Trade BarriersTrade Barriers

Mukul MishraMukul Mishra

INTRODUCTION INTRODUCTION

A trade barrier is a general term that A trade barrier is a general term that describes any describes any government policy or government policy or

regulation that restricts international regulation that restricts international tradetrade. The barriers can take many forms, . The barriers can take many forms, including the following terms that include including the following terms that include

many restrictions in international trade within many restrictions in international trade within multiple countries that import and export any multiple countries that import and export any

items of trade.items of trade.

Import dutyImport duty Import licensesImport licenses Export licensesExport licenses Import quotasImport quotas TariffsTariffs SubsidiesSubsidies Non-tariff barriers to tradeNon-tariff barriers to trade Voluntary Export RestraintsVoluntary Export Restraints Local Content RequirementsLocal Content Requirements EmbargoEmbargo

Most trade barriers work on the same Most trade barriers work on the same principle: the imposition of some sort of principle: the imposition of some sort of cost on trade that raises the price of cost on trade that raises the price of the traded productsthe traded products. If two or more . If two or more nations repeatedly use trade barriers nations repeatedly use trade barriers against each other, then a trade war against each other, then a trade war results.results.

Economists generally agree that Economists generally agree that trade trade barriers are detrimental and decrease barriers are detrimental and decrease overall economic efficiencyoverall economic efficiency. In theory, . In theory, free trade involves the removal of all such free trade involves the removal of all such barriers, except perhaps those considered barriers, except perhaps those considered necessary for health or national security. necessary for health or national security.

In practice, however, even those countries In practice, however, even those countries promoting free trade heavily subsidize certain promoting free trade heavily subsidize certain industries, such as agriculture and steel.industries, such as agriculture and steel.

Trade barriers are any of a number of Trade barriers are any of a number of government-placed restrictions on trade government-placed restrictions on trade between nations. The most common sorts of between nations. The most common sorts of trade barriers are things like subsidies, tariffs, trade barriers are things like subsidies, tariffs, quotas, duties, and embargoes. quotas, duties, and embargoes.

The term free trade refers to the theoretical The term free trade refers to the theoretical removal of all trade barriers, allowing for removal of all trade barriers, allowing for completely free and unfettered trade. In practice, completely free and unfettered trade. In practice, however, no nation fully embraces free trade, as however, no nation fully embraces free trade, as all nations utilize some assortment of trade all nations utilize some assortment of trade barriers for their own benefit.barriers for their own benefit.

Advantages of Trade BarriersAdvantages of Trade Barriers

1. Trade barriers 1. Trade barriers increase the competitiveness increase the competitiveness of domestic producers bothof domestic producers both domestically and domestically and in foreign markets.in foreign markets.

2. They raise money for the government in terms 2. They raise money for the government in terms of of revenuerevenue which can be used for government which can be used for government spending.spending.

3. They 3. They improve the balance of payments improve the balance of payments positionposition by decreasing imports as they become by decreasing imports as they become more expensive and less attractive to purchase.more expensive and less attractive to purchase.

Disadvantages of Trade BarriersDisadvantages of Trade Barriers

1.1. Trade barriers could result in Trade barriers could result in retaliation from retaliation from other foreign economiesother foreign economies which could mean which could mean import control on goods that are imported from import control on goods that are imported from foreign countries, leading to higher prices and foreign countries, leading to higher prices and potentially inflationary.potentially inflationary.

2. A tariff will only work if the 2. A tariff will only work if the price elasticity of price elasticity of demand for the good is elasticdemand for the good is elastic. If inelastic, . If inelastic, then the demand is unresponsive to changes then the demand is unresponsive to changes in price and therefore an import control in price and therefore an import control resulting in a higher price of the good will have resulting in a higher price of the good will have little impact on the demand for it.little impact on the demand for it.

