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

T RAINING P ROGRAMME F OR T HE G OVERNMENT O F I NDONESIA P OSSIBLE P OLICY T OOLS FOR I NDONESIA TO CONSIDER Jogjakarta, Indonesia 26-29 March 2019

A GENDA 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)

T HREE P ERSPECTIVES • 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.

E CONOMIC R ANKING OF T RADE P OLICY I NSTRUMENTS • 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.

E CONOMIC R ANKING OF T RADE P OLICY I NSTRUMENTS • 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 the government decided to forego the advantages of an import tariff and to restrain imports mechanism. 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 • In contrast, import quotas and VERs interfere with the competitive process by promoting the goods from any source. They will tend to buy from the country which offers the most cartelization of domestic and foreign industry. Quotas introduce uncertainty into international competitive conditions and thereby ensure that the foreign exchange expenditures for the total commerce. For instance, when an importer concludes a contract with an exporter he may not imports permitted under the quota are minimized. If the quota is allocated among supplying know whether the goods, once they arrive at the customs border, are still admitted because the countries, the importers will lose that freedom; they must then import from the sources quota may already have been filled by other importers. determined by the government, regardless of cost. • 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.

L EGAL R ANKING OF T RADE P OLICY I NSTRUMENTS • Production subsidies are in principle permitted under the WTO Agreement. • If the subsidy impairs a tariff concession, injures a domestic industry of 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 of 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.

L EGAL R ANKING OF T RADE P OLICY I NSTRUMENTS 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

L EGAL R ANKING OF T RADE P OLICY I NSTRUMENTS • 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.

P OLITICAL R ANKING OF T RADE P OLICY I NSTRUMENTS • 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 of direct budgetary transfers, the costs of 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.

P OLITICAL R ANKING OF T RADE P OLICY I NSTRUMENTS • 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.

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