1

CHAPTER 1

INTRODUCTION OF NON TARIFF BARRIERS

Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff Measures

(NTMs)" are trade barriers that restrict imports, but are unlike the usual form of a

tariff; And Tariff Barriers restricts Exports. Some common examples of NTB's are

anti-dumping measures and countervailing duties, which, although called non-tariff

barriers, have the effect of tariffs once they are enacted. Example of Tariff Barrier is

Export Duty.

Their use has risen sharply after the WTO rules led to a very significant reduction in

tariff use. Some non-tariff trade barriers are expressly permitted in very limited

circumstances, when they are deemed necessary to protect health, safety, sanitation,

or depletable natural resources. In other forms, they are criticized as a means to evade

free trade rules such as those of the World Trade Organization (WTO), the European

Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use

of tariffs.

Some of non-tariff barriers are not directly related to foreign economic regulations but

nevertheless have a significant impact on foreign-economic activity and foreign trade

between countries.Trade between countries is referred to trade in goods, services and

factors of production. Non-tariff barriers to trade include import quotas, special

licenses, unreasonable standards for the quality of goods, bureaucratic delays at

customs, export restrictions, limiting the activities of state trading, export subsidies,

countervailing duties, technical barriers to trade, sanitary and phyto-sanitary

measures, rules of origin, etc. Sometimes in this list they include macroeconomic

measures affecting trade.

2

3

4

5

CHAPTER 2

DIFFERENCE BETWEEN TARIFF AND NON TARIFF BARRIERS

Tariff Barriers vs Non Tariff Barriers

All countries are dependent on other countries for some products and services as no

country can ever hope to be self reliant in all respects. There are countries having

abundance of natural resources like minerals and oil but are deficient in having

technology to process them into finished goods. Then there are countries that are

facing shortage of manpower and services. All such shortcomings can be overcome

through international trade. Though it seems easy, in reality, importing goods from

foreign countries at cheap prices hits domestic producers badly. As such, countries

impose taxes on goods coming from abroad to make their cost comparable with

domestic goods. These are called tariff barriers. Then there are non tariff barriers also

that serve as impediments in free international trade. This article will try to find out

differences between tariff and non tariff barriers.

Tariff Barriers

Tariffs are taxes that are put in place not only to protect infant industries at home, but

also to prevent unemployment because of shut down of domestic industries. This

leads to unrest among the masses and an unhappy electorate which is not a favorable

thing for any government. Secondly, tariffs provide a source of revenue to the

government though consumers are denied their right to enjoy goods at a cheaper price.

There are specific tariffs that are a one time tax levied on goods. This is different for

goods in different categories. There are Ad Valorem tariffs that are a ploy to keep

6

imported goods pricier. This is done to protect domestic producers of similar

products.

Non Tariff Barriers

Placing tariff barriers are not enough to protect domestic industries, countries resort to

non tariff barriers that prevent foreign goods from coming inside the country. One of

these non tariff barriers is the creation of licenses. Companies are granted licenses so

that they can import goods and services. But enough restrictions are imposed on new

entrants so that there is less competition and very few companies actually are able to

import goods in certain categories. This keeps the amount of goods imported under

check and thus protects domestic producers.

Import Quotas is another trick used by countries to place a barrier to the entry of

foreign goods in certain categories. This allows a government to set a limit on the

amount of goods imported in a particular category. As soon as this limit is crossed, no

importer can import further quantities of the goods.

Non tariff barriers are sometimes retaliatory in nature as when a country is

antagonistic to a particular country and does not wish to allow goods from that

country to be imported. There are instances where restrictions are placed on flimsy

grounds such as when western countries cite reasons of human rights or child labor on

goods imported from third world countries. They also place barriers to trade citing

environmental reasons.

7

CHAPTER 3

TYPES OF NON TARIFF BARRIERS TO TRADE

Specific Limitations on Trade:

1. Import Licensing requirements

2. Proportion restrictions of foreign domestic goods (local content

requirements)

3. Minimum import price limits

4. .Fees

5. Embargoes

Customs and Administrative Entry Procedures:

1. Valuation systems

2. Anti-dumping practices

3. Tariff classifications

4. Documentation requirements

5. Fees

Standards:

1. Standard disparities

2. Intergovernmental acceptances of testing methods and standards

3. Packaging, labeling, and marking

Government Participation in Trade:

1. Government procurement policies

2. Export subsidies

3. Countervailing duties

4. Domestic assistance programs

8

Charges on imports:

1. Prior import deposit subsidies

2. Administrative fees

3. Special supplementary duties

4. Import credit discrimination

5. Variable levies

6. Border taxes

Others:

1. Voluntary export restraints .

2. Orderly marketing agreements.

There are several different variants of division of non-tariff barriers. Some scholars

divide between internal taxes, administrative barriers, health and sanitary regulations

and government procurement policies. Others divide non-tariff barriers into more

categories such as specific limitations on trade, customs and administrative entry

procedures, standards, government participation in trade, charges on import, and other

categories.

