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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 nontariff strategies
Tariffs
A tariff is a tax imposed on goods involved in international 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 one country bound for another (transit tariff).
or weight, either net weight or gross weight (e.g. $ 30 per kilogram net). iii) Compound Duty Compound duty is assessed as a combination of the specific duty & ad velorem duty ($ 30 per kilogram net, plus 30% of FOB price) Tariffs were a major barriers to imports during the early days 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.
Export Duties
A country may levy export duties primarily as a means to restrict exports of a particular product for the following reasons: 1) To reserve the domestic supply for local industries 2) To make the raw materials inputs available to the local industry at a low price 3) To preserve natural resources & protect the countrys environment 4) To encourage foreign direct investment (FDI) in downstream industries
2) To make the raw materials & inputs available to the local industry at a low price: Export duties resemble import tariffs in that their primary effect is on the price of traded goods They resemble other domestic industryprotecting export restrictive measures such as minimum export pricing A country has a dominant position in a vital raw material, or a country that has dominance in the world market as such, could further extend its domination by artificial increasing
Export duties are intended to exploit its market power by fully cultivating dominant position It is in a price making situation This raises the world prices for that material & makes it difficult for the other players to compete internationally This militates against the concept or free trade.
3) To preserve the natural resources and protect the countrys environment: Export duty will tend to discourage the export & consequent depletion of the natural resource or harm to the environment. 4) To encourage foreign direct investment (FDI) in down-stream industries: As the raw material from country A would be available to a foreign processor from country B only at a higher price if he were to import & process it in his country B he tempted to set up the processing
unit in country A In any case, most tariff measures are now on the wane with the increasing power of WTO the inter-national trade regulating body.
With the regulatory organization like WTO in place & the subsequent erosion of tariffs as instruments of protecting domestic industries from foreign competition, the non-tariff barriers (NTBs) have proliferated as political & protective measures It is not that the resort to NTBs only when their macroeconomic conditions are deteriorating ; any economic & industrial re-structuring that happens within the country 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
to NTBs for other nations that would like to export their goods & services to that country
A) Price-influencing NTBs
i) Subsidies ii) Customs Valuation iii) Administered Minimum Price Levels iv) Customs Deposits & Special Fees
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 mutual allegations by France & USA of subsidies given to their farmers led to a near impasse in the negotiations.
a) Indirect Subsidies Subsidies could be indirect, when some of the expenses of the inputs are borne by the government 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
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 competitive advantages The industry being of strategic importance, the home governments chip in to help
ii) Customs Valuation This is another major non-tariff barrier while the customs officers must levy the duty on
the declared invoice price, sometimes the custom officer may suspect that the invoice prices are under-valued The customs official, then, may assess the real price based on the price of identical or similar products at that point in time The custom officials arbitrary valuation of the goods becomes a non-tariff barrier, if the exporting country feels that the valuation has been higher than the real price
Countervailing Duties
The WTO Agreement says that if an importing country feels that it could be hurt because of the subsidies in the exporting country, the importing country can use the WTOs 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 & ultimately charge extra duty (known as countervailing duty) on subsidized imports that are found to be hurting domestic producers Many countries charge such countervailing duties
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 the Least Developed Countries (LDCs), WTO rules exempt LDCs & developing countries with less than US $ 1,000 per capita GNP from disciplines on prohibited export subsidies.
Anti-Dumping Actions
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 Thus, the company is willing to suffer a loss in exporting, in its efforts to get a slice of the overseas markets A country may fear that the foreign company may use its financial strength to suffer such losses for extended periods of time until it captures the entire domestic market or a large portion of the market
Thereafter, the company being in a monopolistic situation can charge any price suitable to it & more than recoup the initial losses Dump the goods, capture the overseas market, marginalize the original domestic players & then start milking the market It is precisely this scenario that many countries dread; developing countries are perennially scared of the financial clout of the developed countries & their dumping of goods.
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 cost efficiency Without the mention of a tariff, this policy acts as a tariff measure
which ate into the earnings of small exporters who did not have large volumes of sales to take care of such add-ons to export cost Similarly, one of the NTBs affecting Indian goods exports to US has been, excessive fees for customs.
B) Quantity-influencing NTBs
i) Quotas ii) Voluntary Exports Restrictions (VER)
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 domestic producers Quotas are generally allocated by country & by or product category, i.e. an importing country will have different quotas for different countries & differently for different products/productcategories
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 & clothing imports from a group of Least Developed Countries The rapid expansion of the garment industry in Bangladesh during the 1980s was partly due to the fact that it was an LDC. 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
For instance, the Organization of Petroleum Exporting Countries (OPEC) decides on the amount of petroleum crude that could be produced & exported in a year by each member of their organization The intension is to regulate the supply of petroleum in the world & thus control the price Different types of quotas exist, such as, global quotas, bilateral (i.e between two countries) quotas, seasonal quotas, quotas linked with export performance (i.e a firm can import required inputs in proportion to or linked 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
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 to meet its export obligations. There could be political reasons for the quotas on imports & exports Quotas could be one of the ways of expressing displeasure or (oppositely) favoritism about the political policies of the other country The expression of displeasure could be subtle or it could be loud
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 prevented even the medical supplies to reach that country.
