Tariffs levied on imports increase their cost and discourage their demand. As a result, each country places higher import barriers on goods determined to be import sensitive. But tariffs are only one way to restrict imports. New and innovative methods, including non-tariff barriers, subsidies, confusing tax codes and red tape, are difficult to measure and are increasingly being used. How does this affect your business?

Industrial and Developing Country Interests Differ

According to the World Bank, industrial countries are less sensitive to manufactured imports. As a result, they maintain low tariff levels on manufactured goods. However, due to their high sensitivity to agricultural imports, they maintain high tariff levels on agricultural products. In fact, the average tariff protection on agricultural goods is nine times higher than on manufacturing goods. And this does not include the impact of agricultural subsidies.

On average, developing countries’ applied tariffs on industrial products are three to four times as high as those of industrial countries. And, their tariff levels on agricultural products are even higher. What would happen if all tariffs were eliminated? According to the IMF and World Bank, potential welfare gains are estimated at $250 - $650 billion annually. About one-third to one-half of this would accrue to developing countries. And removal of agricultural supports would raise global economic welfare by an additional $128 billion annually, with some $30 billion going to developing countries.

Studies Show Protectionist Measures Inflict Severe Damage

Although in some instances protectionism may help fledgling industries for limited periods of time, current and decades-old studies indicate that trade barriers have severe negative consequences. Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers and results in net job losses.

According to the 2002 U.S. International Trade Commission report, The Economic Effects of Significant U.S. Import Restraints, if all U.S. trade barriers had been simultaneously eliminated in 1999, 175,000 full-time workers would have been displaced, with the textile and apparel sector incurring nearly 90 percent of that loss. This would have represented only one one-hundreth of 1 percent of the 1999 labor force of 122.1 million. However, the report indicates, 192,400 full-time jobs would have been created, resulting in a net gain of nearly 17,400 jobs. In addition, total output would have increased by $58.8 billion.

The World Trade Organization (WTO) determined in 1988 that $3 billion was added annually to grocery bills of U.S. consumers to support sugar import restrictions. In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58 percent.

And when the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41 percent between 1981 and 1984. The objective was to save American jobs. However, in the end, it cost more jobs due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Additionally, Trade, Jobs and Manufacturing, a report by Dan Griswold published by the Cato Institute, a Washington, D.C. think tank, contends that if import barriers on sugar products were eliminated, imports would surge by almost 50 percent and domestic production would fall by 7.2 percent. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs — a small number compared to an average of 235,000 net new jobs the U.S. economy created each month leading up to 1999, the year the report was released.

The Rising Use of Non-Tariff Barriers

Unlike tariffs, non-tariff barriers are often hidden. Sometimes referred to as “red tape,” they typically include quotas, boycotts, licenses, standards and regulations, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls and subsidies. Although some are used to legitimately protect consumers, many are not. In fact, in some countries environmental, labor, competitive policy and investment issues are increasingly also used in an abusive manner to discourage imports.

Controversy over Subsidies and Tax Codes

Several countries have continually changed and manipulated their tax codes to obtain a trade advantage. In addition, many have thrown convoluted subsidies into the mix and ended up with a lot of unintended consequences. Today, that’s the situation in both the United States and European Union.

What’s happening now is tied to actions of the past. For decades, European industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition. Additionally, the European Union has exempted and continues to exempt its exporters from paying a substantial value added tax.

The Foreign Sales Corporation and Extraterritorial Income Exclusion Act

To counter these unfair actions, in 1984, the United States crafted the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved beneficial, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the European Union challenged the FSC rule through the World Trade Organization, and won in 2000.

In attempt to satisfy the global trade body, the United States repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy Europe, who again challenged the law, and won.

Consequently, the European Union is now authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery. Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

The U.S.-EU Challenge

How can the United States respond to this challenge? If Congress terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms are small. But they’re not the only ones that stand to lose. Boeing alone estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Airbus, Boeing’s heavily subsidized European rival, has received more than $30 billion in European financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

The U.S. response to the ETI challenge is currently being debated in Congress. And one thing remains certain: U.S. exporters need a mechanism that counters their European rivals’ government handouts. Small and medium-size companies, which account for about 96 percent of all U.S. exporters, and large companies, as well as farmers, all need a level playing field.

Sound Research Is Needed to Identify All the Barriers to Trade

Regardless of how the U.S. and EU work out their disagreements, one thing is certain: tax codes, subsidies, tariffs and multiple layers of non-tariff barriers can artificially create winners and losers in international trade. As a result, it is essential that U.S. exporters in pursuit of new markets conduct sound research to determine what barriers exist and what impact they are likely to have on your level of competitiveness. In today’s era of hidden obstacles, in-depth research and analysis can mean the difference between international success or failure.

This article appeared in Impact Analysis, January-February 2004.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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