ll":1i:i:":t !c11mia' I f,tf raitl1 :'ti: Analysis of a Tariff ig$st economisrs far,or ietting nalions tr"ade freeiy', with few larifit or oiher barriers tc trade. Indee{ economists have tended to ire even more critical of trade barriers than har.e other€roups in society, even though economists have taken great care to lisi tlie e.x*eptionai"cases in wilifli they feel trade liarriers caii be justified. Such agreernent among eccnomists is rare. Why should ihey agree on this one issue l . T'he srriking consensus in favor of free trade is based primarily on a body of eco- nomic analysii cleffionstraiing that iheie are usually net gains fu'om fieer trade. both f*r naiions alel lbr the world. Chaptel2 shorvec!- with detnand and suppil' ctrves. ihat free trade brings greater aggregate well-being than no trade, The maill task of this r, -.--... ^.. I rL . +'^rr.'.,.;r-,! ,.1-.--r,:r-c .r{'Ptrr It ic *n nn rlrnnrF lrrce-11Xflg p,lliCieS lVil}f aL lluptUl illlU tlltr ltlll\rWIlrg lildlitt't) ur I dr t rr IJ tu uvt'rP(trv ri!! wide range offrade barriers. barriers that do not necessarily shut out all international trade. It ii mainly on this more detailed analysis of trade policies lhat economists have based their view ihat liee trade is generally better rhan parlial restrictjotts on ffade, with a list of exceptions. This analysis makes it easier to understand what divides the malonr-1'- of economists frcm grcups cailirig lbr resiricficfis oii f,"8de. T'o see what is lost or gained try putr.ing up barriels to international trade. let us take a close look at the eftects of the classic kind of trade barrier, a lariff on an imported prodnct. This chapter spelis out $'ho is 1ike1y to gain and who is likely to lose {ion] i tarift-, r"nil explains conditions *nder ..^:ltich a rtalion eouLl end up better ofT fronr a tarifl Chapfers 9 through I I wiil exlend tlie basic slory lold here. A ?*riff, as the terrn is used in intelnational trade. is a tax on importing a good n! \{r!'\ ire irrtn n {-{rulltv. rrsrrallr' collctrtcd bv eustonls oflicials at the place of'etttrv. 'farills come in two main types. A sfi*{*f;{ Xari'ff is stipulated as a money fiIilounl per unit oi iinpr:rt, such as clollars per ton of steei bars, or dollars per eigirlcylinrier rw.o-door sporr,s car. A-n eq-i v***r-er:: (on the velue) t*nlff is a percentage of the esti- mated market value of tire goods *'hen they reach the importing counfry. \Are will not pav much attention to this distinction, because it nrakes alnrost no difl-erence ic our conc,lusirrls. -iariffrates ilave treen cleclining, but they'are stiii intportant. Indeed" only one coun- rry in the r.','orl4 Singapore, has na tariff.q. {ln adclition, two aufonomolls custoffis arsas, l-{ong Kong and Macau, harre no tarilli}. Iior th* ililustrialized eoLlntries. averagr tariff rales in the 1930s were about 60 p*r'ceni. in the aJtennath r:f the infarnous Smoot-Ffawley tarifli lhat fhe United States enacie{ in 1930 and the i ...

1. ll":1i:i:":t !c11mia' I f,tf
raitl1
:'ti:
Analysis of a Tariff
ig$st economisrs far,or ietting nalions tr"ade freeiy', with few
larifit or oiher barriers tc
trade. Indee{ economists have tended to ire even more critical
of trade barriers than
har.e other€roups in society, even though economists have taken
great care to lisi tlie
e.x*eptionai"cases in wilifli they feel trade liarriers caii be
justified. Such agreernent
among eccnomists is rare. Why should ihey agree on this one
issue l
. T'he srriking consensus in favor of free trade is based
primarily on a body of eco-
nomic analysii cleffionstraiing that iheie are usually net gains
fu'om fieer trade. both
f*r naiions alel lbr the world. Chaptel2 shorvec!- with detnand
and suppil' ctrves. ihat
free trade brings greater aggregate well-being than no trade,
The maill task of this
r, -.--... ^.. I rL . +'^rr.'.,.;r-,! ,.1-.--r,:r-c .r{'Ptrr It ic *n nn
rlrnnrF lrrce-11Xflg p,lliCieS lVil}f aL lluptUl illlU tlltr
ltlllrWIlrg lildlitt't) ur I dr t rr IJ tu uvt'rP(trv ri!!

2. wide range offrade barriers. barriers that do not necessarily shut
out all international
trade. It ii mainly on this more detailed analysis of trade
policies lhat economists have
based their view ihat liee trade is generally better rhan parlial
restrictjotts on ffade,
with a list of exceptions. This analysis makes it easier to
understand what divides the
malonr-1'- of economists frcm grcups cailirig lbr resiricficfis oii
f,"8de.
T'o see what is lost or gained try putr.ing up barriels to
international trade. let us take
a close look at the eftects of the classic kind of trade barrier, a
lariff on an imported
prodnct. This chapter spelis out $'ho is 1ike1y to gain and who
is likely to lose {ion]
i tarift-, r"nil explains conditions *nder ..^:ltich a rtalion eouLl
end up better ofT fronr a
tarifl Chapfers 9 through I I wiil exlend tlie basic slory lold
here.
A ?*riff, as the terrn is used in intelnational trade. is a tax on
importing a good
n! {r!' ire irrtn n {-{rulltv. rrsrrallr' collctrtcd bv eustonls
oflicials at the place of'etttrv.
'farills come in two main types. A sfi*{*f;{ Xari'ff is stipulated
as a money fiIilounl
per unit oi iinpr:rt, such as clollars per ton of steei bars, or
dollars per eigirlcylinrier
rw.o-door sporr,s car. A-n eq-i v***r-er:: (on the velue) t*nlff
is a percentage of the esti-
mated market value of tire goods *'hen they reach the importing

