International Trade

Trade is exchange of capital, goods, and services across international borders or

territories. In most countries, it represents a significant share of gross domestic
product (GDP). While international trade has been present throughout much of
history, its economic, social, and political importance has been on the rise in
recent centuries. Industrialization, advanced transportation, globalization,
multinational corporations, and outsourcing are all having a major impact on the
international trade system. Increasing international trade is crucial to the
continuance of globalization. International trade is a major source of economic
revenue for any nation that is considered a world power. Without international
trade, nations would be limited to the goods and services produced within their
own borders.

International trade is in principle not different from domestic trade as the

motivation and the behavior of parties involved in a trade does not change
fundamentally depending on whether trade is across a border or not. The main
difference is that international trade is typically more costly than domestic trade.
The reason is that a border typically imposes additional costs such as tariffs,
time costs due to border delays and costs associated with country differences
such as language, the legal system or a different culture.

International trade uses a variety of currencies, the most important of which are
held as foreign reserves by governments and central banks. Internationally, is
the most sought-after currency, with the Euro in strong demand as well.

Another difference between domestic and international trade is that factors of

production such as capital and labor are typically more mobile within a country
than across countries. Thus international trade is mostly restricted to trade in
goods and services, and only to a lesser extent to trade in capital, labor or other
factors of production. Then trade in good and services can serve as a substitute
for trade in factors of production. Instead of importing the factor of production a
country can import goods that make intensive use of the factor of production
and are thus embodying the respective factor. An example is the import of
labour-intensive goods by the United States from China. Instead of importing
Chinese labour the United States is importing goods from China that were
produced with Chinese labour. International trade is also a branch of economics,
which, together with international finance, forms the larger branch of
international economics.

Trade Barriers
A trade barrier is a general term that describes any government policy or
regulation that restricts international trade. The barriers can take many forms,
including the following terms that include many restrictions in international
trade within multiple countries that import and export any items of trade.

• Import duty
• Import licenses
• Export licenses
• Import quotas
• Tariffs
• Subsidies
• Non-tariff barriers to trade
• Voluntary Export Restraints
• Local Content Requirements
• Embargo
Most trade barriers work on the same principle: the imposition of some sort of
cost on trade that raises the price of the traded products. If two or more nations
repeatedly use trade barriers against each other, then a trade war results.

Economists generally agree that trade barriers are detrimental and decrease
overall economic efficiency. In theory, free trade involves the removal of all
such barriers, except perhaps those considered necessary for health or national
security. In practice, however, even those countries promoting free trade heavily
subsidize certain industries, such as agriculture and steel.

Trade barriers are any of a number of government-placed restrictions on trade

between nations. The most common sorts of trade barriers are things like
subsidies, tariffs, quotas, duties, and embargoes. The term free trade refers to
the theoretical removal of all trade barriers, allowing for completely free and
unfettered trade. In practice, however, no nation fully embraces free trade, as all
nations utilize some assortment of trade barriers for their own benefit.

Advantages of Trade Barriers

1. Trade barriers increase the competitiveness of domestic producers both
domestically and on foreign markets.

2. They raise money for the government in terms of revenue which can be
used for government spending.
 3. They improve the balance of payments position by decreasing imports as
they become more expensive and less attractive to purchase.

Disadvantages of Trade Barriers

1. Trade barriers could result in retaliation from other foreign economies
which could mean import control on goods that are imported from foreign
countries, leading to higher prices and potentially inflationary (negative
world multiplier effect)

2. A tariff will only work if the price elasticity of demand for the good is
elastic. If inelastic, then the demand is unresponsive to changes in price
and therefore an import control resulting in a higher price of the good will
have little impact on the demand for it.

3. Trade barriers don’t actually deal with the main cause of the problem.
Instead governments looking to impose trade barriers. Most likely to
improve B.O.P positions or increase domestic producers competitiveness,
government should look to implement supply side policies and increase
the efficiency of production. Leading to a fall in costs of production and
these lower costs can be passed on to consumers through lower prices and
therefore increasing competitiveness. (reducing demand for imports and
increasing demand for exports)
Trade Barriers have its own advantages and disadvantages, so below we jot
down a few points on both the questions, why trade should be liberalized and
why trade barriers should be maintained.

Why trade should be liberalized?

