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Cleins C. Coughlinand Geoffrey E. Wood

Cletus C. Coughlin is a senior economist at the Federal ReserveBank of St. Louis and Geoffrey E. Wood is a professor ofeconomics at City UniVersity, London. Thomas A. Pollmann pro-vided research assistance.

An Introduction to Non-TariffBarriers to Trade

ESTRICTIONS on international trade,primarily in the form of non-tariff barriers,have multiplied rapidly in the 1980s. TheJapanese, for example, began restrictingautomobile exports to the United States in 1981.One year later, the U.S. government, as part ofits ongoing intervention in the sugar market,

imposed quotas on sugar imports.

The increasing use of protectionist tradepolicies raises national as well as internationalissues. As many observers have noted, interna-

tional trade restrictions generally have costlynational consequences.5 The net benefits re-ceived by protected domestic producers (that is,

benefits reduced by lobbying costs) tend to beoutweighed by the losses associated with ex-cessive production and restricted consumptionof the protected goods. Protectionist tradepolicies also cause foreign adjustments in pro-

duction and consumption that risks retaliationby the affected country.

As a type of protectionist policy, non-tariffbarriers produce the general consequences iden-tified above; however, there are numerousreasons, besides their proliferation, to focus at-tention solely on non-tariff barriers! Non-tariffbarriers encompass a wide range of specificmeasures, many of whose effects are not easilymeasured. For example, the effects of a govern-ment procurement process that is biased towarddomestic producers are difficult to quantify. Inaddition, many non-tariff barriers discriminateamong a countrys trading partners.

This discrimination violates the most-favored-

nation principle, a cornerstone of the GeneralAgreement on Tariffs and Trade (GATT), themultinational agreement governing internationaltrade. Not only does the most-favored-nation

See Page (1987) for a general discussion indicating thatthe proliferation of trade restrictions in recent years hastaken the form of non-tariff, as opposed to tariff, barriers.A recent Congressional Budget Office study (1987) notesthat the average tariff rate for most developed countries isless than 5 percent. There is no evidence of rising tariffrates or coverage. For example, U.S. tariff revenue as apercentage of total imports has changed very little be-tween 1975 (3.9%) and 1986 (3.6%), See the Statistical

Abstract of the United States (various editions) for thefigures for other years.

2For example, see Coughlin et al. (1988).tmSee chapter 1 in Laird and Yeats (forthcoming) for adiscussion of the policy issues raised by non-tariff barriers.

FEDERAL RESERVE BANK OF ST. LOUIS

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principle require that a country treat its tradingpartners identically, but it also requires thattrade barrier reductions negotiated on abilateral basis be extended to all GATI mem-bers. By substituting bilateral, discriminatoryagreements for multilateral approaches to tradenegotiations and dispute settlement, countriesraise doubts about the long-run viability ofGATT.

This paper provides an introduction to non-tariff barriers. We begin by identifying numer-ous non-tariff barriers and document their pro-liferation. We then use supply and demandanalysis to identify the general effects of twofrequently used non-tariff barriers: quotas andvoluntary export restraints. Next, we considerwhy non-tariff barriers are used instead oftariffs. A brief history of GATTs attempts tocounteract the expansion of non-tariff barrierscompletes the body of the paper.

NON-TARIFF BARRIERS:TYPES AND USE

A tariff is a tax imposed on foreign goods asthey enter a country; non-tariff barriers, on theother hand, are non-tax measures imposed bygovernments to favor domestic over foreignsuppliers. Non-tariff barriers encompass a widerange of measures. Some have relatively unim-portant trade effects. For example, packagingand labeling requirements can impede trade,but usually only marginally. Other non-tariffmeasures such as quotas, voluntary exportrestraints, trade restraints under the MultifiberArrangement, non-automatic import authoriza-tions and variable import levies have muchmore significant effects.~These hard-core non-tariff measures are designed to reduce importsand, thereby, benefit domestic producers. The

discussion below focuses on these hard-corebarriers.

