Voluntary Export Restraints

One of the most important of the nontariff trade barriers or NTBs is voluntary exports restraints (VER). These refer to the case where an importing country induces another nation to reduce its exports of a commodity“voluntarily”, under the threat of higher all-around trade restrictions, when these exportsthreaten an entire domestic industry. Voluntary export restraints have been negotiated since the 1950s by the United States government to curtail textile exports from Japan and more recently also to curb exports of automobiles, steel, shoes, and other commodities from Japan and other nations. These arethe mature industries facing sharp declines in employment especially in a period (such as the present one) of sluggish economic growth all over the world. Sometimes called "orderly marketing arrangements," these voluntary export restraints have allowed the United States and other industrial nations making use of them to save at least the appearance of continued support for the principle of free trade.

When voluntary export restraints are successful, they have all the economic effects of (and, therefore, can by analyzed in exactly the same way as) an equivalent import quota, except for the revenue effect, which foreign suppliers of the commodity are now likely to capture by charging higher prices. A clear example of this is provided by the rise in the sticker price of Japanese automobile exports to the United States after Japan "voluntarily" agreed to restrict them to 1.85 million units or less per year from 1981 to 1985. Voluntary export restraints are also likely to be less effective in limiting imports than import quotas because voluntary export restraints are usually administered by the exporting nations, which only reluctantly agree to curb their exports. Furthermore, as a rule only major supplier countries are involved, leaving the door open for other nations to replace part of the exports of the major suppliers and also from transshipments through third countries.

4. Technical, Administrative, and Other Regulations

International trade is also hampered by numeroustechnical, administrative, and other regulations. These include safety regulations for automobile and electrical equipment, health regulations for the hygienic production and packaging of imported food products, and labeling requirements showing origin and contents. While many of these regulations serve legitimate purposes, some (such as the French ban on scotch advertisements and the British restriction on the showing of foreign films on British television) are only thinly veiled disguises for restricting imports.

Other trade restrictions have resulted from laws requiring governments to buy from domestic suppliers (the so-called government procurement policies). For example, under the "Buy American Act" passed in 1933, United States government agencies gave a price advantage of up to 12 percent (50 percent for defense contracts) to domestic suppliers. As part of the Tokyo Round of trade liberalization, the United States and other nations agreed on a code on government procurements to bring these practices and regulations into the open and give foreign suppliers a fair chance.

Much attention has been given in recent years to border taxes. These are rebates for internal indirect taxes given to exporters of a commodity and imposed (in addition to the tariff) on importers of a commodity. Examples of indirect taxes are excise and sales taxes in the United States and the value added tax in Europe. Since most government revenues are raised through direct taxes (such as income taxes) in the United States and through indirect taxes (such as the value-added tax) in Europe, United States exporters receive much lower rebates than European exporters (or no rebate at all) andare at a competitive disadvantage.

International commodity agreements and multiple exchange rates also restrict trade. However, as the former are of primary concern to developing nations and the latter relate to international finance.

5. International Cartels

An international cartel is an organization of suppliers of a commodity located in different nations (or a group of governments) that agrees to restrictoutputand exports of the commodity with the aim of maximizing or increasing the total profits of the organization. Though domestic cartels are illegal United States and restricted in Europe, the power of international carter not easily be countered because they do not fall under the jurisdictionof any one nation.

The most important recent example cartel is the Organization of Petroleum Exporting Countries (OPEC). A cartel is a collusive arrangement among producers of the same product in a number of different countries. These firms (or governments) act as a monopoly in setting prices and allocating markets. A cartel can then be viewed as an international version of a trust, and it has the same goal of earning monopoly profits by avoiding price competition.

Cartels were of considerable importance in world trade during the 1920s, but they largely disappeared during the depression. The topic received little attention from economists until OPEC began to dominate the world oil market in the early 1970s. Early examples of cartels can be found as early as 1301, and Adam Smith in 1776 noted the tendency of previously competing firms to collude to increase prices and profits, so this is not a new topic.

Many developing countries that export other primary products thought OPEC would be a model that they could follow, but these hopes have been disappointed and even OPEC now has only a limited ability to affect prices. The requirements -for creating a successful cartel are rather stringent, and cartels have a tendency to weaken the longer they are in operation. For a cartel to be successful in raising prices well above marginal costs, the following conditions must exist:

1. The price elasticity of demand for the product must be low, which means that it has no close substitutes. Otherwise the volume sold will shrink dramatically when pricesare raised.

