barriers to trade[1]

8/3/2019 Barriers to Trade[1]

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Barriers to Trade Some countries pursue an inward-looking

strategy towards foreign trade These countries use several barriers to protect

domestic industries from competition from

foreign firms The barriers generally include tariff and non-

tariff strategies


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Tariffs A tariff is a tax imposed on goods involved in inter-

national trade Tariffs are imposed on goods imported, in which

case they are called import duties Taxes are also imposed on goods when they leave the

country (export tariff) or as they pass through onecountry bound for another (transit tariff).


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Import tariff does two things:a) It adds on to the cost of the imported

item and hence to the price of thatimported item

It, thus, possibly reduces thecompetitiveness of that item vis--vis any

competing domestic items Thus, tariff may act as a measure

protecting the local industry

b) It gives revenue to the government


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or weight, either net weight or grossweight (e.g. $ 30 per kilogram net).

iii) Compound Duty

Compound duty is assessed as a combi-nation of the specific duty & ad veloremduty ($ 30 per kilogram net, plus 30% of FOB price)

Tariffs were a major barriers to imports during theearlydays of the General Agreement on Tariffs & Trade

(GATT) Over the years, due to the increasing influence of GATT,

tariffs have been successively reduced all over the world Therefore, tariffs have ceased to be the strong barriers

to inter-national trade as they were earlier.


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Export DutiesA country may levy export duties primarily as ameans to restrict exports of a particular product forthe following reasons:

1) To reserve the domestic supply for localindustries

2) To make the raw materials inputsavailable to the local industry at a lowprice

3) To preserve natural resources & protectthe countrys environment 4) To encourage foreign direct investment

(FDI) in downstream industries


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1) To reserve the domestic supply for localindustries: The intention is to protect the domesticindustries by ensuring that they have theinputs available.

2) To make the raw materials & inputs available tothe local industry at a low price:

Export duties resemble import tariffs in thattheir primary effect is on the price of tradedgoods

They resemble other domestic industry-protecting export restrictive measures such as

minimum export pricing A country has a dominant position in a vital

raw material, or a country that has dominancein the world market as such, could furtherextend its domination by artificial increasing


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vital raw material or products Export duties are intended to exploit its

market power by fully cultivatingdominant position

It is in a price making situation This raises the world prices for that

material & makes it difficult for theother players to compete inter-nationally

This militates against the concept orfree trade.


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3) To preserve the natural resources and protect the countrys environment:

Export duty will tend to discourage theexport & consequent depletion of thenatural resource or harm to theenvironment.

4) To encourage foreign direct investment (FDI) indown-stream industries:

As the raw material from country A would

be available to a foreign processor fromcountry B only at a higher price if hewere to import & process it in his country

B he tempted to set up the processing


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unit in country AIn any case, most tariff measures are now on the wanewith the increasing power of WTO the inter-nationaltrade regulating body.


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Non-tariff Barriers (NTBs) to Inter-national Trade With the regulatory organization like WTO in place &

the subsequent erosion of tariffs as instruments of

protecting domestic industries from foreigncompetition, the non-tariff barriers (NTBs) haveproliferated as political & protective measures

It is not that the resort to NTBs only when their macro-economic conditions are deteriorating ; any economic& industrial re-structuring that happens within thecountry may give rise to cries for protection from

various groups that are affected by the re-structuring A country may resort to various strategic internal &

external trade policy measures to give a lift to the

domestic industry; these policy measures may amount


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to NTBs for other nations that would like to export theirgoods & services to that country

Non-tariff barriers are of two kinds:A) Price-influencing NTBsB) Quantity-influencing NTBs


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A) Price-influencing NTBsi) Subsidies

ii) Customs Valuationiii) Administered Minimum Price

Levelsiv) Customs Deposits & Special Fees


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i) Subsidies Subsidy is a monetary help by the government to the

local firms so that they &/or their products are madecompetitive

Due to the subsidy, the firms cost may come down& they may become more competitive price-wise

&/or quality-wise The payments by the government may be direct to the

firms or it could be indirect Agricultural subsidies, that are direct, are common

occurrence in many countries However, when the local farmers are given such

subsidies, the other countries exporting similaragricultural products may find it difficult to compete


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with the local agriculturists In such cases, the subsidies become a non-tariff barriers

to the other countries products

At the Uruguay Round of GATT, the mutualallegations by France & USA of subsidies given totheir farmers led to a near impasse in the negotiations.

