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CONTRAINTS TO INTERNATIONAL
MARKETING
TARIFF AND NON TARIFF BARRIERS
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TRADE BARRIERS
Trade barriers are the artificialrestrictions imposed by thegovernments on free flow of goods
and services between countries.
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Tariffs, quotas, taxes, duties, foreignexchange restrictions, trade agreementsand trading blocs are the techniques
used for restricting free movement ofgoods from one country to the other
Trade barriers are broadly classified intofollowing two categories:
Tariff barriers or Fiscal controlsNon-tariff barriers or quantitative
restrictions.
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OBJECTIVES OF TRADE
BARRIERS To Protect Home Industries from Foreign Competition
To Promote New Industries and Research and Development
To Conserve Foreign Exchange Reserves
To Maintain Favorable Balance of Payments
To Protect Economy for Dumping To Curb Conspicuous Consumption
To Make Economy Self-reliant
To Mobilize Public Revenue
To Counteract Trade Barriers Imposed by Other Countries
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Methods of Valuing Imports
Free alongside (F.A.S.) price
The price of the imported good as the foreign
countrys market price before loading the good for
shipment to the importing country
Free on Board (FOB) price
The price of the imported good as the foreign
countrys market price plus the cost of loading thegood in the means of conveyance
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Cost, Insurance, and Freight (C.I.F.) price
The price of the imported good as the foreign countrys
market price plus the cost of loading the goods into the
means of conveyance plus all inter-country
transportation costs up to the importing countrys port
of entry.
Most countries use the C.I.F. price for calculating ad
valorem tariffs.
BUT the U.S. uses the FOB price for calculating ad
valorem tariffs.
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TARIFFS BARRIERS
Tariffs in international trade refer to the duties
or taxes imposed on internationally traded
commodities when they cross the national
borders.
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Import tariffs Export tariffsdirection
Specific duties
Ad valorem duties
Combined dutiesTariff rates
Single column tariff
Double column
Triple columnApplication
Revenue tariff
Protective tariffPurpose
Anti dumping duties
Countervailing dutiesOthers
CLASSIFICATION OF TARIFFS
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ON THE BASIS OF DIRECTION
Export Duties
An export duty is a tax imposed on a
commodity originating from the duty-levying
country destined for some other country.
Import duties
An import duty is a tax imposed on acommodity originating abroad and destined
for the duty-levying country.
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ON THE BASIS OF TARIFF RATES
Specific Duties
A specific duty is a flat sum per physical unit of the commodityimported or exported, thus a specific import duty is a fixed amountof duty levied upon each unit of the commodity imported.
Ad-Valorem Duties
Ad-valorem duties are levied as a fixed percentage of the value ofcommodity imported/exported. Thus, while the specific duty isbased on the quantum of commodity imported/ exported, the ad-valorem duty is based on the value of the commodityimported/exported.
Compound DutiesWhen a commodity is subject to both specific and ad-valoremduties, the tariff is generally referred to as compound duty.
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ON THE BASIS OF APPLICATION
Single Column Tariff
The single-column, also known as the uni-linear, tariffsystem provides a uniform rate of duty for all likecommodities without making and discrimination betweencountries.
Double Column Tariff
Under the double-column tariff system, there are two ratesof duty on some or on all commodities. Thus, the doublecolumn tariff discriminates between countries. The double-
column tariff system may be broadly divided into:(a) General and conventional tariff;
(b) Maximum and minimum tariff.
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continued
Triple-Column Tariff
The triple-column tariff system consists of threeautonomously determined tariff schedules
the general,
the intermediate and
the preferential.
The general and intermediate rates are similar to themaximum and minimum rates mentioned above under
the double-column tariff systems. The preferential rateis generally applied in trade between the mothercountry and the colonies.
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On the basis of purpose
Revenue Tariff
Sometimes the main intention of the government inimposing a tariff may be to obtain revenue. When raisingrevenue is the primary motive, the rates of duty aregenerally low, lest imports should be highly discouraged,defeating the objective of mobilizing revenue for thegovernment.
Protective Tariff
Protective tariff is intended primarily, to accord protection
to domestic industries from foreign competition. Naturally,the rates of duty tend to be very high in this case becausegenerally, only high rates of duty curtail imports to asignificant extent.
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Others
Countervailing and Anti-Dumping DutiesCountervailing duties may be imposed on certainimports when they have been subsidized by
foreign governments.Antidumping duties are applied to imports whichare dumped on the domestic market at priceseither below their cost of production or
substantially lower than their domestic prices. Countervailing and anti-dumping duties are,
generally penalty.
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IMPACT OF TARIFFS
Tariffs affect on economy in different ways. An import duty
generally has the following effect:
(i) Protective Effect An import duty is likely to increase the price
of imported goods. This increase in the price of imports is
likely to reduce imports and increase the demand for
domestic goods. Import duties may also enable domestic
industries to absorb higher production costs. Thus, as a result
of the production accorded by tariffs, domestic industries are
able to expand their output.(ii) Consumption Effect The increase in prices resulting from the
levy of import duty usually reduces the consumption capacity
of the people.
