Chapter 8- Analysis of Tariffs and Other

Barriers to Free Trade

In this chapter we will discuss:

1. Introduction to tariffs and other trade

barriers

2. Analysis of a tariff in a "small" economy

3. Analysis of a tariff in a "large" economy

4. Analysis of a quantitative restriction-import

quota- in a small economy.

5. Other non-tariff barriers, voluntary export

restraints (VERs), local content requirements,
government procurement policies, etc.

1. Introduction to tariffs and other trade

barriers

In the previous chapters, we presented a positive picture of the

welfare enhancing effects of free trade. That is, if there are no
market "failures", free international exchange of goods and services
can potentially increase welfare for all trading partners. In reality
though, very few countries or regions in the world practice free
trade. Hong Kong is the only free trade port city in the world.
Practically all other countries large and small impose some form of
trade barrier --of varying strengths-- on their imports from other
countries. Even countries who sign free trade pacts with their
neighbors-- NAFTA for example or EU-- still maintain trade
barriers against the rest of the world. Therefore, while there may be
a relative state of free trade within a few particular regions of the
world, we are certainly far away from state of free trade for the
world as a whole (the prospects and future role of WTO, not
withstanding).

Countries employ a variety of tools for limiting free trade: from

tariffs to import quotas to voluntary export restraint agreements, and
all the way to invisible, sometimes strange methods of discouraging
a foreign producer of a good from selling in their country. Quotas
and the latter group of barriers to free trade are called non-tariff
barriers or NTBs, in the language of GATT. In this chapter, we
analyze the effects of imposing tariffs, import quotas, and briefly
other non-tariff barriers.

One important question is to consider why, with all the research

including both analytical and empirical evidence pointing towards
benefits of free trade, countries still hold on to their anti-free trade
positions? 1
Specifically, why do so many countries still maintain the policy of
import tariffs? The set of arguments in favor of tariffs produced by
policy makers reads as follows:

1. Tariffs provide an important source of revenues for the

government.
2. The change of policy from limited to free trade hurts the income
of particular groups within the economy (usually the scarce factor--
remember this argument from the H-O model?) and is an
unacceptable policy choice.

3. There is a form of "market failure" in the form of an externality in

the import competing industry. In other words, the positive
externality of producing more of the good domestically outweighs
the negative effects of a tariff imposed to protect domestic
production. This is essentially a type of "infant industry" argument
for protection of a domestic industry.

4. Tariffs are used as a "retaliatory" tool against tariffs imposed by a

trade partner or an act of "dumping" by a foreign firm. The latter are
called anti-dumping duties.

5. Tariffs are part of a "strategic trade policy" by some countries.

This entails government involvement with promotion of sale of
product or service by a large firm in an international oligopoly (or
some form of imperfectly competitive market where price and
production follow a strategic or game type behavior).

Among all the reasons and excuses put forward by policy makers
against free trade, the only acceptable argument by an economist is
that of a market failure (no. 3 above). As trade and exchange go
synonymously with markets, if a market fails to provide the socially
efficient level of output and a true evaluation (price) for the product,
then some form of government intervention is necessary. Regarding
all other reasons for government intervention (including imposing
tariffs), economic analysis provides a counter argument. With
respect to no. 1 above, for example, economists argue that lack of
ability of a government to have a workable tax revenue service to
earn revenues through income tax is no good reason to meddle with
the price allocation mechanism of free markets. In some countries,
such as India, tariff revenues constitute nearly 40% of government
revenues, so that adoption of a policy of free trade as required by the
WTO would significantly hurt the government's budget. The
suggestion by economists is for the government to work on
instituting a workable income tax collection mechanism so it does
not have to rely on border taxes for its revenues.

With respect to the politically unacceptable income distribution

effects of free trade (no. 2 above), again, we showed in chapter 3
that while the scarce factor receives lower real income and receives
a smaller portion of the economic pie in free trade than in autarky,
the overall economic pie grows with trade. Potentially then, the
losers can be compensated by the gainers (consumers with enhanced
consumer surplus) and there will be still some net benefits of free
trade left! Therefore, economists do not agree with imposition of
tariffs to keep a particular interest group happy at the cost of the
whole society. They advocate programs for retraining laid off
workers who may have been hurt due to foreign competition and
other direct income help to those negatively affected. The
imposition of a tax on imports thereby raising the price of the
importable good to protect the income of the scarce factor is a
highly inefficient way to help the losers as it creates distortions in
the price and hence the resource allocation mechanism of the
economy.

