TRADE BARRIERSTRADE BARRIERS

Trade BarriersTrade Barriers

““Any hurdle, impediment or road block that Any hurdle, impediment or road block that hampers the smooth flow of goods/services and hampers the smooth flow of goods/services and payments from one destination to anotherpayments from one destination to another

They arise from the rules and regulations They arise from the rules and regulations governing trade either from home country or governing trade either from home country or host country or intermediary.host country or intermediary.

They are man –made obstacles to the free They are man –made obstacles to the free movement of goods between different movement of goods between different countries .countries .

Free and fair international trade is an ideal Free and fair international trade is an ideal situation as it is beneficial to all countries.situation as it is beneficial to all countries.

Inspite of WTO , trade barriers exist.Inspite of WTO , trade barriers exist.

Objectives of Trade BarriersObjectives of Trade Barriers To protect domestic industries from foreign To protect domestic industries from foreign

goods.goods. To promote new industries and R & D activities To promote new industries and R & D activities

by providing a home market for domestic by providing a home market for domestic industries.industries.

To maintain favourable balance of payment, by To maintain favourable balance of payment, by restricting imports from foreign country.restricting imports from foreign country.

To conserve foreign exchange reserves of the To conserve foreign exchange reserves of the country by restricting imports from foreign country by restricting imports from foreign countries.countries.

To protect the national economy from dumping To protect the national economy from dumping by other countries with surplus production.by other countries with surplus production.

Objectives of Trade BarriersObjectives of Trade Barriers

To mobilise additional revenue by imposing heavy To mobilise additional revenue by imposing heavy duties on imports.This also restricts conspicuous duties on imports.This also restricts conspicuous consumption within the country.consumption within the country.

To counteract trade barriers imposed by other countries.To counteract trade barriers imposed by other countries. To encourage domestic production in the domestic To encourage domestic production in the domestic

market and thereby making the country strong and self –market and thereby making the country strong and self –reliant.reliant.

Demerits of protectionDemerits of protection

Protection is against the interest of consumers Protection is against the interest of consumers as it increases price and reduces variety and as it increases price and reduces variety and choice.choice.

Protection makes producers and sellers less Protection makes producers and sellers less quality conscious.quality conscious.

It encourages domestic monopoliesIt encourages domestic monopolies Even inefficient firms may feel secure under Even inefficient firms may feel secure under

protection and it encourages innovationprotection and it encourages innovation

Demerits of protectionDemerits of protection

Protection leads to corruption.Protection leads to corruption. Reduces the volume of foreign trade.Reduces the volume of foreign trade. Protection leads to uneconomic utilization of Protection leads to uneconomic utilization of

world’s resources.world’s resources.

Two types of trade barriersTwo types of trade barriersA) Tariff barriersA) Tariff barriersB) Non-Tariff barriers.B) Non-Tariff barriers.

Non-Tariff BarriersNon-Tariff Barriers Types of Non-tariff barriers Types of Non-tariff barriers

A) Quota system:A) Quota system:The quantity of a commodity permitted to be imported The quantity of a commodity permitted to be imported from various countries during a given period is fixed in from various countries during a given period is fixed in advance. advance. The different types of quota areThe different types of quota are

1) Tariff quota: imports of a commodity up to a specific 1) Tariff quota: imports of a commodity up to a specific volume are allowed duty free or at a special low rate. volume are allowed duty free or at a special low rate.

Imports in excess of this limit are subject to duty or a Imports in excess of this limit are subject to duty or a higher rate of duty.higher rate of duty.

2) Unilateral quota:2) Unilateral quota: Here a country unilaterally fixes a ceiling on the quantity of the import of a Here a country unilaterally fixes a ceiling on the quantity of the import of a particular commodity.particular commodity.

3) Bilateral quota :3) Bilateral quota : results from negotiation between the importing country and a particular results from negotiation between the importing country and a particular supplier country. Or between the importing country and export groups within supplier country. Or between the importing country and export groups within the supplier country.the supplier country.

4) Mixed quota:4) Mixed quota:

Here the producers are obliged to utilize domestic raw materials up to a Here the producers are obliged to utilize domestic raw materials up to a certain proportion in the production of a finished product.certain proportion in the production of a finished product.

B) Import Licensing: B) Import Licensing: Here the prospective importers are obliged to Here the prospective importers are obliged to

obtain a licence from the licensing authorities . obtain a licence from the licensing authorities . The possession of an import licence is The possession of an import licence is

necessary to obtain the foreign exchange to pay necessary to obtain the foreign exchange to pay for the imports.for the imports.

It is a powerful device for controlling the It is a powerful device for controlling the quantity of imports. quantity of imports.

C) Voluntary Export Restraints:C) Voluntary Export Restraints: are bilateral arrangements instituted to restrain the rapid growth of exports are bilateral arrangements instituted to restrain the rapid growth of exports of specific manufactured goods.of specific manufactured goods.U.S and EU have regulated the imports of several products (e.g--- MFA—U.S and EU have regulated the imports of several products (e.g--- MFA—Multi-Fibre arrangement).Multi-Fibre arrangement).

Under VERs , the exporting country voluntarily restrains the export of the Under VERs , the exporting country voluntarily restrains the export of the specific product in order to either help the other country to reduce its trade specific product in order to either help the other country to reduce its trade deficit or to protect domestic industry (of the importing country).deficit or to protect domestic industry (of the importing country).

VERs are adopted under pressure from the importing countryVERs are adopted under pressure from the importing country

D) State Trading : D) State Trading :

refers to import-export activities conducted refers to import-export activities conducted by the government or a govt. agency. by the government or a govt. agency.

State trading acts as a barrier, restricting State trading acts as a barrier, restricting the freedom of private parties.the freedom of private parties.