a) Indirect Subsidiesb) Export Subsidies

c) Conditional Subsidies


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a) Indirect Subsidies Subsidies could be indirect, when some of the

expenses of the inputs are borne by the govern-ment out of public funds

Free electric power to the farmer is an example Seeds could also be supplied at low rate through

government-controlled organizations Inter-national examples of indirect subsidy are

the cases of Airbus Industries & Boeing

While Boeings R&D expenses were - in a way- paid for by the US governments defenceprogramme involving much R&D in aviation,

USA alleges that the European funds were used


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for indirectly subsidizing Airbus Industries Aviation industry cannot hold more than a few

players Its volumes, in terms of the number of planes

demanded world-wide, are limited In such a scenario, the players would like to hold

on to their position by creating competitiveadvantages

The industry being of strategic importance, the

home governments chip in to help


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b) Export Subsidies It is alleged that China currently sells corn below

the world price and below the cost of domesticprocurement

It is an export subsidy State trading enterprises in China, Canada &

Australia, were said to be creating de facto exportsubsidies through the mechanism of pool pricing,cross-subsidization of commodities or even long-term supply agreements between governments

Such support policies are trade distorting & WTOis making efforts to discourage such practices.


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c) Conditional Subsidies Subsidies that require recipients to meet certain

export targets or to use domestic goods instead of imported goods are prohibited by the WTO

They are prohibited on the grounds that they arespecifically designed to distort inter-nationaltrade, and are therefore, likely to hurt othercountries trade

If the dispute settlement procedure of WTOconfirms that a subsidy is prohibited, it must bewithdrawn immediately

Otherwise, the complaining country can take

counter-measures.


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ii) Customs Valuation This is another major non-tariff barrier

while the customs officers must levy the duty onthe declared invoice price, sometimes the customofficer may suspect that the invoice prices areunder-valued

The customs official, then, may assess the realprice based on the price of identical or similarproducts at that point in time

The custom officials arbitrary valuation of thegoods becomes a non-tariff barrier, if theexporting country feels that the valuation has

been higher than the real price


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Countervailing Duties The WTO Agreement says that if an importing

country feels that it could be hurt because of thesubsidies in the exporting country, the importingcountry can use the WTOs dispute settlementprocedure to seek the withdrawal of the subsidy

or the removal of its adverse effects Or the country can launch its own investigation

& ultimately charge extra duty (known as

countervailing duty) on subsidized imports thatare found to be hurting domestic producers

Many countries charge such countervailingduties

Th f i h d b d h


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There are a few questions that need to be answered here:1. Is the product really being subsidized? What is

the meaning of being subsidized? Can it be

calculated and thus established ?2. Is the subsidy hurting the domestic industry ?

How is the hurt decided ? The complaining country has to show that the subsidy has

an adverse effect on its interests. Otherwise, as per WTO, the subsidy is permitted Since the subsidies play an important role in the economic

development of the developing nations, particularly theLeast Developed Countries (LDCs), WTO rules exemptLDCs & developing countries with less than US $ 1,000per capita GNP from disciplines on prohibited exportsubsidies.


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Anti-Dumping Actions If a company exports a product at a price lower

than the price it normally charges on its ownhome market, it is said to be dumping theproduct

Thus, the company is willing to suffer a loss inexporting, in its efforts to get a slice of the over-seas markets

A country may fear that the foreign company may

use its financial strength to suffer such losses forextended periods of time until it captures theentire domestic market or a large portion of the

market


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Thereafter, the company being in a mono-polistic situation can charge any price suitableto it & more than recoup the initial losses

Dump the goods, capture the overseas market,marginalize the original domestic players & thenstart milking the market

It is precisely this scenario that many countriesdread; developing countries are perenniallyscared of the financial clout of the developed

countries & their dumping of goods.

) d d l l


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iii)Administered Minimum Price levels For the entry of a particular type of overseas

product, a minimum price may be set by the

importing country This limits the competitive power of the

overseas product in the importing country Therefore, the foreign product can compete

mostly based on its quality but not on its costefficiency

Without the mention of a tariff, this policy actsas a tariff measure

i ) C t D it & S i l F


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iv) Customs Deposits & Special Fees A way of increasing the cost of an

imported item is by asking for payment of

deposits with the customs in advance of theshipment

Such requirements of advance payments, inaddition to increasing the cost, act asfinancial hurdles to the foreign exporter

Some levy special fees at the customs,making the import that much more

expensive & less competitive For instance, in the countries of the Gulf

region, Indian exporters had to pay

legalization charges for documents, etc.


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which ate into the earnings of small exporterswho did not have large volumes of sales to takecare of such add-ons to export cost

Similarly, one of the NTBs affecting Indiangoods exports to US has been, excessive fees forcustoms.


