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Need & barriers of import



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  • 1. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 1 IMPORT, NEED FOR IMPORT, BARRIERS TO INTERNATIONAL TRADE 1) IMPORT The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Imports consist of transactions in goods and services (sales, barter, gifts or grants) from non-residents residents to residents. DEFINITION The exact definition of imports in national accounts includes and excludes specific "borderline" cases. A general delimitation of imports in national accounts is given below: An import of a good occurs when there is a change of ownership from a non-resident to a resident. This does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also smuggled goods must be included in the import measurement. Imports of services consist of all services rendered by non-residents to residents. In national accounts any direct purchases by residents outside the economic territory of a country are recorded as imports of services; therefore all expenditure by tourists in the economic territory of another country are considered as part of the imports of services. Also international flows of illegal services must be included.
  • 2. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 2 Example of Import:-Imports to China 2) TYPES OF IMPORT There are two basic types of import:  Industrial and consumer goods  Intermediate goods and services Companies import goods and services to supply to the domestic market at a cheaper price and better quality than competing goods manufactured in the domestic market. Companies import products that are not available in the local market. There are three broad types of importers:  Looking for any product around the world to import and sell.  Looking for foreign sourcing to get their products at the cheapest price.
  • 3. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 3  Using foreign sourcing as part of their global supply chain. Direct-import refers to a type of business importation involving a major retailer (e.g. Wal- Mart) and an overseas manufacturer. A retailer typically purchases products designed by local companies that can be manufactured overseas. In a direct-import program, the retailer bypasses the local supplier (colloquial middle-man) and buys the final product directly from the manufacturer, possibly saving in added costs. This type of business is fairly recent and follows the trends of the global economy. 3) LIST OF TOP 20 COUNTRIES BY IMPORTS 1. United States $ 2,314,000,000,000 2011 est. 2. China $ 1,664,000,000,000 2011 est. 3. Germany $ 1,339,000,000,000 2011 est. 4. Japan $ 794,700,000,000 2011 est. 5. France $ 684,600,000,000 2011 est. 6. United Kingdom $ 654,900,000,000 2011 est. 7. Italy $ 541,200,000,000 2011 est. 8. South Korea $ 525,200,000,000 2011 est. 9. Netherlands $ 514,100,000,000 2011 est. 10. Hong Kong $ 493,200,000,000 2011 est. 11. Canada $ 459,600,000,000 2011 est. 12. India $ 359,300,000,000 2010 est. 13. Spain $ 315,300,000,000 2010 est. 14. Singapore $ 310,400,000,000 2010 est. 15. Mexico $ 306,000,000,000 2010 est. 16. Belgium $ 285,100,000,000 2010 est. 17. Taiwan $ 251,400,000,000 2010 est. 18. Russia $ 248,700,000,000 2010 est. 19. Switzerland $ 226,300,000,000 2010 est. 20. Australia $ 195,200,000,000 2010 est. 21. Brazil $ 181,700,000,000 2010 est.
  • 4. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 4 4) TYPES OF IMPORT DUTIES Import duties are generally of the following types:- i. Basic Duty: - it may be at the standard rate or, in the case of import from some other countries, at the preferential rate. ii. Additional customs duty: - equal to central excise duty leviable on like goods produced or manufactured in India. Additional duty is commonly referred to as Countervailing duty or C.V.D. It is payable only if the imported article is such as, if produced in India, its process of production would amount to 'manufacture' as per the definition in Central Excise Act, 1944. Exemption from excise duty has the effect of exempting additional duty of customs. Additional duty is calculated on a value base of aggregate of value of the goods including landing charges and basic customs duty. Other duties like anti-dumping duty, safeguard duty etc. are not taken into account. In case of goods covered by provisions of the Standards of Weights and Measures Act, 1976, the value base would be the retail sale price declared on the package of the goods less the rebate as notified under the Central Excise Act, 1944 for such goods. iii. True Countervailing duty or additional duty of customs: -is levied to offset the disadvantage to like Indian goods due to high excise duty on their inputs. It is levied to provide a level playing field to indigenous goods which have to bear various internal taxes. Value base for this additional duty would be as in the case of C.V.D, under Customs Tariff Act, 1975 minus the retail sale price provision. This additional duty will not be included in the assessable value for levy of education cess on imported goods. Manufacturers will be able to take credit of this additional duty for payment of excise duty on their finished products. iv. Anti-dumping Duty/ Safeguard Duty: - for import of specified goods with a view to protecting domestic industry from unfair injury. It would not apply to goods imported by a 100% EOU (Export Oriented Units) and units in FTZ (Free Trade Zones) and SEZ (Special Economic Zones). On export of goods, anti-dumping duty is relatable only by way of a special brand rate of drawback. Safeguard duties do not require the finding of unfair trade practice such as dumping or subsidy on the part of exporting countries but they must not discriminate between imports from different countries.