Below, we present a simple analysis of just such an argument: the

welfare effect of a tariff in a small economy.
2. Analysis of a tariff in a "small" economy

Consider the U.S. economy in an H-O type world. U.S. is

considered a small country in the sense that both consumers and
producers in the U.S. takes the price of clothing as given by the
larger international market. The trade or commercial policies of the
U.S. will not affect the world price of clothing. Here we produce a
"partial equilibrium" analysis in that we only consider the market for
the import good, clothing (the supply and demand for clothing) in
the U.S. Below, we contrast the welfare effects of free trade in
clothing with that of a "specific" tariff, i.e. a per unit tax on import
of clothing (similar to tax on gasoline).

How do we illustrate the case of free trade in clothing on a supply

and demand graph for clothing in the U.S.? Consider the domestic
demand for clothing to be a linear downward sloping curve and the
domestic supply of clothing to be a linear upward sloping curve, as
shown in Graph 8.1 below.
Price Domestic Supply

Domestic Demand

Pd =Pw +t

b c d
Pw

Qs Qs’ Qd’ Qd

As the graph indicates, at the free trade world price of clothing, PW,
the quantity of clothing demanded by U.S. residents exceeds the
domestic quantity supplied by the amount QS QD. This is indeed the
volume of clothing imported at free trade price by the U.S.
Now suppose that for one of the reasons mentioned above, most
appropriately for reason no. 2-protecting the income of labor- the
government in the U.S. decides to impose a specific (percentage tax
per unit value) import tariff of $t on clothing. The price of clothing
inside the U.S. will rise to PW + t.
How does this increase in price (inside U.S., not outside) affect the
overall level of welfare in the U.S.?
To answer this question, note that the import tariff has lowered
consumer surplus, has partially enhanced the level of producer (of
clothing) surplus, and has brought some revenues to the government.
The net change in welfare is indeed the sum of all these losses and
gains. To use the geometric areas of the graph that pertain to
changes in consumer surplus:
Decline in consumer surplus due to import tariff = a + b + c + d
Increase in Producer surplus = a
Increase in government surplus (tariff revenues) = c

The net fall in welfare in the U.S. due to an import tariff is:
a + b + c + d - (a + c) = b + d

The triangle "b" indicates the production inefficiency (dead weight

loss) created by artificially raising the price of clothing, thereby
shifting resources away from other sectors in the U.S. and towards
clothing. The triangle "b" is also called the "production distortion
loss".

The triangle "d" indicates the consumption inefficiency (dead weight

loss) created by artificially raising the price of clothing, thereby
shifting consumption away from clothing in the U.S. This triangle is
also called the "consumption distortion loss".
Note that the original intent of the tariff, as we claimed, was to help
income of the scarce factor-labor-in the U.S. but its unintended
consequences go far beyond: they make the consumer reduce its
purchase of the good as well! The overall welfare effect of the tariff
is negative. Indeed, from our analysis in chapter 3, we can infer that,
as with free trade the welfare benefits exceed the income losses to
the scarce factor, so with limiting free trade the welfare losses shall
exceed any income benefits to labor (the scarce factor in the U.S. in
a H-O model). In other words, the U.S. consumers have to pay a lot
more than just keep labor income from declining in free trade.

How about terms of trade (TOT) effects of this tariff? There will be
none as the U.S. is small enough not to be able to affect the world
price. The world price stays at PW as before.

What are the income distribution effects of this tariff? In an H-O

world, where clothing uses the scarce factor - labor- relatively
intensively, the Stolper-Samueslon effect indeed applies. That is, as
the price of clothing rises with a tariff inside the U.S., the real
income of labor will rise and that of the other factor (capital) will
fall. This policy does indeed protect labor incomes in the model, or
workers’ jobs if we allow for the possibility of unemployment.