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B) Quantity-influencing NTBs i) Quotasii) Voluntary Exports Restrictions

(VER)

i) Q t


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i) Quotas Quotas are restrictions on the imports of a goods to

a particular level in a given year The quotas could be by the maximum number/

quantity or by the maximum value of the goods One of the major intended effects of an import

quota is to limit the competition for the domesticproducers

Quotas are generally allocated by country & byor product category, i.e. an importing country willhave different quotas for different countries &differently for different products/product-categories

Multi Fibre Arrangement (MFA)


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Multi-Fibre Arrangement (MFA) A major example of quotas has been that of the quotas

on textiles & garments called as multi-fibre

arrangement (MFA), which was introduced in 1974 The developed countries wanted to shield their

domestic textiles & clothing industries from thegrowing competition from developing-countryproducers, & hence these quotas

Textile & clothing industry could be highly labour-intensive and hence several developing countries had a

competitive advantage over the industries in thedeveloped countries

Hence, these special quotas for textiles & garments Quotas have been negotiated on a country-by-country

b i & h b t bli h d t diff t l l


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basis & have been established at different levels For example, strict quotas generally operate on imports

from India, Korea & Hong Kong, whilst the developed

countries impose little restriction on textile & clothingimports from a group of Least Developed Countries

The rapid expansion of the garment industry in

Bangladesh during the 1980s was partly due to the factthat it was an LDC.Export Quotas & other Quotas

Quotas could also be on the exports The reasons behind the export quotas could be to

protect & conserve the national natural resources The other reason for export quotas could be to influence

the world pricing of that commodity/product

F i h O i i f P l E i


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For instance, the Organization of Petroleum ExportingCountries (OPEC) decides on the amount of petroleumcrude that could be produced & exported in a year byeach member of their organization

The intension is to regulate the supply of petroleum inthe world & thus control the price

Different types of quotas exist, such as, global quotas,bilateral (i.e between two countries) quotas, seasonalquotas, quotas linked with export performance (i.e a

firm can import required inputs in proportion to orlinked in some other way to its exports of products),quotas linked with the purchase of local goods (i.e

to protect the local industries), quotas for sensitive

product categories etc


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product categories, etc. Export-linked import quotas were a very common

practice in India Of course, that led to some queer situations where a

large industrial house would export Basmati rice tomeet its export obligations.

Political Reasons for the Quotas There could be political reasons for the quotas onimports & exports

Quotas could be one of the ways of expressingdispleasure or (oppositely) favoritism about the politicalpolicies of the other country

The expression of displeasure could be subtle or it could

be loud

Wh i i l d h i i ll d d i


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When it is loud, the action is called a trade sanction When all the trade from & to a country is blocked, it is

called an embargo For example, when India conducted nuclear tests, many

major industrial nations declared trade sanctions In the case of Iraq, during the regime of Saddam

Hussein, US had declared trade embargo that preventedeven the medical supplies to reach that country.

Rules of Origin


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Rules of Origin As a result of the quota system, exporting

countries - that have been restricted have usedother means of beating the system

They have diverted their goods to other countriesthat did not fall under those restrictions

Thereafter, the goods were exported from thatcountry to the desired original destination

It involved a re-routing

Such re-routing could avoid anti-dumping action& countervailing duties

Some used more ingenuity

If automobiles were restricted & not the spare

parts they would export the spare parts (i e


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parts, they would export the spare parts (i.e.dismantled or completely knocked down or CKDautomobile) & re-assemble them in that overseas

country Just a few years ago, the world was concerned

about mad cow disease that could be spread to humans with the consumption of infected beef & beef products

The beef export from certain countries wereprohibited due to this possibility of infection

However, there was always a possibility of re-routing

Due to these practices, the countries that restrict

that imports also specify the rules of origin

for the in-coming shipments


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for the in coming shipments.Rules of origin are, therefore, important for followingreasons:

a) Protecting public health & safety b) Protecting the free trade agreements from misuse(e.g. diverting goods to a country that gets duty-

free treatment)

c) Declaring to the customers in a transparent mannerinformation about the product as to where it wasmade

While the rules of origin specifications are also requiredto properly administer quotas, anti-dumping actions,counter-vailing duties, sanction against a particularcountry, etc., these uses of rules of origin go againstthe grain of free trade &, hence, should not beem hasized

R l f igi th it i d t d fi h


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Rules of origin are the criteria used to define where aproduct was made

It should be clear as to what confers the origin These rules & their implementation should be

consistent, uniform, impartial & reasonable Therefore, some rules of origin require that a certificate

indicating the country of origin must accompany animported good

Which country/countries produced the good should be

clear from these certificates It is essential to harmonize i.e bring in uniformity in the

rules of origin used by different WTO member

countries

Ho do r les of origin become a non tariff barrier?