The first category includes methods to directly import restrictions for protection of

certain sectors of national industries: licensing and allocation of import quotas,

antidumping and countervailing duties, import deposits, so-called voluntary export

restraints, countervailing duties, the system of minimum import prices, etc. Under

second category follow methods that are not directly aimed at restricting foreign trade

and more related to the administrative bureaucracy, whose actions, however, restrict

trade, for example: customs procedures, technical standards and norms, sanitary and

9

veterinary standards, requirements for labeling and packaging, bottling, etc. The third

category consists of methods that are not directly aimed at restricting the import or

promoting the export, but the effects of which often lead to this result.

The non-tariff barriers can include wide variety of restrictions to trade. Here are some

example of the popular NTBs.

I. Licenses

The most common instruments of direct regulation of imports (and sometimes export)

are licenses and quotas. Almost all industrialized countries apply these non-tariff

methods. The license system requires that a state (through specially authorized office)

issues permits for foreign trade transactions of import and export commodities

included in the lists of licensed merchandises. Product licensing can take many forms

and procedures. The main types of licenses are general license that permits

unrestricted importation or exportation of goods included in the lists for a certain

period of time; and one-time license for a certain product importer (exporter) to

import (or export). One-time license indicates a quantity of goods, its cost, its country

of origin (or destination), and in some cases also customs point through which import

(or export) of goods should be carried out. The use of licensing systems as an

instrument for foreign trade regulation is based on a number of international level

standards agreements. In particular, these agreements include some provisions of the

General Agreement on Tariffs and Trade and the Agreement on Import Licensing

Procedures, concluded under the GATT (GATT)..

10

II. Quotas

Licensing of foreign trade is closely related to quantitative restrictions – quotas - on

imports and exports of certain goods. A quota is a limitation in value or in physical

terms, imposed on import and export of certain goods for a certain period of time.

This category includes global quotas in respect to specific countries, seasonal quotas,

and so-called "voluntary" export restraints. Quantitative controls on foreign trade

transactions carried out through one-time license.

Quantitative restriction on imports and exports is a direct administrative form of

government regulation of foreign trade. Licenses and quotas limit the independence of

enterprises with a regard to entering foreign markets, narrowing the range of

countries, which may be entered into transaction for certain commodities, regulate the

number and range of goods permitted for import and export. However, the system of

licensing and quota imports and exports, establishing firm control over foreign trade

in certain goods, in many cases turns out to be more flexible and effective than

economic instruments of foreign trade regulation. This can be explained by the fact,

that licensing and quota systems are an important instrument of trade regulation of the

vast majority of the world.

The consequence of this trade barrier is normally reflected in the consumers‟ loss

because of higher prices and limited selection of goods as well as in the companies

that employ the imported materials in the production process, increasing their costs.

An import quota can be unilateral, levied by the country without negotiations with

exporting country, and bilateral or multilateral, when it is imposed after negotiations

and agreement with exporting country. An export quota is a restricted amount of

goods that can leave the country. There are different reasons for imposing of export

11

quota by the country, which can be the guarantee of the supply of the products that are

in shortage in the domestic market, manipulation of the prices on the international

level, and the control of goods strategically important for the country. In some cases,

the importing countries request exporting countries to impose voluntary export

restraints.

III. Agreement on a "voluntary" export restraint

In the past decade a widespread practice of concluding agreements on the "voluntary"

export restrictions and the establishment of import minimum prices imposed by

leading Western nations upon weaker in economical or political sense exporters. The

specifics of these types of restrictions is the establishment of unconventional

techniques when the trade barriers of importing country, are introduced at the border

of the exporting and not importing country. Thus, the agreement on "voluntary"

export restraints is imposed on the exporter under the threat of sanctions to limit the

export of certain goods in the importing country. Similarly, the establishment of

minimum import prices should be strictly observed by the exporting firms in contracts

with the importers of the country that has set such prices. In the case of reduction of

export prices below the minimum level, the importing country imposes anti-dumping

duty, which could lead to withdrawal from the market. “Voluntary" export agreements

affect trade in textiles, footwear, dairy products, consumer electronics, cars, machine

tools, etc.