Economic theory and practical experience demonstrate that open markets and
trade liberalization—dismantling tariff and nontariff barriers to trade—provide
a proven path to wealth creation and development. Countries that are open to
trade tend to have more wealth, healthier populations, higher rates of education
and literacy, stronger labor rights and environmental standards, and greater
investment opportunities. Trade barriers, in contrast, may shield narrow special
interests from competition, but ultimately they leave a nation as a whole worse
off in terms of wealth foregone, slower growth, and, hence, fewer resources to
address pressing societal needs.

The intellectual underpinnings of free trade are well known to economists.

Simply put, nations benefit by specializing in the production of goods and
services that they can produce most efficiently, and exchanging these for the
goods and services that other countries produce at higher quality and lower cost.
In this arrangement, countries benefit from more efficient production, increased
consumer choice, and better goods and services at lower prices. Dismantling
government barriers to trade allows individuals access to the world's
supermarket for food, clothing, and other manufactured goods, and for services
that form the infrastructure of the modern economy, ranging from finance to
telecommunications and transportation to education.

Competition also motivates businesses to innovate, to find new production

processes and technologies to better serve customers, and to advance
knowledge. For example, the development of advanced computer technologies
and life-saving medicines in recent years has flourished under conditions of
open markets and export opportunities for industry growth, coupled with
enforcement of strong copyright and patent laws.

Why trade barriers must be maintained?

If every place (country, state, town, region, whatever) produces and exports
whatever they produce best and imports whatever somebody else can produce
cheaper, and nobody puts up trade barriers. The idea seems great on it’s face–
everyone is creating as much value as they possibly can, and nothing costs more
than however much the most efficient producer charges. But there are some
major flaws in this philosophy.

The problem is that some people aren’t going to be able to produce anything (or
at least not enough products) enough more efficiently than everyone else to
enable them to export. Even if they do manage to be marginally more cost
effective than everyone else in production, the costs involved in exporting the
product eat up the difference and make profitable export impossible.

Is it in the best interests of such people to buy imported goods only, since
they’ll be cheaper than the same things produced locally? If they have enough
in the bank to last them for the rest of their lives and the lives of all the coming
generations that they care to prepare for, sure. But of course, only in a fantasy
world would that be the case. If they import everything and produce nothing,
obviously they’re going to run out of money really soon. Then they won’t be
able to import anything, and they’ll have to start producing for themselves–only
they won’t have any capital to start with, so it’ll take a very long time to ramp
up production. Clearly, in some cases, buying locally is a better mid to long
term strategy than importing.

So how do you convince people to buy locally when an importer is offering

them the same goods for less? Unless the people have the big picture clearly in
mind and are willing to sacrifice for the good of the community, it won’t
happen. Consider WalMart in the U.S. People shop at WalMart because for
many, many things that they buy, they have the best prices. They don’t put a lot
of thought into whether WalMart is driving local businesses under. They’ve
heard that communities that WalMart moves into usually end up with higher
unemployment a few years down the road, but they don’t feel the pain, so their
buying behavior doesn’t change.

In many cases, the only way to ensure that local economies survive is to create
artificial advantages for local businesses–import tariffs, subsidies, etc.
 TYPES OF TRADE BARRIERS

Despite all the obvious benefits of international trade, governments have a

tendency to put up trade barriers to protect the domestic industry.

There are two kinds of barriers: tariff and non-tariff.

 Tariff Barriers

Tariff is a tax levied on goods traded internationally. When imposed on goods

being brought into the country, it is referred to as an import duty. Import duty is
levied to increase the effective cost of imported goods to increase the demand
for domestically produced goods. Another type of tariff, less frequently
imposed, is the export duty, which is levied on goods being taken out of the
country, to discourage their export. This may be done if the country is facing a
shortage of that particular commodity or if the government wants to promote the
export of that good in some other form, for example, a processed form rather
than in raw material form. It may also be done to discourage exporting of
natural resources. When imposed on goods passing through the country, the
tariff is called transit duty.

 Classification of Tariffs:
A) On the basis of origin and destination of the goods crossing national
boundaries

• Export duty: An export duty is the tax levied by the country of origin on
a commodity designated for use in other countries .The majority of the
finished goods do not attract export duties .Such duties are normally
imposed on primary products in order to conserve them for domestic
industries. In India export duties are levied on oilseeds, coffee and
onions.

