What is the impact of a quota on imported goods for government?

3.2 Quantitative Restrictions, Import Quotas, and Tariff Rate Quotas

Import quotas—defined as a limit on the number of units of a product that may enter a country—are generally forbidden under the original GATT through Article XI. A long line of economic research has shown that the administration of a quota affects the allocation of welfare and the costs that the quota imposes on different societal groups. If a domestic government auctions off licenses to import the good, then the difference between the item's price under free trade and the domestic price of the good under the quota is a “quota rent” which is collected by the importing country's government. If the government gives away licenses to import under the quota, it transfers the value of this potential (auctioned license) revenue to whomever receives the licenses—a foreign government, a foreign export licensing board, or foreign producers. In this process, there is great scope for corruption; concern regarding corruption is one of the reasons why ad valorem tariff policies have long been encouraged as the “preferred” form of border barrier.bf While the inherent assumption in the preceding examples was that the world market price was below the domestic price, so that the entire quota was filled, in practice, nonbinding quotas with unfilled allotments are not uncommon. In these cases, the quota fill rate, the ratio of actual imports to quota-allowed imports, can serve as a measure of the restrictiveness of the policy.

Countries today continue to apply quantitative restrictions on imports in a few different areas under the WTO system.

First, a number of countries continue to maintain quantitative restrictions in their agricultural sector. Some countries have articulated—as part of their legal commitment to the WTO—a minimum volume of imports of a product for which they offer one (lower) tariff rate; any additional imports arising beyond that minimum volume face a higher tariff rate. These are referred to as tariff rate quotas (TRQs). Take, for example, the United States, which continues to maintain a TRQ for sugar with an in-quota specific duty of 0.625 cents per pound and out-of-quota specific duty of over 20 times that—ie, of 15.36 (raw sugar) or 16.21 (refined sugar) cents per pound. Overall, in the United States in 2013, 4.5% of agricultural products remained subject to quantitative restrictions (through tariff rate quotas). TRQs are also prominent in agriculture in a number of other high-income economies: for the EU, 11.3% of agricultural products were still subject to TRQs, in Canada 9.5%, and in Japan 6.2% (WTO, 2014).

Second, quantitative restrictions remain an especially prevalent outcome in safeguard investigations, including many imposed by emerging and developing countries. Overall, 30% of the import restrictions that WTO members imposed under the Agreement on Safeguards between 1995 and 2014 involved quotas.

Do countries impose quotas so as to discriminate among trading partners? Indeed, the administration of quotas frequently allocates the import licenses under an historical market share rule; typically a firm or country's average market share over the prior 3 years.bg Bown and McCulloch (2003) examine the WTO safeguards imposed over 1995–2000 and highlight the discriminatory nature of quota allocations. For example, quantitative restrictions which base within-quota shares on historical market presence discriminate against new entrants.

Finally, the most significant quota system of the last half-century, the multifiber arrangement (MFA)— that we address in Section 4—was dismantled in 2004. A number of studies have focused on different aspects of the MFA (Brambilla et al., 2010; Harrigan and Barrows, 2009; Dean, 1995; Khandelwal et al., 2013), and especially the implications of its expiration.

2.2 Stockpiling as a Response to Import Dependency

Several policies limited U.S. dependency on imported oil through the early 1960s. One was an oil import quota that attempted to limit imports directly. Initiated in 1957, it remained in effect until rising world prices and controlled domestic prices made it politically unworkable in 1973. The other was the pro-rationing of production in unitized oil fields by state regulatory agencies in Texas and Oklahoma. For example, the Texas Railroad Commission attempted to stabilize crude oil prices by raising and lowering the pro-rationing rate in response to changes in demand. By 1972, however, prorating reached 100%, removing the capacity of the state agencies to stabilize price.

The first proposals for holding strategic reserves came from economists who distinguished between import dependence and vulnerability. They argued that it was not import dependence per say that was worrisome, but rather that the imports were subject to disruption from world events. From this perspective, energy security could be achieved by reducing vulnerability even with substantial reliance on imports. These ideas began to take hold politically, but legislation to create a strategic petroleum reserve introduced in the Senate in April 1973 failed to pass.

4.2 Customs Regulations: Export

Another interesting feature of the WTO is that, while export subsidies are banned by the WTO Agreement on SCM, export taxes are treated symmetrically to import tariffs in Articles II and XXVII of the GATT framework. This implies that export taxes are explicitly legal in the WTO agreement and, while they can be negotiated over and bound like tariffs, in practice this does not typically occur. As export subsidies are considered in a separate chapter of this Handbook, in this chapter we will focus on the WTO's treatment of export taxes. As noted by Ethier (2004), this treatment of export taxes does not appear consistent with the terms-of-trade approach to trade agreements. Specifically, Lerner symmetry suggests that, in a general equilibrium environment, an export tax has the same effects on the economy and welfare as an equivalent import tariff. Thus, by the same logic as in Bagwell and Staiger (1999) in would seem the export taxes would be overutilized in the Nash equilibrium and that negotiating over (and binding) export taxes would be mutually beneficial.