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How do rules of origin become a non -tariff barrier?Developing countries have complained that they are

being asked to prove the genuine country of origin This was particularly true regarding the textiles &

clothing quotas under MFA Frequent changes in the rules of origin criteria by the

importing country could also pose difficulties Thus, rules of origin could be used (misused) as a

bureaucratic tool for increasing the hassles for the

foreign exportersThe more complex the rules, the more would they work as a non-tariff barrier.

ii) Voluntary Export Restrictions (VER)


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ii) Voluntary Export Restrictions (VER) Instead of imposing quotas, an importing country

(generally an economically & politically power-full developed country) may make an offer to theexporting country (a country in a weaker position&/or a developing country) to voluntarily have

restrictions on its exports Such an offer is generally not refused About three decades ago, when Japanese auto-

mobiles started becoming popular in theAmerican market, USA asked Japan to havevoluntary restrictions on its automobiles export. Japan agreed.

iii) Safeguards


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iii) Safeguards According to WTO Agreement on Safeguards, a

WTO member may restrict imports of a product

temporarily (take safeguard actions) if itsdomestic industry is seriously injured orthreatened with injury caused by a surge inimports

It may be noted that there has to be a surge inimports, the injury has to be serious, & therestrictions placed to safeguard have to be

temporary The safeguard action should be applied only to

the extent the seriously injured industry is helpedto recover

Moreover the emphasis is on transparency & on


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Moreover, the emphasis is on transparency & onavoiding arbitrary methods

When the safeguards are applied, the exporting

countries should be suitably compensated, the com-pensations being decided after mutual consultation.

iv) Domestic Content Requirements


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iv) Domestic Content Requirements Many countries require that a company, in order

to be eligible to import, has to show that it isgoing to use the required percentage of inputsproduct locally

These mechanisms, also known as domestic content requirements, are allowable under therules of the WTO (TRIMS Agreement) & weredesigned to assist transitional or developingcountries

However, such measures are used by manycountries developing & developed

EU had domestic content requirements for Japanese


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EU had domestic content requirements for Japanese automobiles manufactured in EU

Thus, imports are not free; they are tied This is kind of barrier to trade.

v) Government Procurement


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v) Government Procurement In several countries, government is the largest

purchaser of goods of all kinds For instance, in India the influence of the

government, its agencies & its public sectorundertakings is enormous

Same is the case with many developed countriesas well

However, because it is government purchase, it

is many a time limited to purchases from the localsuppliers

This means, a large portion of trade is not open tointer-national competition

WTO is changing this situation through the Agreement


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WTO is changing this situation through the Agreement on Government Trade

Services (including construction services), procurementat the sub-central level (for example, states or provinces& departments), & procurement by public utilities arealso covered under this agreement.

vi) Sanitary & Phytosanitary (SPS) Measures


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vi) Sanitary & Phytosanitary (SPS) Measures A country has a right to ensure that its people are

being supplied with food that is safe to eat

safe by the standards of that country It has a right to prevent the spread of pests or

diseases among animals & plants At the same time, it must ensure that these strict

health & safety regulations are not being used asan excuse for protecting domestic producers

WTO Agreements (SPS Agreement) allowscountries to set their own standards

But it also says that the regulations must bebased on science

SPS Agreement allows countries to use different


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SPS Agreement allows countries to use differentstandards & different methods of inspecting products,provided these do not arbitrarily or unjustifiablydiscriminate between countries where identical orsimilar conditions prevail

Sanitary (human animal health) phytosanitary (plant

health) measures would apply to domestically producedfood or local animal & plant diseases, as well as toproducts coming from other countries

This is an consonance with WTOs fundamental principles of non -discrimination & nationaltreatment

The meanings of these two principles are:


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g p pa) Non-discrimination: Treat all countries

equally

b) National treatment: Treat other nationsproducts (once these enter your country)

just as you treat your own Only when these principles are violated, does an SPS

measure become an NTB For the proposes of the SPS Agreement, sanitary &

phytosanitary measures are defined as any measures

applied: to protect human or animal life from risks

arising from additives, contaminants,toxins or disease-causing organism intheir food;

to protect human life from plant-or animal-carried


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p pdiseases;

to protect animal or plant life from pests, diseases

or disease-causing organisms; to prevent or limit other damage to a countryfrom the entry, establishment or spread of pests