Case in Point

An Empirical Study of the Effects of Protection in the U.S.

Textile Industry, 1986 and 1990

William Cline (1990) has estimated the cost of tariff (and quota)
protection in the textile industry of the U.S. for 1986 and 1990. The
policy is intended at saving the jobs of textile workers in the U.S.
Here, we shall reproduce the results for 1990 only.

Consumer welfare loss

(areas a+b+c+d in Graph 8-1) $ 3.274 Billion
Tariff revenue gain (area c) $ 0.632 Billion

Transfer to producers (area a) $ 1.749 Billion

Net welfare loss (includes also loss

From quota rents) $ 0.894 Billion

Employment gain (number of employees) 16,203

The net welfare loss for a worker who keeps his textile job thanks to
trade protection is: $ 0.894 bilion/16,203 = $55,174 per worker. This
is indeed a loss net of all gains (income) to each textile worker and
the government for just one year (1990). It would have been far less
costly for the whole economy if these workers were paid by
taxpayers to seek other forms of training where they could later be
employed in other sectors. 2

How about a general equilibrium analysis of the same issue? We

can do this with a general equilibrium PPF graph, Graph 8.2 below.
 Graph 8-2

Quantity of Software Free Trade Relative Price

Domestic Relative Price

After Tariff

Level of welfare
I1 in Free Trade

I2

Quantity of Clothing

Point A in the graph pertains to the free trade allocation of resources

between clothing (labor intensive) and software (capital intensive)
produced in the U.S. The U.S. exports software and imports
clothing. This is shown by the difference between the production
point and consumption point shown by the consumer indifference
curve, I1 on the graph. As the U.S. imposes an import tariff on
clothing, the "internal" relative price of clothing rises. Accordingly,
both producers and consumers in the U.S. respond to this higher
relative price for clothing (shown on the graph with the broken and
solid parallel lines). Production shifts towards clothing and away
from software. Consumers also choose their bundle according to the
higher price of clothing, producing the indifference curve I2, which
pertains to a lower overall level of welfare than before. The
difference between production and consumption under tariff is again
the amounts of goods traded, still at the given world price PW.

3. Analysis of a tariff in a "large" economy

Now suppose U.S. has a trade partner like Mexico in an H-O world.
U.S. and Mexico both produce two goods, clothing (relatively labor
intensive) and software (relatively capital intensive). U.S. is the
relatively capital abundant country so in free trade, it exports
software to Mexico and imports clothing from that country.
Here, we face the case of a "large" country analysis in the sense that
the U.S. and Mexico, as each other's trade partners can influence the
world price or TOT by their respective commercial policies. While
in each country, perfect competition in all sectors rules, in terms of
cross border trade, these countries represent a form of monopoly
seller and monopsony buyer of each other's products.
How does the tariff on the imports of clothing by the U.S. from
Mexico affect the TOT, level of welfare, and the distribution of
income in both countries? We can address the first two questions via
a partial equilibrium (demand and supply) graphical analysis.
Let's look at the supply and demand for clothing in both U.S. and
Mexico. In free trade, the free trade world price of clothing is PW.
 Graph 8-3

U.S. Mexico

P
Domestic
Demand
Domestic Supply
P

Domestic Supply
Domestic Demand
Pd
a b
Pw d
e
Pw’

Q Q

At world price of PW, U.S. imports QS QD from Mexico, which is the

same amount of surplus production (at PW) of clothing in Mexico.
Now suppose U.S. imposes a specific tariff $t per unit on the
imports of clothing from Mexico. The new equilibrium will have to
be where at the new price, the amount that U.S. imports from
Mexico is the same as the volume exported by Mexico. This implies
a change in the price of clothing in Mexico, or the world price. As
you can see from the diagram, the price in Mexico falls while the
price of the same item rises inside the U.S.! The import tariff has
reduced the amount of clothing demanded by the U.S. from Mexico,
hence the world price falls to PW'. Due to the tariff, the domestic
price of clothing in the U.S. increases. The difference between the
new world price, PW', and the new domestic price in the U.S is the
level of tariff, $t per unit. Indeed the U.S. makes Mexico pay part of
the tariff levied by the U.S. government in terms of earning lower
price for its exports to the U.S.! Therefore the import price of
clothing for the U.S. falls which represents an improvement in the
TOT of the U.S. This also means that the TOT for Mexico declines.