The lack of explicit negotiation over export taxes is most likely due to their infrequent use in practice. The fact that WTO member largely refrain from using export taxes is probably due to undesirable political economy effects such as redistributing income away from politically organized producers. For example, even in a terms-of-trade model like Grossman and Helpman (1995), export taxes do not occur in equilibrium if the weight on political interests is sufficiently strong. That said, there are sectors where export taxes are indeed quite frequent. For instance, governments have used export taxes, and export restrictions more generally, on food products as a means to insulate the domestic market from high and rising world food prices (Anderson and Martin, 2011; Giordani et al., 2014). Another sector is natural resources, where export taxes and restrictions are often used to lower the domestic price of the resource as a form of subsidy to the downstream sector (Latina et al., 2011). In these sectors, the lack of agreed rules at the WTO is problematic, as these policies of exporters contribute to the volatility of food and natural resource prices in international markets and trigger policy responses by trading partners (Ruta and Venables, 2012; Giordani et al., 2014).

A related area where there is potentially more policy relevance, and thus discussion, is in the WTO's treatment of export cartels. Similar to the WTO's prohibition on import quotas, Article XI also bans the use of quantitative restrictions on the export side (ie, export quotas). Thus, Article X1 can and has been used to regulate export cartels that are proactively maintained and/or facilitated by government.bb However, private export cartels that are maintained by colluding firms are, in practice, legal under WTO rules (note that WTO rules only constrain governmental actions). In addition, many WTO members have explicit competition policies that exempt export cartels from antitrust legislation. For example, while the United States prohibits collusion (by either foreign or domestic firms) which harms domestic consumers, it explicitly exempts from such legislation collusion among exporters with respect to foreign markets even when such collusion may harm foreign consumers (the Webb–Pomerene Act). The standard rationale for such exemptions is that collusion may facilitate companies in undertaking (foreign) joint ventures which both reduces the fixed costs of exporting (both informational and administrative) as well as diversifying the risk associated with entering new international markets. However, consistent with the terms-of-trade motivation for trade agreements it is also possible that allowing collusive behavior in export markets could result in higher prices in foreign countries.

The treatment of export cartels in the WTO (or lack thereof) is somewhat controversial as it often reflects a power imbalance between developed and developing countries. Specifically, while WTO rules potentially allow for the formation of private export cartels which could raise prices in foreign markets, these rules also allow those foreign countries to use their own antitrust laws to deter any such anticompetitive behavior. However, it is well recognized that many developing countries lack the capabilities to break-up foreign cartels and thus expanding the WTO agreement to constrain developed-county firms from colluding to raise prices in foreign markets is often seen as a development strategy for poorer countries (see Hoekman and Mavroidis, 2003). Given the difficulty in convincing developed countries to adopt such policies unilaterally, later papers (eg, Hoekman and Saggi, 2007) have suggested using market access concessions and income transfers to induce developed countries into curtailing export cartel activities. However, despite their policy relevance, export cartels have not received much attention in the trade literature. Thus, information on the severity of this problem and thus the costs and benefits of curtailing export cartel activity is somewhat limited.cc

3.7 Economic policy modeling: objectives and instruments

In the theory of economic policy, through the linear algebra and the systems of linear equations, we can model the instruments to be adopted by the decision makers, in order to reach a set of objectives, given some exogenous macroeconomic variables. We will show the basics of these models in a certain and static environment.

Econometrics is massively used in the economic policy and macroeconomic models to estimate the parameters of the models.

Let us introduce m linear equations, n unknown (endogenous) variables, k instrumental variables, and v exogenous variables. We can formalize the following system of linear equations:

(3.7-1){(a11y1+⋯+a1nyn)+(b11x1+⋯+b1kxk)+(c11z1+⋯c1vzv) =0(a21y1+⋯+a2n yn)+(b21x1+⋯+b 2kxk)+(c21z1+⋯c2vzv)=0⋯(ai1 y1+⋯+ainyn)+(b i1x1+⋯+bikxk)+(ci1z1+⋯civzv)= 0⋯(am1y1+⋯+amnyn)+(bm1x1+⋯+bmkxk)+(cm1z1 +⋯cmvzv)=0

Eq. (3.7-1) can be rewritten in a more condensed matrix-based form, where in round brackets the orders of matrices and vectors have been indicated:

(3.7-2)A︸(m⋅n)⋅y︸(n⋅1)+B︸(m⋅k)⋅x︸(k⋅1)+C︸(m⋅v)⋅z︸(v⋅1)=0

Eq. (3.7-2) can be solved either in terms of endogenous variables, or in terms of instrumental variables available in the hands of the economic policy maker.

In the first case, we have the followings solution if and only if det(A)≠0:

(3.7-3)y0=−A−1Bx−A −1Cz

Eq. (3.7-3) is very useful for comparative statistics, when we want to compare the levels in the endogenous variables when we change the instrumental and exogenous variables.

In the second case, we have the following solution if and only if y0 = −A−1Bx−A−1Cz:

(3.7-4)x0=−B−1Ay∗− B−1Cz

where we have denoted with x0 = −B−1Ay∗−B−1Cz the economic policy objectives, i.e., the desired level of the endogenous variables involved, at which the economic policy makers are aiming. The vector of instrumental variables implementable to reach these goals is then calculated in Eq. (3.7-4) once the objectives have been established and given the exogeneous variables.

