constraints to international marketing

8/14/2019 constraints to international marketing

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CONTRAINTS TO INTERNATIONAL

MARKETING

TARIFF AND NON TARIFF BARRIERS


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TRADE BARRIERS

Trade barriers are the artificialrestrictions imposed by thegovernments on free flow of goods

and services between countries.


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Tariffs, quotas, taxes, duties, foreignexchange restrictions, trade agreementsand trading blocs are the techniques

used for restricting free movement ofgoods from one country to the other

Trade barriers are broadly classified intofollowing two categories:

Tariff barriers or Fiscal controlsNon-tariff barriers or quantitative

restrictions.


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OBJECTIVES OF TRADE

BARRIERS To Protect Home Industries from Foreign Competition

To Promote New Industries and Research and Development

To Conserve Foreign Exchange Reserves

To Maintain Favorable Balance of Payments

To Protect Economy for Dumping To Curb Conspicuous Consumption

To Make Economy Self-reliant

To Mobilize Public Revenue

To Counteract Trade Barriers Imposed by Other Countries


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Methods of Valuing Imports

Free alongside (F.A.S.) price

The price of the imported good as the foreign

countrys market price before loading the good for

shipment to the importing country

Free on Board (FOB) price

The price of the imported good as the foreign

countrys market price plus the cost of loading thegood in the means of conveyance


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Cost, Insurance, and Freight (C.I.F.) price

The price of the imported good as the foreign countrys

market price plus the cost of loading the goods into the

means of conveyance plus all inter-country

transportation costs up to the importing countrys port

of entry.

Most countries use the C.I.F. price for calculating ad

valorem tariffs.

BUT the U.S. uses the FOB price for calculating ad

valorem tariffs.


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TARIFFS BARRIERS

Tariffs in international trade refer to the duties

or taxes imposed on internationally traded

commodities when they cross the national

borders.


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Import tariffs Export tariffsdirection

Specific duties

Ad valorem duties

Combined dutiesTariff rates

Single column tariff

Double column

Triple columnApplication

Revenue tariff

Protective tariffPurpose

Anti dumping duties

Countervailing dutiesOthers

CLASSIFICATION OF TARIFFS


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ON THE BASIS OF DIRECTION

Export Duties

An export duty is a tax imposed on a

commodity originating from the duty-levying

country destined for some other country.

Import duties

An import duty is a tax imposed on acommodity originating abroad and destined

for the duty-levying country.


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ON THE BASIS OF TARIFF RATES

Specific Duties

A specific duty is a flat sum per physical unit of the commodityimported or exported, thus a specific import duty is a fixed amountof duty levied upon each unit of the commodity imported.

Ad-Valorem Duties

Ad-valorem duties are levied as a fixed percentage of the value ofcommodity imported/exported. Thus, while the specific duty isbased on the quantum of commodity imported/ exported, the ad-valorem duty is based on the value of the commodityimported/exported.

Compound DutiesWhen a commodity is subject to both specific and ad-valoremduties, the tariff is generally referred to as compound duty.


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ON THE BASIS OF APPLICATION

Single Column Tariff

The single-column, also known as the uni-linear, tariffsystem provides a uniform rate of duty for all likecommodities without making and discrimination betweencountries.

Double Column Tariff

Under the double-column tariff system, there are two ratesof duty on some or on all commodities. Thus, the doublecolumn tariff discriminates between countries. The double-

column tariff system may be broadly divided into:(a) General and conventional tariff;

(b) Maximum and minimum tariff.


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continued

Triple-Column Tariff

The triple-column tariff system consists of threeautonomously determined tariff schedules

the general,

the intermediate and

the preferential.

The general and intermediate rates are similar to themaximum and minimum rates mentioned above under

the double-column tariff systems. The preferential rateis generally applied in trade between the mothercountry and the colonies.


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On the basis of purpose

Revenue Tariff

Sometimes the main intention of the government inimposing a tariff may be to obtain revenue. When raisingrevenue is the primary motive, the rates of duty aregenerally low, lest imports should be highly discouraged,defeating the objective of mobilizing revenue for thegovernment.

Protective Tariff

Protective tariff is intended primarily, to accord protection

to domestic industries from foreign competition. Naturally,the rates of duty tend to be very high in this case becausegenerally, only high rates of duty curtail imports to asignificant extent.


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Others

Countervailing and Anti-Dumping DutiesCountervailing duties may be imposed on certainimports when they have been subsidized by

foreign governments.Antidumping duties are applied to imports whichare dumped on the domestic market at priceseither below their cost of production or

substantially lower than their domestic prices. Countervailing and anti-dumping duties are,

generally penalty.


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IMPACT OF TARIFFS

Tariffs affect 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.


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(iii) Redistribution Effect

If the import duty causes and increase in the price ofdomestically produced goods, it amounts toredistribution of income between the consumers andproducers in favor of the producers.