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(iii) Redistribution Effect
If the import duty causes and increase in the price ofdomestically produced goods, it amounts toredistribution of income between the consumers andproducers in favor of the producers.
(iv) Revenue Effect
As mentioned above, a tariff means increased revenuefor the government (unless, of course, the rate of tariffis so prohibitive that it completely stops the import ofthe commodity subject to the tariff).
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(v) Income and Employment Effect
The tariff may cause a switchover from spending onforeign goods to spending on domestic goods. Thishigher spending within the country may cause anexpansion in domestic income and employment.
(vi) Competitive Effect
The competitive effect on the tariff is, in fact, an anti-competitive effect in the sense that the protection ofdomestic industries against foreign competition mayenable the domestic industries to obtain monopolypower with all its associated evils.
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(vii) Term of Trade Effect In a bid to maintain theprevious level of imports to the tariff imposingcountry, if the exporter reduces his prices, the
tariff-imposing country is able to get imports at alower price. This wills, ceteris paribus, improvethe terms of trade of the country imposing thetariff.
(vii) Balance of Payments Effect Tariffs, by reducingthe volume of imports, may help the country toimprove its balance of payments position.
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NON TARIFF BARRIERS
All forms of discrimination against imports other
than import duties
Administered protection(Non Quantitative)
Quantitative
Quotas: numerical limits placed on specific classes
of imports
Voluntary export restraints (VERs): Export quotasimposed by exporting nation
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Administered Protection
Administered protection encompasses a wide
range of bureaucratic government actions,
which have grown in absolute as well as
relative importance over the last decade ormore
Important administrative protection measures
include the following:
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Health and Product Standards:-
Several health and product standards imposed
by the developed countries hinder the exports
of developing countries because of the added
costs or technical requirements.
The need for maintaining health and product
standards is unquestionable.
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Customs Procedures:
Certain customs procedures of many countries
become trade barriers.
For example, studies point out that frequent
changes of Japans customs regulations are
themselves a significant barrier to exporters,
especially those not affiliated with Japanese
overseas joint ventures.
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Consular Formalities :
A number of countries insist on certain
consular formalities like certification of export
documents by the respective consulate, of the
importing country, in the exporting country.
This becomes a trade barrier when the fees
charged for this is very high or the procedure
is very cumbersome
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Licensing:
Many countries regulate foreign trade
particularly imports, by licensing.
In most cases, the purpose of import licensing
is to restrict imports.
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Government Procurement:
Government procurements often tend to
hinder free trade.
The Tokyo Round has, therefore, formulated
an agreement on government procurement
with a view to securing greater international
competition in government procurements.
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State Trading :
State trading also hinders free trade many a timebecause of the counter trade practices,
canalization, etc. State trading was an important feature of the
foreign trade of the centrally planned economicsand many developing countries.
With the economic liberalizations in most ofthese countires, the role of state trading hasdeclined.
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Monetary Controls:
In addition to foreign exchange regulations, other monetarycontrols are sometimes employed to regulate trade,particularly imports.
For instance, to tide over the foreign exchange crisis in1990-91 and 1991-92, the Reserve Bank of India tookseveral measures which included as 25 per cent interestrate surcharge on bank credit for imports subject to acommercial rate of interest of a minimum 17 per cent, therequirement of substantially high cash margin requirementon most imports other than capital goods, and restrictionson the opening of letters of credit for imports.
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Foreign Exchange Regulations :
Foreign exchange regulations are an important
way of regulating imports in a number of
countries. This is done by the State
monopolizing the foreign exchange resources
and not realizing foreign exchange for import
of items which the government do notapprove of for various reasons.
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Quantitative restrictions
Voluntary Export Restraints
Importing countries persuade exporting
countries to voluntarily limit their exports.
Example: 1.68 million Japanese cars permitted
annually beginning in 1981.
There is an implied threat of tariffs or quotas if
exporting country doesnt comply.
VERs exist for political reasons, noteconomically valid ones.
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Quantitative Restrictions - Quotas
Quantitative restrictions or quotas are an
important means of restricting imports and
exports. A quota represents a ceiling on the
physical volume of the import/export of acommodity
Types of Import Quota
There are four important types of import
quotas, including import licensing. These are:
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(i) Tariff Quota
A tariff quota combines the features of the
tariff as well as of the quota.
Under a tariff Quota the imports of a
commodity up to a specified volume are
allowed duty free or at a special low rate;
but any imports in excess of this limit are
subject to duty-a higher rate of duty
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(ii) Unilateral Quota
In a unilateral quota, a country unilaterally
fixes a ceiling on the quantity of the import of
particular commodity.
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(iii) Bilateral Quota
A bilateral quota results from negotiations
between the importing country and a
particular supplier country, or between the
importing country and export groups within
the suppliercountry
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(iv) Mixing Quota
Under the mixing quota, the producers are
obliged to utilize domestic raw materials up to
a certain proportion in the production of a
finished product
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Under the import licensing system, theprospective importers are obliged to obtain alicense from the licensing authorities: thepossession of an import license is necessary toobtain the foreign exchange to pay for theimports,
In a large number of countries, import licensing
has become a very powerful device forcontrolling the quantity of imports-either ofparticular commodities or aggregate imports.