  • 5. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 5 Safeguard action is resorted to only if it has been established that a sudden increase in imports has caused or threatens to cause serious injury to the domestic industry. v. Education cess: - at the prescribed rate is levied as a percentage of aggregate duties of customs. If goods are fully exempted from duty or are chargeable to nil duty or are cleared without payment of duty under prescribed procedure such as clearance under bond, no cess would be levied. 5) INDIA IMPORTS India imports were worth 37753 Million USD in December of 2011. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main import partners are European Union, Saudi Arabia and United States.
  • 6. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 6 6) COMPOSITION Imports can be internally divided according to economic destination and to product classes: 1. Imports contributes to domestic consumption (increasing consumers well-being through consumption goods), to domestic investments (increasing production capabilities through new - or used! Equipment) , to domestic current production (e.g. raw materials and spare parts). There is an important stream of imports that first will be processed, and then exported abroad. To a smaller extent, import can satisfy public expenditure (e.g. military equipment). In short, imports contribute to all GDP components, but they are usually left by central statistical offices apart as a stand-alone aggregate. 2. Import can also be divided by product classes at different levels of aggregation (e.g. "agricultural product" instead of "rice"). Import of services comprehends for instance transport and shipping of goods, tourism, banking services, and patent royalties. 7) DETERMINANTS OF IMPORT Imports are usually seen as determined by: 1. Level and dynamics of domestic income; 2. Level and dynamics of each GDP components (investment, consumption, public expenditure, exports) as differentiated drivers of imports; 3. Price competitiveness of domestic production, normally influenced by exchange ratelevel and fluctuations as well as by inflation differentials between the country and foreign nations. 4. Non-price competitiveness of domestic production, for example as far as product quality, technological innovativeness, design, promotion are concerned; 5. National attitude toward foreign goods. 6. Shifts in domestic patterns of demand and supply, including the organization of supply chains and the ownership of distribution channels; 7. Historical links with certain origin countries. 8. Structural trends toward economic integration with other countries.
  • 7. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 7 IN PARTICULAR, IMPORTS SHOULD GROW WHEN 1. Families' disposable income increases (especially if imported goods are "luxury" goods, i.e. their demand grows more than proportionally when income rises); 2. GDP at large increases, where an elasticity of 1 is often supposed, so that an increase of 5% in GDP corresponds to an increase of 5% in import (5%/5% = 1); 3. Consumption, investment, exports and public expenditure rise, where different elasticity of imports to GDP components may reasonably appear; 4. A revaluation takes place and national currency rises against foreign ones; 5. Inflation abroad is lower than domestically, so that foreign products become cheaper and cheaper; 6. With the widening technological and quality gap of domestic production in comparison to foreign one, also in the perception and in the requests of domestic buyers; 7. A nationalistic tone in the demand is replaced by a "foreign is better" general opinion, spread both throughout consumers and decision-makers of distribution channels (supermarkets). 8. A domestic left shift of supply or a right shift in demand, provided that the realistic description of the market can be offered by a standard neoclassical model; 9. Integration with other countries grows; a stronger national specialization takes place and the world get more and more interdependent. 8) NEED OF IMPORT The motivation for a country to import goods and services from other countries is perhaps less obvious than its motivation for selling exports (making a profit on goods not consumed by the domestic market). As with exports, the purposes served by imports vary from country to country. Yet no country today can be totally self-sufficient without suffering a high cost. All countries need to—or choose to—import at least some goods and services for the following reasons: 1) Goods or services that are either a. essential to economic well-being or b. highly attractive to consumers but are not available in the domestic market.