Rules of Origin
As a result of the quota system, exporting countries - that have been restricted have used other means of beating the system They have diverted their goods to other countries that did not fall under those restrictions Thereafter, the goods were exported from that country 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. dismantled or completely knocked down or CKD automobile) & 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 were prohibited 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. Rules of origin are, therefore, important for following reasons: a) Protecting public health & safety b) Protecting the free trade agreements from misuse (e.g. diverting goods to a country that gets dutyfree treatment) c) Declaring to the customers in a transparent manner information about the product as to where it was made While the rules of origin specifications are also required to properly administer quotas, anti-dumping actions, counter-vailing duties, sanction against a particular country, etc., these uses of rules of origin go against the grain of free trade &, hence, should not be emphasized
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 exporters The more complex the rules, the more would they work as a non-tariff barrier.
ii) Voluntary Export Restrictions (VER) Instead of imposing quotas, an importing country
(generally an economically & politically powerfull developed country) may make an offer to the exporting 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 automobiles started becoming popular in the American market, USA asked Japan to have voluntary restrictions on its automobiles export. Japan agreed.
iii) Safeguards
According to WTO Agreement on Safeguards, a WTO member may restrict imports of a product temporarily (take safeguard actions) if its domestic industry is seriously injured or threatened with injury caused by a surge in imports It may be noted that there has to be a surge in imports, the injury has to be serious, & the restrictions placed to safeguard have to be temporary The safeguard action should be applied only to the extent the seriously injured industry is helped to recover
Moreover, the emphasis is on transparency & on avoiding arbitrary methods When the safeguards are applied, the exporting countries should be suitably compensated, the compensations being decided after mutual consultation.
iv) Domestic Content Requirements Many countries require that a company, in order
to be eligible to import, has to show that it is going to use the required percentage of inputs product locally These mechanisms, also known as domestic content requirements, are allowable under the rules of the WTO (TRIMS Agreement) & were designed to assist transitional or developing countries However, such measures are used by many countries developing & developed
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.
WTO is changing this situation through the Agreement on Government Trade Services (including construction services), procurement at the sub-central level (for example, states or provinces & departments), & procurement by public utilities are also covered under this agreement.
SPS Agreement allows countries to use different standards & different methods of inspecting products, provided these do not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail Sanitary (human animal health) phytosanitary (plant health) measures would apply to domestically produced food or local animal & plant diseases, as well as to products coming from other countries This is an consonance with WTOs fundamental principles of non-discrimination & national treatment
The meanings of these two principles are: a) Non-discrimination: Treat all countries equally b) National treatment: Treat other nations products (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 in their food;
to protect human life from plant-or animal-carried diseases; to protect animal or plant life from pests, diseases or disease-causing organisms; to prevent or limit other damage to a country from 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 the welfare of animals are not covered by the SPS Agreement The sanitary & phytosanitary measures can take many forms, such as requiring products to come from a
disease-free area, inspection of products, specific treatment or processing of products, setting of allowable maximum 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 by Japanese standards affecting food additives, even though these additives might be generally recognized as safe elsewhere This Japanese case would be WTO-compatible
vii) Technical Barriers to Trade (TBT) 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 characteristics of a product, such as its size, shape, design, functions & performance, or the way a product is labelled or packaged before it enters the marketplace 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 made in EU Included in this set of measures are also the technical procedures, which confirm that products fulfil 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 basic objective of free trade The technical standards then become technical barriers to trade (TBT)
Since, there could be myriad technical specifications & labelling requirements, these could 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 from exporting ? Then, it becomes a barrier to trade.
viii) Environmental Standards These days, with rapid industrialization & the
depletion of natural resources, environment is a major concern Some of the important inter-national environmental agreements are: Montreal Protocol for the protection of the o-zone layer, the Basel Convention on the trade or transportation of hazardous waste across inter-national borders, & the Convention on Inter-national Trade in Endangered Species (CITES) But, the environmental issues could be misused With the ostensible explanation of protecting
ones environment &/or the global environment, a country may ban/restrict trade from another country as creating conditions that are environmentally & ecologically unsafe It is necessary to distinguish between genuine ecological concerns & the intentions to protect domestic industries through green trade restrictions on imports
another country?
If a country has less labour rights, does it gain any 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 multilateral trade negotiations are little more than a smokescreen for protectionism & that it is an effort to undermine the advantage of the developing countries in terms of their low wages.
In an interesting case, it is said that when the French decided that the imports of Japanese VCRs were excessive, they simply applied the rules & gave each VCR a complete inspection The number of VCRs entering the country dropped from thousands to six per day An official report from India on the subject of NTBs has said 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 Indias exports to other developed countries such as the European Union & Japan