3. counfry. Are will not
pav much attention to this distinction, because it nrakes alnrost
no difl-erence ic our
conc,lusirrls.
-iariffrates ilave treen cleclining, but they'are stiii intportant.
Indeed" only one coun-
rry in the r.','orl4 Singapore, has na tariff.q. {ln adclition, two
aufonomolls custoffis arsas,
l-{ong Kong and Macau, harre no tarilli}.
Iior th* ililustrialized eoLlntries. averagr tariff rales in the
1930s were about 60
p*r'ceni. in the aJtennath r:f the infarnous Smoot-Ffawley tarifli
lhat fhe United States
enacie{ in 1930 and the increased rates adopted by othel
coitntries in response ttl
.,{.58',, lnternational Economics - Vol. 1
{44 Part Two Trude Poticl
,Duri*g the ,past f;5,:yeais., govgftr*ents: of
industr:ialized {ountf ie1:r€aehed . a ser:ies of glo-bal
agreernents'that hav€ r€du(ed tariff: ,on their
nonagric*ltural imports to very'Iow levels. How
did they accornplish this remarkable reduetion?
And, what is the position of the develoroing coun-
tries in,the process? To answer *hese questions, we
take up the topic of global governa4cfppp6l.ut
and institutions thet condition how national gov-
€rnments interafi with each other=--{vith a focus
on,international econamic issues like trade^

4. 6ATT TO WfO
The story begins duriryg Woild War lJ, when the
United States, Britain, and the.alher allies began,
to discuss:how to ensure thatthe ecancmic syst€m
worked better after the war than":it,had b€fore.
the war. For trade, the goal was to find a way to
avoid the virulent protedioniin that had taken
hold in many countri*s in the early 1930s; The,
United Statet Britairr. and their allies expected
the key institution to be the lnternatisnal'Trade'
Organization. Hcwev€r; it never cam€ into exis:'
tence becau:e;of oSposition, led ,by memberi of
the,U.5. Congress. to what many vievred as the
excessive breedth of the organizationt prroposed
ch arter.
lrJstead, a "provis!*nal{l atcord; thd.S*r:*r,al
*g,*f***r*t s*,, lxri#*,*ry*f .,!1ggt {*4:1; becarne
the tey institutlix.,;fh€ Ceff waisigne-d in 1947
by 23 .c*untri*g.and focused sguarely, on':interna-
tionattrade isiues. The number of countries in the
cAl]' rose to'38 in 1960, 77 in ,1970, 84.in 1980;
and 99 in 1390" A new grobal agreqnrgnt in the
ea,rly 199$s led lgthecrcation,of the.
Organieation {Wf*l in January 1995. The WTO,
which subsumes and expands on the GAn, is'now
the organizatisn that ov€rsees: the global rules 'cf
gsvernment policies tourard internaiional trade
4_11d provides tLlg, forum'for negotiating global
6greementgto:improvc'theserules. :'' :
.l The lLr{O {}ike the GATT before ir} espouses.
three major principles:
r 'Reductions of barriers to trade. , '
.'Nsndiscri$ination"'*ften called.the fiost-

5. {&vored aatiofi,tVFN)principie.,, : .,
*.:rl&,ggtair ead*qr-agement'{or' expot'ts..' .'
' .As of.'early , 20t l th€ .WTO had.' 1S3,,.member
-countri**, in addi*on,. 30::{ountfieS, inelud.
'ing Russia,'hava been negotiating to becorne
member:s. The WIO's 'headquarters, are in
:Geneva, Switzerfand,
NEGOTIATIOHS LOW€N TARIFFS .]:
ln the first, decades af its exi$tence' rhe SAfi
focused on tariffs:'ln recent decades other {"non-
,tariffo) $31y"iers have received more,attention,
and these are taken up in the next chapter.
, Under ihe GATT; member eountrie$ pursued
eight rounds of nultitateral trade negotiations
.to lower barrierts. The first five .r+unds,focused
,on redu{tions in tariff retes,. uiing ftem-by-
item neg€tiations in ,which the largest trading
'countries agreed to mutual reductions and then
extended there n€w{ow*r tariffs to a!l.rnembers.
foflowing the MFN nofidiscrimination principle,
This 'meant that the' aegotiationJ w€re con-
duc,ted *rn on g,the, la rgesi,i *d ustria l cou ntl"ies. I n
addilia* it was qu ickJy,recog nieed that lowering'
'barriers to,trade in agriculturalr products would
.be,fraught with ccntroversy; s* the negotiations
focusedfn nonagricultwal pioducts.
, The first round, Geneva 1947, achieved sub-
stantial tariff reductlonr ffor instance,.the ,aver-
a ge, U.S". tariff rate, was,reduced, by, 2 1 per:cent).
Th* nex three rounds,, Anfte{y, 1949, Torquay
1950-1'951. and Geneva .1956;,achieved,rnod-

6. est new reduciions; as'did the Dillon Round
t1 960: 1 961), which also took up the rreation of
a'common external tariff schedr.rle for the newly
,f ornle d, :Egropean . Economic.,, eomm u nity {now
the f.rropeAn Uninn).
To accompiish more :substantial:.{ariff reduc-
tions;' ihe Kennedy Rcund' {1963*1967} shifted
the",procesr,so that the industrialized countries
began:with an agreem€nt to use e forrnula to
lower all'nonagricultural larjffs and the* negoti-
ated :Iim ited exeeptio!]E, i n w-hich .jsom e' pl:od u{ts
had lesser tar.iff cuts. Ihis innovation worked*the
*veriige tarfff'reduction was,3€ per{ent for non-
agricultura I irnports' i nto ind usrialized cou ntries.
The Tokyo Round {1973-1979) and'the i.}ruguay
Round, {1 9S6* 1 994)'eontinued the pracess using
{ermulas .for,cuts; xrith:,negotinted,'excep-tisns.,
, I *dustr.i alized., cou ntriesf nona g rieuf tu ra l' taliffs
lnternational Economics, 1 5th Edition 159
ChaPlerB 'r,,,''ir' i 1..':'
,s*.
$ffi
ffi
;*5*
$l
.l

7. i:,
ir,
i&
'.*
i
$
it
.
6
s
s
.$,
1e;
&l
.i..
$,
sl
E
?:
1
,t
i
!'i
iil

8. l
i
:.
'{.i
Fl
:,
'!
t
ii
F
fell by ail average of 33 percent and 38 percent,
respective lY.
DEVELOPING COUNTRIES
Lnrhile the indusrrialized couniries have negoti-
ated tariff reductions, what has been ihe role of
develcping tountries? O{ tne 23 founding mem-
bers of GAil, 13 were developing countries, and
riovv trlost wTo members ar€ developing ccun-
tries. Hovve'rer, until recentiy, develaping coun-
tries piayeci little role in the nrultilateral tracle
negotiations. lje<.aule Litey were seiciom rnajoi
exporteri or importerE of specific rionagricultural
prodLrcts, they were nci active irr ihe negotiations
,rf tha firct {irrp vnrrn.l( In thF Kerrnedv ROund
ilrerL' rrras forrnal recognition that developing
rounlries did not rreed to offer tariff cuts even
though tirey benefited from the tariff reductions
iry the ir:eJustrialized coLintries. The Tokyo Rounri
irontiilued the apprr:ach. forrnalizing "special

