vary with the policy instrument chosen. A production subsidy, - - PowerPoint PPT Presentation

TRAINING PROGRAMME FOR THE GOVERNMENT OF INDONESIA

POSSIBLE POLICY TOOLS FOR INDONESIA TO

CONSIDER

Jogjakarta, Indonesia 26-29 March 2019

AGENDA

The paper will analyse from three different perspectives. the main instruments for protecting a domestic industry from import competition, namely: (a) production subsidies; (b) import tariffs; (c) import quotas; and (d) voluntary export restraints (VERs)

THREE PERSPECTIVES

• Efficiency with which they attain the goal of protection

(which instrument is likely to minimize the cost of protection?)

• Legal status under current international trade rules (which

instrument which is subject to the least constraint under WTO law?)

• Factors influencing the choice among these instruments in

the domestic political process.

ECONOMIC RANKING OF TRADE POLICY INSTRUMENTS

• Economic cost of protecting the domestic industry will

vary with the policy instrument chosen.

• A production subsidy, compared to instruments which

discriminate against imports, has the advantage of distorting only the production structure of the economy, leaving the structure of consumption unaffected.

• By contrast, tariffs, quotas, VERs and other measures

discriminating against imports not only have the (desired) impact on the production structure, but also the (normally undesired) effect of raising prices and distorting the pattern of consumption.

the government decided to forego the advantages of an import tariff and to restrain imports administratively instead. In that case, it has the choice between a global quota and a quota allocated among exporting countries. In the case of a global quota, the importers are free the goods from any source. They will tend to buy from the country which offers the most competitive conditions and thereby ensure that the foreign exchange expenditures for the total imports permitted under the quota are minimized. If the quota is allocated among supplying countries, the importers will lose that freedom; they must then import from the sources determined by the government, regardless of cost.

ECONOMIC RANKING OF TRADE POLICY INSTRUMENTS

• If the government decides to grant import protection instead of a production subsidy to the

industry, it will have to determine whether to restrain imports through fiscal or administrative measures.

• The principal fiscal means available is the import tariff.

Import tariffs, compared to administrative limitations on imports, have the advantage of not interfering with the market mechanism.

• In contrast, import quotas and VERs interfere with the competitive process by promoting the

cartelization of domestic and foreign industry. Quotas introduce uncertainty into international

• commerce. For instance, when an importer concludes a contract with an exporter he may not

know whether the goods, once they arrive at the customs border, are still admitted because the quota may already have been filled by other importers.

• The government can restrain imports through administrative means. In that case, it has the

choice between a global quota and a quota allocated among exporting countries. In the case of a global quota, the importers are free to purchase the goods from any source. They will tend to buy from the country which offers the most competitive conditions and thereby ensure that the foreign exchange expenditures for the total imports permitted under the quota are minimized. If the quota is allocated among supplying countries, the importers will lose that freedom; they must then import from the sources determined by the government, regardless of cost.

LEGAL RANKING OF TRADE POLICY INSTRUMENTS

• Production subsidies are in principle permitted under the WTO

Agreement.

• If the subsidy impairs a tariff concession, injures a domestic industry
• f another WTO Member or otherwise causes serious prejudice to

another WTO Member, the Member according the subsidy may have to renegotiate the impaired tariff concession, bear the consequences

• f countervailing duties or remove the adverse effects of the subsidy,

for instance through an export tax. It is, however, not obliged to withdraw the subsidy. These constraints apply only to subsidies that are specific to an enterprise or industry or group of enterprises or industries, not to more generally available subsidies.

LEGAL RANKING OF TRADE POLICY INSTRUMENTS

Import duties are in principle permitted under the GATT. WTO Members are restrained in the use of that instrument only if they have bound the tariff for a particular product. A tariff binding on a particular product may however be renegotiated by offering tariff reductions on other products. Import quotas are in principle prohibited under the GATT. They may be imposed only if the importing country can invoke one of the exceptions to that prohibition, such as the safeguard provisions permitting emergency action on imports of particular products injuring domestic producers or the balance-of-payments' provisions permitting quantitative restrictions to safeguard the external financial position. The invocation of these provisions is however subject to strict procedural and substantive requirements. Import restrictions under these exceptions must be administered in a non- discriminatory manner. While the institution of country quotas is permitted, contracting parties are to give preference to global quotas wherever practicable

LEGAL RANKING OF TRADE POLICY INSTRUMENTS

• Voluntary export restraints are generally implemented

through discriminatory export quotas, which are in principle prohibited by the GATT. There is no exception in the GATT permitting the use of such measures for the purpose of protecting an industry.

• The WTO Safeguards Agreement prohibits not only

the imposition of VER’s by the exporting country, but even the seeking of such restraints by the importing country.

POLITICAL RANKING OF TRADE POLICY INSTRUMENTS

• Domestic political resistance to protection depends on

how clearly the costs of protection are perceived by

• consumers. In the case of a production subsidy in the

form

• f

direct budgetary transfers, the costs

• f

protection are more apparent than in the case of import

• controls. Moreover, in order to subsidize, taxes need to

be raised, which is unpopular. Production subsidies in the form of budgetary transfers are for these reasons the instrument of protection least preferred by the import- competing industry seeking protection and by politicians seeking re-election.

POLITICAL RANKING OF TRADE POLICY INSTRUMENTS

• Import duty is the most transparent instrument.
• Import duties are generally decided upon by legislators

in a public decision-making process. The margin of nominal protection they provide is evident.

• By contrast, administrative import restrictions are

normally decided upon by the executive branch of the government in a substantially less transparent manner and the margin of protection they provide is much less apparent.

CONCLUSION

Instrument Ranking Economic Legal Political Production Subsidies 1 1 4 Import Duties 2 2 3 Import quotas 3 3 2 VERs 4 4 1

The hierarchy of trade policy instruments under the WTO Agreement corresponds to the hierarchy suggested by economic theory. The less costly the instrument of protection, the fewer the legal constraints imposed. With the exception of certain methods of subsidization, the ranking of policy instruments in accordance with domestic political considerations tends to be the reverse: the less efficient the policy instrument and the higher the legal barriers under WTO law, the more it will tend to be favoured by the protectionist forces in the domestic political decision-making process. The following table summarizes the result of this analysis: