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Lecture 16 trade barriers

Lecture 16 trade barriers






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    Lecture 16 trade barriers Lecture 16 trade barriers Document Transcript

    • INTERNATIONAL TRADE LESSON 16: TRADE BARRIERSThe main objectives of imposing trade barriers are to protect Single Column Tariffdomestic industries from foreign competition, to guard against The single-column, also known as the uni-linear, tariff systemdumping, to promote indigenous research and development, provides a uniform rate of duty for all like commoditiesto conserve the foreign exchange resources of the country, to without making any discrimination between countries.make the balance of payments position more favourable, and Double Column Tariffto discriminate against certain countries. Under the double-column tariff system, there are two rates ofTrade barriers may be broadly classified into tariff and non- duty on some or on all commodities. Thus, the double-tariff barriers. column tariff discriminates between countries.Tariffs The double-column tariff system may be broadly divided into:Tariffs in international trade refer to the duties or taxes imposed (a) General and conventional tariff;on internationally traded commodities when they cross the (b) Maximum and minimum tariff.national borders. The general and conventional tariff system consits of twoClassification of Tariffs schedules of tariff- the general and the conventional. TheThere are different ways of classifying the tariffs. general schedule is fixed by the legislature at the very start and(i) On the basis of the origin and destination of the goods the conventional schedule results from the conclusion of crossing the national boundary, tariffs may be classified commercial treaties with other countries. The maximum and into the following three categories: minimum system consists of two autonomously determined schedules of tariff – the maximum and the minimum. TheExport Duties minimum schedule applies to those countries which haveAn export duty is a tax imposed on a commodity originating obtained a concession as a result of a treaty or through M.F.N.from the duty-levying country destined for some other country. (most favoured nation) pledge. The maximum scheduleImport duties applies to all the other countries.An import duty is a tax imposed on a commodity originating Triple-Column Tariffabroad and destined for the duty-levying country. The triple-column tariff system consists of three autono-Transit Duties mously determined tariff schedules – the general, theA transit duty is a tax imposed on a commodity crossing the intermediate and the preferential. The general and intermediatenational frontier originating from, and destined for, other rates are similar to the maximum and minimum rates men-countries. tioned above under the double-column tariff systems. The preferential rate is generally applied in trade between the mother(ii) With reference to the basis for quantification of the tariff, country and the colonies. we may have the following threefold classification: (iv) With reference to the purpose they serve, tariffs may beSpecific Duties classified into the following categories.A specific duty is a flat sum per physical unit of the commodityimported or exported, thus a specific import duty is a fixed Revenue Tariffamount of duty levied upon each unit of the commodity Sometimes the main intention of the government in imposingimported. a tariff may be to obtain revenue. When raising revenue is the primary motive, the rates of duty are generally low, lest importsAd-Valorem Duties should be highly discouraged, defeating the objective ofAd-valorem duties are levied as a fixed percentage of the value mobilizing revenue for the government. Revenue tariffs tendof commodity imported/exported. Thus, while the specific to fall on articles of mass consumption.duty is based on the quantum of commodity imported/exported, the ad-valorem duty is based on the value of the Protective Tariffcommodity imported/exported. Protective tariff is intended primarily, to accord protection to domestic industries from foreign competition. Naturally, theCompound Duties rates of duty tend to be very high in this case because generally,When a commodity is subject to both specific and ad-valorem only high rates of duty curtail imports to a significant extent.duties, the tariff is generally referred to as compound duty. Countervailing and Anti-Dumping Duties(iii) With respect to its application between different countries, Countervailing duties may be imposed on certain imports the tariff system may be classified into following three when they have been subsidized by foreign governments. Anti- types: dumping duties are applied to imports which are dumped on © Copy Right: Rai University 11.675.3 125