Now, for convenience, let us rewrite Eq. (3.7-4) into the following standard system:

(3.7-5)B︸ (m⋅k)x︸(k⋅1) =h︸(m⋅1)

where h= −(Ay∗︸(m⋅1 )+Cz︸(m⋅1)) .

From the Rouché–Capelli theorem, we know that if the above system is regular, i.e., r(B)=r(B|h )=m=k, the solution is unique. We have that the number of objectives is equal to the number of instruments.

In theory, another case where the solution is unique is when r(B) = r(B|h) = m = k. Under this circumstance, however, r(B) = k < m instruments (the columns of k) are fewer than the number B of objectives (the rows of m), and B objectives (equations) have to be removed (see Fig. 3.2-5) to solve the system 3.7-5.

Otherwise, there will be infinite solutions if (m−k) (r(B) = m < k solutions). There is an excess of instruments and we can get around it (A) either setting (k−m) instruments as given exogenous variables or (B) increasing the number (k−m) of objectives.

Let us see an example of this last case of excess of instruments with the following set of equations:

(3.7.6-1)Y=C+I+G+NX

(3.7.6-2)C=(1−s) (Y−T)

(3.7.6-3)NX=X−M

(3.7.6-4)M=mY−Z

where

Y =Income (or Output)

I=Investments

G=Government spending

NX=Net Exports (Balance of Trade)

X=Exports

M=Imports

T=Taxes

Z=Import quotas 

m=marginal propensity to import

s = marginal propensity to save

Replacing s = marginal propensity to save in Eq. (1) with Eq. (2) and replacing C in Eq. (3) with Eq. (4) we reduce system 3.7-6 to:

(1.a)sY−I−G−NX+(1−s)T=0

(3.a)mY+NX−X−Z=0

Let us separate the variables in endogenous, exogenous, and instrumental.

The variables mY + NX−X−Z = 0, G and T, are instrumental variables.

The variables Y and NX are endogenous (i.e., explained by other variables in the model).

The variables Z and I are exogenous (i.e., causally independent from other variables in the model).

Let us write, from equations X and (1.a), system 3.7-6 as follows:

[s−1m1][YNX ]︷A·y+[− 1(1−s)000−1][GTZ]︷B·x+[−100−1 ][IX]︷C·z=0

The matrix B is not invertible, and we cannot find a solution for the three instruments B to meet the desired targets of G, T, Z, and Y∗.

We can then move NX∗ from the set of the instrumental variables to the set of exogenous variables, and we obtain the following new version of the system:

[s−1m1] [YNX]︷A·y+[−100−1][GZ]︷B·x+ [−1(1−s)000−1][ITX] ︷C·z=0.

Now B is invertible and we can adopt the form 3.7-5 to get the solution of the instruments B and G, given the desired level of endogenous variables.

The system 3.7-5 with Z is therefore as follows:

[−100−1] [GZ]=−[sY−NXmY+NX]︷ -A·y−[−I+(1−s)T−X]︷-C·z

Setting now the desired levels for the objective variables Y=Y∗ and Y = Y∗, we have the solution:

[G0 Z0]=−[−100−1]−1[sY∗−NX∗mY∗+NX∗]− [−100−1]−1 [−I+(1−s)T−X ]

3.2 Spending buckets of gold on sheepskin

Yellow Earth was founded in Melbourne in 1991 by a young Chinese couple, Liu Zhihua (or James Liu) and Zhang Yiling (or Elaine Zhang), who had both been studying in Melbourne for a couple of years before setting up their business. James was a postgraduate research student at the University of Melbourne on an international scholarship awarded by the Australian government, and Elaine had just completed an advanced English language course, on top of her first bachelor's degree in English from Shanxi University, and started a professional accountant training programme in Australia. Both of them were originally from Taiyuan, the capital city of China's Shanxi province, a place that is situated between the Yellow Earth Plateau, also known as China's Loess Plateau through which the upper Yellow River flows, and the North China Plain, where Beijing and the old industrial port city of Tianjin are located. This whole area can be broadly seen as part of what is normally called the land of yellow earth.

Just like tens of thousands of other Chinese students living in Australia in the early 1990s, James and Elaine had to work to support themselves while attending university. Because of their advanced English language skills, thanks to their university education in China and further training in Australia, they did not waste too much of their time doing low-paid casual or part-time work, what is called dagong in Chinese. Instead, they quietly started a business venture of their own, running a small company to import and sell a variety of fabrics from China.

It sounds a fairly simple, straightforward task to do these days if one decides to buy fabrics from China to sell in other places. However, in the late 1980s and early 1990s, China still partially kept a rigid trade quota system, or a quota allocation system, to manage both export and import of a wide range of commodities and products. Import and export quotas and their allocation were an important component of China's nontariff external trade restriction (Huang, 2001, p. 252), and they were originally decided and managed by government departments at different levels (U.S. International Trade Commission, 2004, p. E-13). Like what had happened in Australia, there was a deregulation process in China in the late 1970s and 1980s, and trade barriers were lowered and the old Soviet-style planning system was decentralised. As Chandrasekhar and Ghosh noticed, China's ‘national purchase and allocation plans were replaced by instructive plans with market regulation and import and export licences and a quota system’ (2006, p. 250). In fact, just a couple of years after the above reforms, as Hockin pointed out, government subsidies on exports were abolished in 1991, and import licencing and import and export quotas became less prevalent in a number of industries, especially export quotas on textile and clothing (Hockin, 2003, p. 142).5