9. and di{fe rential" lreatfi}ent for developing ccuir-
tries. in fact, nrr:st ciet;eloping courrities had noi
even agreed ro maxiixufn bound tariffs for niost
producls, so they were free to raise their tariffs if
they u,'anted to.
while the cievelaBinE counlries benefited
from tlre tari*f reductions by industrialized
cquntries, they wei'e rrot able to infiuence
l'row the industrialized countries wers lower-
ing tariffs, because they were not involved in
the give-and-take of negotiating over muiuai
recluctions. lnduslrialized couniries siried frorri
lowering tariff: on "sensitive" products, which
ru",ere cftt-:n the labor-iniensive nonagricultural
prcc!ucts lh*t were the nrast pronisit'rg prcdur-ts
for expanding deveicping counl.ries' manufac-
iured exports"
ln the 'i 9BOs mariy de,veloping countries
shifteri toward a more culward-oriented strat-
*gy for develr-rpment (see Chapter 'l 4 for further
rl iscr-rssio i.:). M any r-rn i I atera i ly lowered th ei r ta riff
rates. ihey ais{i became more invciveci in the
rregotiations of the Uruguay Rclund, althcurllt
ultimately the conclusiun of the round stiil laras
r{nn!l:lqr'{ hrr nannli:tinnq ;l!1.}nnrt the irtdUS-, !/
IrlyvL'q$vMy - * ""
trialized currrtries, especially the Uniieci States
and the Ii:rofiean Unir:n. A5 part of the Urugu..ly
Roi;nrl, inariy developinc; cr:liniries agreed to
adopt bound rates for most of their tariffs,
thaugh these bound rates often rernain aL:cve
their actual rates. For example, Mexico has rto*r

10. bound mcst of its rates. but Mexico's average
ariual taiiff raie of i2 p€rceni is rrvell bei*',ru il:
average bor,tnd rate of 36 percent.
RECENT PROGRTSS
Under the WTO, reduction of tarif{ barriers
(ontlrrues. First. a special negotiation led to the
infarmation Technology Agreement of 1996'
iach country to the agreemen{ {inltially 29 coun-
tries) ccmmits to eiiminate tariffs on impcrts
of infcrrnation technoiogy goods {computers,
'telerommunicaiions equiprrrent, 5emiconductors,
serniconductor nranuf.liturin5; equipment, and
related iilstrumenis and parts) and software. By
2011, 73 countries had adopted ihe agreement,
so thai 97 percent cf glotlai irarje in these infor-
rnation technology products is {or soorr wilt be)
tariff-free.
SeconC, the derveloping counffles that i"lave
jcined ihe WTO since 1995 have g*oneraily lttw-
ered their actual tariff rates as a conditicn for
joining and accepted bound rates equal to or
very close to their actual rates. For instance,
the average tariff raie *f China, which ioined
the WTO in 2001, fell from 17 percelit in 20{j0
t$ 1 1 per.ent in 2003' Third, reducing r'ariffs
is an important part of the agenda far ihe
(urrent Dcha Round of trade negotiatians, a
,r,,r.-.:ll L=^ ^..--*i^^J 1...+h^. i,. r}-', '^wttOplC l-l1dt VVlll
Ue cxdrlllllYu rur lrrer rrr tilc rrt^(
th apter.
Overali, the liberalizatir:n prcceelures set

11. up r:nr-ler the G/TT and continuecJ under tl":e
WTO have been remarkably sucressful irr low'-
erinq industrialized countries' tariffs on non-
agriculturai products. ln part tir* multilateral
ilegotiatiorls have succeeded because each courr-
try's government is able to defend iis tariff-
cutting "concessions" against the protests of
don:estic iirotectionists as the pi ice ihe cour!ii'v-
murt pay to qive its exparters betler sccess to
other rnarkets. This rnerarrtiiist logic is bad
economics*-rv-e know instead thet imports aie
something the country gains and exports aie
s{)rnething lhe ccr-inti'y gives up-Lrtrt the logic
qeem5 io be Lrseful P0liti(s.
I6{} lnternational Economics - Vol. 1
::: Part Two Jiutlc I'iriirr
the irigher U.S. tariffs. Negotiated a[Jreements since then have
dropped most taritTs
on nonagriculturai products ir: these countrtes to very 1ow
ler,eis. T'he key roie of the
Ceneral Agreerlent on Tariffs and Tracie (CAl-f ), rvhicir is no-
,v lolded itto the World
Tt'ade Organization {WTO), as a fbrui}r for these multilateral
trade negotiations is
descri'neci in the box "WTO and GAIT: TarifT Silccess."
in 2009. taritT rates averaged 2.5 to 4.0 percent on
nottagricultural prodlicts
irnportecl into the L;nited States, Canada, the European Unt'on"
and.lapan. But tarifJi

12. on solne nonagricuitural prodLrcis are much higher" up to 60
perceilt in ihe Uniled
States. 25 percent in Canada. 26 percent in lhe Er-iropean
Union. and 384 perceilt
in .lapan. l"arilT rates for agrrcultural products are higher for
man,v indrrstrialized
coLtnfies. q,ith average taritft of 5 percent ior the United Siaies
(liighest i'ate 350
petcegt). avel"age 1 l percelt ior Canada (highest 539 percent),
average 14 percent
for the European Union (higitest 166 percent), and average 21
percent for Japan
{highesi 641 perceni).
Average tariff rates are higher in most developing collntries.
For exantple. for
Cirlna, itr 20091he average tarilf rale on nonagricultural
imports was 9 percent, rvith
a maximum raie oi'50 percent, and the avelage tariff raie an
agricrtltural imports 'was
1 6 percent. with a high rate af 65 percent. For Mexico, the
average atrrl maximlim tar-
iffiates were 10 percent and -50 percent for nonagricultural
products and22 and254
pel'ccni l'or agriculrural piodticts.
Our exploration of the pros and cons of a tadlT rvil1 be detailed
enough lo rvarrant
listing its main conclusions lrere at the oritset. This chaptel and
fihapters 9 antl I0 will
ciiscirss horv ',
A taritTalruost ah.lays lowers rvorld well-beittg.
." A tariff r-lsually lower-c the well-being oleach nation.
ineluding the ttation itttprlsitrg

