Module -4 Introduction

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Managing any business strategically needs an understanding of the business policies. Govt. announce their trade policies with regard to the following from time to time. There are called the instruments of trade policy. They are : Tariffs Subsidies Import quotas Local content requirement Administrative policies Voluntary export restraints

Tariffs

Tariffs refers to the tax imposed on imports. Tariffs are two types : 1.specific tariffs 2.valorem tariffs Specific tariffs are levied as a fixed charge for each unit of product imported. extra tariff of Rs. 1,000 on each TV imported Tariff levied as a proportion of the values of imported goods is called ad valorem tariff. For ex imposition of 30 % tax on the value of computers imported the purpose of tariff is to protect the domestic industry by increasing the cost of imported goods. Govt. of India imposed tariffs to protect domestic automobile industry sugar industry, cement industry and steel industry.

The following parties gain from the tariff : Govt. of importing country : Govt. of the importing country gets the revenue in the form import duties. Industry of importing country : the product of importing country would find market as the cost of importing goods higher than that of domestic goods. Jobs in the domestic country are saved Business for the ancillary industry, servicing ,market intermediation etc. is also protected.

The following parties are adversely affected by the tariffs :

Consumers of domestic country lose the demand for its product .thus the consumers pay for the inefficiency of the domestic industry. The industry of the exporting country lose the demand for its product ,sale and profit ultimately ,tariffs enhances the efficiency of some countries and the growth of the most efficient countries .thus tariffs reduce the efficiency of the world economies. this process results in inefficient utilization of all kinds of resources.

Subsidies

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In ordered to encourage domestic production or to protect the domestic producer from the foreign competitors, Govt. pays to a domestic producer by reducing operations cost. Such payment called subsidies. Subsidies are in the following forms .they are : Cash grant Loans Advances at low rate of interest Tax holidays Govt. procurement of output at a higher rate Equity participation Supply of inputs at lower price

Subsidies help the domestic producers in the following ways :

Acquires the character of a low cost producer and have all the advantage of low cost producer like high profit margin or fixing the price at the lower level. Compete with a foreign producer in the domestic market. Enter the foreign markets.

Advantages and disadvantages of subsidies

Advantages Subsidies enhance the international competitiveness of the domestic industry. therefore the domestic business ,industry and advocates of strategic international trade favor subsidies. Subsidies in turn ,help the firms to have the large scale economies and advantages of low cost producer. In addition to these advantage firm can enter into the foreign markets before the firms of other country can also have the first mover advantage in ASIA and AFRICAN countries The first turn advantage brings the advantage of employment and tax gain to the domestic country. Disadvantages Subsidies are paid by the got by taxing the individuals .thus subsidies are a national cost . Therefore ,subsidies should produce national benefit more than the national cost otherwise subsidies are the national waste . Infect ,subsidies are not enhancing international competitiveness of domestic companies In such case ,subsidies protect the inefficiency of the domestic firms Hence WTO proposed for the phased withdrawal of subsidies.

Import quotas

Import quota is direct restriction on the quantity of goods which are imported into a country . These restrictions are imposed by the issued licenses to certain firms and individuals to import certain quantity of the goods India had quotas of import of various goods like cars .motor cycles, milk etc. up to 31st march 2001 import quotas provide the protection to the domestic firms from the foreign country competitors.

Voluntary export restraints (VER )

A VER is the opposite form of import quotas. A VER is a quota on exports of domestic firms imposed by the exporting country. Exporting countries imposed such restrictions mostly at the request of importing country Import quotas and VER help the domestic firms by providing protection from the foreign competitors. thus enhance the prices of import goods and make the domestic goods cheep. For ex : Japanese automobile exporters have certain restraint in 1981 due to the request of US govt.foreign exporters mostly accept for the VER as its violation leads to imposition of import tariffs, import quotas.

Local content requirement (LCR )

LCR is a condition that requires some specific fraction of a product imported be produced domestically. The requirement may be in physical terms (50% of the components should be from the domestic country.) or in the value terms ( 50% of the value of the products should be produced domestically. Most of the developing countries insist on the local content requirements in order to shift at least certain part of manufacturing base in there country This helps the country to enhance the employment opportunities, utilization of local resources and economic activities. This factor protects the domestic producer as in case of quotas.

Administrative polices

Govt. in addition to the quotas and other restrictions ,use formal and informal policies to restrict imports and boost exports. Administrative policies are bureaucratic rules and procedures which are formulated to make it difficult to imports enter the country . Formal trade barrier Most of the developing countries insist on the local content requirements era like tariffs and quotas are lowest in Japan mostly uses the administrative policies