Trade Barriers

Mukul Mishra
 INTRODUCTION
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
in 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.

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.
 Disadvantages of Trade Barriers

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)
 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.
 Tariff Barriers
 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.
·
 Classification of Tariffs

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 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.