special interest groups, usually assumed to be organized producer groups. It is likely to lead to policies that shelter favored producers and reduce trade flows at the expense of national welfare.

Question 14

Explain beggar-thy-neighbor polici

Answer 14

Beggar-thy-neighbor policies are instances where non-tariff measures are used for protectionist purposes.

A country with market power in international trade can improve its terms of trade by shifting profits from foreign firms to home firms. The use of NTM to achieve this goal results in gains in national welfare but at the expense of other countries.

Question 15

How to correct for market failure from negative externality?

Answer 15

Negative externalities occur when an agent’s economic activity generates costs to others that the agent does not fully absorb.

use non-price measures such as performance standards, emission quotas, and mandated technologies.

Question 16

Explain Cournout competition

Answer 16

Cournot competition is where firms compete through output level choice.
Under Cournot competition, export subsidies can help the home firm expand output, forcing its foreign rival to reduce production and concede market share.
The subsidy commitment to a more aggressive strategy induces the foreign firm to produce less, resulting in the home country’s profit rising by more than the amount of the subsidy.

Question 17

Explain Bertrand competition

Answer 17

Bertrand competition is where firms compete through price choice.

Under Bertrand competition, an export tax is optimal instead of an export subsidy. The tax persuades the foreign firm to follow the home firm’s higher price, which benefits both firms.

Question 18

What is meant by protection for sale?

Answer 18

Governments use NTMs to increase social welfare by correcting market failures or taking advantage of a country’s or firm’s international market power.

Trade protection may be “for sale” to the highest bidder in cases where policies are influenced by special interest groups.

Question 19

What are the three types of NTM measures?

Answer 19

Quality, price and quality.

Quantitative restrictions fix trade flows at a specific level and can be used for income transfer to special interest groups or public policy goals.

Price measures address market failures like externalities and information asymmetry.

Quality measures for imported products can either hinder or promote trade, depending on their impact on compliance costs, consumer confidence, and market failures.

Question 20

why does some firms have a preferences for trade measures inducing fixed costs?

Answer 20

Fixed cost increases affect firms differently, and technical product regulation entails fixed costs that represent a higher burden for smaller and less productive firms in both domestic and foreign countries.
Consequently, less efficient firms will exit the market, while the more productive and larger firms both domestically and abroad will see profits and market shares increase.

Question 21

What are Export Subsidies?

Answer 21

Export subsidies are financial incentives given to domestic producers to promote exports to make them more competitive in foreign markets.

It can lead to lower prices for exported goods, which can increase demand for them and stimulate economic growth. However, export subsidies can also distort trade by encouraging overproduction and reducing the competitiveness of foreign producers.

Export subsidies can also lead to retaliation by trading partners, which can reduce overall trade and economic welfare.

Export subsidies can create winners and losers within a country and can lead to increased inequality and inefficiency.

Question 22

What are import Subsidies?

Answer 22

Import subsidies are payments made by governments to domestic consumers or producers to encourage the consumption or production of imported goods.

Import subsidies can increase the competitiveness of domestic producers by reducing the cost of imported inputs, which can lead to increased domestic production and economic growth. However, import subsidies can also distort trade by reducing the competitiveness of foreign producers and stimulating overproduction in the domestic market.

Import subsidies can also lead to retaliation by trading partners, which can reduce overall trade and economic welfare.

Import subsidies can create winners and losers within a country, and can lead to increased inequality and inefficiency.

Question 23

What are Antidumping measures?

Answer 23

Antidumping measures are policies that impose additional duties on imports that are sold in the domestic market at prices that are lower than their production costs.

Question 24

What is local content requirement?

Answer 24

Local content requirements require that a certain percentage of the value of a product be produced domestically, which can lead to higher costs and reduced efficiency.

Question 25

What is tariff and quota equivalence ?

Answer 25

A quota of has the same effects on domestic production, domestic consumption, and the allocation of resources to a protected sector as would an ad valorem tariff.

see p.57

Question 26

What are the trade and welfare effects of export taxes?

Answer 26

see p.58

Question 27

What are the trade and welfare effects of production subsidies?

Answer 27

see p. 61

Question 28

What is the Bhagwati–Ramaswami Rule?

Answer 28

As a very general rule, whenever trade policy of some kind can be used to achieve some production-level or consumption-level objective, there will always be an alternative policy taxing or subsidizing production or consumption directly that will achieve the desired goal at a smaller welfare cost.

Trade—whether imports or exports—is always the difference between domestic production and domestic consumption of a good.
When trade policy is used to influence domestic production (consumption) it will unavoidably also affect domestic consumption (production) of the same good.
But subsidies or taxes, on either production or consumption, affect only the activity at which they are directed, without affecting the other.
As a result, production-side objectives can be achieved without the consumption-side costs, and vice versa.