How about the welfare effects of the tariff for both partners? Let's
use the same geometric analysis of net changes in welfare as before.

For the U.S.:

The decline in consumer welfare/surplus: a + b + c + d
The increase in producer welfare: a
The increase in government tariff revenues: c + e
The net decline in welfare = a+ b + c + d - (a + c +e) =
b+d-e
Hence the decline in welfare in U.S. is indeed the algebraic sum of
two different terms, the production and consumption distortion loss
(b + d), and, the TOT improvement (rectangle e). If the TOT
improvement for the U.S. is large enough to outweigh the efficiency
losses, then the U.S. is indeed better off at the cost of making
Mexico worse off! Of course, if e < b + d, then the U.S welfare falls
as well.

In Mexico the only change is the lower TOT (the equivalent area of
"e" in the graph for Mexico) and that only makes the economy of
that country worse off! The tariff by the U.S. has indeed been laid
partially on the shoulders of their trade partner. As both U.S. and
Mexico are major partners of each other in trade, a lower import
demand for clothing by the U.S due to tariff will indeed lower the
price of this good for Mexico. This type of policy, on that hurts your
trading partner, is called "beggar-thy-neighbor" policy. It upsets the
relationship between a country and its trade partner and leads to
retaliation by the hurt party.

What are the income distribution effects of tariff by the U.S.? These
are similar to the previous section. In the U.S., due to Stolper-
Samuelson effect, the real income of labor (the scarce factor used
intensively in clothing production in the U.S.) rises while that of
capital falls. The opposite is true for Mexico where labor loses and
capital gains.

Note the overall world welfare effect of a tariff: it is always

negative! Even if U.S. makes itself better off, at the cost of its
neighbor, the net world welfare change is b + d which represents
loss of efficiency in the U.S.

4. Analysis of a quantitative restriction-import

quota- in a small economy.
An import quota or a quantitative restriction on imports is another
way to restrict the volume of imports from another country. Below,
we will present the simple analysis of a quota in a small economy
and contrast it with that of a tariff. We will see that quotas present a
relatively inferior device for policy makers to protect the income of
some group or another, at the cost of greater efficiency losses to the
whole economy.

An import quota by a government usually entails giving (or selling)

a "license" to import a given volume of a good, say clothing, into the
country. For a small country, the world price at which clothing is
purchased by the import company is the same before and after quota
(at the free world price of the good). If the quota is simply given out,
then the firm that is allowed to import this good will earn the quota
"rents" as we shall see. Let's use a supply and demand graph, Graph
8.4, to analyze this problem.

Suppose the U.S., a small country imports clothing at the free world
price, PW from the rest of the world.
Price Domestic Supply

Domestic Demand

Pd: Domestic Price After Quota

b c d

Pw

Qs Qs’ Qd’ Qd

In free trade, the volume of imports is QS QD. Now suppose the

government desires to reduce the volume of imports to just the
amount QS' QD'. It can limit imports by setting up a quota, allowing
only QS' QD' to be imported. This is a quantitative restriction on
imports and requires some form of licensing of those firms or
individuals who import clothing and sell it in the country.
What would be the equilibrium price of clothing inside the U.S.? It
will rise to the dotted higher price line in the graph. Therefore,
quotas and tariffs in small country under perfect competition have
similar effects on price. In fact, the difference between the new
domestic price and the world price is a "tariff equivalent quota rent".
As such the welfare analysis of the two instruments of trade policy
would be the same except for one thing: quota rents--rectangle "c"--
are not necessarily earned by government and may not be part of
government revenues. Indeed, if the permit to import--a quota
license--is simply given by the government to an individual or
company, the difference between international and the domestic
price of clothing is simply a form of "economic rent", not part of or
contributing to a productive economic activity. It is not a gain to the
rest of the economy.
Therefore, where the quota rents are earned by an importer, the net
welfare decline resulting form the quota is: fall in the consumer
surplus- increase in the producer surplus or areas a + b + c + d - (a)
= b + c + d.
The net welfare loss in this case is higher than that of a tariff by "c".