All these changes were made within a short period of time, during which China was also troubled by a series of domestic issues, especially student protests. The public's attention was drawn to numerous outcries, while opportunities created by a string of new reforms were left to those who possessed a special ability, or suzhi as this book emphasises, to exploit. Like all the other Chinese migrant entrepreneurs included in this book, this special ability helped the Yellow Earth owners to resist the influence of popular sentiments and focus on what they wanted to achieve and also to detect where new opportunities would appear. This was particularly difficult for the Chinese living abroad. Being away from China without the help of accessible telecommunication technologies in the early 1990s meant it was not easy to obtain much information from China and to have accurate understanding of it. Apparently, the Yellow Earth founders overcame the difficulties imposed by the old quota system and made better use of the chances created by China's trade liberalisation.

Unlike many other fellow Chinese who were engaged in different business activities, James and Elaine have kept doing what they initially set out to pursue. When many new Chinese migrants started engaging in various businesses in the early 1990s, guerrilla warfare techniques that were characterised by irregularities, especially small, fast-changing operations in the market, were very popular among them (Gao, 2013a). Many were proud of their ability to be flexible in the market, but they failed to establish themselves solidly in one sector before China's abundant supply of cheap goods became more evenly shared around.

Entrepreneurship is not a one-off effort, but a continuous process. The Yellow Earth founders took advantage of the opportunities created by China's abundant supply of cheap goods and Australia's demand for more imports after closing down many of its factories, and they have also benefitted from their own determination and persistence in sticking to one rapidly changing industry. In the early years, their persistence brought at least two major benefits, enabling them to be competitive. First, they became part of the industry after being an active player as a fabric supplier for a few years. They had become well connected in Australia, through which they became familiar with a few sectors, including textiles and clothing, and problems of the industries. In the mid-1990s, some of their fellow migrants already noticed that the gatherings they organised were often attended by some of their non-Chinese colleagues or friends, which was unusual among the new Chinese migrants.

The second major benefit of focusing on one business was the opportunity to identify new products or trends for their business expansion. The fabric business had obviously given the Yellow Earth owners a handsome return, partially because many operators in Australia were scared off from the trade. Added to this pressure was China's speedy trade liberalisation, which was attracting more players to the fabric trade. They then had to decide where and how to reinvest what they earned. Because of their long involvement in the trade, they had witnessed the recession and recognised the likely policies that would result from Australia's economic restructuring. In a practical sense, they also learnt what the market needed and where the demand was, especially the gap between what the market needed and what Australia was able to provide. All these helped them identify a potentially more profitable and sustainable opportunity than the fabric business: a sheepskin tanning business.

This was a decisive moment for the expansion of Yellow Earth as they had to come to a decision on whether to spend their hard-earned, well-deserved fortune, or the first bucket of gold (diyitong jin) in a popular Chinese expression of the time, on sheepskins that were out of favour in Australia.

Although it is not the only factor, choosing to reinvest some early profits seems to be the first step in making some entrepreneurs successful in their businesses and others not. A great majority would stop at this point and enjoy what they have achieved. This was also a big challenge for the Yellow Earth owners. In theory, they knew they had to reinvest in order to make Yellow Earth a sizable, sustainable business. In reality, however, Australia was urged to get off the sheep's back, and all indications made it evident that the industry was dying. Sheepskins were by-products of this shrinking industry, which appeared to have no future and therefore were a risky base on which to build a business.

Australia was statistically out of the recession in 1994, but almost all businesses were then just keeping afloat, while some hard-hit sectors were still declining. The latter included textiles, clothing and footwear. Sheepskins were traditionally used for boots, clothing, caps, bedding, car-seat covers, aviation suits and other items. That is, the sheepskin tanning business was tied to shrinking industries. In terms of business operation, the tanning business was more difficult than importing fabrics and was also a difficult base on which to build a business model.

Their decision to go ahead with the tanning business was a big surprise to all their friends. Although it had been known to be lucrative since ancient times, tanning was still a difficult, laborious, smelly work in the 1990s, and it was not easy for the operators to hire workers and supervise them adequately in their tasks. Many of their old friends attributed their decision to their down-to-earth and hard-working attitudes and practical manner, which set them apart from many others. One of their old friends mentioned the following several times:

Their sheepskin business is not an easy one, not the one that everyone is able to cope with, as it requires a lot of hard work and dedication … Maybe just because of this, the business has a great potential to develop … They can definitely do something else according to their ability to invest and skills, but they have decided to stick to it with their own plan.

(A former Yellow Earth employee, 2012)

At a number of academic conferences and workshops, I have also mentioned the case of Yellow Earth, and on one such occasion, one Chinese historian suggested that this particular success may be deeply rooted in the business traditions of the region where the Yellow Earth owners lived in China. I can understand this perspective, especially the influence of recent research on the history of the so-called Shanxi merchants or jinshang (Chen, 2012; Kong, 2010; Zhang & Zhang, 2011). It was also true that Shanxi once had a lot of sheepskin-related economic activities because of its geography. However, my own observations have suggested no link between those two aspects of the regional history and the success of the Yellow Earth business, except the fact that, as mentioned, they are indeed down-to-earth, hard-working people. In fact, their use of the phrase ‘yellow earth’ in the business name already indicates their determination to work hard as the word carries such a deep cultural meaning. Over decades, they have been obviously guided by the spirit of the yellow earth.

