Trade Policy on Quantity Restrictions under Open Conditions

Author: Zou Zhengfang / Country: Mainland China
Publisher:
Publish Date: 2002-07-01
Features: From the perspective of transition countries, governments may need to adopt some quantitative restriction measures to prevent foreign imports from entering their domestic markets too rapidly and causing excessive shocks to domestic enterprises. Although, from the perspective of resource allocation and economic welfare, quantitative restrictions are not as good as tariffs, from the perspective of government control, they are still necessary and inevitable in the short term to prevent a large number of enterprises from collapsing under the impact of foreign goods and to enable more direct and easier control over imports. Some may argue that while quantitative restrictions are easier for governments to implement than tariffs, they not only lead to the waste of resources but also do not benefit the government itself. If we view the government as an interest-seeking entity, implementing tariffs can generate tax revenue for the government, whereas using quantitative restrictions not only fails to produce tax revenue but also requires significant human and material resources for control, making it a loss-making approach. So why would governments still adopt such measures? We must understand that from the government's perspective, the government is not an abstract concept but is composed of many departments. For many developing countries, the department responsible for tariff management is often not the same as the one controlling licenses and quotas. Even if they are the same department, tax revenue must be submitted to the state treasury, and the department managing taxes itself may not necessarily benefit. However, if this department is in charge of issuing licenses, during negotiations with businesses to grant licenses, the management department may be able to extract a portion of the rent from the businesses for its own benefit. Clearly, as long as the rent received by businesses is positive, they will be willing to accept licenses to engage in trade. Therefore, in developing countries, the rent generated from issuing licenses is generally not entirely retained by the businesses that receive them; a significant portion is likely to be captured by the management department. Furthermore, there is also the possibility that individuals responsible for issuing licenses may use their power for personal gain during the process. Obviously, if these departments are granted policy-making power, they will naturally choose quantitative restrictions. Equally clearly, this outcome is not only detrimental to resource allocation but also, compared to tariffs, leads to a loss of national income. However, if we analyze the realities of developing countries, considering that the salaries of civil servants in these countries are generally still relatively low, the situation where rent is extracted from the management of quantitative restrictions is also objectively inevitable.
2.3 The Widespread Implementation of Quantitative Restrictions and the Safeguard Provisions of WTO (GATT)
2.3.1 The Widespread Implementation of Quantitative Restrictions and the Safeguard Provisions of GATT
The widespread implementation of quantitative restrictions is closely related to the institutional flaws of the World Trade Organization (and its predecessor, GATT), primarily due to the provisions on safeguard clauses in its agreements. In many respects, the increasing use of automatic export restraints has been driven by the importing countries' perception of the defects in GATT's safeguard clause (Article 19). This has led to discussions on how to address the inclusion of measures like automatic export restraints in GATT and how to reform the safeguard clause. This was a key issue in the two rounds of post-GATT negotiations. At the Tokyo Round, the reform of the safeguard clause was unsuccessful, mainly due to severe disagreements among EU member states and other countries on selective issues. However, at the Uruguay Round, an agreement was finally reached in the form of a new Safeguard Measures Agreement, which is considered to clarify and strengthen Article 19.
Why do agreements like GATT need safeguard clauses? The existence of safeguard clauses is justified both economically and politically. Economically, they are intended to provide time for production factors to exit import-competing sectors and enter expanding sectors. Furthermore, temporary protection helps absorb the costs borne by factor owners due to adjustment by increasing the income of protected sectors' factors. For example, higher profits may help producers finance necessary rationalization reforms in protected sectors. Studies have shown that the economic rationale for such protection is weak. If trade expansion imposes social costs, a more economically efficient solution would be to address the root causes of market imperfections that first lead to increased adjustment problems. For instance, if the issue is imperfect labor market functioning, the best solution would be to reform labor market mechanisms to allow wages to respond more flexibly to supply and demand factors. Trade restrictions merely impose additional costs on other parts of society. These considerations are rarely taken into account when import barriers are implemented for adjustment purposes. On a purely economic basis, temporary restrictions are only justified when the marginal social cost of allowing imports to increase (i.e., the total social adjustment cost) exceeds the marginal social benefit (the welfare gains from trade expansion). In most cases where temporary protection is implemented, this seems unlikely. In fact, if costs exceed benefits and temporary restrictions are certain to be implemented, further considerations are needed on two fronts: , how to ensure that the adjustment actually occurs during the restriction period; and second, how to ensure that import barriers are gradually reduced as adjustment progresses. These two issues are interrelated. Unless a deadline for gradually reducing barriers is set, producers in protected sectors will have no incentive to make necessary adjustments. In such cases, trade restrictions would delay rather than accelerate adjustment. If restrictions are prolonged beyond the necessary period, protection would certainly be harmful, as the lost benefits would exceed the saved costs. Clearly, assuming that temporary restrictions exist for a longer period than initially envisioned (such as in the Multi-fiber Arrangement), this would become the norm. In practice, temporary restrictions often become permanent, leading us to question whether the primary motivation for such restrictions is truly to reduce adjustment costs.
Politically, there are stronger reasons for allowing some countries to implement emergency protection. Beyond the economic rationale, there are also political considerations. On a purely economic level, this depends on the so-called adjustment problems caused by trade liberalization. Lowering tariff barriers makes domestic industries more vulnerable to sudden, unpredictable competition from new foreign entrants. In a perfectly competitive product and factor market, this would not pose any problem. Resources would flow, more or less immediately, from declining sectors to expanding sectors in response to price and cost differences. In reality, markets are imperfect, so this adjustment cannot occur quickly enough. As a result, additional costs are incurred by the owners of factors used in import-competing sectors and by society as a whole. Therefore, temporary protection needs to be increased to allow sufficient time for necessary adjustments. The purpose is to ensure that domestic producers in industries that would otherwise be negatively affected by trade liberalization have a potential safety net, otherwise, some of them would refuse to agree to tariff reductions. In other words, including safeguard clauses helps governments secure the consent of producers (especially in sensitive sectors) to lower tariffs. This helps alleviate the concerns of producers in sectors previously protected by high barriers about sudden, unpredictable surges in imports when protection is reduced. At the same time, allowing temporary protection in cases where trade expansion causes adjustment problems can reduce the private adjustment costs of factor owners and lower the likelihood of high-level permanent protection. On the other hand, this may carry the risk that emergency protection is implemented at the expense of producers in declining sectors, as a means of increasing economic rent, to the detriment of producers in expanding sectors. Almost certainly, if progress is made in reducing trade barriers and improving market access, this risk could materialize.