Disadvantages of Trade BarriersDisadvantages of Trade Barriers

3. 3. Trade barriers don’t actually deal with the main Trade barriers don’t actually deal with the main cause of the problemcause of the problem. Instead governments . Instead governments looking to impose trade barriers most likely to looking to impose trade barriers most likely to improve B.O.P positions or increase domestic improve B.O.P positions or increase domestic producers competitiveness, government should look producers competitiveness, government should look to implement supply side policies and increase the to implement supply side policies and increase the efficiency of production efficiency of production leading to a fall in costs of leading to a fall in costs of production and these lower costs can be passed on production and these lower costs can be passed on to consumers through lower prices and therefore to consumers through lower prices and therefore increasing competitiveness. (reducing demand for increasing competitiveness. (reducing demand for imports and increasing demand for exports)imports and increasing demand for exports)

TYPES OF TRADE BARRIERSTYPES OF TRADE BARRIERS

Despite all the obvious benefits of Despite all the obvious benefits of international trade, governments have a international trade, governments have a tendency to put up trade barriers to protect tendency to put up trade barriers to protect the domestic industry.the domestic industry.

There are two kinds of barriers: tariff and There are two kinds of barriers: tariff and non-tariff.non-tariff.

Tariff BarriersTariff Barriers Tariff is a tax levied on goods traded Tariff is a tax levied on goods traded

internationally.internationally. When imposed on goods being brought When imposed on goods being brought

into the country, it is referred to as an into the country, it is referred to as an import dutyimport duty. .

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

Tariff BarriersTariff Barriers

Another type of tariff, less frequently imposed, is the Another type of tariff, less frequently imposed, is the export dutyexport duty, which is levied on goods being taken out of , which is levied on goods being taken out of the country, to the country, to discourage their exportdiscourage their export. This may be . This may be done if the country is facing a done if the country is facing a shortage shortage of that particular of that particular commodity or if the government wants to commodity or if the government wants to promote the promote the export of that good in some other formexport of that good in some other form, for example, , for example, a processed form rather than in raw material form. It may a processed form rather than in raw material form. It may also be done to also be done to discourage exporting of natural discourage exporting of natural resources. resources.

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

Classification of TariffsClassification of Tariffs

A) On the basis of origin and destination of the goods crossing nationalA) On the basis of origin and destination of the goods crossing nationalboundariesboundaries

Export dutyExport duty: An export duty is the tax levied by the country of origin on: An export duty is the tax levied by the country of origin ona commodity designated for use in other countries .The majority of thea commodity designated for use in other countries .The majority of thefinished goods do not attract export duties .Such duties are normallyfinished goods do not attract export duties .Such duties are normallyimposed on primary products in order to conserve them for domesticimposed on primary products in order to conserve them for domesticindustries. In India export duties are levied on oilseeds, coffee andindustries. In India export duties are levied on oilseeds, coffee andonions.onions.

Import dutyImport duty: An import duty is a tax imposed on commodity originating: An import duty is a tax imposed on commodity originatingin another country by the country for which the product is designated.in another country by the country for which the product is designated.The purpose of heavy import duties is to earn revenues, to make importsThe purpose of heavy import duties is to earn revenues, to make importscostly and to provide protection to domestic industries. Countries imposecostly and to provide protection to domestic industries. Countries imposeheavy import duties to restrict imports and thereby remove the deficits inheavy import duties to restrict imports and thereby remove the deficits inthe balance of trade and balance of payment.the balance of trade and balance of payment.

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Classification of TariffsClassification of Tariffs

Transit Duty: Transit Duty: A transit duty is a tax A transit duty is a tax imposed on a commodity when it crosses imposed on a commodity when it crosses the national border between the originating the national border between the originating country and the country which it is country and the country which it is consigned. African and Latin American consigned. African and Latin American nations impose such transit duties at any nations impose such transit duties at any point in time. Sri Lanka is another country point in time. Sri Lanka is another country enjoying such benefits from Indian enjoying such benefits from Indian companies.companies.

B) On the basis of the quantification of tariffsB) On the basis of the quantification of tariffs

Specific Duty: Specific Duty: Is a Is a tax of so much local currency per tax of so much local currency per unit of the goods importedunit of the goods imported (based on weight, number, (based on weight, number, length, volume or other unit of measurement). Specific length, volume or other unit of measurement). Specific duties are often levied on foodstuffs and raw materials.duties are often levied on foodstuffs and raw materials.A specific duty is a flat sum collected on a physical unit A specific duty is a flat sum collected on a physical unit of the imported commodity. Here, the rate of the duty is of the imported commodity. Here, the rate of the duty is fixed and is collected on each imported unit. fixed and is collected on each imported unit.