Problems arise when the quotas are distributed between countries because it is

necessary to ensure that products from one country are not diverted in violation of

quotas set out in second country. Import quotas are not necessarily designed to protect

domestic producers. For example, Japan, maintains quotas on many agricultural

12

products it does not produce. Quotas on imports is a leverage when negotiating the

sales of Japanese exports, as well as avoiding excessive dependence on any other

country in respect of necessary food, supplies of which may decrease in case of bad

weather or political conditions.

Export quotas can be set in order to provide domestic consumers with sufficient

stocks of goods at low prices, to prevent the depletion of natural resources, as well as

to increase export prices by restricting supply to foreign markets. Such restrictions

(through agreements on various types of goods) allow producing countries to use

quotas for such commodities as coffee and oil; as the result, prices for these products

increased in importing countries.

A quota can be a tariff rate quota, global quota, discriminating quota, and export

quota.

IV. Embargo

Embargo is a specific type of quotas prohibiting the trade. As well as quotas,

embargoes may be imposed on imports or exports of particular goods, regardless of

destination, in respect of certain goods supplied to specific countries, or in respect of

all goods shipped to certain countries. Although the embargo is usually introduced for

political purposes, the consequences, in essence, could be economic.

13

V. Standards

Standards take a special place among non-tariff barriers. Countries usually impose

standards on classification, labeling and testing of products in order to be able to sell

domestic products, but also to block sales of products of foreign manufacture. These

standards are sometimes entered under the pretext of protecting the safety and health

of local populations.

VI. Administrative and bureaucratic delays at the entrance

Among the methods of non-tariff regulation should be mentioned administrative and

bureaucratic delays at the entrance, which increase uncertainty and the cost of

maintaining inventory.

VII. Import deposits

Another example of foreign trade regulations is import deposits. Import deposits is a

form of deposit, which the importer must pay the bank for a definite period of time

(non-interest bearing deposit) in an amount equal to all or part of the cost of imported

goods.

At the national level, administrative regulation of capital movements is carried out

mainly within a framework of bilateral agreements, which include a clear definition of

the legal regime, the procedure for the admission of investments and investors. It is

determined by mode (fair and equitable, national, most-favored-nation), order of

nationalization and compensation, transfer profits and capital repatriation and dispute

resolution.

14

VIII. Foreign exchange restrictions and foreign exchange controls

Foreign exchange restrictions and foreign exchange controls occupy a special place

among the non-tariff regulatory instruments of foreign economic activity. Foreign

exchange restrictions constitute the regulation of transactions of residents and

nonresidents with currency and other currency values. Also an important part of the

mechanism of control of foreign economic activity is the establishment of the national

currency against foreign currencies.

15

CHAPTER 4

EXAMPLES OF NON TARIFF BARRIERS TO TRADE

Non-tariff barriers to trade can be the following:

Import bans

General or product-specific quotas

Rules of Origin

Quality conditions imposed by the importing country on the exporting

countries

Sanitary and phytosanitary conditions

Packaging conditions

Labeling conditions

Product standards

Complex regulatory environment

Determination of eligibility of an exporting country by the importing country

Determination of eligibility of an exporting establishment (firm, company) by

the importing country.

Additional trade documents like Certificate of Origin, Certificate of

Authenticity etc.

Occupational safety and health regulation

Employment law

Import licenses

State subsidies, procurement, trading, state ownership

Export subsidies

16

Fixation of a minimum import price

Product classification

Quota shares

Foreign exchange market controls and multiplicity

Inadequate infrastructure

"Buy national" policy

Over-valued currency

Intellectual property laws (patents, copyrights)

Restrictive licenses

Seasonal import regimes

Corrupt and/or lengthy customs procedures

17

CHAPTER 5

HISTORY OF NON TARIFF BARRIER ON WORLD TRADE

The transition from tariffs to non-tariff barriers

One of the reasons why industrialized countries have moved from tariffs to NTBs is

the fact that developed countries have sources of income other than tariffs.

Historically, in the formation of nation-states, governments had to get funding. They

received it through the introduction of tariffs. This explains the fact that most

developing countries still rely on tariffs as a way to finance their spending. Developed

countries can afford not to depend on tariffs, at the same time developing NTBs as a

possible way of international trade regulation. The second reason for the transition to

NTBs is that these tariffs can be used to support weak industries or compensation of

industries, which have been affected negatively by the reduction of tariffs. The third

reason for the popularity of NTBs is the ability of interest groups to influence the

process in the absence of opportunities to obtain government support for the tariffs.

