International Trade and Investment

The Effects of Nontariff Barriers on International Trade

   While trade can generate many economic benefits, governments at times set up barriers to international trade. One of the more common and harmful barriers is a nontariff barrier, a barrier behind the border that is a policy (other than a tariff or tax) or official practice that can unfairly inhibit competition. Unjustified nontariff barriers can distort the prices and quantities of goods and services traded internationally, restrict international investment, and reduce economic welfare in exporting and importing countries. As tariffs have fallen both in the United States and in many other countries, nontariff barriers have increased in importance and are often cited as more traderestricting than tariffs. Nontariff barriers can arise as a result of government policies aimed explicitly at protecting domestic firms from international competition, or from rules or laws within a country that effectively hinder trade.

   Unjustified nontariff barriers (NTBs) make it more difficult for international goods and services to compete freely and fairly with those produced domestically. Common examples of NTBs are burdensome or nontransparent product standards or regulations. For example, in Korea, pharmaceutical imports must be tested on Korean nationals, and each individual batch produced must undergo testing. In China, the process of standards certification for telecommunications and IT products can be burdensome and unpredictable, as two separate Chinese regulatory agencies each check for conformity to the same set of standards. Other often-cited NTBs include investment restrictions, government procurement laws, and lax enforcement of intellectual property rights.

   Measuring the effects of NTBs on trade is more difficult than assessing the effects of tariffs, but some attempts have been made. A growing body of evidence consistently shows that the economic welfare gains from eliminating NTBs are at least as large as those obtained from further tariff liberalization. One study shows that the U.S. payoff from eliminating NTBs with just seven of our trading partners (Australia, Canada, Germany, Italy, Japan, the Netherlands, and Great Britain) would generate annual income gains of $90 billion for the United States (0.72 percent of GDP), compared with $37 billion from tariff liberalization (0.30 percent of GDP). These benefits arise largely from the pro-competitive effects of increased international trade and more efficient allocation of resources.

   Tariff negotiations are fairly straightforward, and forums such as the World Trade Organization (WTO) exist for this purpose. Members are required to report their tariff schedule to the WTO each year, so members know the tariff rate for each product in every country. However, countries do not always agree on what constitutes a NTB and there is no formal, consistent notification process, thereby making negotiations aimed at addressing such barriers more complicated. Part of the policy problem is making distinctions as to whether NTBs are warranted for nontrade reasons (e.g., product safety standards) or whether they are simply covert barriers to imports (nontransparent licensing requirements for foreign firms). For instance, customary regulatory and legal procedures within one country might be seen as complex and overly burdensome to would-be exporters.

   Apart from the challenges of identifying NTBs, policymakers face difficulties in knowing which NTBs they should seek to dismantle first. The U.S. Department of Commerce has surveyed its industry and trade experts and country desk officers in an effort to identify the most prevalent NTBs faced by U.S. exporters and to identify which export products are most likely affected. The survey results suggest that, on average, at least one NTB affects U.S. exporters for each major product category in which they export to our main trading partners. For instance, a problematic regulatory environment was cited as a problem in 43 of the 49 countries covered by the survey, and was cited as the top problem in 14 of those countries. The industries facing the most NTBs included entertainment, pharmaceuticals, and information technology.