  • 8. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 8 2) Goods or services that satisfy domestic needs or wants can be produced more inexpensively or efficiently by other countries, and therefore sold at lower prices. Generally speaking, countries import goods primarily to satisfy a demand for the good that is not produced within it. For example, an industrialized country may import agricultural products, while an industrializing country may import high-value consumer electronics. Countries may also import goods in order to provide consumers with greater variety, and increase competition in the local market. From an economic standpoint, increased competition is usually favorable as it tends to improve the quality of goods and services, while lowering its market price. There are number of supporting reasons why import business and services is growing at such a fast rate, three of them are given below:- i. Availability: An individual or business man or an importer needs to import because there are certain things that he can’t grow or manufacture in his home country. For example Bananas in Alaska, Mahogany Lumber in Maine and Ball Park franks in France. ii. Cachet: A lot of things, like caviar and champagne, pack more cachet, more of an "image," if they're imported rather than home-grown. Think Scandinavian furniture, German beer, French perfume, Egyptian cotton. It all seems classier when it comes from distant place. iii. Price: Price factor is also an important reason for import of products. Some products are cheaper when imported from foreign country. For example Korean toys, Taiwanese electronics and Mexican clothing, to rattle off a few, can often be manufactured or assembled in foreign factories for far less money than if they were made on the domestic country.
  • 9. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 9 9) BARRIERS TO INTERNATIONAL TRADE The main objectives of imposing trade barriers are to protect domestic industries from foreign competition, to guard against dumping, to promote indigenous research and development, to conserve the foreign exchange resources of the country, to make the balance of payments position more favorable, and to discriminate against certain countries. Trade barriers may be broadly classified into tariff and non-tariff barriers TARIFF BARRIERS Tariff derived from a French word meaning rate, price, or list of charges, is a customs duty or a tax on products that move across borders. Tariffs can be classified in several ways. The classification scheme used here is based on direction, purpose length, rate, and distribution point. These classifications are not necessarily mutually exclusive 1 Direction: Import and Export Tariffs Tariffs are often imposed on the basis of the direction of product movement, which is, on imports or exportwith the latter being the less common one. When export tariffs are levied, they usually apply to an exporting country’s scarce resources or raw materials. Companies exporting from Russia must pay an average export tariff of 20 percent on a number of goods sold in cash transactions and an average export tariff of about 30 percent for goods sold in noncash transactions. 2 Purpose: Protective and Revenue Tariffs Tariffs can be classified as protective tariffs and revenue tariffs. The distinctionis based on purpose. The purpose of a protective tariff is to protect home industry, agriculture, and labor against foreign competitors by trying to keep foreign goods out of the country. The purpose of revenue tariff, in contrast, is to generate tax revenues for the government. Compared to a protective tariff, a revenue tariff is relatively low.
  • 10. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 10 3 Length: Tariff surcharge Versus Countervailing Duty Protective tariff can be further classified according to length of time. A tariff surcharge is a temporary action, whereas a countervailing duty is a permanent surcharge. Countervailing duties are imposed on certain imports when products are subsidized by foreign governments. These duties are thus assessed offset a special advantage or discount allowed by an exporter’s government. Usually, a government provides an export subsidy by rebating certain taxes if goods are exported. 4 Rates: Specific, Ad Valorem and Combined A specific duty is a flat sum per physical unit of the commodity imported or exported, thus a specific import duty is a fixed amount of duty levied upon each unit of the commodity imported. Ad-valorem duties are levied as a fixed percentage of the value of commodity imported/exported. Thus, while the specific duty is based on the quantum of commodity imported/exported, the ad-valorem duty is based on the value of the commodity imported/exported.Combined rates or compound duty are a combination of specific and ad valorem duties on a single product. They are duties based on both the specific rate and the ad valorem rate that are applied to imported products. 5 Distribution Point: Distribution and Consumption Taxes Some taxes are collected at particular point of distribution or when purchases and consumption occur. These indirect taxes, frequently adjusted at the border, are of four kinds: single stage, value added, cascade and excise. Single-stage sales tax is a tax collected only at one point in the manufacturing and distribution chain. The tax is perhaps most common in the United States, where retailers and wholesalers make purchases without paying any taxes simply by showing a sale tax permit. The single-stage sales tax permit. The single-stage sales tax is not collected until products are purchased by final consumers. A value-added tax (VAT) is a multistage, noncumulative tax on consumption. It is a national sales levied at each stage of the production and distribution system, though only on the value added at that stage. In other words, each time a product changes hands, even between middlemen, a tax must be paid. But the tax collected at certain stages is based on the
