3.2 Non-tariff barriers to trade

Non-tariff barriers are sneaky trade restrictions that countries use to protect their industries. These include quotas, technical regulations, and subsidies. Unlike tariffs, they don't generate revenue but can be harder to spot and measure.

These barriers mess with trade flows, market prices, and resource allocation. They can lead to higher consumer costs and less competition. The WTO and regional trade agreements work to reduce these barriers and promote fair trade practices.

Non-Tariff Barriers to Trade

Types of non-tariff trade barriers

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• Quotas restrict the quantity or value of a good that can be imported or exported during a specific time period, imposed unilaterally or through bilateral agreements (import quotas, export quotas)
• Voluntary Export Restraints (VERs) involve an exporting country voluntarily limiting the quantity of a good exported to a specific country, often under the threat of more restrictive trade barriers by the importing country (Japanese automakers' VER on car exports to the United States in the 1980s)
• Technical Regulations and Standards specify product characteristics, production methods, or performance requirements, potentially used to protect domestic industries by making it more difficult for foreign firms to comply (safety standards, environmental regulations, labeling requirements)
• Subsidies provide government financial assistance to domestic producers or exporters through direct payments, tax credits, or low-interest loans, potentially giving domestic firms an unfair advantage over foreign competitors
• Administrative Barriers encompass bureaucratic procedures that can hinder or delay trade, such as complex licensing requirements, customs procedures, and documentation requirements

Economic effects of trade barriers

• Reduced Trade Flows occur when non-tariff barriers increase the cost or difficulty for firms to export or import goods, leading to a misallocation of resources and reduced economic efficiency
• Distorted Market Prices result from non-tariff barriers artificially raising the prices of imported goods, leading to higher costs for consumers and downstream industries, with quotas and VERs reducing competition in the domestic market
• Inefficient Resource Allocation happens when non-tariff barriers shield inefficient domestic industries from foreign competition, discouraging firms from investing in productivity improvements and innovation
• Welfare Losses arise from the economic inefficiencies caused by non-tariff barriers, with consumers facing higher prices and reduced choice, and the economy experiencing lower output and employment levels

Tariffs vs non-tariff barriers

• Similarities between tariffs and non-tariff barriers include their potential to reduce trade flows, lead to economic inefficiencies, result in higher consumer prices, and protect inefficient domestic industries
• Differences between tariffs and non-tariff barriers:
  1. Tariffs are taxes on imported goods, while non-tariff barriers encompass a wider range of trade-restricting measures
  2. Tariffs generate government revenue, while non-tariff barriers do not
  3. Non-tariff barriers can be more difficult to identify and quantify compared to tariffs
  4. The welfare effects of non-tariff barriers may be more complex and harder to measure than those of tariffs

Regulation of non-tariff barriers

• The World Trade Organization (WTO) provides a framework for negotiating trade agreements and resolving disputes, aiming to reduce barriers and promote fair competition through non-discrimination, with agreements like the Technical Barriers to Trade (TBT) Agreement and the Sanitary and Phytosanitary (SPS) Agreement addressing specific types of non-tariff barriers
• Regional Trade Agreements (RTAs) are bilateral or multilateral agreements between countries to reduce trade barriers and promote economic integration (European Union, North American Free Trade Agreement, Comprehensive and Progressive Agreement for Trans-Pacific Partnership), often including provisions to harmonize regulations and standards, reducing the impact of non-tariff barriers on trade within the bloc
• International Standards Organizations develop and promote the adoption of international standards to facilitate trade and reduce technical barriers (International Organization for Standardization, Codex Alimentarius Commission), with harmonization of standards across countries helping to reduce compliance costs for firms engaging in international trade