    • the domestic market at prices either below their cost of made possible by the tariff structure relative to the situation inINTERNATIONAL TRADE production or substantially lower than their domestic prices. the absence of tariffs but the same exchange rates. It depends Countervailing and anti-dumping duties are, generally, penalty not only on the tariff on the commodity produced but also on duties and an addition to the regular rates. the input coefficients and the tariffs on the inputs. Impact of Tariff The effective protective rate of industry j (Ej) may be defined as Tariffs affect on economy in different ways. An import duty the difference between the industry’s value added under generally has the following effect: protection (Vj) and under free market conditions (Vj) expressed as a percentage of the free market value added. (i) Protective Effect An import duty is likely to increase the price of imported Vj – Vk goods. This increase in the price of imports is likely to reduce Ej = ---------- imports and increase the demand for domestic goods. Import Vj duties may also enable domestic industries to absorb higher Obviously, the protective effect of a tariff on domestic manu- production costs. Thus, as a result of the production accorded facturing is larger if the import duty on the raw materials used by tariffs, domestic industries are able to expand their output. in its manufacture is lower. (ii) Consumption Effect Optimum Tariff The increase in prices resulting from the levy of import duty If a country raises its tariff (import duty) unilaterally, its terms usually reduces the consumption capacity of the people. of trade may improve and its volume of trade may decline. (iii) Redistribution Effect The improvement in the terms of trade initially tends to more If the import duty causes and increase in the price of domesti- than offset the accompanying reduction in the volume of trade, cally produced goods, it amounts to redistribution of income Hence a higher trade indifference curve is reached and commu- between the consumers and producers in favour of the nity welfare is enhanced. Beyond some point, however, it is producers. Further, a part of the consumer income is trans- likely that the detrimental effect of successive reductions in the ferred to the exchequer by means of the tariff. trade volume begins to outweigh the positive effect of further (iv) Revenue Effect improvements in their terms of trade; as a result, community As mentioned above, a tariff means increased revenue for the welfare begins to fall. Somewhere in between there must be a government (unless, of course, the rate of tariff is so prohibi- tariff which optimizes a country’s welfare level under these tive that it completely stops the import of the commodity conditions. subject to the tariff). Thus, the optimum tariff is the rate of tariff beyond which any further gain from an improvement in the terms of trade will be (v) Income and Employment Effect more than offset by the related decline in volume. By raising The tariff may cause a switchover from spending on foreign the rate of tariff beyond the optimum rate, it may still be goods to spending on domestic goods. This higher spending possible to improve the country’s terms of trade; but the gain within the country may cause an expansion in domestic income from this improvement in the terms of trade is more than and employment. offset by the related decline in the volume of trade. (vi) Competitive Effect Non-Tariff Barriers The competitive effect on the tariff is, in fact, an anti-competi- Non-tariff barriers (NTBs), many of which are described as new tive effect in the sense that the protection of domestic protectionism measures (as against tariffs which are regarded as industries against foreign competition may enable the domestic traditional barriers), have grown considerably. According to a industries to obtain monopoly power with all its associated World Bank study, NTBs in major industrial countries affect evils. more than one-third of imports from developing countries, (vii) Term of Trade Effect compared to more than one-fourth from all countries. In a bid to maintain the previous level of imports to the tariff- NTBs are of two categories, Firstly, there are those which are imposing country, if the exporter reduces his prices, the generally used by developing countries to prevent foreign tariff-imposing country is able to get imports at a lower price. exchange outflows or result from their chosen strategy of This wills, ceteris paribus, improve the terms of trade of the economic development. These include import licensing, foreign country imposing the tariff. exchange regulations, canalization of imports etc. The second (vii) Balance of Payments Effect category of NTBs is those which are used by developed Tariffs, by reducing the volume of imports, may help the economies to protect domestic industries which have lost country to improve its balance of payments position. international competitiveness and/or which are politically sensitive for government of these countries. Nominal Tariff and Effective Tariff The NTBs are less transparent, difficult to Identify and their Nominal tariff refers to the actual duty on an imported item. impacts on exporting countries are almost impossible to For example, if a commodity X is subject to an import duty of quantify. 25 percent ad valorem, the nominal tariff is 25 per cent. As a matter of fact several advanced countries like the U.S.A., Corden defines the effective protective rate as the percentage who are high priests of free trade, resort to several NTBs, increase in value added per unit on an economic activity which is © Copy Right: Rai University 126 11.675.3
