Tariff and Non Tariff Barriers Final

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Main feature of international trading environment is

Proliferation of trade barriers

world tariff average in manufacturing countries has gone down to level of 40 percent in 1947, 3 percent in industrial countries

Developed countries have been replaced by growing

protectionism

Reasons attributed to protectionism-currency crisis, recession

and high unemployment and trade deficit

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Protection of infant industry

Diversification of economic activities

Improving terms of trade

Improving balance of payments

Anti-dumping measure

Bargaining

Employment protection

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Employment protection

National defense

Key industry

Strategic trade policy

Keeping money at home

The pauper labor

Size of home market

Equalization of cost of production

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Against interest of consumers Protection makes producers less quality

conscious Encourage domestic monopoly Secure under protection and discourage

motivation Corruption Reduces volume of trade Uneconomic utilization of resources

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Tariff Barriers

Non-Tariff Barriers

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Tariff in international trade refers to the taxes or

duties imposed on goods when they cross

international borders.

Tariff rates are generally high in developing

countries.

With liberalization tariff rates have reduced and

NTBs are part of trade liberalization.

Economists and organizations like WTO prefer tariff

to Non Tariff Barriers

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Any methods not covered by a tariff, most usually:◦Rules◦Regulations◦Voluntary Export Restraints (VERs)◦Legislation◦Exacting Standards or Specifications

A trade barrier is a general term that describes any government policy or regulation that restricts international trade. Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.The barriers can be majorly divided in two types, namely:

Tariff barriers Non-tariff barriers

04/08/23Group 1_International Business_Trade

Barriers 9

Tariff is a tax levied on goods traded internationally. When imposed on goods being brought into the country, it is referred to as an import duty.

Import duty is levied to increase the effective cost of imported goods to increase the demand for domestically produced goods.


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Another type of tariff, less frequently imposed, is the export duty, which is levied on goods being taken out of the country, to discourage their export. This may be done if the country is facing a shortage of that particular commodity . It may also be done to discourage exporting of natural resources.

When imposed on goods passing through the country, the tariff is called transit duty.


Barriers 11

Specific Duty: Is a tax of so much local currency per unit of the goods imported (based on weight, number, length, volume or other unit of measurement).

For example, Rs 800 on each TV set or washing machine or Rs.3000 per metric ton of cold rolled steel coils.


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Ad-Valorem duty: This kind is most commonly used; it is calculated as a percentage of the value of the imported goods - for example, 10, 25 or 35 per cent. This duty is imposed at a fixed percentage on the value of an imported commodity.

In the ad-valorem duty, the percentage of the duty is decided, but the actual amount of the duty changes as per the FOB value of a product.


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Compound duty: The "specific" part of the compound duty (called compensatory duty) is levied as protection for the local raw material industry.

A tariff is referred to as a compound duty when the commodity is subject to both specific and ad-valorem duties. It is imposed on manufactured goods that contain raw materials that are themselves subject to import duty.


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Revenue Tariff: A revenue tariff aims at collecting substantial revenues for the government. A revenue tariff increases government funds, but does not really obstruct the flow of imported goods. Here, the duty is imposed on items of mass consumption, but the rate of the duty is low.


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Protective Tariff: It is aimed at protecting home industries by restricting or eliminating competition. A protective tariff is used to raise the price of imported goods as a protective measure against the competition from foreign markets. A higher tariff allows a local company to compete with foreign competition. Protective tariffs are usually high so as to reduce imports.


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Anti dumping duty: Dumping is the commercial practice of selling goods in foreign markets at a price below their normal cost or even below their marginal cost so as to capture foreign markets. It is harmful to less developed countries where the cost of production is high.

The government of the foreign country will counter this dumping with imposing "anti-dumping" duties. Anti-dumping are special duties additional to the normal ones, designed to match the difference between the price in the home country and the price abroad.


Barriers 17

Non-tariff barriers (NTBs) include all the rules, regulations and bureaucratic delays that help in keeping foreign goods out of the domestic markets.

Types of Non-tariff barriers:1) Quotas

A quota is a limit on the number of units that can be imported or the market share that can be held by foreign producers. For example, the US has imposed a quota on textiles imported from India and other countries. Deliberate slow processing of import permits under a quota system acts as a further barrier to trade.


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2) EmbargoWhen imports from a particular country are totally banned, it is called an embargo. It is mostly put in place due to political reasons. For example, the United Nations imposed an embargo on trade with Iraq as a part of economic sanctions in 1990.