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

Ad-Valorem duty: Ad-Valorem duty: This kind is most commonly This kind is most commonly used; it is calculated as a used; it is calculated as a percentage of the percentage of the value of the imported goodsvalue of the imported goods - for example, 10, - for example, 10, 25 or 35 per cent. This duty is imposed at a fixed 25 or 35 per cent. This duty is imposed at a fixed percentage on the value of an imported percentage on the value of an imported commodity. Here the value of the commodity on commodity. Here the value of the commodity on the invoice is taken as the base for the the invoice is taken as the base for the calculation of the duties. 3% ad- valorem duty on calculation of the duties. 3% ad- valorem duty on the C&F value of the goods imported. In the ad-the C&F value of the goods imported. In the ad-valorem duty, the percentage of the duty is valorem duty, the percentage of the duty is decided, but the actual amount of the duty decided, but the actual amount of the duty changes as per the FOB value of a product.changes as per the FOB value of a product.

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

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

C) On the basis of the purpose that they serveC) On the basis of the purpose that they serve

Revenue Tariff: Revenue Tariff: A revenue tariff aims at A revenue tariff aims at collecting substantial revenues for the collecting substantial revenues for the governmentgovernment. A revenue tariff increases . A revenue tariff increases government funds, but does not really obstruct government funds, but does not really obstruct the flow of imported goods. Here, the duty isthe flow of imported goods. Here, the duty is

imposed on items of mass consumption, but the imposed on items of mass consumption, but the rate of the duty is low. For example a tariff on rate of the duty is low. For example a tariff on coffee imports imposed by countries where coffee imports imposed by countries where coffee cannot be grown, raises a steady flow of coffee cannot be grown, raises a steady flow of revenue.revenue.

Protective Tariff: Protective Tariff: It is aimed at It is aimed at protecting home protecting home industries by restricting or eliminating competitionindustries by restricting or eliminating competition. . A protective tariff is used to raise the price of imported A protective tariff is used to raise the price of imported goods as a protective measure against the competition goods as a protective measure against the competition from foreign markets. A higher tariff allows a local from foreign markets. A higher tariff allows a local company to compete with foreign competition. Protective company to compete with foreign competition. Protective tariffs are usually high so as to reduce imports. tariffs are usually high so as to reduce imports. Protective tariffs can be advantageous as they can help Protective tariffs can be advantageous as they can help foster the local economy, but sometimes they can also foster the local economy, but sometimes they can also make the price of the item so expensive that companies make the price of the item so expensive that companies must charge more. For example, when gas prices must charge more. For example, when gas prices become too high, industries such as the trucking industry become too high, industries such as the trucking industry may have to charge retailers more for delivering may have to charge retailers more for delivering products. The retail industry then has to mark up their products. The retail industry then has to mark up their items to allow for their increased transportation costs in items to allow for their increased transportation costs in order to make the same profit they once did. The end order to make the same profit they once did. The end result is that consumers pay more for the goods.result is that consumers pay more for the goods.

Anti dumping duty: Anti dumping duty: Dumping is the commercial Dumping is the commercial practice of practice of selling goods in foreign markets at selling goods in foreign markets at a price below their normal cost or even below a price below their normal cost or even below their marginal costtheir marginal cost so as to capture foreign so as to capture foreign markets. Many countries follow dumping markets. Many countries follow dumping practices. It is harmful to less developed practices. It is harmful to less developed countries where the cost of production is high. countries where the cost of production is high. Since these practices are naturally considered to Since these practices are naturally considered to be unfair competition by manufacturers in the be unfair competition by manufacturers in the country in which the goods are being dumped, country in which the goods are being dumped, the government of the foreign country will be the government of the foreign country will be asked to impose "anti-dumping" duties. Anti-asked to impose "anti-dumping" duties. Anti-dumping are special duties additional to the dumping are special duties additional to the normal ones, designed to normal ones, designed to match the difference match the difference between the price in the home country and between the price in the home country and the price abroad.the price abroad.

