1.

0 Introduction

Trade barriers come in many forms. This is when a country sets a limit to the imported
products. This is done for a number of reasons. One is because the government of the
importing country wants to protect its domestic manufacturers. Other barriers or
limitations are added costs such as tariffs, duties, and taxes.

In this way, trade barriers can affect international trade by preventing the flow of goods
from producers to consumers. Where quotas, tariffs, and duties prevent this flow, it
impacts the productivity of the producers, although these will usually seek other markets
without these barriers. (Acharya & Keller, 2007)

Without net exports, a country cannot remain a consumer of other countries’ goods
without incurring large debts through the imbalance of trade. It is usually economically
beneficial to all parties to maximize the production of their industries, through open
markets to a wide consumer base.

Countries in order to protect their economies apply methods of restrictions such as tariffs,
quotas, subsidies and exchange controls. By applying protectionism a country can gain
from it in such as protecting infant industries, dumping and protecting manufacturing
industries, but on the other hand can also have problems such as firms remaining
inefficient, retaliation, and misallocation of resources, and related directly to international
trade countries benefit on comparative and absolute advantage, and economies of scales it
affects the international trade. (Aghion & Griffith, 2005)

International trade increases the number of goods that domestic consumers can choose
from, decreases the cost of those goods through increased competition, and allows
domestic industries to ship their products abroad. While all of these seem beneficial, free
trade isn’t widely accepted as completely beneficial to all parties. This article will examine
why this is the case, and how countries react to the variety of factors that attempt to
influence trade. (Anderson, 2003)

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2.0 Subsidies

Subsidies are assistance provided to offset high domestic production costs to assist
exporters to make selling prices cheaper or more profitable when selling abroad. They may
be in the form of research and development aid or loans, or direct payments to compensate
domestic firms for the losses incurred from exporting.

Despite the net economic and social benefits of reducing most government subsidies and
barriers to international trade and investment, almost every national government intervenes in
markets for goods, services, and capital in ways that distort international commerce. To keep
the task manageable, the policy instruments considered will be limited to those trade-related
ones over which a government’s international trade negotiators have some influence both at
home and abroad. (Anderson et. al., 2011)

That thereby excludes measures such as generic taxes on income, consumption and value
added, government spending on mainstream public services, infrastructure and generic social
safety nets in strong demand by the community, and subsidies (taxes) and related measures set
optimally from the national viewpoint to overcome positive (negative) environmental or other
externalities. Also excluded from consideration here are policies affecting markets for foreign
exchange. (Anderson et. al., 2011)

This challenge in its modern form has been with us for eight decades (Anderson 2012). The
latter part of the nineteenth century saw a strong movement toward laissez faire in goods and
financial capital and widespread international migration, but that development was reversed
following the First World War in ways that contributed to the Great Depression of the early
1930s and the conflict that followed (Kindleberger 1989). It was during the Second World
War, in 1944, that a conference at Bretton Woods in New Hampshire proposed an
International Trade Organization.

An ITO charter was drawn up by 1947 along with a General Agreement on Tariffs and Trade
(GATT), but the ITO idea died when the United States failed to progress it through Congress
(Diebold 1952). Despite that, the GATT came into being from 1948 and during its 47-year
history (before it was absorbed into the WTO on 1 January 1995) oversaw the gradual
lowering of many tariffs on imports of most manufactured goods by governments of high-
income countries. (Baldwin, 2011)

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Manufacturing tariffs remained high in developing countries, however, and distortionary
subsidies and trade policies affecting agricultural, textile, and services markets of both rich
and poor countries, plus immigrations restrictions, continued to hamper efficient resource
allocation, consumption choices, economic growth and poverty alleviation.

The GATT’s Uruguay Round of multilateral trade negotiations led to agreements signed in
1994 that contributed to trade liberalization over the subsequent ten years. But even when
those agreements were fully implemented by early 2005, and despite additional unilateral trade
liberalizations since the 1980s by a number of countries (particularly developing and transition
economies), many subsidies and trade restrictions remained. They include not just trade taxes-
cum-subsidies but also contingent protection measures such as anti-dumping, regulatory
standards that can be technical barriers to trade, and domestic producer subsidies (allegedly
decoupled from production in the case of some farm support programs in high-income
countries, but in fact only partially so). (Cameron, 2007)