If the government engages in selling (or auctioning) the quota

permits, then the maximum price an importer will be willing to pay
is the difference between the price the importer pays at the border
and the price it receives in the country. Therefore, the maximum
value of a license to import one unit is the same as the domestic
price minus the world price--the tariff equivalent quota premium. Of
course the government earns this amount when it sells the quota
permits. In this case, the effect of tariff and quota are one and the
same, as the rectangle "c" is also earned by government as quota
premium or tariff revenues. Therefore, the net welfare loss in this
case is similar to tariff at b + d.
Do countries usually auction off their import licenses? They did not
use to. The high rents earned from ownership of quotas are part of
some notorious stories of corruption, influence peddling and
nepotism in the government of many developing countries. This,
among other reasons we shall leave out here (namely the presence of
a domestic monopoly producer of a product under quota), indeed
makes the import quota an inferior device of commercial policy. It
creates greater distortion and allocational inefficiency than a tariff.
In the rules of the WTO, quotas are ruled out. All such quantitative
restrictions are to be changed to tariffs and then phased out over a
period of 10 years (up to about 2005).

Case in Point

The Cost of U.S. Sugar Quota

Since 1934, the U.S government has added an import quota in sugar
to its already existing tariffs for this product. The aim has been to
further protect the income of sugar growers. As one dissatisfied
consumer/taxpayer writes:
"Since 1980, the sugar program has cost consumers and taxpayers
the equivalent of more than $3 million for each American sugar
grower. Some people win the lottery; other people grow sugar.
Congressmen justify the sugar program as protecting Americans
from the "roller-coaster of international sugar prices," as Rep.
Byron Dorgan (D.-N.D.) declared. Unfortunately, Congress protects
consumers from the roller-coaster by pegging American sugar
prices on a level with the Goodyear blimp floating far above the
amusement park. U.S. sugar prices have been as high as or higher
than world prices for 44 of the last 45 years.
Sugar sold for 21 cents a pound in the United States when the world
sugar price was less than 3 cents a pound. Each 1-cent increase in
the price of sugar adds between $250 million and $300 million to
consumers' food bills. A Commerce Department study estimated that
the sugar program was costing American consumers more than $3
3
billion a year."

5. Other non-tariff barriers (NTBs): voluntary

export restraints (VERs), local content
requirements, government procurement
policies, etc.

One of the reasons for lack of success of GATT and its replacement
with a more legally solid structure of WTO in mid 1990s was the
rise in the number of non-tariff barriers countries would impose to
keep imports out. Policy makers in many countries, attempting to
appear in compliance with GATT (to reduce tariffs) would find
creative means of import control in the form of NTBs. One such tool
is an import quota, which we already discussed in the previous
section. Here, we mention and discuss some of the other means of
reducing imports in order to protect an industry or the income of a
particular factor of production.

a. Voluntary Export Restraint (VER):

This is also a quantitative import restriction. As its name suggests, it

occurs by agreement between the importing and exporting country
and implies a "large" country trade situation; that is, an agreement
by one partner to limit its exports to the other. For a VER to be
effective, the two countries involved need to be major trade partners
of each other, at least for the good in question, hence the large
country analysis.

VERs share an uncanny similarity to quotas except for one

seemingly mysterious difference: an import quota affects the
exporting country negatively and hence creates much disagreement
and distress between trade partners. A VER, on the other hand,
meets with the agreement of the exporting country and indeed the
exporting economy would "voluntarily" reduce the exports of its
good to its partner.

