Hidden Trade Barriers

Christopher Magee asks why rich nation tariffs are not high. He concludes they are in fact high, but in hidden ways:

In the median industry … over $42 is transferred from consumers to producers for every $1 in efficiency costs caused by the tariff. … The industry lobby should be willing to contribute a lot to the politician to raise those tariffs. And because higher tariffs cause such a small reduction in overall welfare, the policy-maker should be willing to trade higher tariffs for campaign cash. … Thus, instead of asking why there are trade barriers at all, the real puzzle in the literature should be why the trade barriers are not extremely high in most industries.

Here is my assessment … I do not believe that policy-makers care only about social welfare and do not care about campaign contributions. … I also do not think that tariffs are low because users of imported intermediate goods spend a lot of time and money lobbying against tariff protection. … A moderately important reason why tariffs are low is that free riding limits industries’ ability to organise political lobbies. … I also consider the hidden costs of trade barriers as somewhat important in explaining low tariffs. Policy-makers understand the value of good international relations and the cost of trade wars. …

The most important explanation for the puzzle of surprisingly low tariffs is that the political economy literature is largely right: trade barriers are relatively high even in developed countries but they are hidden as quotas and other non-tariff barriers. Unfortunately, these non-tariff barriers, which do not generate government revenue and become more restrictive as the size of the market grows, harm the economy even more than open tariffs do. … In trade policy, what we don’t see is hurting us the most. …

Kee et al. (2004) estimate that the average manufacturing industry in the USA in 1996 had non-tariff barriers that added over 10% to the price of imported goods and that the non-tariff barriers were over three times larger than the tariff rates. In 2004, the ad valorem equivalent of core non-tariff barriers was 9.5% in the USA and 13.4% in the European Union according to estimates from Kee et al. (2009). Trefler (1993) … finds that … the non-tariff barriers were over six times as restrictive as tariffs and that the ad valorem tariff equivalent of US non-tariff barriers was over 20%. (more)

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