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# **Box 4**

# **Nontariff Measures** and International Price Stability

Initial analyses of the Uruguay Round's accomplishments relating to NTBs tend to focus on the resulting trade gains. This orientation understates the importance of what was achieved since there is reason to believe other benefits should also result. African countries, for example, have long been concerned with the effects of price and earnings instability for their major exports and imports and have been strong supporters of measures like STABEX and UNCTAD's Common Fund which would assist them counter the adverse effects. Related studies have shown, however, that industrial countries' nontariff measures are an important source of this instability. For example, quotas and other quantitative restrictions (like VERS) make the import demand curve completely inelastic at the point where they become operative. As such, any shift in export supply will result in a grater price change than that which would occur under normal demand conditions. Similarly, European countries' variable import levies -- which are widely applied to agricultural imports -- are designed to shield domestic producers from instability in agricultural prices and earnings, but in doing so have a destabilizing influence on international markets.' Actions taken during the Round on NTBs should reduce the importance of the effects of international price instability on African economies.

Variable levies may have both an upward and downward destabilizing influence on the products to which they are applied. When world prices rise variable levies fall and may become negative (i.e., they become subsidies on imports) if the world price rises above the EC's threshold price. In this case EC import demand is higher than under a nominal tariff. The excess demand in an inflationary period contributes to a further increase in world prices. In periods when world prices are falling, however, the variable levies rise thereby restricting any increase in demand. Thus, through their perverse effects on import demand variable levies destabilize world prices. Although EU and EFTA countries rely heavily on variable levies, they are also used by the US and Japan.

Aside from levies, other types of nontariff measures are also recognized to have a destabilizing impact on international trade and prices. For example, in an analysis of international commodity markets the OECD (1982) compiled the following matrix which showed how international price instability would be affected by different NTBs

||Variance of Price Instability Com|pared to that Under Free Trade|
|---|---|---|
|Importing Country Measures|Exporting Country|Importing Country|
|Specific Tariff|same|Same|
|Ad Valorem Tariff|smaller|Larger|
|Fixed Quota<br>Proportional Quota|Generally Larger<br>Generally Larger|Generally Larger<br>Generally Larger|
|Import Prohibition|Generally Larger|Generally Larger|
|Price Fixing|Larger|Smaller or the Same|
|Variable Levy|Larger|Smaller|

relative to what would occur in a free trade situation. The importance of this classification is highlighted by the fact that Laird and Yeats (1990, p. 105) show that more than 70 percent of EC(10) imports of meat, cereals, dairy products, sugar and honey, live animals, and beverages are subject to variable import levies or minimum import prices. Levies are also applied to over 80 percent of Japan's sugar and honey imports while fixed quotas are applied extensively to Japan's meat, dairy, fish and cereal imports. While attempts to quantify exact magnitudes would be useful, there is every indication that the Uruguay Round's "tariffication" of NTBs will make an important contributions to the reduction of global price and trade instability for agricultural products.

'Food security issues have been a major concern on many African countries and one factor increasing these concerns is the wide variability in international prices for basic import staples like grains. Sampson and Snape (1980) develop quantitative evidence showing that OECD nontariff barriers have played an important role in increasing price instability for these goods. This, in turn, raises the cost of food security programs.