  • 11. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 11 added value and not the total value of the product at that point. Sellers in the chain collect the VAT from a buyer, deduct the amount of VAT they have already paid on their purchase of the product, and remit the balance to the government. The VAT is supposed to be non- discriminatory because it applies to both products sold on the domestic market and imported goods. The importance of VAT is due to the fact that GATT allows a producing country to rebate the VAT when products are exported. Since the tax implies to imports at the border but because it is fully rebated on exports, the VAT may improve a country’s trade balance. Cascade taxes are collected at a point in the manufacturing and distribution chain and are levied on the total value of a product, including taxes borne by the product at earlier stages. Of the tax systems examined, this appears to be the most severe of them all. An excise tax is one-time charge levied on the sales of specified products. Alcoholic beverages and cigarettes are good example. 10) IMPACT OF TARIFF Tariffs effect on economy in different ways. An import duty generally has the following effect: i. Protective Effect An import duty is likely to increase the price of imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable domestic industries to absorb higher production costs. Thus, as a result of the production accorded by tariffs, domestic industries are able to expand their output. ii. Consumption Effect The increase in prices resulting from the levy of import duty usually reduces the consumption capacity of the people. iii. Redistribution Effect If the import duty causes and increases in the price of domestically produced goods, it amounts to redistribution of income between the consumers and producers in favor of
  • 12. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 12 the producers. Further, a part of the consumer income is transferred to the exchequer by means of the tariff. iv. Revenue Effect As mentioned above, a tariff means increased revenue for the government (unless, of course, the rate of tariff is so prohibitive that it completely stops the import of the commodity subject to the tariff). v. Income and Employment Effect The tariff may cause a switchover from spending on foreign goods to spending on domestic goods. This higher spending within the country may cause an expansion in domestic income and employment. vi. Competitive Effect The competitive effect on the tariff is, in fact, an anti-competitive effect in the sense that the protection of domestic industries against foreign competition may enable the domestic industries to obtain monopoly power with all its associated evils. vii. Term of Trade Effect In a bid to maintain the previous level of imports to the tariff-imposing country, if the exporter reduces his prices, the tariff-imposing country is able to get imports at a lower price. This wills, ceteris paribus; improve the terms of trade of the country imposing the tariff. viii. Balance of Payments Effect Tariffs, by reducing the volume of imports, may help the country to improve its balance of payments position.
  • 13. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 13 11) NON-TARIFF BARRIERS Tariffs, though generally undesirable, are at least straightforward and obvious. Non-tariff barriers, in comparison, are more elusive or nontransparent. Tariffs have declined in importance, while nontariff barriers can be just as devastating, if not more, as the impact of tariffs. There are several hundred types of non-tariff barriers. These barriers can be grouped in five major categories contain a number of different non-tariff barriers. 1 GOVERNMENT PARTICIPATION IN TRADE The degree of government involvement in trade varies from passive to active. The types of participation include administrative guidance, state trading, and subsidies. i. Administrative Guidance Many governments routinely provide trade consultation to private companies. Japan has been doing this on a regular basis to help implement its industrial policies. This systematic cooperation between the government and business is labeled “japan, Inc.” To get private firms to conform to the Japanese government’s guidance, the government uses a carrot-and-stick approach by exerting the influence through regulations, recommendations, encouragement, discouragement, or prohibition. ii. Government Procurement and State Trading State trading is the ultimate in government participation, because the government itself is now the customer or buyer who determine what, when, how, and how much to buy. In this practice the state engages in commercial operations, either directly or indirectly, through the agencies under its control. Such business activities are either in place of or in addition to private firms. Although government involvement in business is most common with the communist countries, whose governments are responsible for the central planning of the whole economy, the practice is definitely not restricted to those nations. iii. Subsidies According to GATT, “subsidy is a “financial contribution” provided directly or indirectly by a government and which confers a benefit.” Subsidies can take many
  • 14. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 14 forms including cash, interest rate, value-added tax, corporate income tax, sales tax, freight, insurance, and infrastructure. Subsidized loans for priority sectors, preferential rediscount rates, and budgetary subsidies are among the various subsidy policies of several Asian countries. There are several other kinds of subsidies that are not so obvious. Brazil’s rebate of the various taxes, coupled with other form of assistance, can be viewed as subsidies. Sheltered Profit is another kind of subsidy. A country may allow a corporation to shelter its profit from abroad. The United States in 1971 allowed companies to form domestic international sales corporation (DISCs) even though they cost the U.S. treasury more than $1 billion a year in revenue. 2 CUSTOMS AND ENTRY PROCEDURE Customs and Entry Procedures can be employed as nontariff barriers. These restrictions involve classification, valuation, documentation, license, inspection, and health and safety regulations. i. Classification Product Classification is important because the way in which a product is classified determines its duty status. A company can sometimes take action to affect the classification of the product. In the United States, if an imported product is determined to have the acceptable minimum percentage of materials produced in a designated country, it can be classified by a customs officer as having duty-free status. Classification thus determines if certain product categories are qualified for a special treatment, but it also determines whether some products should be banned altogether. ii. Valuation Regardless of how products are classified, each product must still be valued. The value affects the amount of tariffs levied. a customs appraiser is the one who determines the value. The process can be highly subjective, and the valuation of a product can be interpreted in different ways depending on what value is used (e.g., foreign, export, import, or manufacturing costs) and how this value is constructed.