Countervailing duty: Countervailing duty: Such duties are similar to Such duties are similar to anti dumping but are not so severe. These anti dumping but are not so severe. These duties are imposed to duties are imposed to nullify the benefits nullify the benefits offered through cash assistance or subsidies offered through cash assistance or subsidies by the foreign country to its manufacturersby the foreign country to its manufacturers. . The purpose of the duty is to The purpose of the duty is to offset, or offset, or "countervail” the subsidy"countervail” the subsidy so that the goods so that the goods cannot be sold at an artificially low price in the cannot be sold at an artificially low price in the foreign country and thereby provide unfair foreign country and thereby provide unfair competition for local manufacturers. The rate of competition for local manufacturers. The rate of such duties will be proportional to the extent of such duties will be proportional to the extent of the cash assistance or granted subsidies.the cash assistance or granted subsidies.

D) On the basis of trade relationsD) On the basis of trade relations

Single column tariff: Single column tariff: Under this system tariff rates are fixed for variousUnder this system tariff rates are fixed for variouscommodities and the commodities and the same rates are made applicable to imports from allsame rates are made applicable to imports from allother countries.other countries.

Double column tariff: Double column tariff: Under this system Under this system two rates of duty are fixed fortwo rates of duty are fixed forvarious commodities on some or all commoditiesvarious commodities on some or all commodities. The lower rate is . The lower rate is made applicable to a made applicable to a friendly countryfriendly country or to a country with which the or to a country with which the importing country has made tariff negotiations. The higher rate is the importing country has made tariff negotiations. The higher rate is the normal rate of dutynormal rate of duty. It is applicable to all other countries.. It is applicable to all other countries.

This lower level of tariff may also apply to products from third countries,This lower level of tariff may also apply to products from third countries,which may be entitled by treaty to which may be entitled by treaty to most-favoured-nation most-favoured-nation treatment - thattreatment - thatis, not having their products subject to higher import duties than those ofis, not having their products subject to higher import duties than those ofany other country. This system is used by, for example, the United Statesany other country. This system is used by, for example, the United Statesand Japan. With the U.S. tariff system, column-two rates apply toand Japan. With the U.S. tariff system, column-two rates apply toproducts from most Socialist countries, and column-one rates (negotiatedproducts from most Socialist countries, and column-one rates (negotiatedrates) to all other countries.rates) to all other countries.

Triple column tariff: Triple column tariff: Under this system Under this system three different ratesthree different rates of duties are fixed; of duties are fixed; general, international and preferential general, international and preferential tariffs. The first two categories have a tariffs. The first two categories have a minimum variance but the preferential is minimum variance but the preferential is substantially lower than the general tariff substantially lower than the general tariff and is applicable to countries with whichand is applicable to countries with which

there is a bilateral relationship. This there is a bilateral relationship. This preferential system is used by, for preferential system is used by, for example, the members of the British example, the members of the British Commonwealth.Commonwealth.

Non-tariff BarriersNon-tariff Barriers

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

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

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

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

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

5. 5. Local Content RequirementLocal Content Requirement

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

6. 6. Technical BarriersTechnical Barriers

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

These These testing procedures being expensive, time testing procedures being expensive, time consuming and cumbersome to the exporters, act as a consuming and cumbersome to the exporters, act as a trade barrier.trade barrier. Under the new system of international trade, Under the new system of international trade, trading partners are required to consult each other before trading partners are required to consult each other before fixing such standards. It also requires that the domestic and fixing such standards. It also requires that the domestic and imported goods be treated equally as far as testing and imported goods be treated equally as far as testing and certification procedures are concerned and that there should certification procedures are concerned and that there should be no disparity between the quality standards required to be be no disparity between the quality standards required to be fulfilled by these two. The importing country is now expected fulfilled by these two. The importing country is now expected to accept testing done in the exporting country.to accept testing done in the exporting country.

7. 7. Procurement PoliciesProcurement Policies

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

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

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