Non-tariff barriers today

With the exception of export subsidies and quotas, NTBs are most similar to the

tariffs. Tariffs for goods production were reduced during the eight rounds of

negotiations in the WTO and the General Agreement on Tariffs and Trade (GATT).

After lowering of tariffs, the principle of protectionism demanded the introduction of

new NTBs such as technical barriers to trade (TBT). According to statements made at

United Nations Conference on Trade and Development (UNCTAD, 2005), the use of

18

NTBs, based on the amount and control of price levels has decreased significantly

from 45% in 1994 to 15% in 2004, while use of other NTBs increased from 55% in

1994 to 85% in 2004.

Increasing consumer demand for safe and environment friendly products also have

had their impact on increasing popularity of TBT. Many NTBs are governed by WTO

agreements, which originated in the Uruguay Round (the TBT Agreement, SPS

Measures Agreement, the Agreement on Textiles and Clothing), as well as GATT

articles. NTBs in the field of services have become as important as in the field of

usual trade.

Most of the NTB can be defined as protectionist measures, unless they are related to

difficulties in the market, such as externalities and information asymmetries between

consumers and producers of goods. An example of this is safety standards and

labeling requirements.

The need to protect sensitive to import industries, as well as a wide range of trade

restrictions, available to the governments of industrialized countries, forcing them to

resort to use the NTB, and putting serious obstacles to international trade and world

economic growth. Thus, NTBs can be referred as a new of protection which has

replaced tariffs as an old form of protection.

Addressing Non-Tariff Barriers

The scarcity of information on non-tariff barriers is a major problem to the

competitiveness of developing countries. As a result, the International Trade Centre

conducted national surveys and began publishing a series of technical papers on non-

19

tariff barriers faced in developing countries. By 2015 it launched the NTM Business

Surveys website listing non-tariff barriers from company perspectives.

A restrictions on international trade, primarily in the form of non-tariff barriers, have

multiplied rapidly in the 1980s.‟ The Japanese, for example, began restricting

automobile exports to the United States in 1981. One year later, the U.S. government,

as part of its ongoing intervention in the sugar market, imposed quotas on sugar

imports. The increasing use of protectionist trade policies raises national as well as

international issues. As many observers have noted, international trade restrictions

generally have costly national consequences. The net benefits received by protected

domestic producers (that is, benefits reduced by lobbying costs) tend to be

outweighed by the losses associated with excessive production and restricted

consumption of the protected goods. Protectionist trade policies also cause foreign

adjustments in production and consumption that risks retaliation by the affected

country. As a type of protectionist policy, non-tariff barriers produce the general

consequences identified above; however, there are numerous reasons, besides their

proliferation, to focus attention solely on non-tariff barriers!‟ Non-tariff barriers

encompass a wide range of specific measures, many of whose effects are not easily

measured. For example, the effects of a government procurement process that is

biased toward domestic producers are difficult to quantify. In addition, many non-

tariff barriers discriminate among a country‟s trading partners. This discrimination

violates the most-favored nation principle, a cornerstone of the General Agreement on

Tariffs and Trade (GATT), the multinational agreement governing international trade.

Not only does the most-favored-nation principle require that a country treat its trading

partners identically, but it also requires that trade barrier reductions negotiated on a

20

bilateral basis be extended to all GAT‟I‟ members. By substituting bilateral,

discriminatory agreements for multilateral approaches to trade negotiations and

dispute settlement, countries raise doubts about the long-run viability of GATT. This

paper provides an introduction to nontariff barriers. We begin by identifying

numerous non-tariff barriers and document their proliferation. We then use supply and

demand analysis to identify the general effects of two frequently used non-tariff

barriers: quotas and voluntary export restraints. Next, we consider why non-tariff

barriers are used instead of tariffs. A brief history of GATT‟s attempts to counteract

the expansion of non-tariff barriers completes the body of the paper.

\

21

CHAPTER 6

THE USE AND EXPANSION OF NON TARIFF BARRIERS ON

WORLD TRADE

In a current study, Laird and Yeats (forthcoming) measure the share of a country‟s

imports subject to hard-core non-tariff barriers. Because countries frequently impose

non-tariff barriers on the imports of a specific good from a specific country, but not

on imports of the same good from another country, they disaggregated each country‟s

imports by both product and country of origin to permit calculation of the total value

of a country‟s imports subject to non-tariff barriers. Each country‟s “coverage ratio”

is simply the value of imports subject to non-tariff barriers divided by the total value

of imports.‟ Table 1 shows the trade coverage ratio for 10 European Community and

six other industrial countries for 1981 and 1986. In computing this ratio, the 1981 and

1986 non-tariff measures are apphed to a constant 1981 trade base. „rhus, the figures

identify changes in the use, but not the intensity, of specific non-tariff measures, while

holding constant the effects of trade changes.