• Import duty: An import duty is a tax imposed on commodity originating

in another country by the country for which the product is designated.
The purpose of heavy import duties is to earn revenues, to make imports
costly and to provide protection to domestic industries. Countries impose
heavy import duties to restrict imports and thereby remove the deficits in
the balance of trade and balance of payment.

• Transit Duty: A transit duty is a tax imposed on a commodity when it

crosses the national border between the originating country and the
country which it is consigned. African and Latin American nations
impose such transit duties at any point in time. Sri Lanka is another
country enjoying such benefits from Indian companies.

B) On the basis of the quantification of tariffs

• Specific Duty: Is a tax of so much local currency per unit of the goods
imported (based on weight, number, length, volume or other unit of
 measurement). Specific duties are often levied on foodstuffs and raw
materials.

A specific duty is a flat sum collected on a physical unit of the imported

commodity. Here, the rate of the duty is fixed and is collected on each
imported unit. For example, Rs 800 on each TV set or washing machine
or Rs.3000 per metric ton of cold rolled steel coils.

• Ad-Valorem duty: This kind is most commonly used; it is calculated as

a percentage of the value of the imported goods - for example, 10, 25 or
35 per cent. This duty is imposed at a fixed percentage on the value of an
imported commodity. Here the value of the commodity on the invoice is
taken as the base for the calculation of the duties. 3% ad- valorem duty on
the C&F value of the goods imported. In the ad-valorem duty, the
percentage of the duty is decided, but the actual amount of the duty
changes as per the FOB value of a product.

• Compound duty: The "specific" part of the compound duty (called

compensatory duty) is levied as protection for the local raw material
industry. A tariff is referred to as a compound duty when the commodity
is subject to both specific and ad-valorem duties. It is imposed on
manufactured goods that contain raw materials that are themselves
subject to import duty.

C) On the basis of the purpose that they serve

• Revenue Tariff: A revenue tariff aims at collecting substantial revenues
for the government. A revenue tariff increases government funds, but
does not really obstruct the flow of imported goods. Here, the duty is
imposed on items of mass consumption, but the rate of the duty is low.
For example a tariff on coffee imports imposed by countries where coffee
cannot be grown, raises a steady flow of revenue.

• Protective Tariff: It is aimed at protecting home industries by restricting

or eliminating competition. A protective tariff is used to raise the price of
imported goods as a protective measure against the competition from
foreign markets. A higher tariff allows a local company to compete with
foreign competition. Protective tariffs are usually high so as to reduce
imports. Protective tariffs can be advantageous as they can help foster the
local economy, but sometimes they can also make the price of the item so
expensive that companies must charge more. For example, when gas
prices become too high, industries such as the trucking industry may have
to charge retailers more for delivering products. The retail industry then
has to mark up their items to allow for their increased transportation costs
in order to make the same profit they once did. The end result is that
consumers pay more for the goods.

• Anti dumping duty: Dumping is the commercial practice of selling

goods in foreign markets at a price below their normal cost or even below
their marginal cost so as to capture foreign markets. Many countries
follow dumping practices. It is harmful to less developed countries where
the cost of production is high. Since these practices are naturally
considered to be unfair competition by manufacturers in the country in
which the goods are being dumped, the government of the foreign
 country will be asked to impose "anti-dumping" duties. Anti-dumping are
special duties additional to the normal ones, designed to match the
difference between the price in the home country and the price abroad.

• Countervailing duty: Such duties are similar to anti dumping but are not
so severe. These duties are imposed to nullify the benefits offered
through cash assistance or subsidies by the foreign country to its
manufacturers. The purpose of the duty is to offset, or "countervail” the
county or subsidy so that the goods cannot be sold at an artificially low
price in the foreign country and thereby provide unfair competition for
local manufacturers. The rate of such duties will be proportional to the
extent of the cash assistance or granted subsidies.

D) On the basis of trade relations

• Single column tariff: Under this system tariff rates are fixed for various
commodities and the same rates are made applicable to imports from all
other countries.