3) Voluntary Export Restraint (VER) A country facing a persistent, huge trade deficit against another country may pressurize it to adhere to a self-imposed limit on the exports. This act of limiting exports is referred to as voluntary export restraint. After facing consistent trade deficits over a number of years with Japan, the US persuaded it to impose such limits on itself.


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4) Subsidies to Local GoodsGovernments may directly or indirectly subsidize local production in an effort to make it more competitive in the domestic and foreign markets. For example, tax benefits may be extended to a firm producing in a certain part of the country to reduce regional imbalances, or duty drawbacks may be allowed for exported goods, or, as an extreme case, local firms may be given direct subsidies to enable them to sell their goods at a lower price than foreign firms.


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5) Local Content RequirementA foreign company may find it more cost effective or otherwise attractive to assemble its goods in the market in which it expects to sell its product, rather than exporting the assembled product itself. In such a case, the company may be forced to produce a minimum percentage of the value added locally. This benefits the importing country in two ways it reduces its imports and increases the employment opportunities in the local market.


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6) Technical BarriersCountries generally specify some quality standards to be met by imported goods for various health, welfare and safety reasons. This facility can be misused for blocking the import of certain goods from specific countries by setting up of such standards, which deliberately exclude these products. The process is further complicated by the requirement that testing and certification of the products regarding their meeting the set standards be done only in the importing country.


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7) Procurement PoliciesGovernments quite often follow the policy of procuring their requirements (including that of government-owned companies) only from local producers, or at least extend some price advantage to them. This closes a big prospective market to the foreign producers.


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8) International Price FixingSome commodities are produced by a limited number of producers scattered around the world. In such cases, these producers may come together to form a cartel and limit the production or price of the commodity so as to protect their profits. OPEC (Organization of Petroleum Exporting Countries) is an example of such cartel formation. This artificial limitation on the production and price of the commodity makes international trade less efficient than it could have been.


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9) Exchange ControlsControlling the amount of foreign exchange available to residents for purchasing foreign goods domestically or while travelling abroad is another way of restricting imports.


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10) Direct and Indirect Restrictions on Foreign InvestmentsA country may directly restrict foreign investment to some specific sectors or up to a certain percentage of equity. Indirect restrictions may come in the form of limits on profits that can be repatriated or prohibition of payment of royalty to a foreign parent company. This create problems because, Foreign companies are generally interested in setting up local operations when they foresee increased sales or reduced costs as a consequence.


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Examples include setting exacting standards on fuel emissions from cars, the documentation required to be able to sell drugs in different countries, the ingredients in products – some of which may be banned in the destination country

NTBs are difficult to prove – when do you accuse a country of protectionism – could be a legal or cultural issue?

The main method involved in NTBs is not to prevent trade but to make the cost of doing so prohibitive to the potential exporter

Protect domestic industries Protect domestic employment Strategic reasons Political pressures Protect culture? Prevent ‘Dumping’ – selling goods

in the destination country below cost to break into that market

General Agreement on Tariffs and Trade Created to promote free trade Principles included, non

discrimination,elimination of non tariff trade barriers,consultation among nations to resolve trade disputes,

Many other meetings followed including Tokyo Round,Uruguay Round , Marrakech Agreement

Focused on Tariffs 1-Qouta 2-Anti-dumping Subsidies Safeguards Intellectual property Services Other Industry Provisions Trade related investment measures WTO.

Aims to free up world trade and break down the barriers to international trade

Basic philosophy rests on the principle of comparative advantage

Talks to achieve trade liberalisation have been ongoing for many years

GATT – General Agreement on Tariffs and Trade

First signed in 1947 – talks on-going since then!

Uruguay Round 1994 – set up the World Trade Organisation (WTO) as well as agreements covering a range of trade liberalisation measures

WTO provides the forum through which trade issues can be negotiated and works to help implement and police trade agreements

Potential benefits:◦ Promotes international specialisation

and increases world output◦ Promotes efficient use and allocation

of world resources◦ Allows developing countries access to the

heavily protected markets of the developed world thus helping promote development

◦ Facilitates the working of the international market system and the working of price signals to ensure efficient allocation of resources, international competition and the associated benefits to all

World agreements are very difficult to achieve

Witness the issues over the removal or reduction of agricultural subsidies, tariffs on steel in the United States, the banana wars, etc!

Tariff and Non Tariff Barriers Final

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