Despite the determination of the Yellow Earth founders, sheepskins not only were hit by both the recession and the economic restructuring but also were experiencing a shrinking demand in Australia. Throughout the 1990s, the concept of ‘recession-proof’ became widespread among ordinary Australians, including many new Chinese migrants, and it was regarded as the principle of deciding what business to do (The Independent, 19 September 1992; The Australian, 28 November 2008). Guided by this principle, many Chinese migrants preferred to run a milk bar, a takeaway food outlet, or any business based on life necessities and products with a short life cycle. In comparison, a sheepskin's life cycle was far too vague and unpredictable, which made many people wonder about the merits of tanning business idea.

Many of these problems, however, were partly offset by not only their hard-working spirit and efforts but also the technical skills that at least James had developed over the years of studying environmental technologies in both China and Australia and working in related institutions. The decision to run the tanning business seemed to be made partly because of James' early training and practical knowledge of industrial wastewater treatment, which was a rather difficult and costly part of this type of business.

All these factors are basic elements of suzhi, which this book seeks to explore, but the difficulties in running a business like Yellow Earth require owners or operators to have more talent and wisdom than what has been discussed. Yellow Earth had another wealth accumulation period in the mid-1990s, during which they tried to enter the Chinese market and found a few buyers for their tanned sheepskins. Importantly, they also tried to make several sheepskin products, including medical sheepskins, sheepskin products for infants and jackets, some of which were produced in cooperation with business partners in China. All these strengthened their investment capacity and also helped them identify a huge market for their sheepskins, enabling Yellow Earth to take its third major step towards become a sheepskin manufacturer.

Yellow Earth acquired Australia's then largest sheepskin tannery, Victoria Mouton, in 1998, and became a main player in the international sheepskin supply chain, supplying tanned sheepskins to a number of industries all over the world from Australia (www.yellowearth.com). A few months after this crucial acquisition, I had an opportunity to visit the tannery in a southwestern suburb of Melbourne in early 1999. Although the acquisition was just concluded, and the hard-working side of the tanning business was very evident, James had already formed his business expansion strategy. He told me many details of their plan, with quickly hand-drawn figures, which aimed at achieving an annual turnover of tens of millions of dollars. The target sounded high, but it seemed achievable when I saw the display of the many beautiful products that were made before and after the acquisition.

This visit, as well as a few chats afterwards, reminded me that migrants, especially new and educated migrants, ‘have a different reference point’ (Averch & Rosenbaum, 1992, p. 127) for understanding various aspects of social conditions and that they ‘have a different perception of the socio-economic conditions’ (Suri, 1994. p. 38). This was obvious in the case of Yellow Earth, as they not only were doing what many Australians felt unable to do but also had plans to expand the business.

That is to say, many new migrants have what I would call ‘a perspective advantage’, the meaning of which is somehow slightly different from what several other researchers have in mind (King, 1995; Wynter, 1992) and basically refers to the fact that new migrants can benefit from their perspectives that differ from longtime residents or people from the so-called mainstream. Since they are new to their host country, the horizon of the Yellow Earth owners is much broader than many longtime residents, at least including China and a few Asian countries in their future plans. This broader perspective has enabled them to free themselves from the worries caused by Australia's economic conditions and made them flexible and competitive in the industry.

Their advantageous perspective has many dimensions, and in addition to their linguistic and technical advantages, Yellow Earth was also actively searching for new targets to acquire while attracting other investments and seeking the government's assistance for primary commodities exports. Their active efforts reminded me of another dimension of their ‘perspective advantage’, which appeared to be an undeclared competition between Yellow Earth and another famous sheepskin-related venture, ‘the story of Ugg’ (The Telegraph, 30 January 2011).

Throughout the 1990s, when Australia was advised to get off the sheep's back, Australia-originated Ugg boots became a fashion in America. This fairy-tale story spread widely, and it has been not only the subject of court challenges (SMH, 18 January 2006; Latimer, 2012, p. 199) but also used as a business case study, as follows:

[The] journal of the humble Australian sheep shearer's furry footwear to become the iconic choice of celebrities is a fascinating story. In 1978 … the Ugg boot fashion was born … Following the acquisition by Deckers in 1995, the Ugg brand was repositioned at the top end of the US retail market and received high-profile media attention. In fact, it could be argued that Ugg boots have enjoyed more celebrity endorsement than any other small fashion brand.

Dahlen, Lange, and Smith (2010), pp. 51–52.

The Ugg boot-related legal challenges and acquisitions intensified after 1995, as part of the intended restructuring of the footwear industry, if viewed from a positive perspective.6 However, the popularity of the products outside Australia has been a lesson to many Australians who knew more about the restructuring in theory, but had not much practical knowledge of how to make better use of raw materials, such as sheepskins, that Australia produces. The story has to be a classic example of the importance of thinking outside the box in both the epistemological and the physical sense. Of course, the story of Ugg boots in America set off a new round of competition in Australia, which has taken place among a different group of entrepreneurs, including the Yellow Earth owners.