• Double column tariff: Under this system two rates of duty are fixed for
various commodities on some or all commodities. The lower rate is made
applicable to a friendly country or to a country with which the importing
country has made tariff negotiations. The higher rate is the normal rate of
duty. It is applicable to all other countries.
This lower level of tariff may also apply to products from third countries,
which may be entitled by treaty to most-favoured-nation treatment - that
is, not having their products subject to higher import duties than those of
any other country. This system is used by, for example, the United States
 and Japan. With the U.S. tariff system, column-two rates apply to
products from most Socialist countries, and column-one rates (negotiated
rates) to all other countries.

• Triple column tariff: Under this system three different rates of duties are
fixed; general, international and preferential tariffs. The first two
categories have a minimum variance but the preferential is substantially
lower than the general tariff and is applicable to countries with which
there is a bilateral relationship. This preferential system is used by, for
example, the members of the British Commonwealth.

 Non-tariff Barriers

Non-tariff barriers (NTBs) include all the rules, regulations and

bureaucratic delays that help in keeping foreign goods out of the domestic
markets. The following are the different types of NTBs:

1. Quotas
A quota is a limit on the number of units that can be imported or the
market share that can be held by foreign producers. For example, the US
has imposed a quota on textiles imported from India and other countries.
Deliberate slow processing of import permits under a quota system acts
as a further barrier to trade.

2. Embargo
When imports from a particular country are totally banned, it is called an
embargo. It is mostly put in place due to political reasons. For example,
the United Nations imposed an embargo on trade with Iraq as a part of
 economic sanctions in 1990.

3. Voluntary Export Restraint (VER)

A country facing a persistent, huge trade deficit against another country
may pressurize it to adhere to a self-imposed limit on the exports. This
act of limiting exports is referred to as voluntary export restraint. After
facing consistent trade deficits over a number of years with Japan, the US
persuaded it to impose such limits on itself.

4. Subsidies to Local Goods

Governments may directly or indirectly subsidize local production in an
effort to make it more competitive in the domestic and foreign markets.
For example, tax benefits may be extended to a firm producing in a
certain part of the country to reduce regional imbalances, or duty
drawbacks may be allowed for exported goods, or, as an extreme case,
local firms may be given direct subsidies to enable them to sell their
goods at a lower price than foreign firms.

5. Local Content Requirement

A foreign company may find it more cost effective or otherwise attractive
to assemble its goods in the market in which it expects to sell its product,
rather than exporting the assembled product itself. In such a case, the
company may be forced to produce a minimum percentage of the value
added locally. This benefits the importing country in two ways it reduces
its imports and increases the employment opportunities in the local
market.

6. Technical Barriers
Countries generally specify some quality standards to be met by imported
goods for various health, welfare and safety reasons. This facility can be
 misused for blocking the import of certain goods from specific countries
by setting up of such standards, which deliberately exclude these
products. The process is further complicated by the requirement that
testing and certification of the products regarding their meeting the set
standards be done only in the importing country.
These testing procedures being expensive, time consuming and
cumbersome to the exporters, act as a trade barrier. Under the new system
of international trade, trading partners are required to consult each other
before fixing such standards. It also requires that the domestic and
imported goods be treated equally as far as testing and certification
procedures are concerned and that there should be no disparity between
the quality standards required to be fulfilled by these two. The
importing country is now expected to accept testing done in the exporting
country.

7. Procurement Policies
Governments quite often follow the policy of procuring their
requirements (including that of government-owned companies) only
from local producers, or at least extend some price advantage to them.
This closes a big prospective market to the foreign producers.

8. International Price Fixing

Some commodities are produced by a limited number of producers
scattered around the world. In such cases, these producers may come
together to form a cartel and limit the production or price of the
commodity so as to protect their profits. OPEC (Organization of
Petroleum Exporting Countries) is an example of such cartel formation.
This artificial limitation on the production and price of the commodity
 makes international trade less efficient than it could have been.

9. Exchange Controls
Controlling the amount of foreign exchange available to residents for
purchasing foreign goods domestically or while travelling abroad is
another way of restricting imports.

Direct and Indirect Restrictions on Foreign Investments

A country may directly restrict foreign investment to some specific sectors or up
to a certain percentage of equity. Indirect restrictions may come in the form of
limits on profits that can be repatriated or prohibition of payment of royalty to a
foreign parent company. These restrictions discourage foreign producers from
setting up domestic operations. Foreign companies are generally interested in
setting up local operations when they foresee increased sales or reduced costs as
a consequence.
Thus, restrictions against foreign investments add impediments to international
trade by giving rise to inefficiencies.