WHY USE NON-TARIFF BARRIERS INSTEAD OF TARIFFS?

Since non-tariff barriers have been used increasingly in recent years, an obvious

question is why non-tariff harriers rather than tariff barriers have become so

popular.‟3 A review by Deardorff (1987) concludes that there currently is no

definitive answer to this question; however, numerous reasons have been suggested.

The Impact of GATT: An Institutional Constraint on the Use of Tarjffs GATT is an

institution whose original mission was to restrict the use of tariffs. Given this

22

constraint, policymakers willing to respond to protectionist demands were forced to

use non-tariff devices. Thus, in this case, non-tariff barriers are simply a substitute for

tariffs. In fact, research by Ray (1981) indicates that non-tariff barriers have been

used to reverse the effects of multilateral tariff reductions negotiated under GATT.14

Certainty of Domestic Benefits Deardorff (1987) suggests that non-tariff barriers are

preferred to tariffs because policymakers and demanders of protection believe that the

effects of tariffs are less certain. This perception could be due to various reasons,

some real and some illusory. For example, it may be much easier to see that a quota of

I million limits automobile imports to 1 million than to demonstrate conclusively that

a tariff of, say, $300 per car would result in imports of only I million automobiles. In

part, doubts that tariffs will have the desired effect is based on the possibility of

actions that could be taken to offset the effects of higher tariffs. For example, the

imposition of a tariff may induce the exporting country to subsidize the exporting

firms in an attempt to reduce the tariff‟s effectiveness. The effects of quotas, on the

other hand, are not altered by such subsidies.‟

How important are non-tariff barriers?

Complementarity of infrastructure and institutions of trading partners Zsoka Koczan

and Alexander Plekhanov Summary The paper provides an empirical analysis of the

importance of infrastructure for bilateral trade flows using an augmented gravity

model of trade. The estimates suggest that potential gains from improvements in

infrastructure are large and far exceed the effects of lowering tariff barriers.

Moreover, the effect of improving hard infrastructure on trade flows in a particular

country increases with the quality of infrastructure of trading partners. Similar

complementarity is observed for control of corruption, with a large asymmetry of

effects, where institutions in the destination market seem to be considerably more

23

important. Schiff and Winters, 2003). Non-tariff and beyond border barriers take

various forms, from rent seeking of customs officials to inadequate transport

infrastructure to poor overall business environment. While they are less visible and

thus harder to measure than tariff barriers, they are no less important. For example, a

recent study estimated that one extra day spent by goods in transit is equivalent to an

additional tariff of between 0.6 per cent and 2.3 per cent (Hummels and Schaur,

2012). This paper contributes to the existing literature by looking at the impact of

hard infrastructure as well as institutional factors proxied by corruption measure

control on trade flows and by particularly focusing on the joint effects of the quality

of infrastructure of trading partners as well as joint effects of the quality of institutions

in exporter and importer countries. A global gravity model of trade is adopted in this

paper to explain exports from a large number of developed and developing economies

to individual trading partners across the world. The analysis confirms that there are

large potential gains from improvements in cross border infrastructure that far exceed

the effects of lowering tariff barriers to trade. The estimates further suggest that such

gains depend crucially on the infrastructure capacity of trading partners. In particular,

trade returns to improving infrastructure are greatest where the infrastructure of

trading partners is highly developed. Similar complementarity is observed for quality

of institutions. The marginal effect of improving institutions (reducing corruption) on

exports from any given country is lower for trade with countries where corruption is

more prevalent, and higher for trade with countries where there is less corruption. The

results point to importance of coordinated improvements in trade infrastructure such

as cross-border transport corridors. Section 2 of this paper provides a brief review of

the vast literature on the role of non-tariff barriers, focusing on infrastructure and

corruption. Section 3 outlines the theoretical micro foundations of the empirical

24

estimation strategy. Section 4 discusses the empirical approach and presents the

results. 2. Importance of non-tariff barriers to trade This study is part of the vast

literature attempting to explain bilateral trade flows using gravity models. Gravity

equations explain bilateral international trade flows using controls such as GDP,

distance and a variety of other factors affecting trade barriers. It has been widely used

to infer trade flow effects of institutions such as customs unions, exchange-rate

mechanisms, ethnic ties, linguistic identity and international borders. 2.1.