Why such a difference? In a large country context, where the actions

of one partner affects the world price and hence the TOT for the
other, quotas lead to different welfare outcomes from VERs.
Consider this point form the point of view of exporting country, say
country A. If the importing country, B, imposes a quota on imports
from A, the world price of A's export good falls (similar to analysis
of tariff in a large country, in section 8.3 above). This implies that
the welfare of the exporting country A falls as its TOT declines.
In the case of a VER, however, the exporter is asked to voluntarily
reduce its export supply of the good it exports to B. As the export
supply falls, the price of the export good rises and so does the TOT
of country A. All else being equal, the level of welfare in A rises
and falls in B. Therefore, the exporting country would agree to a
VER but object to a quota imposition. Of course the economy that
gets hurt in the case of a VER is the home country, importer of the
good in question. It not only creates allocational inefficiency due to
import restriction, it also suffers a lower TOT due to VER. A good
example of such a voluntary export restraint agreement was the
1981 VER deal between U.S. and Japan. The Japanese car makers
"voluntarily" reduced their shipment of cars to the U.S. The price of
U.S. made cars rose alongside with the price of imported Japanese
cars. The agreement was designed help protect and resurrect the car
industry of the U.S.

b. Local Content Requirements:

This form of NBT requires that some specified fraction of an import

good to be produced or assembled locally. For example, a country
may require that cars imported in to its borders arrive disassembled.
A factory with employed local talent is to assemble the cars to their
final form. Countries (such as Indonesia) use this rule to limit the
imports of final goods and use the restriction to create some jobs and
local income.

c. National Procurement Policies:

This policy amounts to disallowing foreign firms to bid for

government's infrastructure projects. In the past, the government of
Japan would keep U.S. firms from bidding on government projects
for building roads, schools, hospitals, etc. in Japan. The new rule of
the WTO prohibits discrimination against foreign bidders except in
matters of national security.

d. Banning of Imports due to hazardous Materials,

Ingredients, and Chemicals.

This type of barrier looks appropriate as imports of hazardous

chemicals and ingredients of production may compromise public
health standards in a country. However, there are instances where
such standards are used simply to keep out imports. They are termed
a protectionist policy by the complaining trade partner. As an
example, in 1994, the U.S. banned the import of gharga skirts from
India with the argument that they are a fire hazard. Of course,
according to Indian officials, the U.S. is using the argument as a
protectionist policy to keep this type of skirts from the U.S. market.

Case in Point

According to the Apparel and Handloom Exporters Association

(AHEA) of India, the U.S. is banning the Indian gharga skirts (long
wide skirts with strings or hooks at the waist) because the U.S. trade
officials feel that, this item which is imported quota free under
"handicraft" category to the U.S., is flooding the market in this
country. Mr. Rajagoplan of the AHEA "feels that the US
government is purposefully cutting out fast moving items especially
ones which do not fall under the restricted [import] category. This
could be a form of non-tariff barrier imposed by the US government
on Indian imports." 4

As another example of use of this type of barrier to trade, the U.S.

did (appropriately) ban the imports of agricultural and food items
from the former Soviet Block after the Chernobo nuclear disaster.
The fear was that the radiation form the blast had affected a large
radius of agricultural land and its soil for many years to come.

e. Red Tape:

This is another method by which governments try to restrict imports

into their countries. For example the government may designate a
port with only a small opening into the sea to allow the import ships
to duck. This may restrict the import of large items such as cars and
trucks. Some of these items may simply have to be brought in
smaller parts only to be assembled in a factory inside the importing
country. In other cases, customs officials of a country may take
samples of imported food items for "testing" that may take forever.
One such claim was made by a wine official from California (NPR
interview in 1990s), charging that the Korean customs' officials have
kept their wine at the border warehouses in S. Korea and have taken
bottles of wine for testing. After a few months and an inquiry by the
exporters, they claimed they were still testing the wine!

f. Import Restrictions to Preserve Local or National

Culture:

This case has a good example: the restrictions by French and

Spanish trade officials on the amount of entertainment services
(movies and songs) imported into those countries from the U.S.
These countries are quite worried about the "cultural imperialism" of
the U.S. with its commercial big budget films. They charge that their
own smaller, more innovative movie and entertainment industries
are in danger of collapsing in view of invasion of American films
and music. To some extent this fear may be justified as these
countries fear their young (and possibly old!) populations are being
culturally Americanized! Nonetheless, it is considered a form of
non-tariff barrier. 5

g. Anti-Dumping Import Duties:

This type of duty is of course allowed under WTO if the country can
prove--with reasonable data and facts-- that another country's firm is
dumping its good there. The trouble is that dumping cases are very
hard to prove. In many cases, the foreign firm may have indeed a
cost advantage over domestic firm and the dumping charge could be
used primarily as a protectionist measure. Much like a tariff, the
antidumping duty maybe used in order to protect the local industry
from foreign imports.
Case in Point
Anti-dumping Duties in U.S. and South Korea

"The U.S. International Trade Commission (USITC) has decided to

impose antidumping duties on imports of stainless steel bar products
from France, Germany, Italy, South Korea and the United Kingdom.
It estimated that the dumping margins ranged from 1.7 to 125
percent…A dumping margin represents by how much the fair-value
price exceeds the dumped price….In 2000 the imports of stainless
steel bar products from the five countries subject to antidumping
6
and countervailing duties amounted to $160.3 million."
And in the case of South Korea,
"The Ministry of Finance and Economy yesterday [June 22, 2002]
announced a plan to extend the expiration date of 15.95 percent
antidumping tariffs on H-beam imports from Russia by another
three years.
South Korea began to impose the antidumping duties on Russian H-
beams in April 15, 1997, in order to protect the local steel industry
from their influx." 7

h. Environmental Rules:

This is a very controversial and indeed tricky part of trade

protection, as manifested by many cases of opposition of
environmental groups to free trade pacts. In some cases, import from
another country may be banned due to violation of the
environmental rule of the importing country in the process of
production of the export good. This points directly to the differing
environmental standards between countries. One famous case in
point is the argument between U.S. environmental groups and trade
officials regarding the tuna caught in Mexico and exported to the
U.S. As the fishing nets in Mexico do also catch and destroy
dolphins who swim near schools of tuna, the U.S. banned the
imports of tuna from Mexico. This disagreement was resolved in a
pre-WTO GATT panel in 1991 to the disbelief of U.S.
environmental groups: The U.S. banning of tuna imports represented
a trade protection policy and was illegal under the WTO rules. The
panel argued that if U.S. could use the "process" of producing a
good as environmentally unsound and ban that good, then any
country could use the same argument banning many types of
products from its borders under this argument. This would open the
whole trading system to a Pandora's box of arguments for imposing
trade restrictions.
As the environmental groups would argue, according to the panel
ruling, a country with the lower standard of environment could also
produce a good "cheaply" and hence be an exporter, meanwhile
forests, rivers, and air would be negatively affected in such
production process. The controversy as to whether different (and
non existent) standards for environmental protection should be
accepted or challenged is only partially resolved by economists and
other trade analysts. Generally speaking if the environmental effect
of production is "local" to the economy producing the good, then
indeed they are free to apply their own standard. If however,
international waters are being muddied by production in one
country, or the whole earth's atmosphere is being affected due to one
country's production process, then it is indeed a matter to be
negotiated and resolved by the world community. One problem,
among others, usually lies in determining which type of
environmental degradation occurred is local and which is
international.

Endnotes

1. See Elliot and Hufbauer, Measuring the Costs of Protection in

the United States, Washington: Institute for International
Economics, 1994, pp. 8-9. This paper estimates the cost of
protection of the clothing industry in the U.S.
Also see the paper by Robin Klay, “Free Trade a Sweeter Deal
for Everyone” posted on the internet on Wednesday, February
27, 2002, http://www.mackinac.org/4096
The author asserts that, “According to a 1998 estimate from the
U.S. General Accounting Office, sugar protection costs
Americans nearly $2 billion per year.”

2. William R. Cline, The Future of World Trade in Textiles and

Apparel, Institute for International economics, Washington
D.C., 1990, p. 191.

3. James Bovard, "The Great Sugar Shaft",

http://www.fff.org/freedom/0498d.asp, April 1998

4. The Economic Times Madras, "US skirting the real issue?",

Thursday, August 18, 1994.

5. Roger Cohen, "France and Spain Are Adopting Quotas On U.S.

Arts Imports", The New York Times, Wednesday, December
22, 1993, p. B1.
6. The United States Mission to the European Union, "USITC
Imposes Antidumping Duties on Steel Bar Imports",
www.useu.be, February 20, 2002.

7. Park Yoon-bae, "Antidumping Duties will be Reimposed on

Russian Steel", The Korea Times, June 23, 2002.