Customs Valuation
There is a widely held view that the invoice values of goods traded
internationally do not reflect their real cost. This gave rise to a very subjective
system of valuation of imports and exports for levy of duty. If the value
attributed to a particular product would turn out to be substantially higher than
its real cost, it could result in affecting its competitiveness by increasing the
total cost to the importer due to the excess duty. This would again act as a
barrier to international trade. This problem has now been considerably reduced
due to an agreement between various countries regarding the valuation of goods
involved in a cross-border trade.
 DUMPING AND ANTI – DUMPING
If a company exports a product at a price lower than the price it normally
charges on its own home market, it is said to be “dumping” the product. Is this
unfair competition? Opinions differ, but many governments take action against
dumping in order to defend their domestic industries. The WTO agreement does
not pass judgement. Its focus is on how governments can or cannot react to
dumping — it disciplines anti-dumping actions, and it is often called the “Anti-
Dumping Agreement”. (This focus only on the reaction to dumping contrasts
with the approach of the Subsidies and Countervailing Measures Agreement.)

The legal definitions are more precise, but broadly speaking the WTO
agreement allows governments to act against dumping where there is genuine
(“material”) injury to the competing domestic industry. In order to do that the
government has to be able to show that dumping is taking place, calculate the
extent of dumping (how much lower the export price is compared to the
exporter’s home market price), and show that the dumping is causing injury or
threatening to do so.

GATT (Article 6) allows countries to take action against dumping. The Anti-
Dumping Agreement clarifies and expands Article 6, and the two operate
together. They allow countries to act in a way that would normally break the
GATT principles of binding a tariff and not discriminating between trading
partners — typically anti-dumping action means charging extra import duty on
the particular product from the particular exporting country in order to bring its
price closer to the “normal value” or to remove the injury to domestic industry
in the importing country.

There are many different ways of calculating whether a particular product is

being dumped heavily or only lightly. The agreement narrows down the range
of possible options. It provides three methods to calculate a product’s “normal
value”. The main one is based on the price in the exporter’s domestic market.
When this cannot be used, two alternatives are available — the price charged by
the exporter in another country, or a calculation based on the combination of the
exporter’s production costs, other expenses and normal profit margins. And the
agreement also specifies how a fair comparison can be made between the export
price and what would be a normal price.

Calculating the extent of dumping on a product is not enough. Anti-dumping

measures can only be applied if the dumping is hurting the industry in the
importing country. Therefore, a detailed investigation has to be conducted
according to specified rules first. The investigation must evaluate all relevant
economic factors that have a bearing on the state of the industry in question. If
the investigation shows dumping is taking place and domestic industry is being
hurt, the exporting company can undertake to raise its price to an agreed level in
order to avoid anti-dumping import duty.

Detailed procedures are set out on how anti-dumping cases are to be initiated,
how the investigations are to be conducted, and the conditions for ensuring that
all interested parties are given an opportunity to present evidence. Anti-
dumping measures must expire five years after the date of imposition, unless an
investigation shows that ending the measure would lead to injury.

Anti-dumping investigations are to end immediately in cases where the

authorities determine that the margin of dumping is insignificantly small
(defined as less than 2% of the export price of the product). Other conditions are
also set. For example, the investigations also have to end if the volume of
dumped imports is negligible (i.e. if the volume from one country is less than
3% of total imports of that product — although investigations can proceed if
several countries, each supplying less than 3% of the imports, together account
for 7% or more of total imports).

The agreement says member countries must inform the Committee on Anti-
Dumping Practices about all preliminary and final anti-dumping actions,
promptly and in detail. They must also report on all investigations twice a year.
When differences arise, members are encouraged to consult each other. They
can also use the WTO’s dispute settlement procedure.

Subsidies and countervailing measures

This agreement does two things: it disciplines the use of subsidies, and it
regulates the actions countries can take to counter the effects of subsidies. It
says a country can use the WTO’s dispute settlement procedure to seek the
withdrawal of the subsidy or the removal of its adverse effects. Or the country
can launch its own investigation and ultimately charge extra duty (known as
“countervailing duty”) on subsidized imports that are found to be hurting
domestic producers.