Quotas

A quota is simply a maximum limitation,specified in either value or physical units, onimports of a product for a given period. It is en-forced through licenses issued to either im-porters or exporters and may be applied to im-ports from specific countries or from all foreign

countries generally. Two examples illustratethese different characteristics. The United Statesimposes a general quota on dried milk imports;licenses are granted to certain U.S. trading com-panies, who are allowed to import a maximumquantity of dried milk based on their previousimports. In a different situation U.S. sugar im-ports are limited by a quota that specifies theshares of individual countries; the right to sellsugar to the United States is given directly tothe governments of these countries.

Voluntary Export Restraints andthe Multjfiber Arrangement

Voluntary export restraints, which are nearlyidentical to quotas, are agreements between anexporting and an importing country limiting themaximum amount of exports in either value orquantity terms to be sold within a given period.

Characterizing these restraints as voluntary issomewhat misleading because they are fre-quently designed to prevent official protectivemeasures by the importing country. In the1980s, for example, exports by the Japaneseautomobile industry to the United States andthe United Kingdom have been limited volun-tarily to prevent the governments of thesecountries from directly limiting imports ofJapanese autos.

An example of a voluntary export restraint ona much broader scale is the Multifiber Arrange-ment. Originally signed in 1974 as a temporaryexception to CATT and renewed three timessince, the Multifiber Arrangement allows forspecial rules to govern trade in textiles and ap-parel. Under this agmeement, quotas are set onmost imports of textiles and apparel bydeveloped countries from developing countries,while imports of textiles and apparel from otherdeveloped countmies except Japan are not sub-ject to any restrictions. Multilateral voluntaryexport restraint agreements are frequentlycalled orderly marketing agreements.

Non-Automatic ImportAuthorizations

Non-automatic import authorizations are non-tariff barriers in which the approval to importis not granted freely or automatically. There

~Thissubset of non-tariff barriers is taken from Laird andYeats (forthcoming). This subset excludes a number ofnon-tariff barriers that can also have sizeable effects.Among these are government procurement policies, delays

at customs, health and sanitary regulations, technical stan-dards, minimum import price regulations, tariff quotas andmonitoring measures. See appendix 4 in Laud and Yeatsfor a glossary of terms associated with non-tariff barriers.

,A.wAnv,tcon, ~aa,,

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are two general categories of non-automaticlicensing.

Discretionary licensing, often called liberallicensing, occurs when an importers govern-ment must approve a specific import; however,precise conditions to ensure approval are notspecified. Frequently, this form of licensing isused to administer quantitative limits. Under thecurrent restraints on U.S. imports of steel, adomestic user can request authorization to ex-ceed the maximum import limitation if thespecific product is unavailable domestically at areasonable cost. Exactly how availability andcost considerations affect the probability of anapproval are left to the discretion of the

authorities.

The second category of non-automatic importlicensing requires the importer to meet specific

conditions, such as minimum export perfor-mance, the use of the imported good for aspecific purpose or required purchases ofdomestic products. In an export-import linkagescheme, a firms value of imported componentsis limited to a maximum percentage of the valueof its exports. rhis measure is intended to im-prove a countrys trade balance and protectdomestic producers of components.-5 Export-import linkage requirements are numerous. Forexample, in Yugoslavia during the early 1980s,authorized importers of automobiles were re-quired to export goods totaling at least 30 per-cent of the value of each imported automobile.6

Variable lEnport Levies

Variable import levies are special charges setto equalize the import price of a pmoduct with a

domestic target price. Fhe levies are variable sothat as the world price of a product falls (rises),the levy rises (falls). The result is that price

changes in the world market will not affectdirectly the domestic price. Ihese measures arean integral aspect of the European CommunitysCommon Agricultural Policy. For example, inMarch 1987, the European Communitys price

for wheat was $8.53 per bushel, while theworld price was $1.95 per bushel. Prospectiveimporters were faced with a levy of $6.58 perbushel!

The Use and Expansion of i\T00

Tariff BarriersIn a current study, Laird and Yeats (forthcom-

ing) measure the share of a countrys importssubject to hard-core non-tariff barriers. Because

countries frequently impose non-tariff barrierson the imports of a specific good from aspecific country, but not on imports of thesame good from another country, they disag-gregated each countrys imports by both pro-duct and country of origin to permit calculationof the total value of a countrys impo