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# Box 1: Nontariff Measures and Price Instabiblty

> ;Iitial andyses of the Uruguay Round's accomplishments relating to NTMs tend to focus on whe associated trade gains. 7Tis orientation understates the importance of what was achieved. Developing :.countaie, fior cxample, have long beet concerned with the effects of price and earings instability for their 7 major exports and ilis recognized-that industrial countries' nontariff nwasures are an important source of tbzs iiistabffty. For.: exle, qimtas and other quantitative restrictions (Ike VERs) make the import encrvetonpletely inelastic at the point where they become operative. As such, any shift in export supply .wilesul ina greater pe cange than that which would occur under normal (not perfectly :inelasic) demanddconditions. Similarly, European countries' variable import levies-which are widely ; applied to aicultr imports.-.are designed to shield domestic producers from instability in agricultural .:prices.:and ein,but in-doing so bave a destabilizing influence on international markets.

Variableklevies may have both an upward and downward destabilizing influence on the products to:which the are applied. -Whworld prices ris variable levies fail and may become negative (i.e., they become subsidies. on: imort) if the world price rises above the EC's threshold price. In this case, EC : 'import demand is higher than under a nominul. tariff. The -excess demand in an inflationary period conitributes to.a further mcrease in:world prices. In periods when world prices are falling, however, the .ariale ievies rise tereb stricnganyincrease in demand. Thus, through their _peNrSe effect_ on: import demand variable levies desbilize world prices. Although the EC and many- EFTA countries rely.Z. .hiavily on these easures iable-levies are also used by the United States and Japan.

Aside from levies, othrutypesofnontiff msu are also recognized to have a destabilizing impact on intenational tradc niid prices.: For example, -in an analysis of international commodity markets the OECD (1982) compiled thiebllowing maitrixi which showedbow inteh ntional price stability woud be

* ~ ~ ......... ~ .... .~~~~~~~~~~~~~ .Variac -. ; ~ -of PrceIntabilit Compared: tof InstbliyUndeir:~~ ~~ .. . . . ... ~ ~ F-ree trade .~~~~~~~~~~~ ance: -Price: : *.f nim;po:.tin Cn-t--MExportin. Import.n CuntrY J. Specif Tariff -- _Sa_ Samne r * Ad Valorem TariffSmle Fixed Quota Generally Larger Generally Larger Proportional Quota Gene. Larger : --- - :- -: -::ral Gen e r:l Lag.-e * Imptrq,-ort Prohibition Gnrly LagrGeneal Larger._--! P*e Fixing ,~~~~~~~~~~~~~~~~~~. .., . .. .. .. .... .. .. .. .. , ... **.** . .... Variable Levy ! "','.' La'e .malle S. a. ffeed by differt NTMs relative to what would: occur8 in a ae s nThimortan of t aboveclassification is highlighted by the:fact'that Laird and Yeats (1990,Qp .105) show that more than 70 percent~ of EC(l0) imports.of meat, cereals, dairy products, sugar and honey. live aimals, and beverages *iresubjectto.variable import levies or minimu imiport prices. Levies are also applied to over 80 percet of Japan's uigatrand honey imporis vwhile:fiied quotas'ar- applied extsively to Japan's meat, dairy fish :.aui ocrl:impQrts. Whilc attempts to yexactmagnitudqes would beusel,: is ev indic :*.:< that the Urnguay.Round's "tarifflcation' of NTMswill mnake an-imporzant contribution to die reduction of > jlobal price and trade instabilityfor gricultul:raprodu.cts.