The agreement defines two categories of subsidies: prohibited and actionable. It

originally contained a third category: non-actionable subsidies. This category
existed for five years, ending on 31 December 1999, and was not extended. The
agreement applies to agricultural goods as well as industrial products, except
when the subsidies are exempt under the Agriculture Agreement’s “peace
clause”, due to expire at the end of 2003.
 1. Prohibited subsidies: subsidies that require recipients to meet certain
export targets, or to use domestic goods instead of imported goods. They
are prohibited because they are specifically designed to distort
international trade, and are therefore likely to hurt other countries’ trade.
They can be challenged in the WTO dispute settlement procedure where
they are handled under an accelerated timetable. If the dispute settlement
procedure confirms that the subsidy is prohibited, it must be withdrawn
immediately. Otherwise, the complaining country can take counter
measures. If domestic producers are hurt by imports of subsidized
products, countervailing duty can be imposed.

2. Actionable subsidies: in this category the complaining country has to

show that the subsidy has an adverse effect on its interests. Otherwise the
subsidy is permitted. The agreement defines three types of damage they
can cause. One country’s subsidies can hurt a domestic industry in an
importing country. They can hurt rival exporters from another country
when the two compete in third markets. And domestic subsidies in one
country can hurt exporters trying to compete in the subsidizing country’s
domestic market. If the Dispute Settlement Body rules that the subsidy
does have an adverse effect, the subsidy must be withdrawn or its adverse
effect must be removed. Again, if domestic producers are hurt by imports
of subsidized products, countervailing duty can be imposed.

Some of the disciplines are similar to those of the Anti-Dumping Agreement.

Countervailing duty (the parallel of anti-dumping duty) can only be charged
after the importing country has conducted a detailed investigation similar to that
required for anti-dumping action. There are detailed rules for deciding whether
a product is being subsidized (not always an easy calculation), criteria for
determining whether imports of subsidized products are hurting (“causing injury
to”) domestic industry, procedures for initiating and conducting investigations,
and rules on the implementation and duration (normally five years) of
countervailing measures. The subsidized exporter can also agree to raise its
export prices as an alternative to its exports being charged countervailing duty.

Subsidies may play an important role in developing countries and in the

transformation of centrally-planned economies to market economies. Least-
developed countries and developing countries with less than $1,000 per capita
GNP are exempted from disciplines on prohibited export subsidies. Other
developing countries are given until 2003 to get rid of their export subsidies.
Least-developed countries must eliminate import-substitution subsidies (i.e.
subsidies designed to help domestic production and avoid importing) by 2003
— for other developing countries the deadline was 2000. Developing countries
also receive preferential treatment if their exports are subject to countervailing
duty investigations. For transition economies, prohibited subsidies had to be
phased out by 2002.
 TRADE BARRIERS & IMPORT POLICIES

We say that this is the Era of globalization and liberalization, as after post 1991
but if you carefully observe the policies of India you will find that India still
plays a very protective role for domestic companies in various sectors. Many
Exporters from U.S. and other countries continue to encounter tariff and
nontariff barriers that impede imports of goods in the Indian Territory, despite
the government of India’s ongoing economic reform efforts. Many member
nations keep on complaining about the Trade barriers imposed for their products
by India to WTO. WTO has also closely observed the Policies of India and are
discussing and working on it as far as Barriers are concerned in order to
improve the coordination between India and different countries. While many
exporting countries registered sizable growth in 2007-2008, further reduction of
the bilateral trade deficit will depend on significant additional Indian
liberalization of its trade regime.

Let’s have a look at the Current Trade barriers and policies of India in respect of
different Sectors and Industries.

Tariffs and other Charges on Imports

India’s import regime is characterized by pronounced disparities in bound

versus applied rates. According to the WTO, India’s average bound rate tariff is
48.6 percent, while its applied tariff for FY2007 (latest data available) was 14.5
percent across all goods. However, the government of India’s (GOI) 2008-2009
budget maintained the applied duty at 10 percent. In December 2008, the GOI
further reduced excise duties on most products to 10 percent from 14 percent. In
February 2009 as part of an economic stimulus package, the GOI again cut the
excise duty on most products to 8 percent. In November 2008, India increased
tariffs on certain steel products to 5 percent. Also, India’s WTO bound tariffs on
agricultural products are among the highest in the world, ranging from 100
percent to 300 percent, with an average bound tariff of 114.2 percent in 2007.
While many Indian applied tariff rates are lower, they still represent a
significant barrier to trade in agricultural goods and processed foods (e.g.,
potatoes, apples, grapes, pistachios, and citrus).