Infrastructure measures in gravity models Numerous papers have examined the role of

infrastructure in gravity models – for a recent review of empirical studies see, for

instance, Kepaptsoglou, Karlaftis and Tsamboulas (2010). 3 The following section

provides a brief summary of some of the recent work in this area, though the list is by

no means exhaustive. Most of the existing literature looks at the role of infrastructure

by augmenting gravity models with various measures of infrastructure, often

alongside institutions, and concludes that these have significant positive effects.

Jansen and Nordas (2004) analysed the effects of trade policy restrictiveness, the

quality of institutions and the quality of infrastructure on trade flows, focusing both

on the size of total trade flows and on bilateral trade patterns. They found that the

quality of roads and the rule of law have a significant and positive effect on the ratio

of trade to GDP and that lower tariffs only increase this ratio in countries where the

rule of law is considered to be strong. In a similar vein, Martínez-Zarzoso and

Márquez-Ramos (2005) estimated a gravity equation augmented with technological

innovation and transport infrastructure and found that investing in transport

infrastructure and technological innovation leads to the level of competitiveness being

maintained or improved. Shepherd and Wilson (2006) used detailed overland transit

information from an original road network database to assess the importance of

25

regional infrastructure externalities. Gravity model simulations suggested that an

ambitious but feasible road upgrade could increase trade by far more than tariff

reductions or trade facilitation programmes of comparable scope. Cross-country

spillovers due to overland transit were found to be very large, bolstering the case for

regional coordination of infrastructure investments. These results were also

reproduced on various subsets of countries. Martinez-Zarzoso and Nowak-Lehmann

(2003) applied the gravity trade model to assess Mercosur-European Union trade

relying on panel data analysis and found that infrastructure, along with income

differences and exchange rates, was an important determinant of bilateral trade flows.

Acosta Rojas, Calfat and Flores (2005) presented evidence on the key role of

infrastructure in the trade patterns of the Andean community. They found that while

trade liberalisation eliminates most of the distortions a protectionist tariff system

imposes on international business, transportation costs represent a considerably larger

barrier to trade nowadays than in past decades. De (2006) found that transaction costs

are a greater barrier to trade integration than import tariffs for most Asian countries.

Fujimura and Edmonds (2006) investigated the impact of cross-border transport

infrastructure on the economies of the Greater Mekong Subregion and concluded that

cross-border and domestic transport infrastructure together could reduce trade costs

and lead directly to increased trade and investment.1 Felipe and Kumar (2010) used a

gravity model to examine the relationship between bilateral trade flows and trade

facilitation (measured using the World Bank‟s Logistic Performance Index, LPI) for

Central Asian countries. They found significant gains in trade as a result of improving

trade facilitation in these countries, varying from 28 per cent in the case of Azerbaijan

to as much as 63 per cent in the case of Tajikistan. Among the different components

of LPI, they found that the greatest increase in total trade was from improvement in

26

infrastructure followed by logistics and efficiency of customs and other border

agencies. Furthermore, they showed that the increase in bilateral trade, due to an

improvement in the exporting country‟s LPI, was greater in more sophisticated high-

tech products compared with the impact on trade in less sophisticated low-tech

products – suggesting that improvements in

1 Greater Mekong Subregion includes Cambodia, Laos, Myanmar, Thailand,

Vietnam and the Yunnan Province of China. 4 infrastructure become particularly

important as Central Asian countries seek to reduce their dependence on exports of

natural resources and diversify their manufacturing base by shifting to more

sophisticated goods. The importance of infrastructure was also highlighted by several

papers focusing on particular sectors. For instance, Nordas and Piermartini (2004)

estimated a gravity model that incorporated bilateral tariffs and a number of indicators

for the quality of infrastructure (road, airport, port and telecommunication, as well as

the time required for customs clearance) on total bilateral trade and on trade in the

automotive, clothing and textile sectors. They found that bilateral tariffs, generally

neglected in gravity regressions of bilateral flows, have a significant negative impact

on trade; the quality of infrastructure is an important determinant of trade

performance; port efficiency appears to have the largest impact on trade among all

indicators of infrastructure; and timeliness and access to telecommunication are

relatively more important for export competitiveness in the clothing and automotive

sector respectively. Further, using an adapted gravity trade model of bilateral agro-

food trade between OECD countries, Bojnec and Ferto (2010) found a positive

association between information and communication infrastructure development and

bilateral agro-food trade. Most of these studies used augmented standard gravity

models, explaining trade flows by the size of countries, their GDP, the distance

27

between them, whether they share a border and a landlocked dummy variable as well

as various measures of infrastructure quality. Very few papers introduced interaction

terms between various characteristics of a country. Notable exceptions include

Francois and Manchin (2007) who examined the influence of institutions, geographic

context and infrastructure on trade, focusing on threshold effects, emphasizing cases