Yellow Earth's strategy to compete in making sheepskin boots was enhanced when they obtained the first order from one of Australia's largest retail chains, which occurred after the acquisition of Victoria Mouton in 1998. This may be nothing out of the ordinary, but it was momentous to Yellow Earth as they were new to the industry and the country. Importantly, both the acquisition and the first order made it more feasible than ever to develop Yellow Earth into a significant player in the industry, which would allow their vision for making better use of Australia's sheepskins to be applied and actualised. What aided their version was China's growing middle-class consumption market. That is, the goal of their endeavour appeared to be very clear. They were not going to continue or repeat ‘the story of Ugg’, but would create a new story of their own: ‘the story of Yellow Earth’.

Definitions

•

Intangible asset. An intangible asset is an identifiable non-monetary asset without physical substance.

Research. Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development. The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use.

Intangible assets. Examples include computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights.

To be capitalised they must meet the definition of an intangible asset, i.e. identifiability, control over a resource and the existence of future economic benefits. If it fails, then expenditure should be expensed unless part of a business combination when it should be treated as part of goodwill.

Kinds of Pictures

Pictures can be subdivided into two main categories: realistic pictures and logical pictures (i.e., graphs). Realistic pictures are surfaces, which can be looked at to create (nearly) the same perception as looking at the corresponding real object. Realistic pictures reveal (to some degree) similarity with what they represent; they represent height by height, width by width, color by color, etc. The degree of realism can differ. Photographs and realistic drawings show a high degree of realism, whereas simplified drawings and illustrations contain less detail, and schematic pictures present only the most essential elements of the depicted object (see Figure 1). Whereas realistic pictures have similarity with the content that they depict, graphs possess only an abstract structural commonality with what they represent. For example, a bar graph can represent nonspatial features such as birth rates, import quotas, and so on by spatial features such as the length of bars. In other words, represented features and representing features may be different from each other. Both realistic pictures and logical pictures can further be subdivided into static and dynamic ones according to their temporal stability.

Dynamic pictures (also referred to as animations) are, often, assumed to result in better learning – when the content being portrayed is itself dynamic. A meta-analysis by Höffler and Leutner (2007) found an average superiority of animations in terms of learning compared to static displays, especially if human movements were involved. However, whether and under which conditions animations will lead to better learning outcomes is still under debate (Lowe and Schnotz, 2008) because, on the one hand, animations provide more information (i.e., information about processes), but on the other they, animations provide information that is transient in nature. If learners have to compare different states within an animation, they have to hold previously seen pictures in working memory over a longer period, which can lead to cognitive overload of the working memory. Although learning with movies and animations is quite popular, these media are also, from a motivational point of view, not necessarily the best choice for learning, because viewing movies is usually considered easy and hence may trigger less learner effort than does reading a text, which is considered more difficult (Salomon, 1984). There is a risk that learners do not elaborate mentally the content of animated pictures with the same effort that they elaborate the mental model they derive when reading a text.

1 Varieties of Commercial Policy

The most obvious form of commercial policy, and historically often the most important, is a tariff, a tax on imports which raises their domestic price above the world price, and so ‘protects’ domestic producers at the expense of home consumers. Confusingly, an export subsidy has a similar effect, raising the price of an export good to domestic producers and consumers above its world price. The two measures have opposite effects on the relative price of imports to exports, which is the basis of the Lerner symmetry theorem: a uniform tariff on all imports has exactly the same effects on relative prices as a uniform tax on all exports. Both raise the relative price of imports at home and thus discourage trade. A corollary is that trade can be liberalized either by reducing tariffs or by leaving them in place and subsidizing exports: politically a more expedient route and one followed successfully by some of the newly industrializing countries of East Asia.

Tariffs have declined in importance since the Second World War relative to nontariff barriers such as import quotas, ‘voluntary export restraints’ (i.e., quotas imposed by exporting countries), and government procurement rules. Such policies are qualitatively similar to tariffs in their protective effects, though the conditions for exact equivalence rarely hold. Finally, most domestic policies (taxes, subsidies, health and safety regulations, etc.), even if not explicitly discriminatory, have external repercussions. Though not strictly forms of commercial policy, their effects are increasingly recognized in trade negotiations.

Constructing a true measure of trade policy is an index-number problem: how to aggregate all these different types of trade restriction into a single measure which is comparable across countries and across time. Solutions in principle to it have been devised, but implementing them in practice is extremely difficult. In applied work, levels of protection are usually measured by trade-weighted average tariffs and, even less satisfactorily, by ‘coverage ratios,’ the percentage of traded commodities which are subject to nontariff barriers.

This article considers only the case where commercial policy applies indiscriminately to imports from whatever source. The desirability of this is enshrined in Article I of the GATT, which requires that all trading partners be treated as favorably as the ‘most-favored nation.’ However, Article XXIV allows exceptions for regional trade agreements, which have grown in importance in recent years with the widening and deepening of the European Union and the signing of the North American Free Trade Agreement. For further details, see International Trade: Economic Integration. The GATT also tolerates tariffs imposed on exporters found guilty of ‘dumping’—selling below cost or below the price charged in their home market. Such ‘anti-dumping’ tariffs are an important form of protection in the contemporary world economy: even the threat of imposing them can deter foreign exporters.

