21 630 DEVELOPMENT BRIEF Number 4 The World Bank October 1992 The high costs of U.S. quantitative restrictions Quantitative restrictions cost the United States three tion is lacking-or when available, times what the protection-equivalent tariff would it is manipulated to support a narrow position. cost-because two-thirds of the higher cost to con- At a time when negotiations on sumers goes straight to foreign producers. Why the the Uruguay Round are flounder- giveaway to foreigners? U.S. producers have a louder ing and an alternative to significant voice than U.S. consumers, and foreign producers increasing,the relianceonbilater- lobby aggressively to face a quota rather than a tar- ally negotiated trade restrictions iff-and thus get a higher price in the U.S. market. (such as VERs), it helps to know some of the costs associated with A long with the rising U.S. covering about a fifth of U.S. the three most important nontariff trade deficit in recent years imports. barrier measures in the United has come rising pressure for Likewise, economists frown on States. These are the restrictions on more protection-pressure that is the other policy theme that often textile and apparel imports through strongest during presidential surfaces in U.S. presidential cam- the Multi-Fiber Arrangement, the election campaigns. There are calls paigns-that "unfair foreign trade system of bilaterally negotiated to protect high-skill sectors to keep practices" should be counteracted. quotas on steel imports (started in real wages up, suggesting that If the Koreans dump steel on the 1985), and the VERs on Japanese failing to do so would turn the United States, the proper response auto imports (initiated in 1980). United States into a low-skill should be to send them a thank you To give an idea of the costs, de "McDonalds chain" economy. note-not to turn to antidumping Melo and Tarr ran general equilib- There are also calls for an industrial measures or voluntary export rium simulations for 1984-85, when policy on somewhat similar restraints (VERs). But as is often the all three measures were in effect- grounds. After all, tariffs are mere case with policy debates, informa- particularly instructive since they shadows of their former selves. allow for easy comparisons with the Are there grounds for such calls? Key numbers costs of protection that tariff World Bank economists Jim de measures afford. Melo and David Tarr built a model * The quotas on steel, autos, and First, the costs of protection from of U.S. trade to find out.* textiles and apparel have a tariff- these three nontariff barriers are To the informed economist, the equivalent of between 13% and 24%, huge in comparison with the popular wsothfar higher than the average U.S. tariff d popular wisdom that the succession on manufactured goods since the distortonary costs occasioned by of multilateral trade negotiations second world war. the remaining tariff structure has reduced barriers to trade to (which includes an 18% average insignificant levels is clearly false. * Removing those quotas would tariff on textile and apparel im- Tariffs may be way down, but bring welfare gains of $21 billion- ports). Removing quotas in these restrictions and other $14.5 billion in transfers to foreign three sectors alone would have quantitative restrictions and other exporters and $6.5 billion in tariff- nontariff barriers are way up, now equivalent distortiDns. yielded a gain in welfare of $21 billion. Of this $21 billion, $14.5 'Joime de Me,o and David Tarr, A Gc,,eral Equ,l,br,a, Analalo * The benefit-cost ratio for removing billion came in the form of transfers of U.S. Ecie,gn Trade Policy, Cambridge. MIT Press (1992) De the quotas is 28:1-yielding a net to foreign exporters who controlled MelolS d,,vision ch,ef, Trade Policy, Country Economics De- benefit of $107 billion partment, and Tarr is an ec-momist at the World Bankb the licensig arrangements to import in the restricted U.S. market. benefit from removal of the quotas the estimated average tariff is To some extent, this cost can be in the three sectors is $107 billion). higher, at 24%, because the ineffi- viewed as the unavoidable price of The imputed rent extraction from ciency costs of a tariff depend both doing business outside GATT, since protection-lobbying activity is very on the average level and on the foreign exporters must somehow be high indeed. variance. compensated for agreeing to sign Third, the "special" features of An alternative is to try to repro- these bilateral deals. But there is the auto and steel industry (signifi- duce what was achieved through also a $6.5 billion cost to U.S. cant economies of scale, strong the multilateral tariff negotiations, exporters who are curbed in foreign union activity, and, for autos, a which have tended to lower tariffs markets, an amount that looms very oligopolistic structure) do not proportionately. With such a large when compared with a benefit significantly affect the estimates proportionate increase since 1984, of $900 million from removing all obtained under the more traditional an average tariff of 13% would assumptions of perfect competition For every dollar of lost and a competitive wage structure. Efforts at improving the Economies of scale do, however, earnings for workers dampen the estimates, but only eficiency of the world displaced by removing marginally. The reason: protection, trading system should be! protection, the economy by deflecting demand to domestic directed at all forms of gains $28 producers, allows them to expand nontariff barriers-not at scale, so long as new producers don't enter the industry (far from further tariff reductions remaining tariff protection. Such certain). relative magnitudes give an idea of And what about the high wages result in the same welfare loss as where efforts at improving the paid to auto and steel workers that from quantitative restrictions efficiency of the world trading because of labor union activity? Do in the three sectors. Compare that system should be directed-at all they make a case for advocating with an average tariff rate on forms of nontariff barriers rather protection on strategic grounds? If manufactured goods of 10% in the than at further tariff reductions. it is recognized that wage demands United States just after the second Second, by any estimate, the costs are likely to be related to the world war. It is thus no exaggera- to the rest of society of protecting tightness of the labor market, the tion to say that protection through the jobs of those who would have to wage distortion from labor union quantitative restrictions is setting relocate if these quantitative activity is reduced when protection freer trade back several decades. restrictions were removed (294,000 is removed. What would removing nontariff workers) are extremely large. Even If anything, de Melo and Tarr's barriers mean for developing after subtracting from the calcu- estimates suggest that wage distor- countries? On the minus side are lated benefits all the earnings losses tions do not provide support for an the reduced transfers (in higher that would be incurred while the active industrial policy. prices) to producers now benefiting displaced workers look for other Finally, how much would tariffs from them. The plus would be a jobs, the benefit-cost ratios still have to be raised from present move toward freer trade-develop- range from 4:1 in steel to 44:1 in levels (set in 1984) to produce the ing countries wouldn't lose out to textiles, where the premia are high welfare losses associated with the the stronger lobbying of the major and the wages are low. For all three quantitative restrictions in these producing countries in the alloca- sectors combined, the ratio is 28:1. three sectors? (The calculation of tion of quotas, and they could be That means that for every dollar of course depends on how tariffs are specializing where they should be lost earnings for displaced workers, restricted from their existing levels.) specializing. Bigger gains (under the economy gains $28 (the net If the tariff structure is uniform, GATT) all around. Development Briefs are issued by the World Bank to inform the media, business, academic and government policy communities about development policy analyses and results from the Bank's researci activities. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its membercountries-and should not therefore be attributec to the World Bank or its affiliates. Briefs are issued periodically by the Research Advisory Staff, Development Economics Vice Presidency, The World Bank, 1818 H Street, NW, Washington, DC 20433 Tel: (202)473-3984, Fax: (202)477-0955. 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