(iv) Revenue Effect

As mentioned above, a tariff means increased revenuefor the government (unless, of course, the rate of tariffis so prohibitive that it completely stops the import ofthe commodity subject to the tariff).


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(v) Income and Employment Effect

The tariff may cause a switchover from spending onforeign goods to spending on domestic goods. Thishigher spending within the country may cause anexpansion 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 ofdomestic industries against foreign competition mayenable the domestic industries to obtain monopolypower with all its associated evils.


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(vii) Term of Trade Effect In a bid to maintain theprevious level of imports to the tariff imposingcountry, if the exporter reduces his prices, the

tariff-imposing country is able to get imports at alower price. This wills, ceteris paribus, improvethe terms of trade of the country imposing thetariff.

(vii) Balance of Payments Effect Tariffs, by reducingthe volume of imports, may help the country toimprove its balance of payments position.


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NON TARIFF BARRIERS

All forms of discrimination against imports other

than import duties

Administered protection(Non Quantitative)

Quantitative

Quotas: numerical limits placed on specific classes

of imports

Voluntary export restraints (VERs): Export quotasimposed by exporting nation


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Administered Protection

Administered protection encompasses a wide

range of bureaucratic government actions,

which have grown in absolute as well as

relative importance over the last decade ormore

Important administrative protection measures

include the following:


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Health and Product Standards:-

Several health and product standards imposed

by the developed countries hinder the exports

of developing countries because of the added

costs or technical requirements.

The need for maintaining health and product

standards is unquestionable.


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Customs Procedures:

Certain customs procedures of many countries

become trade barriers.

For example, studies point out that frequent

changes of Japans customs regulations are

themselves a significant barrier to exporters,

especially those not affiliated with Japanese

overseas joint ventures.


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Consular Formalities :

A number of countries insist on certain

consular formalities like certification of export

documents by the respective consulate, of the

importing country, in the exporting country.

This becomes a trade barrier when the fees

charged for this is very high or the procedure

is very cumbersome


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Licensing:

Many countries regulate foreign trade

particularly imports, by licensing.

In most cases, the purpose of import licensing

is to restrict imports.


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Government Procurement:

Government procurements often tend to

hinder free trade.

The Tokyo Round has, therefore, formulated

an agreement on government procurement

with a view to securing greater international

competition in government procurements.


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State Trading :

State trading also hinders free trade many a timebecause of the counter trade practices,

canalization, etc. State trading was an important feature of the

foreign trade of the centrally planned economicsand many developing countries.

With the economic liberalizations in most ofthese countires, the role of state trading hasdeclined.


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Monetary Controls:

In addition to foreign exchange regulations, other monetarycontrols are sometimes employed to regulate trade,particularly imports.

For instance, to tide over the foreign exchange crisis in1990-91 and 1991-92, the Reserve Bank of India tookseveral measures which included as 25 per cent interestrate surcharge on bank credit for imports subject to acommercial rate of interest of a minimum 17 per cent, therequirement of substantially high cash margin requirementon most imports other than capital goods, and restrictionson the opening of letters of credit for imports.


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Foreign Exchange Regulations :

Foreign exchange regulations are an important

way of regulating imports in a number of

countries. This is done by the State

monopolizing the foreign exchange resources

and not realizing foreign exchange for import

of items which the government do notapprove of for various reasons.


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Quantitative restrictions

Voluntary Export Restraints

Importing countries persuade exporting

countries to voluntarily limit their exports.

Example: 1.68 million Japanese cars permitted

annually beginning in 1981.

There is an implied threat of tariffs or quotas if

exporting country doesnt comply.

VERs exist for political reasons, noteconomically valid ones.


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Quantitative Restrictions - Quotas

Quantitative restrictions or quotas are an

important means of restricting imports and

exports. A quota represents a ceiling on the

physical volume of the import/export of acommodity

Types of Import Quota

There are four important types of import

quotas, including import licensing. These are:


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(i) Tariff Quota

A tariff quota combines the features of the

tariff as well as of the quota.

Under a tariff Quota the imports of a

commodity up to a specified volume are

allowed duty free or at a special low rate;

but any imports in excess of this limit are

subject to duty-a higher rate of duty


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(ii) Unilateral Quota

In a unilateral quota, a country unilaterally

fixes a ceiling on the quantity of the import of

particular commodity.


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(iii) Bilateral Quota

A bilateral quota results from negotiations

between the importing country and a

particular supplier country, or between the

importing country and export groups within

the suppliercountry


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(iv) Mixing Quota

Under the mixing quota, the producers are

obliged to utilize domestic raw materials up to

a certain proportion in the production of a

finished product


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Under the import licensing system, theprospective importers are obliged to obtain alicense from the licensing authorities: thepossession of an import license is necessary toobtain the foreign exchange to pay for theimports,

In a large number of countries, import licensing

has become a very powerful device forcontrolling the quantity of imports-either ofparticular commodities or aggregate imports.


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Impact of Quotas

Like fiscal controls, the quantitative

restrictions on imports have a number of

effects on the economy.