2.2.1 Measurement of Trade Policy

Measurement of trade policy is one of the toughest issues in the evaluation of trade policy, especially in cases where nontariff barriers are the primary trade policy instrument. Domestic regulations and standards, which act as barriers to international trade, also affect our ability to assess the extent to which international trade is free. Consider the automobile market within the European Union. Imports of automobiles within the European Union are not subject to import tariffs. However, until very recently, country-specific requirements on car specifications, national car registration rules, and a selective and exclusive distribution system restricted international trade in automobiles within the single market.d The challenges in the measurement of trade policy raise the question of whether the world is truly liberalized, or whether this impression is misguided and due to our inability to measure restrictions to trade that really matter. Multicountry, multiindustry studies are particularly prone to measurement issues. Because of the scope of their analyses, these studies are more affected by data limitations regarding the measurement of trade policy as measures of trade policy restrictiveness are often not comparable across industries, countries, and time.

The measurement of trade policy is challenging even when the definition of trade policy is confined to traditional tariff and nontariff barriers to international trade. In part, the measurement is affected by the lack of detailed comprehensive information on trade barriers for a large set of countries prior to 1980s (Anderson and van Wincoop, 2004). The United Nations’ TRAINS database or the World Bank's WITS database is systematically available only from 1989 onward. In general, measures of tariffs are more readily available than measures of nontariff barriers to trade. In addition, for many countries, these databases do not provide comprehensive information on trade policy measures. For example, fewer than 20% of countries report tariffs, nontariff barriers to trade, and trade flows in any given year (Anderson and van Wincoop, 2004).

In situations in which trade policy measures exist, systematic measurement of their restrictiveness across products, industries, countries, and time is difficult, especially when policies curtail international trade through nonprice-based instruments. As price-based measures, ad-valorem tariffs are easiest to measure and most comparable across industries and time, because they restrict international trade by imposing a tax on imported products that varies proportionally to the product's price. On the other hand, policy instruments such as specific tariffs, which are imposed as a per-unit surcharge on an import, or quantitative restrictions on imports, vary with underlying market conditions.e The comparability of measured trade policy across countries, industries, and time can therefore affect inference about the effects of trade policy in cross-country and multiindustry studies. This is less of an issue in studies that examine the effects of a particular nontariff barrier in an industry, for example, the literature on the effects of the Multi-Fibre Agreement (Brambilla et al., 2010; Harrigan and Barrows, 2009; Khandelwal et al., 2013), studies of antidumping (Blonigen and Prusa, 2003, 2016), and studies of VERs in the automobile industry (Berry et al., 1999; Goldberg, 1995; Verboven, 1996). These studies incorporate the relevant industry-specific institutional and regulatory details, and can appropriately capture variations in industry-specific market conditions that affect the restrictiveness of implemented policy.

Data availability and measurement issues, combined with the timing and nature of large-scale trade liberalizations, help explain why most of the recent empirical studies that examine the effects of trade policy changes from large-scale, economy-wide trade liberalizations focus on trade liberalization episodes in less-developed countries rather than in developed economies. Import tariffs in many developed countries, which the WTO estimates averaged between 20% and 30% in ad-valorem terms prior to the first WTO negotiation round, were reduced in early rounds of the GATT/WTO negotiations. The bound tariffs averaged 8.9% by the end of the Dillon negotiation round in 1962, and 4.1% by the conclusion of the Tokyo Round in 1978 (WTO, 2007).f These liberalizations preceded the collection of readily available data on detailed trade flows and surveys of firms and workers, both of which are needed for the analysis of the effects of trade policy.g In addition, tariffs were often replaced by NTBs, including import quotas (such as the Multi-Fibre Agreement in the apparel and textiles and the VERs in the US automobile industry in the 1980s), and antidumping duties. Many studies have found that these nontariff barriers to trade have severely restricted trade, sometimes even prior to the imposition of the barriers.h To the extent that one cannot comprehensively control for these NTBs, the identification of trade policy effects, especially in multisector and multicountry studies that include developed countries, is challenging. With a few notable exceptions, most empirical studies on developed countries have focused on the effects of import competition or exporting rather than the effects of trade policy on outcomes of interest. A handful of studies have examined the effects of recent trade agreements, such as NAFTA and CUFTA, in developed countries.i

In studies that focus on developing countries, which encompass most of the recent studies on consequences of trade policy, these measurement issues present less of a problem. Most developing countries did not actively participate in earlier GATT/WTO negotiation rounds. As a result, import tariffs remained high in many of these countries at the onset of their large-scale trade liberalizations since the 1980s. For example, ad-valorem tariffs averaged over 50% in Colombia and over 80% in India prior to their trade liberalizations. Trade liberalizations in these countries, therefore, are characterized by large declines in import tariffs. In many cases, nontariff barriers were also reduced, and declines in tariffs were highly correlated with declines in NTBs (see Goldberg and Pavcnik, 2005 for Colombia's trade liberalization). These characteristics of the trade liberalization episodes in less-developed countries facilitate the measurement and identification of the effects of trade policy.