13. the tarift'.
' As a genc'ral mle. rvhatever a tarifT can do for the nation,
sonrethin-t else can do
There are exceptiotis to the case for free trade:
a. 'fhe fir:st exception is the '"nationaily optimai" tariff
discussed near the end
of this ciraprer. When a nation can afieci the prices at which it
trades with
foreigners. it can gain fronr its orvn tarifT. {The rvorld as a
whole loses.
howe'ver. )
7;. Chapler'10 presents solne "second-best" arguments for a
tariff: ln cases where
r:ther incurable distortions exist in the econon:ry, imposing a
taritTmay be better
than doing nolhing.
r'. in a narrow range of cases tvith ciistortions tirat are specific
to internatiotrai trade
jtself" a tariff cau be better than any other polic-r,. and not just
better than doing
nothing.
' A tariff absoluteiy helps those grollps tied closely to the
production of import sub-
stitutes" even when the tarillis bad firr tlte nation as a rvhole.
lnternational Economics, 1 5th Edition

14. . -,.,.... :---..,.--, -,..--.,
ChaPter I AnirlYris of u1'ar{f 16?
you mav wish to review these overall conclusions after we have
completed
tlre analysis
oi i*p*, barriers in this and the next two chapters'
TT{H fiFFfrCT L}F A TA$IIFF *N ffi#TdfiSTii F}ft#*UTTffiS
lntuitron suggests that donrestic pt'oducers which compete
against
'TOo.tt:,*tt-l ?:T:t]t; ; bri#:If the government piaces a tax on
imports.of the product. the domestrc
;;; ;i C ;r;#; o'"o.," roitt lrt. Domestic-producers can then e1rynd
their
;;;-fi;;d#u*J ruies, or raise the price thev gharqe' or both. The
tariff, bv tax-
ing imporls to make *potrt less competitive in the domestic
market, should make
domestic producers bettsr off' :rr- -_.--:.^a-_
The demand
""a
u.,pplv.ralysis of a tariffagrees with our intuition' It
goes beyond
i"t;ii*., ifr"rifr, r-V .ii'"ti'irg us ro calculate ju-st how much a
tariffbenefits domestic
producers.
"'"ri[J-gi" with a demand-suppg_view:f th* U.S. market for

15. bicycles without
anv
tarjff. For most of this chapter, we Ae* with the simple case in
r'vhich
o-ur nation is a
;d{.1;il1;;;-i,gJi in ttt. u'orld markets for the products we trade'
This is the
same s*tall **.r,ntry- tftat we defined in Chapter ?' Fo1 a.small
coYnt"rY, th- ,gtl:: ll:l
the country must palithe foreign sellers is not affected by how
much the small counffy
imports of the product.
In the free-trade situation shown in Figure 8-1, bicycles are
impcrled lreely
at the
gir*;;dd il;;;i$tgO. At this price clnsun:ers buy 'lo bikes a vear
fi'orn do'restic
F:**ilJ*s s.t
The U.S.
Market foi'
Bicycles with
Free Tracle
Price
f S ptr b,kr,')
54 (domestic suPPIY curve)

16. World price
5o-0.6 Dq= 1.6
krwqsw#
lmports Mo=1-A
D6 (domestic demand curve)
Quantity
-",; 'tli: : , 'l ':
fi tf't" ,rotfO price is $300 per bike, with free trade the courtryb
consumers. buy
1.6 million Uites, anO its local firms produce 0.6 million bikes'
so 1'0 million
bikes are imported. With free trade damestic producer surplus is
area CBA
and domestic consrimer swplus is area FEC,
lnternational Economics, 1 5th Edition
Fls{Jfir *.}
The Effect
ot a tar1ff
on Domestic
Producers
Chapter 8 Arx;lY.sis ol uTxnff 1a*
Price

17. {$ **r i:ike}
540 56 (domestic suPP|Y curve
or marginal cost curve)
330
300
.
210
Domestic Price with tariff
A rrri{{
J3 World Price
Da (domestic demand curve)
0 5g* 0'6 5r = 0.8 tr1 Do
[email protected];!e#
:
M1
Quantity
rr*iiiii:rrs *i L'il{}t i}ijl' {q*i:}
Mo,
Shaded,area a=,Producerrs gain from tariff = $2t mi[lion
Th. $30 ;.;tf on imports allows domestic ploducers toexpand
their prodtrclion fro1,'ft to 5r

18. The S30 bike tariffgives dornesiic producers extra surpius cn all
the bikes they wquld have
produced even with-out the tariff{an exhra $30 X So) plus
smalief net gains on additional
sales fgainequaling % x $30 x (S, - q)].
We can think of this as conlposed of trvo pieces. First, the
rectangular part of area
d covering the first 0.6 miilion bikes refleits the higher price
received on r-rnits that
are suppli;d even if ttrere is no tariff. Second" the triangle at
the right-hand end of
arca a'ieflects the additional producer surylus earned on the
exfa 0.2 million bikes
supplied.
YMffi XTPffiCY #F A T&ffi,l$r #rd ffi#re4ffi$T'$fl
t*P*$UPJ*HffiS
Intuition also suggests that buyers of a good.rmported from
ab.roaf wi1lte hu*by a
tariff. Domestic iinsumers end up paying a higher price, or
buying less of the product,
or both. Again, we can use delnand'anA supply analysis to
calculate the consumer los.s'
First, le-t's ,ut r* to the free-trade situa-tion {before the tariff is
imposed) Shown in
Fi;;;