The following are, in general , the important

economic effects of quotas:


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(i) Balance of Payments Effect

As quotas enable a country to restrict theaggregate imports

within specified limits, quotas are helpful inimproving its

balance of payments position.

(ii) Price Effect

As quotas limit the total supply, they may causean increase in

domestic prices.


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(iii) Consumption Effect

If quotas lead to an increase in prices, people may beconstrained

to reduce their consumption of the commodity subject

to quotas or some other commodities. (iv) Protective Effect

By guarding domestic industries against foreigncompetition to

some extent, quotas encourage the expansion ofdomestic

industries.


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v) Redistributive Effect

Quotas also have a redistributive effect if the fallin supply due to important restrictions enablesthe domestic producers to raise prices. The rise in

prices will result in the redistribution of incomebetween the producers and consumers in favor ofthe producers.

(vi) Revenue Effect

Quotas may have revenue effect. Thegovernment may obtain some revenue bycharging a license fee.


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Comparison of an Import Quota to an Import Tariff

1. With a given import quota, an increase in demand

will result in a higher domestic price and greaterdomestic production than with an equivalent import

tariff. However, with a given import tariff, an

increase in demand will leave the domestic price and

domestic production unchanged but will result inhigher consumption and imports than with an

equivalent import quota.


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2. The quota involves the distribution of import

licenses. The government does not auction off these

licenses in a competitive market, firms that receive

them will reap monopoly profits. These profits will

make potential importers devote efforts to lobbying

and even bribing to obtain the licenses (rent seeking

activities). Thus import quotas not only replacemarket mechanism but also result in waste from the

point of view of the economy as a whole and contain

the seeds of corruption.


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3. An import quota limits imports to the specified level

with certainty, while a tariffs effect is uncertain.

The reason is that the elasticity of supply anddemand often unknown, making it difficult to

estimate the import tariff required to restrict imports

to a desired level. Furthermore, foreign exporters

may absorb all or part of the tariff by increasingtheir efficiency or accepting lower profits. Exporters

cannot do this with an import quota since quantity of

imports is clearly specified. For this reason domestic

producers prefer quotas to tariffs. However, sincequotas more restrictive than tariffs, society should

resist these efforts.


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Organizations Promoting International

Trade

The General Agreement on Trade and Tariff

(GATT) came into existence in 1947

It sought substantial reduction in tariff and other

barriers to trade and to eliminate discriminatorytreatment in international commerce.

India signatory to GATT 1947 along with twenty

two other countries Eight rounds of negotiations had taken place

during five decades of its existence


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WORLD TRADE ORGANISATION (WTO) Came into existence on

1-1-1995 with the conclusion of Uruguay Round Multilateral Trade

Negotiations at Marrakesh on 15th April 1994, to :

Transparent, free and rule-based trading system

Provide common institutional framework for conduct

of trade relations among members

Facilitate the implementation, administration and

operation of Multilateral Trade Agreements

Rules and Procedures Governing Dispute Settlement Trade Policy Review Mechanism

Concern on Non-trade issues such as Food Security,

environment, health, etc.


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Represents 149 negotiated trade agreements

among countries

Key Functions

Cooperating with other International Organizations

Administering

WTO

agreement

Providing a forum for

trade negotiations

Handling trade

disputes between

nations

Monitoringnational trade

policies

Providingtechnical assistance and

training for people in

developing countries


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What is NAFTA?

Began on January 1, 1994

Between Canada the United States

and Mexico


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What is ASEAN?

Established on August 8th, 1967

10 member countries

-Brunei Darussalam, Cambodia,

Indonesia, Laos, Malaysia,

Myanmar, Philippians, Singapore,Thailand, and Vietnam


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What is the EU?

27 member states: Austria,

Belgium, Bulgaria, Cyprus,

Czech Republic, Denmark,

Estonia, Finland, France,

Germany, Greece, Hungary,

Ireland, Italy, Latvia, Lithuania,

Luxemburg, Malta,Netherlands, Poland, Portugal,

Romania, Slovakia, Slovenia,

Spain, Sweden, and the United

Kingdom.


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IMF

1. IMF was created to assist nations in becoming and

remaining economically viable

2. It assists countries that seek capital for economic

development and restructuring3. IMF loans come with stipulations that borrowing

countries slash spending and impose controls to

curb inflation

4. It helps maintain stability in the world financial

markets


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Objectives of the IMF include:

1. stabilization of foreign exchange rates

2. establish convertible currencies to facilitate

international trade3. lend money to members in financial trouble


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World bank

1. lending money to countries to finance developmentprojects in education, health, and infrastructure;

2. providing assistance for projects to the poorestdeveloping countries;

3. lending directly to the private sector in developingcountries with long-term loans, equity investments,and other financial assistance;

4. provide investors with investment guaranteesagainst noncommercial risk, so developing

countries will attract FDI; and5. provide conciliation and arbitration of disputes

between governments and foreign investors

constraints to international marketing

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