where bilateral pairs do not trade. They found that infrastructure and, to a lesser

extent, institutional quality are significant determinants not only of export levels but

also of the probability that exports will take place at all. They concluded that for the

least developed countries, there is evidence of a broad three-part complementarity

between greater involvement of the government in the economy, domestic

communication infrastructure and domestic transport infrastructure in terms of their

impact on export performance. Similarly, Iwanow and Kirkpatrick (2007) applied a

gravity model augmented with trade facilitation, regulatory quality and infrastructure

and showed that while trade facilitation can indeed contribute to improved export

performance, improvements in the quality of the regulatory environment and the basic

transport and communications infrastructure are equally or perhaps even more

important in facilitating export growth. Examining interactions between contract

enforcement and trade facilitation, as well as between regulatory quality and trade

facilitation, they concluded that most benefits would stem from an integrated

programes of strategic investments aimed at relaxing the supply side constraints that

limit an economy‟s responsiveness to improved market opportunities. To our

knowledge, none of the gravity model papers so far have examined interactions

between exporter and importer infrastructure measures. We therefore aim to

contribute to this literature by allowing marginal benefits of improving infrastructure

to depend on the trade partner‟s infrastructural quality. 5 2.2 Corruption measures in

28

gravity models Corruption is not new to the gravity literature on trade flows. Trade

may be reduced in response to hidden transactions costs associated with the insecurity

of international exchange. Contracts may not be enforced. Bribes may be extorted.

Shipments may be hijacked. Abundant evidence suggests that transactions costs

associated with insecure exchange significantly impede international trade. They

result in a price mark-up equivalent to a hidden tax or tariff. These price mark-ups

significantly constrain trade where legal systems poorly enforce commercial contracts

and where economic policy lacks transparency and impartiality. However, most of the

literature notes that there could be two opposing effects and tries to determine which

of them is more important. On the one hand, corruption effectively acts as a tax on

trade when corrupt customs officials in the importing country extort bribes from

exporters (the extortion effect discussed above). Conversely, if tariffs are high

corruption may be trade- enhancing (conditional on prevailing tariffs) when corrupt

officials allow exporters to evade tariff barriers (the evasion effect). Most papers

found some evidence for both effects, with the extortion effect dominating in most

cases. Dutt and Traca (2010) derived and estimated a corruption-augmented gravity

model and examined opposing effects in greater detail by interacting corruption

measures with nominal tariffs. They hypothesised that while corruption taxes trade in

an environment of low tariffs, it may create trade-enhancing effects when nominal

tariffs are high, thus creating an inverted-U shape. Their predictions were borne out in

the data - corruption taxes trade in the majority of cases, but in high tariff

environments (covering 5-14 per cent of the observations in their sample) its marginal

effect is trade-enhancing. Lavallee (2005) tested a gravity model on a sample of 21

OECD countries and 95 developing countries over the period 1984-1997 and used a

non-linear approximation to show that the two traditional views of the consequences

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of corruption on trade co-exist. The estimation results showed that corruption could

act both as an obstacle and as beneficial „grease‟ for international trade. Horsewood

and Voicu (2011) relied on a data set comprising OECD economies, new EU

members and developing nations, finding that reducing a country's corruption

increases trade flows. Anderson and Marcouiller (2002) estimated the effects of

corruption on trade using a structural model of import demand in which insecurity

acts as a hidden tax on trade and found that inadequate institutions constrain trade as

much as tariffs do. On the other hand, trade was implied to expand dramatically when

supported by a legal system capable of enforcing commercial contracts and

transparent and impartial government economic policy. Corruption could also account

for the fact that high-income, capital-abundant countries trade disproportionately with

each other (despite similar factor endowments) as good institutional support for trade

among high-income countries lowers transactions costs. This argument does not

imply, however, that low-income countries should also trade disproportionately with

each another. On a related note, Tingvall (2010) analysed how firms‟ choices of

country and the volume of offshored material inputs are affected by corruption in

target economies. Based on the gravity model of trade, the analysis suggested that

corruption is a deterrent for offshoring at both the extensive and the intensive margins

– firms avoid corrupt countries and, conditional on the 6 choice of country, corruption

reduces the volume of offshored inputs. The negative impact of corruption is largest

in poor countries. As in the case of infrastructure, we aim to contribute to the existing

literature by examining interaction effects between the control of corruption in the

exporting and the importing country. We thus hope to allow for varying marginal

effects of improvements in the quality of institutions depending on the institutions of

the trading partners. 3. Theoretical framework The gravity model of trade has been