Further, given the fact that there are large disparities between bound and applied
rates, U.S. exporters face greater uncertainty because India has the ability to
raise its applied rates to bound levels in an effort to

manage prices and supply. For example, in April 2008, the GOI, in an effort to
curb inflation, reduced applied duties on crude edible oils and corn to zero,
refined oils to 7.5 percent, and butter to 30 percent from 40 percent. However,
in November 2008, the GOI raised crude soy oil duties back to 20 percent.
Imports also are subject to state-level value added or sales taxes and the Central
Sales Tax as well as various local taxes and charges. In March 2006, the
government established a 4 percent ad valorem"extra additional duty".

The extra additional duty is calculated on top of the basic customs duty (i.e., a
tariff) and additional duty.

Import Licensing
India maintains a negative import list of products subject to various forms of
nontariff regulation. The negative list is currently divided into three categories:
banned or prohibited items (e.g., tallow, fat, and oils of animal origin);
restricted items that require an import license (e.g., livestock products, certain
chemicals); and "canalized" items (e.g., petroleum products, some
pharmaceuticals, and bulk grains) importable only by government trading
monopolies subject to cabinet approval regarding timing and quantity. The
government allows imports of second-hand capital goods by the end users
without requiring an import license, provided the goods have a residual life of
five years. Refurbished computer spare parts can only be imported if an Indian
chartered engineer certifies that the equipment retains at least 80 percent of its
residual life, while refurbished computer parts from domestic sources are not
subject to this requirement.

Customs Procedures

Issues have emerged regarding the application of customs valuation criteria to

import transactions. Valuation procedures allow India’s customs officials to
reject the declared transaction value of an import when a sale is deemed to
involve a reduction from the ordinary competitive price. Exporters have
reported that India’s customs valuation methodologies do not reflect actual
transaction values and effectively increase tariff rates. U.S. industry reports
that, since September 2007, India has improperly included certain royalties in
the customs valuation of imported digital video disc (DVD) analog master tapes
and digital linear tapes. The United States is working through the WTO
Committee on Customs Valuation and the Trade Policy Forum to address this
issue.
India’s customs officials generally require extensive documentation, which
inhibits the free flow of trade and leads to frequent processing delays. In large
part this red tape is a consequence of India’s complex tariff structure and
multiple exemptions, which may vary according to product, user, or intended
use. There is a positive sign that India has worked to reduce the time lap of
import transaction to 20 and reduction in number of documents. Issues have
also arisen regarding customs policies with respect to imports of edible oils,
such as crude soybean oil.

The customs policies, including the customs valuation system, are Non
transparent and unpredictable. Motor vehicles may be imported through only
three specific ports and only from the country of manufacture.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

In early 2009, the GOI revised its mandatory certification compliance list,
which now includes 85 specific commodities. The revised list includes such
products as milk powder, infant formula, bottled drinking water, certain types of
cement, household and similar electrical appliances, gas cylinders, certain steel
products and multi-purpose dry cell batteries. Products on the mandatory
certification list must be certified for safety by the Bureau of Indian Standards
(BIS) before the products are allowed to enter the country. All manufacturers,
foreign and domestic, must register with the BIS in order to comply with this
requirement.

Agricultural Biotechnology

The GOI’s trade policy stipulates that imports of all biotechnology

food/agricultural products or products derived from biotechnology
plants/organisms should receive prior approval from the regulatory body, the
Genetic Engineering Approval Committee (GEAC).
India’s biotechnology regulatory system is onerous and time consuming, but is
evolving towards harmonization with international standards. Despite recent
efforts by regulatory bodies to streamline the process, the biotechnology
community feels there is a need for further reforms to facilitate faster growth in
the sector.