19. "8.;.
Witrr ;."" trade domesfic consumers b1y D, bikes at ttre rvorld
price of
gi?0. *r6i itot" ifrupter 2 that {silslrl!?€r 5$r$l.t{5 is the
amount that consumers
gain from being able to tuy bikes at the going market price.
Graphicaily, consumef
ffirut ii trt* aiea below the deman'd curve and abov? the market
price iine'.ro 13e
thii. recall that the demand curve tells us the highest price that
some consumer: is will-
ing to pay for each additional bike. Thus. accorcling to the
demand citrve in Figure 8' I ,
:::;.,.':;[email protected][.1;:,
!
lnternational Economics - Vol. 1
15* Part Two Tia.de Policr
*
F**tiRE S.3
The E{Iect
ofa Tariff
on Domestic
Consumers
some consuner is,wiiling to pay $540 forthe first6ike (atpolntF),
This consuner
can buy the bike at the irarkeiprice of $300, so the consumer

20. receives a net gain
(consumer surplus)of $240 on tl'lat first unit. As we go down
the demand curve frortl
point F to point E, we find that the vertical distances befween
the demand curve and
the world price of $300 show us the bargains that these
consumers are getting. These
consumers pay less for bikes than the maximum amount they
would have been rvilling
to pay. By summing the net gain on each unit purchased we sec
that the entire area
(FEC) between the dernancl curve and the S300 pnce line tells
us the total anrourtt of
collsumer surplus.
Now the govemmenl imposes a tariff of 10 percent on imported
bikes. Figure 8.3
shows the consumers?view of the bicycle market with the tariff
The tariffraises the price
that consunrers must pay for bikes (both imported and
domestically produced) to $330.
By raising the price to $330, the tanff forces consumers who
were buying the I.6
million bikes to make a decision;
' Some will continue to buy bikes, paying $30 more per bike.
" Sorne will decide that a bike ls not worth $330 to thenr, so
they will not buy at the
higher price.
Price
{$ pe:"*;k*l
s40].r

21. 330
3*0
; -
' .;,Domestic Prke with tari{f{ t anTT
World price
5,q (domestic suPPlY curve)
Da (domestic demand curve)
' , QuantitY
{rr'rilliant *f .Lrik*:; $*rt y*l"i}
M1
L"e"d"*[email protected]
Mo
, shaded area i:Cost.of thetarifJ to cons*mers -$45 million
no i*porr tariffof $30 raises the price that
dcmesticconsumel'1;Tust.pay for imported and
domestic bikes. Quantity demanCed fal1s fron Do to D,' The
tariff costs consumers
botir the
fu|1 $30 on every bike tbey cootinue to tluy (a loss of $30 X D,)
and the net en1o1'rnent
on
;;;;;t;""i6 troo* lought at the loweitariff-free price but do not
buy at the higher

22. pti.* in ioai"g the tariff [air additional ioss of % x $30 x i'0
* Dl)]'
:r' 18,11'r'.lnternational Economics, 1 5th Edition
I.{ontariff Barriers
to I*ports
, Ilr*tectin$'doniesti c pro*Lrcers aga i nst i inport conrpetiti on
'' ClearlY helPs those Producers.
- Harlns i-lomestic c()nsumers of the products'
u Fn:babiy hurts the importi-ng nation as a u'iroie'
Altnost surelv hurts lne uorld as a wliolc'
d,,
So ir is with a typicai tariffbarrier as sr.rggested in Chapler 8.
and so- it is witlr other
kincls or barners agait-tst inrports that r.vc- u,ill anaiyze in tlds
chapter" In t-act' as tari{f
rates have iieclined in indusinalized countries and rnarry
deveioping cormfries, the use
,;il;;;';';;-;;;;il"'d*;;"t*;; t; *o**"ti' p""r''"" has iicreased
-
The niajor purpose of tli chapter is to exarnine various kinds of
nontariffbarriers
t* imports and their etflects. We aiso look at horv large are
deadrveigltt losses froln

23. pr:otection. in relation to the size of th,e who11"11tional
e."::1t.y^ i:.: '!t :_lLi l'l;
rlucer treitefits created by the protection. In addition. we
continue our exalnlnfltioil
or
tt; -;;;;i*; ;iA; lvo.l* i'uo. organization. first in a bax that looks
at wro rr'rles
ofr*tr nonturitrlairiers unJ ur the Jurrent Duha Round
clmultilateral trade negotia-
tionu, anO then in a section at the end of the chapter that
examines liow irade disputes
hetween couutdes can be resolved.
,?l$J$--'. r,]ir h,i3{l irr:-iilt cii-it-'h,qi;Ft5 T1. t,,.,'ryflrii 1l,
A r"ri:,ir;r-+rlif !:r;siriqrr ir:irlj;? to inports is an-v policy used
by the goverrutrent to reduce
trnports. other than a sirnple tanflon importi. Nontariff barriers
can take many forn-rs-
inciuding inrporl quiltas, biscriminatorv procluct
t:1li:1i.?:Y:1iT- rules for gov-
*rn**ntlur*1upr. atd alirninisuative red tape to harass
imp_oners of.foreign.products'
n" Nig reduces irnports through one or more of the follorving
direct efl'ects:
" I-imitlng the quantity of imports.
" ]ncreasing the cost of getting imports inlo tire market'
,, Creating uncertaiptl, about thc conditions under whicit

24. intports will
'ne perrnittecl'
16r
:.-'.! lnternational Economics -Vol. 1
lSS Part Two TradePalicl
Covernment Procurement
TyPe:
lmpon quota . l
Vof untarir expo'rr restr*int S/lR)
Tariff quota
Direct:sftsct{r} ' ,
QuanJhy .r .' , , . ":" ,
Q-u;ntiqr' ,i" . ,,. i'
Quantity (if the tariff for
potentiaf :imports above the
specitied quantity is so high
tha"t it is prohibitive, so that
there are no imPorts above
the specif ied quant'itY)
Quant {for instance, an

25. outright prohibition)
Cost of importing (for instance,
special procedures for imports)
QnantitY.' ', '' '1"', ', ' ' :
Cost {to conforrn to slandards
or demonstrate comPltance)
Uncertainty (if apProval
proc*dures ai'e t;nclear)
Cost (forgone interesO
Desription
Quantitative limrit o* impcrts ' ' , ,
Quantita.tive'limit'on, foleign exports
{based,on rhreat of import restriction).
Allows imporls to enter the country
at a.low or zgi:o tariff up to a speeified
quantity impo:es a lrigher tariff on '
impons above this.QLentitY, : ,, "
Laws: and qovernment rules that fa,vor
local prsducts when.the qovernm€nt*
1s the buyer ' ' '
Require specified use o{ local labor,
miterials;,o-tr other produc.ts ' , ,
Diserirninale against' imports by wriiing
or enf6rci.ng standards in a way that'
adversely;ffe(ts improrts more than
donresticprodu{ts .',