    • particularly against developing countries. They are even accused point out that frequent changes of Japan’s customs INTERNATIONAL TRADEof involving in arms-twisting tactics to mend the economic regulations are themselves a significant barrier to exporters,policies of the developing countries. The Super 301, of the especially those not affiliated with Japanese overseas jointOmnibus Trade and Competitiveness Act, 1988, of the U.S.A. ventures.is a case in point. The Tokyo Round formulated a Customs Valuation CodeJagadish Bhagwati observes that since the late 1970s, in the US intended to provide a uniform and neutral system for theand the EC, protectionism has increasingly taken the covert valuation of goods for customs purposes which will conformshape. In those countries which advocated free trade, the U.S. to the commercial realities and to prevent the use of arbitrary orand the West European countries, there has been a growing fictitious value.demand for more protective measures in the wake of the (iii) Consular Formalities : A number of countries insist onchallenge of their trade supremacy, particularly by the Pacific Rim certain consular formalities like certification of exportnations. The growing demand in the EC and US for local documents by the respective consulate, of the importingcontent regulation and the controversial Super 301 of the US country, in the exporting country. This becomes a tradeAct’are manifestations of these. The Super 301 may allegedly be barrier when the fees charged for this is very high or theused for covert protectionism, like harassment of successful procedure is very cumbersome.foreign rivals. First the rivals may be accused of indulging in (iv) Licensing: Many countries regulate foreign trade, particularlyunfair trade’ and then they may be taken through time consum- imports, by licensing. In most cases, the purpose ofing and expensive procedures. import licensing is to restrict imports.The following are some of the important non-tariff barriers. (v) Government Procurement : Government procurementsVoluntary Export Restraints often tend to hinder free trade. The Tokyo Round has,Voluntary Export Restraints (VERs) are bilateral arrangements therefore, formulated an agreement on governmentinstituted to restrain the rapid growth of exports of specific procurement with a view to securing greater internationalmanufactured goods. The United States and the European competition in government procurements.Community have thus regulated the imports of several (vi) State Trading : State trading also hinders free trade many aproducts. The recent advances in VERs and other new time because of the counter trade practices, canalization, etc.protectionism measures dates from the establishment of the State trading was an important feature of the foreign tradeMulti-Fiber Arrangement (MFA) in the mid 1970s. Other of the centrally planned economics and many developingbilateral arrangements have involved mainly restraining the countries. With the economic liberalizations in most ofgrowth of specific exports from Japan and the newly industrial- these countires, the role of state trading has declined.izing countries (NICs). (vii) Monetary Controls: In addition to foreign exchangeAdministered Protection regulations, other monetary controls are sometimesAdministered protection encompasses a wide range of bureau- employed to regulate trade, particularly imports. Forcratic government actions, which have grown in absolute as well instance, to tide over the foreign exchange crisis in 1990-91as relative importance over the last decade or more. Most recent and 1991-92, the Reserve Bank of India took severalVERs are in fact regarded as the outgrowth of administered measures which included as 25 per cent interest rateprotection actions. surcharge on bank credit for imports subject to aImportant administrative protection measures include the commercial rate of interest of a minimum 17 per cent, thefollowing: requirement of substantially high cash margin requirement(i) Health and Product Standards :- Several health and product on most imports other than capital goods, and restrictions standards imposed by the developed countries hinder the on the opening of letters of credit for imports. exports of developing countries because of the added costs (viii)Environmental Protection Laws: The growing concern for or technical requirements. The need for maintaining health environmental protection has led to the extension of and product standards is unquestionable. The objection environmental protection regulation to the imports. For should be to their use with the deliberate intention trade example, the U.S. congress was considering a legislation to restriction or discrimination. prohibit the import of shrimp harvested with commercialThe Agreement on Technical Barriers to Trade (also known as fishing technology which might adversely affect thethe Standards Code) evolved by the Tokyo Round of the endangered or threatened sea turtiles unless the PresidentGATT lays down that when governments or other bodies certified that the supplying country has a turtleadopt technical regulation or standard for reasons of safety, conservation programme comparable to that of the U.S.health consumer or environmental protection, or for other (ix) Foreign Exchange Regulations : Foreign exchangepurposes, these should not create unnecessary obstacles to regulations are an important way of regulating imports in atrade. Exporters from developing countries complain, how- number of countries. This is done by the Stateever, that this code is not respected by developed countries in monopolizing the foreign exchange resources and notseveral cases. realizing foreign exchange for import of items which the(ii) Customs Procedures: Certain customs procedures of many government do not approve of for various reasons. countries become trade barriers. For example, studies © Copy Right: Rai University 11.675.3 127