GOVERNMENT PROCUREMENT

In India, different procurement practices apply at the Central level and at the
state level, and to the public sector agencies and enterprises. At the Central
(federal) level, procurement is regulated through executive directives and
administered by the government agencies. The General Financial Rules (GFR),
issued by the Ministry of Finance, lay down the general rules and procedures for
financial management, the procurement of goods and services, and contract
management. India’s government procurement practices and procedures are not
transparent. Foreign firms rarely win Indian government contracts due to the
preference afforded to Indian state-owned enterprises in the award of
government contracts and the prevalence of such enterprises.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

Large-scale copyright piracy, especially in the software, optical media, and

publishing industries, continues to be a major problem. The United States
retained India on the "Priority Watch List" as part of the 2008 Special 301
review.
Patents

India amended its patent law effective January 1, 2005. The amended patent law
extends product patent protection to pharmaceuticals and agricultural chemicals.

Copyrights

The GOI has proposed amendments that are intended to update the copyright
laws to address issues related to the Internet and digital works. WTO continues
to encourage India to address these issues and fully implement the treaties.
SERVICES BARRIERS

Indian government entities have a strong ownership presence in some major

services industries such as banking and insurance, while private firms play a
preponderant or exclusive role in a number of rapidly growing parts of the
services sector, including the information technology sector, advertising, car
rental, and a wide range of business consulting services. While India has
submitted initial and revised offers for improved services commitments in the
WTO Doha Round, these offers do not remove existing limitations or promise
new liberalization in key sectors as distribution, express delivery,
telecommunications, financial services, and the professions.

Insurance

Foreign participation in the Indian insurance sector has been allowed since
1999, but foreign equity is limited to 26 percent of paid-up capital. The GOI
introduced legislation in late 2008 that would allow foreign equity participation
to 49 percent, but the legislation was not passed before Parliament adjourned
prior to elections due in the first half of 2009.

Banking
Although India has opened up to privately-held banks, most Indian banks are
government-owned, and entry of foreign banks remains highly constrained.
State-owned banks hold roughly 70 percent of the assets of the banking system,
although private banks are growing rapidly. Foreign banks may operate in India
in one of three forms: a direct branch, a wholly-owned subsidiary, or through a
stake in a private Indian bank. Under India’s branch authorization policy,
foreign banks are required to submit their internal branch expansion plans on an
annual basis, but their ability to expand is severely limited by non transparent
quotas on branch office expansion. In 2007, India granted 19 new foreign
branch office licenses.

Accounting

Only graduates of an Indian university can qualify as professional accountants

in India. Foreign accounting firms can practice in India if their home country
provides reciprocity to Indian firms. Only firms established as a partnership
may provide financial auditing services, and foreign-licensed accountants may
not be equity partners in an Indian accounting firm. The GOI is working on
opening up the sector to foreign chartered accountants and professional
consultants through the Limited Liability Partnership Bill, which still awaits
approval in the Parliament.

Construction, Architecture, and Engineering

Many construction projects are offered only on a nonconvertible rupee payment

basis. Only government projects financed by international development
agencies allow payment in foreign currency. Foreign construction firms are not
awarded government contracts unless local firms are unable to perform the
work. Generally, foreign firms may participate in government contracts through
joint ventures with Indian firms.

Legal Services

Foreign law firms are not authorized to open offices in India. Foreign legal
service providers may be engaged as employees or consultants in local law
firms, but they cannot sign legal documents, represent clients, or be appointed
as partners.

Telecommunications

However, other U.S. companies complain that India’s licensing fee for these
services (approximately $500,000 per service) serves as a barrier to market
entry for smaller market players. The GOI maintain limits on foreign direct and
foreign indirect investment (FDI and FII) in several areas; namely, cable
networks (49 percent), satellite uplinking (49 percent), "direct-to-home" (DTH)
broadcasting (49 percent with FDI limited to 20 percent), and the uplinking of
news and current affairs television channels (26 percent). The GOI continues to
hold equity in three telecommunications firms: a 26 percent interest in the
international carrier, VSNL; a 56 percent stake in MTNL, which primarily
serves Delhi and Mumbai; and the 100 percent ownership of BSNL, which
provides domestic services throughout the rest of India. These ownership stakes
have caused private competitive carriers to express concern about the fairness of
the GOI’s general telecommunications policies. By way of example, valuable
3G wireless spectrum will be set aside for MTNL and BSNL and not subject to
competitive bidding.

Distribution Services
The retail sector in India is largely closed to foreign investment. In January
2006, the government began allowing FDI in single-brand retail stores, subject
to a foreign equity cap of 51 percent and government
approval and 100 percent in cash and carry (wholesale). FDI in multi-brand
retail outlets is not permitted.