26. Requir€ssomeoJ:thevalue'
.:':'
of, ifiten'ded imaorts to be deposited' . '
with the governrnent,:and allows,
the qovernment to PaY {ow or '
zero interest on these dePosits
Requires importers to apply for and
, receiw. apProval foi intended inports
Affect the anlotrn-t of tariff,dutie5
owed or the quota limit applied'''' :'
'proiedures can be'ilow or costlY
Figure 9.1 provides a listing of major rypes of NTBs and
indicates the main way that
ea;h affects imports. Although antidumping duties and
countervailing duties are not
listed in the figure, they are also oflen considered NTBs.
Because governments claim
that they impo-se thess kinds of measures in response to unfair
practices by_foreign
expofie;s, we defer an in-depth discussion of antidumping ryd
countervai.ling
duties 1o
Chapter t 1. Here we will eximine careiirlly several types of
NTBs. listed in Figure 9.1'
Fiow much protection do NTBs provide? Kee et al. (2009)
estimate that NTBs are

27. mor;im;;fiuni thun tariffs in restricting world trade. One way to
summarize.the size
of NTBs on a product is to estimate the equivalent tariffthat
would lead !o the same
reduction in import quantity as does the set of NTBs. {We will
se,e explicitly what this
means when we anaiyze the import quota in the next section.)
Using this approach,
fi*{J}q$r 9.Y MajorTypes ofNTBs , .,.....-.-.--
Local ccntent a,nd' '- ,
mixinq requirements
Technical and Product
standards.
Advance deposit
lmporl licensing
Other eustoms Procedures
(classif ication of product,
valuation of product,
procedures for clearing)
9651 (of applicati$n Proced ure)
'Uncertainlyli:f'basjs *or ,'
apprpvaljs'unelear)','':
Cost., .' : . "
Uncertainty

28. lnternational Economics, 1 5th Edition 183
Chapter 9 Ni.'r:trri'rlJ lliiili(r rir .lllll)r'iJ I
and averaging across products. Kee et al. esiimaie ihat the
couniry's NTBs
create prc'-
tection against irnports that is the equivalent olall avetage
tariffof 5'5 percertt for tlte
Unite<lSiates. 3.0 perceut for Clanada. 9.6 percent tbr the
Litropeatl Union'
B'5 perceltt
lbr Japait. {r.4 perient fbr C'hina, ancl i3.9 percent tbr Mexico.
The lVorlcl Trarie Orgarization has rttles that trrv to limit the
use of nontariiTbar-
riers. aitcl it serl,es o* ,',?o.r,rrl 1br negotiations to retlttce
NTBs. T'he first box of
this
chapter" "T'l-re wTo: Beyoncl TaLill's, dcscribes the role olthe
wTl) (and tlie tjAfT
betbre it) in areas that extend outside its traditional tbcus on
reclr'tcitlg tariffs on
nc,nagriciltural goocls. Ptessures 1br tariil ailci
nonlarijTbarriers to in:ports usuallv
rise Juri*g receisions. The secorrcl box. "Do<lg:i*g
Protectioilisltl." examittes
lorv

29. the world}anage6 to 1i*rit new i*rport barriers that eollld have
trlade the
global
financial and economic crisis wolse'
Thg besr-knorvn lontariil barrier: is the r,,,,, ' :, , : (or just ). a
lirlijt on
the h')ta1 Quantity) of irnports ola prorluct alloweil into the
countfY duri*g
a pertod
ciltine (fbr ilstancr', a yeafl. (Jne rvav of an()thel'. the
governntent gives ont a lirn-
iteci nLrmbcr oi licenses io import the qriota quantitY iegally
and prohibits illportittg
rvith*gt a license. As long asihe quota q,,aniity is iess than the
quantitv that
peopie
rvouicl want to impgrt r.viihogt the qlicla, the quota has an
impact on the market
fbr
this product.
-['here are several reasolls rvh-y pr-otectionists and governtnent
off ifials may favcrr
using a quola instead of a tarilL For ittstance.
' A qucta eitslpes that the quantitv of irnports is strictly linlited:
a taritf would allou'

30. the irnport quantity tti incrlase iftfb.eigrr proclucers cut the ir
prices or i1'our dotne
s{ic
dr:rtand ittcreases.
. A quota giyes gorrerttment oflicials greatef power' As rve will
see belor1'. the se oll'i-
ctais olien have acfuninistrative aLrthority oier who gets the
inrport licenses uttdel
a qui)ta svstem. and t1te1.' cilll usc this porver tei iheir
adYalltage (ibr instailce' by
taking bribes).
Note tirat these are not alguillents showing that an iurpofi
quotrt is in the nationai
iniet csi.
[.et! ccrrnpafe the quota to a tariff tls a way of irnpeding
ilnports' As we salv,in
(,ihapter 8. a tarilf incr.ur., the'rjcnlesfic price of the inrporfed
producl and recittces the
quantit.v irnportecl. A quofa reduces the r;irantit,v' imported.
Does a quofa also ittcrease
tire doprestic price of tle irnportecl proifi-rct/ ve rvi11 see that
the ;rnswer is yes' In fact'
rvc will see that" il most rvays. tire efl'ects of a qrota irre the
sallle aS the efiects 6f a
tarifTthat Jcarls fr: the same quantiry,'of inlports as the quota.