  • 15. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 15 iii. Documentation Documentation requirements vary from country to country. Usually, the following shipping documents are either required or requested: commercial invoice, proforma invoice, certificate of origin, bill of lading, packing list, insurance certificate, import license, and shipper’s export declarations. Without proper documentation, goods may not be cleared through customs. At the very least, such complicated and lengthy documents serve to slow down product clearance. iv. License or Permit The most common instruments of direct regulation of imports (and sometimes export) are licenses or Permit. 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 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 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). v. Inspection Inspection is an integral part of product clearance. Goods must be examined to determine quality and quantity. This step is highly related to other customs and entry procedures. First, inspection classifies and values products for tariff purposes. Second, inspection reveals whether imported items are consistent with those specified in the accompanying documents and whether such documents require any licenses. Third, inspection determines whether products meet health and safety regulations in order to make certain that food products are fit for human consumption or that the products can be operated safely. Fourth, inspection prevents the importation of prohibited articles. Inspection can be used intentionally to discourage imports.
  • 16. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 16 vi. Health and Safety Regulations Many products are subject to health and safety regulations, which are necessary to protect the public health and environment. Health and Safety Regulations are not restricted to agricultural products. The regulations apply to TV receivers, microwave ovens, X-ray devices, cosmetics, chemical substances and wearing apparel. 3 PRODUCT REQUIREMENTS For goods to enter a country, product requirements set by that country must be met. Packaging may apply to product standards and product specifications as well as to packaging, labeling and marking. i. Product Standards Each country determines its own product standards to protect the health and safety of its consumers. Such standards must also be erected as barriers to prevent or to slow down importation of foreign goods. For e.g. because of U.S. grade, size, quality, and maturity requirements, many Mexican agricultural commodities are barred from entering the United States. ii. Packaging, Labeling and Marking Packaging, Labeling and Marking are considered together because they are highly interrelated. Many products must be packaged in a certain way for safety and other reasons. For e.g. Canada requires imported canned foods to be packed in specified can sizes, and instructions contained within packages or on them must be in English and French. Products must also be properly marked and labeled, and marking and labeling may apply either to products themselves or to their packages. iii. Product Testing Many products must be tested to determine their safety and suitability before they can be marked. This is the area in which United States has some troubles in Japan. Although products may have won approval everywhere else for safety and effectiveness, such products as medical equipment pharmaceuticals must go through elaborate standards testing that can take a few years. iv. Product Specifications Product Specifications, though appearing to be an innocent process, can wreak havoc on imports. Specifications can be written in such a way as to favor local bidders and
  • 17. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 17 to keep out foreign suppliers. For example, specifications can be extremely detailed, or they can be written to closely resemble domestic products. They can be used against foreign suppliers who cannot satisfy their specification without expensive or lengthy modification. 4 QUOTAS Quotas are a quality control on imported goods. Generally, they are specific provisions limiting the amount of foreign products imported in order to protect local firms and to conserve foreign currency. Quotas can be used for export control as well. From a policy standpoint, a quota is not as desirable as a tariff since a quota generates no revenues for a country. 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. There are three kinds of quotas: absolute, tariff and voluntary. i. Absolute Quotas An absolute quota is the most restrictive of all. It limits in absolute terms the amount imported during a quota period. Once filled, further entries are prohibited. Some quotas are global, but others are allocated to specific foreign countries. The most extreme of the absolute quota is an embargo, or a zero quota, as in case of the U.S. trade embargoes against North Korea. ii. Tariff Quotas A Tariff quota permits the entry of a limited quantity of the quota product at a reduced rate of duty. Quantities in excess of the quota can be imported but are subject to a higher duty rate. Through the use of tariff quotas, a combination of tariffs and quotas is applied with the primary purpose of importing what is a needed and discouraging excessive quantity through higher tariffs. iii. Voluntary Quotas A voluntary quota differs from the other two kinds of quotas which are unilaterally imposed. A voluntary quota is a formal agreement between nations or between a nation and an industry. This agreement usually specifies the limit or supply by product, country, and volume. Two kinds of voluntary quotas can be legally distinguished: VER(voluntary export restraint) and OMA(orderly marketing