2. The elasticity of supply for the product from outside the cartel membership must be low, which means that new firms or countries are not able to enter the market easily in response to the higher price. If this condition does not hold, the cartel will discover that higher prices result in a sharp reduction in its sales as new entrants crowd into the business.

3. At least a few members of the cartel must be able and willing to reduce production and sales to hold the price up. If all members insist on producing at previous levels despite the higher price, there will almost certainly be an excess supply of the product, resulting in a price decline, often through seer price cuts by members competing for sales despite promises not to do so.

4. The membership of the cartel must be congenial and small enough to allow successful negotiations over prices, production quotas, and a variety of other matters. It would probably be impossible to manage a cartel of 50 members particularly if some of them were historic adversaries.

From this list of conditions a reader can see why OPEC was temporarily successful and why this kind of success has been so rare in other markets. Most products do have substitutes and/or can be produced by new firms or countries if prices are increased sharply. Cartels have frequently failed when the market available to the members shrank, but none of them was willing to cut production sufficiently to support the price. Cheating in the form of secret price cuts to gain new customers followed, and the intended monopoly collapsed.

A cartel is an agreement among independent units to control production and to get better prices. The term usually refers to agreements among sellers to raise price, as opposed to buyer cartels.

The most successful exercise of cartel power in history, the victory of OPEC in late 1973, resulted from several simultaneous developments. World demand for oil had grown rapidly, world supply growth was concentrated in OPEC countries, and the Arab-Israeli conflict broke out anew in a context o new U.S. dependence on oil imports.

OPEC was temporarily successful in the 1970s because all four of the above conditions held for oil, but the longer high prices remained in effect, the weaker OPEC became. Efforts to conserve energy and the increased use of alternative energy sources reduced the demand for oil, and non-OPEC countries such as Mexico and the United Kingdom increased production sharply in the late 1970s. The results were a sharp reduction in the volume of oil that OPEC members could sell, unsuccessful attempts to get members to curtail production sufficiently, andan eventual decline in the price, as can be seen in Figure 1.

It is not clear, however, that OPEC is permanently weak. The low oil pricesof the 1980s encouraged consumption and discouraged exploration in the United States and elsewhere, thus increasing their reliance on OPEC sources. Iraq's invasionof Kuwait in 1990 led to a temporary increase in the price of oil, but it is possible that increased dependence on OPEC during the 1990s will recreate the situationof the early 1970s when sharp price increases could be imposed and maintained for a considerable period of time.

1973 1975 1977 1979 1981 1983 1985 1987 1989

1974 1976 1978 1980 1982 1984 1986 1988 1990

Note: The nominal price is the average of OECD import prices of crude petroleum. The real price is obtained by dividing the nominal price by the export unit value index of manufactures (base year 1973=100)

FIGURE 1 Nominal and real prices of crude petroleum, 1973-1990. Source: GATT International Trade, 1989-1990 (Geneva, 1990), Vol. 2, p. 45.

Four factors of dependence of buying countries on cartel’s exports can be linked:

1. The elasticity of world demand for the cartel’s product.

2. The elasticity of competing supply.

3. The cartel’s share of the world market.

4. The share of cartel sales, consisting of sales by small members, who are likely to feel a strong incentive to behave competitively despite their cartel membership.

The optimal cartel price makeup over marginal cost to the first three of these four factors.

The experience of OPEC and other attempts at primary-product cartels can be interpreted with the help of the monopoly model of cartel success and failure.

6. Dumping

Trade barriers may also result from dumping.Dumping is international price discrimination in which an exporting firm sells at a lower price in a foreign market than it charges in other (usually its home-country) markets. Dumping is the export of a commodity at below cost or at least the sale of a commodity at a lower price abroad than domestically.

Dumping is classified into:

persistent,

predatory,

sporadic.

Persistent dumping, or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market (which is insulated by transportation costs and trade barriers) than internationally (where it must meet the competition of foreign producers).

Predatory dumping is the temporary sale of a commodity at below cost or at lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad.

Sporadic dumping is the occasional sale of a commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.

Persistent dumping trade prescription is simply to relax and enjoy the cheap imports because producers.

Trade restrictions to counteract predatory dumping are justified and allowed to protect domestic industries. These restrictions usually take the form of antidumping or countervailing duties to offset price differentials, or the threat to impose such duties. However, it is often difficult to determine the type of dumping, and domestic producers invariably demand protection against any form of dumping. In some cases of persistent and sporadic dumping, the benefit to consumers from low prices may actually exceed the possible production losses of domestic producers.