31. illiarliets are llerlectll'
contpr-titive,
As u'e dirt *'ith the anaiysis o1'the tarifJ'' rve begin our
analYsis ol tlte quc'ita tl'ilh
the sntall-c*untry case ancl ihen proceed to the large-cor"llitry
case' Ortr analVsis
in the
text assgines that a1i relevant marke{s are highl-v cofipetitive'
(l'he box 'A Donrestic
Monopoly Ptetet's a Qnota" examirtes an altertrative case')
184 lnternational Economics - Vol,'l
tlart Tw,o
.Iiir,l,'
ft,lir*'
;:rr:::'::itl-' i:i :;:;:::l{:,i
f .:tJr j.:,itf ti:r; t-:r.lli.:i- i
lhe box "WTCI and GATT: Tariff Success" in Chaptel S
intrqcJuced the Worid Trade Organization (VWO),
rryhich in '1995 subsumed the General Agreement
on 'Iariffs and
-lrade
{64I'l). That box dccumented
the succ*ss of the rounds of ntultilateral trade
negotiations in reducing the tariffs imposed i:y

32. industrialized coltntr;es on most nonagricuitural
g;oods. We now turn to examine three ways in
which the WTO tries to ga beyond tariffs on non-
agrirultura{ goods:
. As tariffs have cleclined, the use oi nontari{f
import i:arriers has increased. How have the
vvrc and th€ GATT tried to limit ;nd reduce
nonlariff h,arriers?
. Tlre birth cf the wTO in 1995 coincided with
efforts to push tratJe rules and traCe liberai-
ization into new areas. What are these new
61945, 3nd what are the agreements?
c The curr€ni rcund of trade negotiations, the
Doha Round, is ;n ambitious effort to push
further. but as of eariy 201 1 there was iittle
progress. What are the key objectives of the
Doha Rounel. and why the laek of progress?
NOf{TARIFF BARRIERS
The criginal GATT of 1947 included provisions
that limited countries' use of some barriers to
imports other than tariffs. Most Irrportant was
a prr;hibition on th€ use of import quotas on
nonagricultural goocls. Countries cornplied by
renrr:ving such quotas-*ancther major suc{ess
for the €ATT" The agreement also stated that any
governmental rules and regulations should not
cliscriminate against imports; imports and domes-
tic proclucts should be treated equrally, often
callerj "national treatnent'" ln additicn, the
agreement included prcvisions for national gov-
ernnrent to take actions against foreign dr-rmpinq
using anticiumping measure: and against export

33. subsicJies using count*rvailing measures. topics
thai '"ve wili take up in Chapter 11.
As tariffs declined and NTSs rose in impor-
tence, the CATT rnembers began to discuss NTBs
more seriously. Yet, negotiations have had less
su{cess in reducing t'lTBs. The protective ef{ects
of NTBs are harder to measure. so it is harder tc
gei negotiated agre*r'nent on vuhat fonstitutes
an internaiiorral exchange clf "cornp:*rable" NIB
red r-rrtions.
The Kennedy Round {1963*1967) inciuded
scme NTB neqotiations but the results were
slirn-one r/oiuntary code on dumping and anti-
dumping proceclures. The Tokyc Round {1973-
1979) maCe sorne progress and resuited in six
vcluntary cccjes on NTBs, cr:vering custorns valu-'
ation, impoit licensing prccedures, government
procurement, product standards and similar tech-
nical barrier:, subsidies a*d countervailing mea-
sures, and dumping and antidumping measures'
Hcwever, the codes had oniy mcdest ef{ects in
lilniting or reducing NTBs.
The Uruguay Round (1986- 1994) was more
ambitious. The aqreements fronr this raund cre-
ated the WTo, addressed a :rumber of NTBs.
anci required that all countries joining the nevr
WTO accept nearly ali the NTB agreeilenls' The
. Uruguay Round agreement5 also gave lhe new
Wl O a ,nuch stronger process for resolving dis-
putes between aouniries abcut NTB and otirer

34. trarje issues. (Dispute setttement iruiil be discussed
in ihe final section of this chapter.)
The UruEuay Round agreements on NTSs are
far-ranging and include nevv or revised codes
on customs rvaluation, irrport licensing, import
proccdures, lafeguards iterupcrary increased
proiection againrt import surgesi. sutlsidiel, and
durnping. Codes on technlcal standards estab-
lished lwo rules to reduce the use of standards
as subtle NTBs. Standards and regulations should
nct restrict imports morg than the rninirnum
necessary to achieve their legitimate objectives,
and standards about food safety should be based
on scientilic evidenee. Another major outcome
r,n:as that governments agreed t0 phase out
ihe giobal web of voluntary export reslraints
on textiles anci clothing (a topic taken up in
a case study later in this chapier), ln addition'
lnternational Economics, I 5th Edition 185
(hailtel 9 rrntrrili jlrjrri"t' tlr Jrll j)'rirs
1
governnlefiis agreed to end the use of most
ither ltERs. anci they agreeci to lirnit their use of
dornesiic content requirernents.
rijfW ARgAs
The Uruguay RounC agreement estabtished wTO
rr.iles lc covei' thre* areas that had received

35. nlrnost 11c atter"ition in 6:r.evious roi.:nds' First,
the treatffisnt of agricullural goocls was shifted
tc be similar ta that of induEtrial goods' Tariifs
{and tariff-r'ate quotas) have repiaced many
agriculturai irnpcrt quotas and other NTBs' tn
aeidition, governments agreed to limits on tlreir
donrestic subsidiels to agricuilural plrociuclion,
anrJ to rorne redu.itiorrs of their:export subsiclies
for agricultural prcduct:. Overaii, the efferis of
these rhanqes have been rncdest' For inslailce,
the r"lew tariffs were usLrally let high enough
that there has been !ittle increase in total trad€'
5econd, the agreernent on "trade-related
intellertual pfoperty" ci'eated global riri*s
ri:quiring protectionr of pater-'ts, copyrights, arrd
tracl*nrarks. fhe purpose is io get all qovern-
nents i:eirind efforts to preveni counterfeitinq
of bra*decl products and piratifig of technoloqy,
software, nusic, and fiims.
l-hird, the Uruguay Rcund establi:hed a new
Sel cf ruies, the Ceneiai Agreement on Trade in
5*rvices. M*ny ccuntries lirnit internalicnal trade
in services iviih leEal red tape or rvith otrtright
i:alis cn {oreign prc",iders. Thjs new agreefierrt
prcviries a fr"amewo;"k for efforts to libetaiize
traiie in -"ervices, althour;h it ccntained little in the
iruay ol actuai liberalizations. Subsequentiy, there
w6s scrTle pr.Jgre-ss. in 1997, 69 countlies reacherJ
an agreernellt 10 open up national rnarket5 for
basic teieccrnrnunicetionl services, and 70 cslun-
rries reaehed an agreement to re mov€ lestrictions