    • Restrictions on currency convertibility can also affect (ii) Unilateral QuotaINTERNATIONAL TRADE imports. In a unilateral quota, a country unilaterally fixes a ceiling on the quantity of the import of particular commodity. NTBs and India’s Exports The problem of NTBs for Indian exports has been growing. (iii) Bilateral Quota The ADB study of the effects NTBs on India’s exports to A bilateral quota results from negotiations between the developed countries has come to the following conclusion. importing country and a particular supplier country, or between Conventional NTBs generally do not exist in developing the importing country and export groups withing the supplier country. country markets at least for Indian exports. Their impact on exports of marine products and leather and leather manufac- (iv) Mixing Quota tures to developed economies is somewhat marginal. Their Under the mixing quota, the producers are obliged to utilize potential adverse effects on India’s emerging exports of domestic raw materials up to a certain proportion in the temperate zone agro-products can be critical. Exports of metal production of a finished product. manufactures and ready made garments from India have Import Licensing suffered on account of the NTBs in developed economies. Quota regulations are generally administered by means of Extension and intensification of NTBs is bound to severely import licensing. In India, for instance, the import of almost restrict India’s export expansion in these two relatively impor- all the items is prohibited except under, and in accordance with, tant export sectors of the economy. Apart from the actual a licence or a customs clearance permit issued under the Imports imposition of these NTBs, the “noise” created is often (Control) Order, 1955, or an Open General Licence issued by adequate to drive out exporters and induce a fall in exports. the Government or under any other provision under the above NTBs and their administration bring about undesirable of order. rewards between rent, profit and wage incomes. The Under the import licensing system, the prospective importers uncertaintly they create clearly has an adverse effect on capacity are obliged to obtain a licence from the licensing authorities: the creation and investment in the industry. As a factor responsible possession of an import licence is necessary to obtain the for an investment shortage, NTBs prevent the industry from foreign exchange to pay for the imports, In a large number of making full use of technological potential and economies of countries, import licensing has become a very powerful device scale. These facts were unambiguously brought out in the for controlling the quantity of imports-either of particular findings of our survey of garment firms in India. commodities or aggregate imports. The above mentioned study has also pointed out that in the case Impact of Quotas of NTBs Indian exporters have not taken full advantage of the Like fiscal controls, the quantitative restrictions on imports have scope which exists. Thus, improvements in domestic capability a number of effects on the economy. The following are, in will surely yield export expansion at least in the short run. general , the important economic effects of quotas: The problem of NTBs for Indian exports has increased recently. The threat under the Super 301 and Special 301 is an indication (i) Balance of Payments Effect As quotas enable a country to restrict the aggregate imports of this. The indications are that India may have to face more within specified limits, quotas are helpful in improving its problems in future. NTBs are often employed when a county’s balance of payments position. exports to a country increases considerably, causing problems to the industries in importing countries when the exporting (ii) Price Effect country does not toe the economic or political lines. As quotas limit the total supply, they may cause an increase in domestic prices. Quantitative Restrictions - Quotas Quantitative restrictions or quotas are an important means of (iii) Consumption Effect restricting imports and exports. A quota represents a ceiling on If quotas lead to an increase in prices, people may be con- the physical volume of the import/export of a commodity. strained to reduce their consumption of the commodity subject In this section, we shall confine ourselves to quantitative to quotas or some other commodities. restrictions on imports, i.e., import quotas. (iv) Protective Effect By guarding domestic industries against foreign competition to Types of Import Quota some extent, quotas encourage the expansion of domestic There are four important types of import quotas, including industries. import licensing. These are: (v) Redistributive Effect (i) Tariff Quota Quotas also have a redistributive effect if the fall in supply due A tariff quota combines the festures of the tariff as well as of to important restrictions enables the domestic producers to the quota. Under a tariff Quota the imports of a commodity raise prices. The rise in prices will result in the redistribution of up to a specified volume are allowed duty free or at a special low income between the producers and consumers in favour of the rate; but any imports in excess of this limit are subject to duty-a producers. higher rate of duty. (vi) Revenue Effect Quotas may have revenue effect. The government may obtain some revenue by charging a license fee. © Copy Right: Rai University 128 11.675.3