30

widely used in empirical work to study the role of various factors. These include

border effects2 , internal and external conflicts,3 currency unions,4 General

Agreements on Tariffs and Trade (GATT)/ World Trade Organisation (WTO)

membership,5 security of property rights and the quality of institutions.6 Anderson

(2011) provides a review of the recent developments in the gravity models literature

(see also Anderson and Van Wincoop (2004) for a survey of the literature on trade

costs). Anderson (1979) offered one of the first attempts to provide clear micro

foundations for the gravity model.7 This theory suggested that, after controlling for

size, trade between two regions is decreasing in their bilateral trade barrier measured

relative to the average barrier to trade between the two regions and all their other

trade partners. Intuitively, the more resistant a region is to trade with others, the more

it is pushed to trade with a given bilateral partner.

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CHAPTER 7

32

SOME KEY FACTS AND FINDINGS

• The contribution of non-tariff measures to overall trade restrictiveness is significant,

and in some estimates NTMs are far more trade restrictive than tariffs.

• TBT/SPS measures have positive trade effects for more technologically advanced

sectors, but negative effects in agricultural sectors.

• There is evidence that TBT/SPS measures have a negative effect on export market

diversification.

• The negative effects on trade caused by the diversity of TBT/SPS measures and

domestic regulation in services are mitigated by the harmonization and mutual

recognition of these measures of Innovation 237.

Non-Tariff Barriers (NTBs) refer to restrictions that result from prohibitions,

conditions, or specific market requirements that make importation or exportation of

products difficult and/or costly. NTBs also include unjustified and/or improper

application of Non-Tariff Measures (NTMs) such as sanitary and phytosanitary (SPS)

measures and other technical barriers to Trade (TBT).

NTBs arise from different measures taken by governments and authorities in the form

of government laws, regulations, policies, conditions, restrictions or specific

requirements, and private sector business practices, or prohibitions that protect the

domestic industries from foreign competition.

CHAPTER 8

33

THE POSITIVE CONSEQUENCES OF NON-TARIFF BARRIERS ON

WORLD TRADE

1. Technological innovation

Innovation often results from pressure, need, or even adversity.” The major portion of

international trade technical norms reflects the state of the art in terms of requirements

for technological know-how and ability, imposed by the developed countries with a

view to dominating and restricting markets. Such norms will result in the creation of

technical barriers to international trade,in as much as direct competitors, including

developing countries, do not effectively invest in quality and in the creation of

innovations, making their goods more competitive. In the words of Delfim Netto

(2007): “It has been empirically proved that exporting companies tend to be more

innovative, have greater productivity, pay higher salaries, and apply newtechnologies

which find their way into the domestic market, accelerating economic development.”

According to Arbix et al (2004), the likelihood of a company being an exporter will

increase 16% when it is involved in technological innovation

2. Social Benefits

There is no doubt that the technological innovation described above will require, in

addition to occasional investments in equipment, specialized labor, consultants and

supervisors, and will therefore create new work opportunities as a part of the

multiplying effect of the actions intended to adapt to international trade norms. In the

light of the pace imposed by global competition, companies will need to have their

staff members permanently updated, an important factor for valuing employees.

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According to a study prepared by Arbix et al (2004), among the four variables that

may affect the likelihood of a company being innovative, two are directly related to

labor training and education

. This shows the importance of intangible factors and of scientific and technical

expertise in the innovation effort.

3. Environmental Benefits

Establishing legitimate environmental barriers will create clear social gains for the

exporting country; while the end of these barriers may bring adverse effects, with the

deterioration of environmental problems as countries increase their (polluting)

production in order to increase exports. An expected outcome when slackening these

barriers would be the trend by polluting companies to migrate to countries with less

environmental concern

4. Managerial innovation

Investments required to overcome non-tariff barriers are not directed solely to a

product‟s assembly line. Companies which opt to direct their production to the

overseas market will as a rule need to create a specific area inside the company to deal

with prospecting new markets and to examine their specific rules and regulations. In

other words, investments in management technology will be needed, represented by a

set of managerial techniques and methodologies with different degrees of complexity

which, when combined among themselves and other basic industrial technology, may

favor the creation of innovations. We may mention as examples: quality management,

environmental management, industrial security, occupational health, marketing,

design management, technology, R&D, business and knowledge strategy

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5. Competitive advantages

The concept of competitiveness may be applied to a firm, in reference to its capacity

of wining over and/or retaining markets, as well as to a country. In the second

instance, competitiveness is assessed by means of a currency entry flow and the

country‟s performance in trade, in particular with regard to a specific sector important

for job creation, productivity, and with growth potential.