5.5 Other Non-Tariff Barriers

Countries use various other non-tariff barriers to protect domestic producers from import competition. They often employ laws and regulations that have otherwise legitimate purposes as a cover for the provision of protection. For instance, considerations relating to consumer protection, the environment, and labour have been invoked as premises (bases, pretexts) to limit import competition. In what follows, we will focus on three other non-tariff barriers, namely, product standards, domestic content requirements, and government procurement mechanisms.

Product Standards

A range of laws and regulations exist pertaining to the quality of consumer products. Specifically, these are often concerned with improving the well-being of society by addressing the negative outcomes that have consequences for human health and the environment. To the extent that private firms, for instance, can ignore the external costs of environmental degradation and adverse health and safety outcomes, they end up producing too much of certain products from the standpoint of the society. Against this backdrop, import protection can be a remedy for these instances of market failure if they are, in fact, legitimate concerns. If they are instead pretexts for supporting import-competing domestic industries, then domestic producers, domestic consumers, the importing nation, and the world experience the usual economic effects of import protection.

Producers benefit from being able to expand higher-cost domestic production at the expense of lower-cost foreign supplies. Meanwhile, domestic consumers are hurt as they must pay a higher price and purchase a smaller quantity of the product. The importing nation, as a whole, experiences a decline in economic well-being, stemming from the usual production (protective) and consumption effects. In addition, its government gives up any opportunity to collect revenue and must incur the additional cost of drawing up and implementing the laws and regulations (policies) and monitoring compliance. The overall social cost to the nation may, therefore, be greater than the usual deadweight losses of the production and consumption effects. The world also experiences a loss of economic well-being due to inefficient allocation of resources.

Domestic Content Requirements

Domestic content rules (or requirements), often advocated by organized labour, mandate that products sold in a country must have a specified minimum amount of domestic production value in the form of wages paid to local workers and other inputs produced within the country. The aim is to encourage domestic and foreign producers to use domestic inputs in products sold within the country. Domestic content requirements can provide import protection at the level of the final product as well as at the level of the inputs. Specifically, they can be a barrier to the importation of (i) final products that do not meet the content requirements and (ii) raw material inputs and components that can be used in domestic production of the final product.

With domestic content requirements, the nation experiences the usual results of import protection. The economic well-being of domestic producers improves because of higher prices and production, while consumers are worse off as they must buy a smaller quantity of the product and pay higher prices. The nation as a whole experiences the usual deadweight losses of the production and consumption effects. In addition, domestic content requirements lead to administrative costs and do not generate tariff-equivalent revenue for the national government. This means that the loss of national economic well-being is likely to be larger than would be the case under equivalent import tariff protection.

Government Procurement Mechanisms

Government procurement policies generally discriminate against foreign products. Many national governments have such procurement policies either explicitly or in some disguised manner. In the United States, procurement policy was enshrined in the Buy America Act, which mandated that U.S. government purchases favour domestic products over foreign ones. Specifically, federal government agencies were required to buy materials and products from U.S. suppliers once prices were not substantially higher than those of foreign suppliers. The restrictions of the Buy America Act have been liberalized with the Tokyo Round of the GATT negotiations in 1979 (Carbaugh, 2015). However, many U.S. states and other jurisdictions (e.g., cities) have “Buy American” or “Buy Local” procurement rules. In the case of many other countries, while explicit laws may not exist, they have similar subtle rules and practices that discriminate against foreign suppliers.

To the extent that a country’s government favours domestic suppliers over foreign suppliers, this likely encourages higher-cost domestic production over lower-cost foreign production. Therefore, there are the usual effects on economic well-being for domestic producers, domestic consumers, the county’s government, and the world. Domestic producers gain; consumers are hurt; the government forgoes tariff-equivalent revenue; and there is inefficient allocation of resources as higher-cost production substitutes for more efficient production elsewhere.

References

Carbaugh, R.J. (2015). International economics, (15th ed.). Cengage Learning.