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Impact of Quotas
Like fiscal controls, the quantitative
restrictions on imports have a number of
effects on the economy.
The following are, in general , the important
economic effects of quotas:
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(i) Balance of Payments Effect
As quotas enable a country to restrict theaggregate imports
within specified limits, quotas are helpful inimproving its
balance of payments position.
(ii) Price Effect
As quotas limit the total supply, they may causean increase in
domestic prices.
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(iii) Consumption Effect
If quotas lead to an increase in prices, people may beconstrained
to reduce their consumption of the commodity subject
to quotas or some other commodities. (iv) Protective Effect
By guarding domestic industries against foreigncompetition to
some extent, quotas encourage the expansion ofdomestic
industries.
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v) Redistributive Effect
Quotas also have a redistributive effect if the fallin supply due to important restrictions enablesthe domestic producers to raise prices. The rise in
prices will result in the redistribution of incomebetween the producers and consumers in favor ofthe producers.
(vi) Revenue Effect
Quotas may have revenue effect. Thegovernment may obtain some revenue bycharging a license fee.
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Comparison of an Import Quota to an Import Tariff
1. With a given import quota, an increase in demand
will result in a higher domestic price and greaterdomestic production than with an equivalent import
tariff. However, with a given import tariff, an
increase in demand will leave the domestic price and
domestic production unchanged but will result inhigher consumption and imports than with an
equivalent import quota.
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2. The quota involves the distribution of import
licenses. The government does not auction off these
licenses in a competitive market, firms that receive
them will reap monopoly profits. These profits will
make potential importers devote efforts to lobbying
and even bribing to obtain the licenses (rent seeking
activities). Thus import quotas not only replacemarket mechanism but also result in waste from the
point of view of the economy as a whole and contain
the seeds of corruption.
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3. An import quota limits imports to the specified level
with certainty, while a tariffs effect is uncertain.
The reason is that the elasticity of supply anddemand often unknown, making it difficult to
estimate the import tariff required to restrict imports
to a desired level. Furthermore, foreign exporters
may absorb all or part of the tariff by increasingtheir efficiency or accepting lower profits. Exporters
cannot do this with an import quota since quantity of
imports is clearly specified. For this reason domestic
producers prefer quotas to tariffs. However, sincequotas more restrictive than tariffs, society should
resist these efforts.
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Organizations Promoting International
Trade
The General Agreement on Trade and Tariff
(GATT) came into existence in 1947
It sought substantial reduction in tariff and other
barriers to trade and to eliminate discriminatorytreatment in international commerce.
India signatory to GATT 1947 along with twenty
two other countries Eight rounds of negotiations had taken place
during five decades of its existence
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WORLD TRADE ORGANISATION (WTO) Came into existence on
1-1-1995 with the conclusion of Uruguay Round Multilateral Trade
Negotiations at Marrakesh on 15th April 1994, to :
Transparent, free and rule-based trading system
Provide common institutional framework for conduct
of trade relations among members
Facilitate the implementation, administration and
operation of Multilateral Trade Agreements
Rules and Procedures Governing Dispute Settlement Trade Policy Review Mechanism
Concern on Non-trade issues such as Food Security,
environment, health, etc.
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Represents 149 negotiated trade agreements
among countries
Key Functions
Cooperating with other International Organizations
Administering
WTO
agreement
Providing a forum for
trade negotiations
Handling trade
disputes between
nations
Monitoringnational trade
policies
Providingtechnical assistance and
training for people in
developing countries
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What is NAFTA?
Began on January 1, 1994
Between Canada the United States
and Mexico
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What is ASEAN?
Established on August 8th, 1967
10 member countries
-Brunei Darussalam, Cambodia,
Indonesia, Laos, Malaysia,
Myanmar, Philippians, Singapore,Thailand, and Vietnam
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What is the EU?
27 member states: Austria,
Belgium, Bulgaria, Cyprus,
Czech Republic, Denmark,
Estonia, Finland, France,
Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania,
Luxemburg, Malta,Netherlands, Poland, Portugal,
Romania, Slovakia, Slovenia,
Spain, Sweden, and the United
Kingdom.
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IMF
1. IMF was created to assist nations in becoming and
remaining economically viable
2. It assists countries that seek capital for economic
development and restructuring3. IMF loans come with stipulations that borrowing
countries slash spending and impose controls to
curb inflation
4. It helps maintain stability in the world financial
markets
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Objectives of the IMF include:
1. stabilization of foreign exchange rates
2. establish convertible currencies to facilitate
international trade3. lend money to members in financial trouble
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World bank
1. lending money to countries to finance developmentprojects in education, health, and infrastructure;
2. providing assistance for projects to the poorestdeveloping countries;
3. lending directly to the private sector in developingcountries with long-term loans, equity investments,and other financial assistance;
4. provide investors with investment guaranteesagainst noncommercial risk, so developing
countries will attract FDI; and5. provide conciliation and arbitration of disputes
between governments and foreign investors