Many industrial nations have a tendency of persistently dumping surplus agricultural commodities arising from their farm support programs. When dumping is proved, the violating nation or firm usually chooses to raise its prices (as Volkswagen did in 1976 and Japanese TV exporters in 1977) rather than face antidumping or countervailing duties.

In 1978 the United States government introduced a trigger-price mechanism under which a charge that steel is being imported into the United States at prices below those of the lowest-cost foreign producer (presumably Japan) will be subject to a speedy antidumping investigation. If dumping is proved, the United States government will provide quick relief to the domestic steel industry in the form of a duty that will bring the price of the importedsteel equal to that of the lowest-cost country.

Export subsidies are also a form of dumping. Though illegal by international agreement, many nations provide them in disguised and not-so disguised forms (such as the granting of tax relief and subsidized loans to potential exporters, and low-interest loans to foreign buyers of the nation's exports). All major industrial nations give foreign buyers of the nation'sexports low - interest loans to finance the purchase through agencies such as the U.S. Export-Import Bank. These low-interest credits finance about 10 percent of exports but as much as 40 percent of the exports of Japan and France. Indeed, this is one of the most serious trade complaints that the United States has against other industrial countries today. The amount of the subsidy can be measured by the difference between the interest that would have had to be paid on a commercial loan and what is in fact paid at the subsidized rate The U.S.Domestic International Corporation (DISC) also stimulates exports by reducing the effective rate taxation on export income.

Embargoes

An embargo is an all-out restriction on import or exports of a good. Embargoes are usually established for international political reasons rather than for primarily economic reasons.

Example:

U.S. embargo of trade with Iraq. The U.S. government hoped that the embargo would so severely affect Iraq’s economy that Saddam Hussein would lose political power. It did make life difficult for Iraqis, but did not bring about the downfall of the Hussein government.

The fact that increased international trade competition displaces import-competing firms and workers can be an argument foe adjustment assistance, or income support while they relocate or retrain. Adjustment assistance is preventing import competition with trade barriers in the displacement costs of the free trade are less than the efficiency gains.

Since the mid-1970s, the number and importance of these nontariff barriers (NTBs) have grown so rapidly that they have now become more important than tariffs as obstructions to international trade. They also represent the greatest threat to the fairly liberal world trading system that was so pains - takingly put together after World War II and which served the world so well since then. It has been estimated that the number of NTBs have more quadrupled over the past 15 years or so and that over half of world trade now subject to some form of nontariff trade barriers. It was primarilyto dealwith the serious threat posed by these NTBs and to deal with the rapidly growing trade in services (banking, insurance, telecommunications, and so on) that the leading nations agreed to begin a new round of multilateral trade negotiations in 1986.

[1] 'Consumer surplus is utility derived from a product for which the consumer does not have to payInFigure 1, someone was willing to pay a price of OK for a few units of the product, but only had to pay 0/\ before the imposition of the tariff. Those units provided consumer surplus of PwK. The total consumer surplus enjoved by users of this product under free trade was triangle PwNK, which fell to triangle P,MK when the tariff became effective The common sense of consumer surplus can be seen through an example If a person is extremely thirsty, a can of sott drink is worth far more to that person than the 50c it costs, the difference being consumer surplus.

Producer surplus is revenue received by those selling a product which is more than the absolute minimum they would have been willing to accept In Figure 1 someone was willing to sell a few units for a price of OR, but actually received OPw before the tariff was imposed RP^ was producer surplus associated with those units The domestic industry received producer surplus of triangle e before the tariff was put in place which was increased by triangle a when the tariff began The intuition of producer surplus can be seen with another example It a student who is seeking a summer job is willing to accept a wage of $6 00 per hour but is fortunate enough to find a job paying $7.50, the student receives producer surplus of $1.50 times the number of hours for which he or she is paid $7.50 when $6.00 would have been acceptable.

[2]This result is obtained directly from the figure

Area b=[Q₁Q₂]*T*1/2

Area d=[Q₃Q₄]*T*1/2

Area b+Area d=1/2*T[Q₁Q₂+Q₁₃Q₄]

[3] Robert Crandall, "Import Quotas and the Automobile Industry: The Costs of Protectionism." Brookings Review. Summer. 1984, reprinted in Robert Baldwin and J. David Richardson, eds.. International Trade and Finance: Readings, 3rd ed. (Boston: Little, Brown, 1986). pp. 62-73.

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