E) Preferential treatment through trading blocs: E) Preferential treatment through trading blocs:

Some countries form regional groups and offer special Some countries form regional groups and offer special concessions and preferences to member countries.concessions and preferences to member countries.As a result trade is developed among the member As a result trade is developed among the member countries and allows advantages to all member countries and allows advantages to all member countries. countries. But it acts as a barrier to non-member countries.But it acts as a barrier to non-member countries.

F) Health and safety measures: F) Health and safety measures:

many countries have specific rules regarding many countries have specific rules regarding health and safety regulations. Such health and health and safety regulations. Such health and safety measures are mainly applicable to raw safety measures are mainly applicable to raw materials and food items. materials and food items.

e.g Import of chicken was banned from china e.g Import of chicken was banned from china after bird flu was reported.after bird flu was reported.

Tariff BarriersTariff Barriers A tariff barrier is a levy collected on goods when they enter a domestic tariff A tariff barrier is a levy collected on goods when they enter a domestic tariff

area through customs.area through customs.

Tariff refers to the duties imposed on internationally traded commodities Tariff refers to the duties imposed on internationally traded commodities when they cross national boundaries and may be in the form of heavy when they cross national boundaries and may be in the form of heavy taxes/import duties.taxes/import duties.

Tariffs enhance the price of the imported goods, thereby restricting their Tariffs enhance the price of the imported goods, thereby restricting their sales as well as their import.sales as well as their import.

The aim of tariff is thus to raise the prices of imported goods in domestic The aim of tariff is thus to raise the prices of imported goods in domestic markets , reduce their demand and thereby discourage their imports.markets , reduce their demand and thereby discourage their imports.

Classification of TariffsClassification of Tariffs A) On the basis of origin and destination of the goods crossing A) On the basis of origin and destination of the goods crossing

national boundaries:national boundaries:

a) Export duty: a) Export duty:

tax levied by the country of origin, on a commodity tax levied by the country of origin, on a commodity designated for use in other countries.designated for use in other countries.

The majority of finished goods do not attract export duty. The majority of finished goods do not attract export duty.

Such duties are normally imposed on the primary products in order Such duties are normally imposed on the primary products in order to conserve them for domestic industries/consumers.e.g oilseeds, to conserve them for domestic industries/consumers.e.g oilseeds, onions, coffee.onions, coffee.

b) Import duty: b) Import duty: is a tax imposed on a commodity originating in another country by is a tax imposed on a commodity originating in another country by the country for which the product is designated.the country for which the product is designated.The purpose of heavy duty is to raise revenue and to provide The purpose of heavy duty is to raise revenue and to provide protection to domestic countries .protection to domestic countries .

c) Transit duty: c) Transit duty: tax imposed on a commodity when it crosses the national frontier tax imposed on a commodity when it crosses the national frontier between the originating country and the country to which it is between the originating country and the country to which it is consigned to.consigned to.

B_) On the basis of quantification of tariffs:B_) On the basis of quantification of tariffs: 1) Specific duty: a flat sum collected on physical unit of 1) Specific duty: a flat sum collected on physical unit of

commodity imported. for e.g Rs 3000 per metric ton on commodity imported. for e.g Rs 3000 per metric ton on cold rolled iron coils.cold rolled iron coils.

2) Ad-valorem duty: This duty is imposed at a fixed 2) Ad-valorem duty: This duty is imposed at a fixed percentage on the value of commodity imported.percentage on the value of commodity imported.

3) Compound duty: here the commodity is subjected to 3) Compound duty: here the commodity is subjected to

both specific and ad-valorem duty.both specific and ad-valorem duty.

C) On the basis of the purpose they serveC) On the basis of the purpose they serve 1) Revenue tariff: 1) Revenue tariff:

It aims at collecting substantial revenue for the government . It aims at collecting substantial revenue for the government . Here the duty is imposed on items of mass consumption, but the Here the duty is imposed on items of mass consumption, but the rate of duty is low (e.g biscuits)rate of duty is low (e.g biscuits)

2)Protective tariff : 2)Protective tariff : aims at giving protection to home industries by restricting or aims at giving protection to home industries by restricting or eliminating competition.eliminating competition.

These tariffs are usually high so as to reduce imports.These tariffs are usually high so as to reduce imports.

3) Anti-dumping duty: 3) Anti-dumping duty: dumping is the commercial practice of dumping is the commercial practice of selling goods in foreign markets at a price selling goods in foreign markets at a price below their normal cost so as to capture below their normal cost so as to capture the foreign market.the foreign market.e.g Indian steel companies were accused e.g Indian steel companies were accused of dumping by USA of dumping by USA

4) Countervailing duty:4) Countervailing duty:duty imposed to nullify the benefits offered duty imposed to nullify the benefits offered through cash assistance or subsidies , by the through cash assistance or subsidies , by the foreign country to its manufacturers in the foreign country to its manufacturers in the destination country.destination country.The rate of such duty will be proportional to the The rate of such duty will be proportional to the extent of cash assistance or subsidy granted.extent of cash assistance or subsidy granted.

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

1) Single column tariff:1) Single column tariff: tariff rates are fixed for various commodities and the same rates are tariff rates are fixed for various commodities and the same rates are made applicable to imports from all other countriesmade applicable to imports from all other countries

2) Double column tariff :2) Double column tariff : here , two rates of duties are fixed.here , two rates of duties are fixed. The lower rate is made applicable to a friendly country or to a The lower rate is made applicable to a friendly country or to a country with which the importing country has a bilateral trade country with which the importing country has a bilateral trade agreement. agreement. The higher rate is applicable to all other countries.The higher rate is applicable to all other countries.