These include sanitary & phytosanitary measures taken

to protect the health of fish & wild fauna, as well as of forests & wild flora

Measures for environmental protection (other than as

defined above), to protect consumer interests, or for thewelfare of animals are not covered by the SPSAgreement

The sanitary & phytosanitary measures can take many

forms, such as requiring products to come from a

disease-free area inspection of products specific


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disease free area, inspection of products, specifictreatment or processing of products, setting of allowablemaximum levels of pesticide residues or permitted use

of only certain additives in food Referring to NTBs on sanitary & phytosanitary (SPS)

conditions, an official report from India said that

processed food imports into Japan were affected byJapanese standards affecting food additives, eventhough these additives might be generally recognized assafe elsewhere

This Japanese case would be WTO-compatible

vii) Technical Barriers to Trade (TBT)


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) ( ) Just like SPS measures, in order to safeguard the

genuine interests of its domestic consumers,

a country may specify technical regulations &standards that mention specific characteristicsof a product, such as its size, shape, design,functions & performance, or the way a product islabelled or packaged before it enters the market-place

The idea is to bring in more transparency

regarding the products characteristics, process,& the location of the major process undergone For instance, if a garment (says the Gucci

brand) is made mostly in Vietnam, the product

label must mention that it is Made in Vietnam

Otherwise, a consumer may assume that it is


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Otherwise, a consumer may assume that it ismade in EU

Included in this set of measures are also thetechnical procedures, which confirm that productsfulfil the requirements laid down in regulations& standards

All these measures are, indeed, fair However, when used to discriminate between

countries & to protect domestic industries from

foreign competition, these go against the basicobjective of free trade

The technical standards then become technical

barriers to trade (TBT)

Since, there could be myriad technical


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Since, there could be myriad technicalspecifications & labelling requirements, thesecould pose substantial difficulties to the foreign

exporters trying to access the market It is not the difficulty, which is in question, as

long as it is applied uniformly across all countries

& within its own territory It is the discrimination, if any that is in question Is there an intention to pose a hurdle to the

exporting country so as to discourage it fromexporting ?

Then, it becomes a barrier to trade.

viii) Environmental Standards


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viii) Environmental Standards These days, with rapid industrialization & the

depletion of natural resources, environment is amajor concern

Some of the important inter-nationalenvironmental agreements are: Montreal Protocol

for the protection of the o-zone layer, the BaselConvention on the trade or transportation of hazardous waste across inter-national borders,

& the Convention on Inter-national Trade inEndangered Species (CITES)

But, the environmental issues could be misused

With the ostensible explanation of protecting

ones environment &/or the global environment,


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one s environment &/or the global environment, a country may ban/restrict trade from anothercountry as creating conditions that are environ-mentally & ecologically unsafe

It is necessary to distinguish between genuineecological concerns & the intentions to protect

domestic industries through green traderestrictions on imports

ix) Labour Standards


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) Many a time a country may prohibit or restrict

imports from another country on the grounds that

the exporting country is departing from the corelabour standards

Thus, carpets from Islamic Republic of Iran maybe banned or restricted as the carpet industry inIran uses child labour to a considerable extent

The pertinent questions are: Should a countrysexports be restricted because it uses child

labour or forced labour ? Does a country have a right to restrict such trade? Can this be treated as a case of different

economic & value systems ?

Should a country impose its value systems on


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y p yanother country?

If a country has less labour rights, does it gainany unfair advantage ?

Several developed countries have used labour standards to restrict the imports from another

country But, many developing nations believe that efforts

to brings labour standards into the arena of multi-lateral trade negotiations are little more than a

smokescreen for protectionism & that it is aneffort to undermine the advantage of thedeveloping countries in terms of their low wages.

x) Bureaucratic Delay Tactics


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) y There could be other barriers erected to trade by

using the bureaucratic procedural delays These in-ordinate delays constitute trade barriers The Sri Lankan Minister of Trade & Commerce

had once said about India that so manyquestions are asked at the Customs, that theexporters are fed up

In the case of the European Union, the NTBs

include delayed or extended administrative &inspection procedures, & delayed laboratorytest reports; delays would mean a loss of

opportunity to sell for the exporter

In an interesting case, it is said that when the French


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g ,decided that the imports of Japanese VCRs wereexcessive, they simply applied the rules & gave eachVCR a complete inspection

The number of VCRs entering the country droppedfrom thousands to six per day

An official report from India on the subject of NTBs hassaid that about 35 per cent of Indias total exports to the US in value terms confronted NTBs in 2002 & so is the

case with the incidence of NTBs in regard to Indiasexports to other developed countries such as theEuropean Union & Japan


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barriers to trade[1]

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