Tariff rate quota

Almost without exception, the US has restricted sugar imports since 1934, with the imposition of a quota to regulate domestic sugar supplies under the Jones–Costigan Act. Then, as now, the USDA was charged with gauging domestic needs. A small group comprised of domestic cane and beet producers, Hawaii, Puerto Rico, the Philippines and the Virgin Islands (US dependencies at the time) and neighboring Cuba, were allocated virtually all of the raw sugar quota.

A series of events served to transform the quota over the ensuing years: the Cuban Revolution and subsequent embargo precluded Cuban imports; the Philippines became independent, while Hawaii opted for statehood, altering the status of the roster of players; and a spike in world sugar prices to 60 cents per pound in 1974 effectively upended the playing field. The quota was removed and replaced by an ineffective tariff system. As prices returned to more normal levels, quotas were reimposed.

A system of quotas employing various duty and fee structures has been in place since May 1982. On 13 September 1990, the quota system was converted from an absolute quota to a tariff rate quota (TRQ) in order to bring the program in line with the prescripts of the General Agreement on Tariffs and Trade (GATT). Country-specific quotas were allocated among exporters based on their historical US raw sugar market share during the period 1975–81. Access to the US market at the ‘low duty rate’ of 0.625 c/lb is granted to 40 countries under the TRQ. Countries covered under the Caribbean Basin Initiative and the Generalized System of Preferences (GSP) are currently granted duty-free access under the TRQ, however, leaving the only countries currently subject to the low-tier duty as Argentina, Australia, Brazil, Gabon and Taiwan. Under GATT provisions, the current quota holders are entitled to their historical share of the US TRQ based on the GATT minimum access of 1.25 million short tons (1.134 million tonnes). A list of quota holders and their respective percentage of the total TRQ is shown in Table 20.1.

Table 20.1. GATT mandated minimum quota access

Notes:

The Secretary of Agriculture establishes the TRQ amount annually. Under the provisions of the FAIR Act, the quota amount is set prior to the 1 October start of the US fiscal year. The total amount of TRQ imports is derived using data published monthly in the USDA’s World Agricultural Supply and Demand Estimate (WASDE). The annual ending stocks-to-use ratio reported in the WASDE is the basis for the secretary’s determination of quota size. From 1997 to 1999, the USDA had set the initial quota size to provide for a projected ending stocks- to-use ratio of approximately 14.5%. More recently, oversupply in the US has forced the USDA to set the quota at the GATT minimum. The US Trade Representatives Office makes an initial allotment available for allocation on a country-by-country basis. Under the current rules, additional quota allocations are made in January, March and May if the ending fiscal year stocks-to-use ratio as published in the WASDE reports for those same months is equal to or less than 15.5%. If the ending stocks-to-use ratio is above the 15.5% threshold, the scheduled tranche is cancelled, and the total quota for the fiscal year in question is reduced by a corresponding amount.

This system of continually monitoring supply as reflected in ending stocks and ending stocks-to-use ratios and removing supply if stocks rise above a predetermined level ensures that prices are maintained at levels sufficient to preclude loan forfeitures. For example, for the 1998/99 program year the USDA announced an initial quota of 1 614 915 tonnes and made available for immediate allocation of 1 164 958 tonnes. Three TRQ tranches of 150 000 tonnes each were withheld for allocation in January, March and May if the ending fiscal year stocks- to-use as published in the WASDE report in those same months were equal to or below 15.5%. As the projected ending stocks-to-use ratio published in January was in excess of 15.5%, the January tranche was cancelled, and the total quota, including unallocated March and May tranches, was reduced to 1 465 915 million tonnes.

March WASDE numbers were released two months later, showing an ending stocks-to-use ratio of 15.9%, and a second tranche quota of 150 000 tonnes was cancelled, reducing the potential total quota to 1 314 934 tonnes. Subsequently, May WASDE numbers were released on 12 May. Owing to an anticipated surge in over-quota imports from Mexico the ending stocks-to-use ratio was estimated at 16.0%, again precluding the allocation of the quota tranche. The total quota supply allowed for allocation for the 1998/99 program year was essentially the minimum allowed under the GATT as the USDA withheld 450 000 tonnes of potential quota from the market in order to reduce stock levels in the US. The USDA thus continually monitors domestic stocks and adjusts imports to ensure the orderly marketing of the domestically produced cane and beet crops.

In the 1999–2000 program year, domestic stocks built significantly, and in the 2000–01 year, the USDA was forced to set the initial TRQ at the GATT minimum, making only a token reference to a potential quota increase if needed. The department thus lost its ability to adjust stocks, and prices, through management of the TRQ. The result was that nearly one million tonnes of sugar were either defaulted or sold into the government’s hands.

As US production continued to increase despite relatively flat consumption, the 2002 farm law saw a shift in focus from managing imports to managing marketing by domestic producers. With US import needs rarely exceeding the WTO minimum level, in surplus years the CCC imposed marketing allotments on US cane and beet processors. After considering the level of carry-in stocks, imports at the legally required minimum, consumption and ‘reasonable’ ending stocks levels, the CCC would set the level of marketing allocation for domestic beet and cane processors at a level that would provide for orderly marketing and prevent forfeitures.