  • 18. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 18 agreement).Whereas a OMA involves a negotiation between two governments to specify export management rules, the monitoring of trade volumes, and consultation rights, a VER is a direct agreement between an importing nation’s government and a foreign exporting industry. 5 FINANCIAL CONTROLS Financial regulations can also function to restrict international trade. These restrictive monetary policies are designed to control capital flow so that currencies can be defended or imports controlled. There are several forms that financial restrictions can take. i. Exchange Control An exchange control is a technique that limits the amount of the currency that can be taken abroad. The reason exchange controls are usually applied is that the local currency is overvalued, thus causing imports to be paid for in smaller amounts of currency. Purchasers then try to use the relatively cheap foreign exchange to obtain items either unavailable or more expensive in the local currency. Exchange controls also limit the length of time and amount of money an exporter can hold for the goods sold. French exporters, for example, must exchange the foreign currencies for francs within one month. By regulating all types of the capital outflows in foreign countries, the government either makes it difficult to get imported products or makes such items available only at higher prices. ii. Multiple Exchange Rates Multiple exchange rates are another form of exchange regulation or barrier. The objective of multiple exchange rates is twofold: to encourage exports and imports of certain goods and to discourage exports and imports of others. This means that there is no single rate for all products or industries. But with the application of multiple exchange rates, some products and industries will benefit and some will not. Spain once used low exchange rates for goods designed for export and high rates for those it desired to retain at home. Multiple exchange rates may also apply to imports. The high rates may be used for imports of particular goods with the government’s approval, whereas low rates may be used for other imports.
  • 19. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 19 iii. Prior Import Deposits and Credit Restrictions Financial barriers can also include specific limitations or import restraints, such as prior import deposits and credit restrictions. Both of these barriers operate by imposing certain financial restrictions on importers. A government can require prior import deposits that make imports difficult by tying up an importer’s capital. In effect the importer is paying interest for money borrowed without being able to use the money or get interest earning on money from the government. Credit restrictions apply only to importers, that is, exporters may be able to get loans from the government, usually at very favorable rates, but importers will not be able to receive any credit or financing from the government. Importers must look for loans in private sectors- very likely at significantly high rates, if such loans are available at all. iv. Profit Remittance Restrictions Another form of exchange barrier is profit remittance restrictions. ASEAN countries share a common philosophy in allowing unrestricted repatriation of profit earned by foreign countries. Singapore, in particular, allows the unrestricted movement of capital. But many countries regulate the remittance of profits earned in local operations and sent to a parent organization located abroad. Brazil uses progressive rates in taxing all profits remitted to a parent company abroad, with such rates going up to 60 percent. Other countries practice a form of profit remittance restriction by simply having long delays in permission for profit expatriation. To overcome these practices, MNCs have looked to legal loopholes. Many employ the various tactics such as countertrading, currency swaps, and other parallel schemes. For example, a multinational firm wanting to repatriate a currency may swap it with another firm that needs that currency. Or these firms may lend to each other in the currency desired by each party. Another tactics is to negotiate for a higher value of an investment than the investment’s actual worth. By charging its foreign subsidiary higher prices and fees, an MNC is able to increase the equity base from which dividend repatriations are calculated. In addition, compared to profit repatriations, the higher prices and fees are treated as costs or expenses and are thus more freely paid to the parent firm.
  • 20. Import, Need for Import, Barriers to International Trade The Business School, University of Jammu 20 12) REFERENCES [1.] [2.] [3.] [4.] [5.] International Business by Donald A. Ball and Michael S. Minor. [6.] Building an Import by Kenneth D. Weiss