36. in banking, financiai service:, and insurance'
T$JE D*$"iA R*IJN*
"J'he effoii to l,lunch a new round of rnuitiiaierai
iracie negoliiatiorrs in the late 1$90s was tilrbLrlent
in tvr,o v,;ays. First, the WTC. w*ith its broarier
mandaie, became a foc.al point far ili'otests
alJainEt giobaiizaiiort' Second, the govelnments
ol the member eountries had diff iculty agreeinq
on what lhe nevn" round shE:uld acccmpli:h, a
chailenq* becau:e decision-making in the WTO is
gerrerally bY consettsu:
Since the iate 1990s protest: have swirlecl
around rneetings of tl're WTO and cther inter-
ilational organizations Many qrollps have been
invoiverl, including humar";-rights aictivists, envi
ronmentalists, cotrsumer-rigi-rts advocates. orga-
nizerJ labor {uriions), anti-immigration groups,
animal-rights atlivists, ar:d anarci"rists' lt is nat easy
to summarize their positions ioward the WTO'
but praminent corlplaints anrj delnancls. some oi
them coniracilttr:ry r,r'ith others. have inciucicri:
' I'hat the W]'O is too powerfui, undemclcrati"
and secretive ancl should be abolished or
greatlY reined in'

37. * That the WTO shauiri expand thg i15g of its
powers to achi*ve qoals othet th*n fi'ec irade'
especially such goais as envircltrrtental prclec-
tion and better vdages ancl warking conditions
in deveioPing cluntries.
' That ths WTO i: the taol of bigl businesl, and
that freer tr*rJe berreiit: c*rpor"atiorts ancl
capitali:ts u'rhile hr-itting ihe envircttntent'
ioral cultiires, and rororkeis'
After failing to begin the ne-x round at the
WTO ministerial con{erence in Seattle ir-r 1999'
the next conference was in Doha, Qatar' in iilt)l
Deveioping {ountries i:elieve;J that they had
not received a fair rJeal in th* lJri:gr"ray llcund'
-IhLry incurred substantial co:ts by acceptinq the
mandaicry llTB ruies and the n.rendatcry irrctec-
tians of intellectual property, but their beneljts
of greater a{{ess to expcrt markets in the indus-
triJize<i countrie! r"vere limited by tlre si':v'r end
to iire V[Rs orr rlat!-rinc; and lextile'q and b5' the
lack of acluel iibe r;:lizaiion uf egricultr-ii'al lrade"
Deve ioping .ountry goveraftenls pi'i:lred fcr ;i
"development rcund" and vcvved to tlc inole
octivc in the riertotiat rrn;
-{ rn{jrii;e d 0n next P;lgtl

38. 186 lnternational Economics - Vol. i
Part Two Ii.r,i. ii,li.r
A{ter much wrangling at the 2001 meet-
ing, the ministers agreed on the agenda and
iaunched the Doha Round of trade negotiations.
Each of the r*ajor players (the United States, the
European Union, and the developing countries)
campromised to reach the consensus. Key eie-
ments of the ambitious agenda include substan-
tia I liberal ization of agricultural trade, reductions
af tariffs on nonagricultural goods, liberalization
of trade in services, provision of assured acc€ss
by developing countrles to low-cost medicines
to protect public health, and refinement cf rules
governing variou: ltT8s' (ln a separate agree-
ment reached in 2003, developing countries
gained the rigirt to import cheap generic versicns
of paterited drugs in health emergencies')
.Ilre
Doha Round negotiationt have been
iniermittent and unproductive for more than a
decade. A meeting in ,ir-ily 2008 seemed to make
progress brut collapsed when some developing
countries, led by lndia and China, demanded a
"safeguard" process that v/ou;d allcw them to
easily increase tariffs on imBotts af agricultural
products if and when such inports increased'
It seems unlikely that an agreement would be
stymied by such a small issue if progress r'vith the
rest of the agreement had been strcng. lt ha: not.

39. The Unitecl states has resisted mearringful cutl in
its agricultural subsidies" The Eurelpean Union has
sought to limit lowering its barriers to agricul-
tural imports. {ndia, Brazi{, and other developing
rountries have bee n 'unwitling io reduce tariffs
ancl to open up service sectors. 5inee 2008 nego-
tiations have been suspended, thouqh discussions
have continued at a iess formal level'
Quota versus Tariff for a Small Country
Tire ellects o1'a quota on bicyeles are portrayerl in i:igure 9.2
for a slllail in-ipo|t-
ilg connlry lacing a givelt rvorlcl price of 5300 pel' bicycle ,
Recall that a cottntry is
..small" ilits ciectsions about hor.v rnuch to import o1'a
proclttct have no ell'ect on the
going r.,,gr1-1 pricc of rhe procluct. That is. the fbleign sr-
4rir1y of exports to this small
Ioutttrl,'is infinitely elastic at this price. In our example in
Figure 9.2, the colltltl-Y
rvoulcl irlport I .0 ntil!ton bikes pe I year u'ith {l"e e trade.
'fhe governlller}t fhen intpose s
a quota that linrits it:rports to a. smallet'quanfity" sa,v. 0.6
millicn btkes per -yeflr'
The cprora alters the available suppl),of bicycles withi;r thc
importing eotrtttry. For
all dr:mestle prices at or itbove the rvorld price. tlre total
{dotnestic pius inlport; sr-rpp1y
u,ifhin the coirntry ecl:als the clomestic strpply ctn've plrts the
fixed quota qtlailtiry tq,i)
olirnpgrts. Ar th; dJmestic price of Si00 ther:e i,voiiid be excess

40. demancl fbr bicycles
in the irnporting co1lltfrv.'fhe narket in the irtrporting countr-y
rvill clear oirly ilt the
higher donrestii price oi533U, as shonn by thc-- intersectiorl of
the total avallable sttp-
olv cir1,c {S, -r g,.) ancl the rlotneslic detnand cut've (D,,) olt
the le1t side of F-rgul"r:
b.i. 1,, tt.1* ,ion,*ilc price o{'5330. the doiuestie tllr;tlltit}r
supplied is 0.8 nliliioir'
the qualtity irrpol.tedis tlre quota qLrantitv of 0.6 ntillion, iittci
the domestic cluautitv
clemandedls 1.4 milliot. (tr''e can see the same eflect on
domestic price by usirlg the
country's rlentatrcl-for-ittlports cltrve sitorvn in the right side
olthe flgure' Ilthe qLlota
limits impor.ts to 0.6 niiliion. then the detnand litr irrtpr:rts
indrcates a price ol53.l0.)