Insufficient or excessive taxation or quantitative regulations in the presence of externalities

such as environmental or food safety risks also lead to inefficiencies and can be trade
distorting. Furthermore, the on-going proliferation of preferential trading and bilateral or
regional integration arrangements – for which there would be far less need in the absence of
high barriers to trade – is adding complexity to international economic relations. In some cases
those arrangements are leading to trade and investment diversion rather than creation, and may
be welfare reducing for some (especially excluded) economies. (Cline, 2004)

The reluctance to reduce trade distortions is almost never because such policy reform involves
government treasury outlays. On the contrary, except in the case of a handful of low-income
countries still heavily dependent on trade taxes for government revenue, such reform may well
benefit the treasury (by raising income or consumption/value added tax revenues more than
trade tax revenues fall, not to mention any payments foregone because of cuts to subsidy
programs). Rather, trade distortions (and barriers to immigration) remain largely because
further liberalization and subsidy cuts would redistribute jobs, income and wealth in ways that
those in government fear would reduce their chances of remaining in power (and, in countries
where corruption is rife, possibly their own wealth). The challenge involves finding politically
attractive ways to phase out remaining distortions to world markets for goods and services.
(Dollar & Kraay, 2002)

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This challenge is even greater now than it was in the inaugural Copenhagen Consensus project
(see Lomborg 2004). One reason is that the WTO membership is struggling to address the
Doha Development Agenda that was launched in the immediate aftermath of 11 September
2001 – a time when there was much more goodwill to cooperate multilaterally than seems to
be the case now. More generally, in some regions there is a broader disenchantment with
globalization that could result not just in a failure to reach agreement under the Doha round to
multilaterally liberalize trade, but also in the raising of current non-trade barriers. Such a
reversal of past reforms could do huge damage to the global trading system and raise global
inequality and poverty.

That suggests the counterfactual to opening markets is not the status quo but something
potentially much worse than the present, especially in the case of food (Anderson and Nelgen
2011). As well, it underscores the need to re-emphasize the virtues of a more open global
trading system – a system to which around 75 additional developing and transition economies
have subscribed since the WTO came into being in 1995, with a further 25+ currently striving
to join. The case needs to be made within the context of the on-going information and
communication technology (ICT) revolution that is globalizing the world’s economies ever-
more rapidly. (Faini, 2004)

3.0 Quotas

Quotas are limits imposed on the quantity of products that can be imported or exported
during a certain period of time. Licensing of foreign trade is closely related to quantitative
restrictions – quotas - on imports and exports of certain goods. A quota is a limitation in
value or in physical terms, imposed on import and export of certain goods for a certain
period of time. This category includes global quotas in respect to specific countries,
seasonal quotas, and so-called "voluntary" export restraints. Quantitative controls on
foreign trade transactions carried out through one-time license. (Feenstra, 2003,)

An import or export quota is a protective measure that sets a fixed quota or limit on the
number of units of a specific good that may be imported or exported within a specified
period of time. A quota of this type is designed to help to maintain an equitable balance in
the marketplace, allowing domestic producers to compete with producers who
manufacture the goods outside the country. Critics tend to see the import quota doing more
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harm than good, claiming that the limit leads to the production of sub-standard goods that
are smuggled into the country illegally, and that provide domestic businesses with an
unfair advantage in the marketplace. (Francois & Hoekman, 2010)

In many situations, the import or export quota is set at a limit that is slightly less than what
is known as free trade. Free trade is a situation where the international trade of goods is
not subject to government intervention, and relies on demand to determine the rate of
imports and exports related to a specific product. When the quota is below free trade
levels, it is known as a binding quota, since it effectively binds the ability to import goods
over a certain number for a period of time. When the import quota is equal to or higher
than the current free trade, it is known as a non-binding quota, since it allows for imports
based on both current demand and the projections of future demand. (Glenday, 2002)

Proponents of the import quota feel this approach is necessary in order to protect the
economy of the nation receiving the goods. Placing limits makes it possible for part of the
demand for those goods to be met by products produced within the country, a move that
helps to ensure jobs are provided for citizens who are engaged in the production of those
goods. At the same time, the measure helps to prevent domestic or imported goods from
overpowering the consumer market, and ensures that consumers have several options on
which products to purchase. (Francois & Martin, 2010)

Critics feel that the need for an import quota to protect the interests of consumers is
unnecessary. Limiting the quantity of goods imported has the potential to limit consumer
options, rather than expand them. In addition, the limits may actually have a negative
impact on the economy, since consumers may pay a higher price for the readily available
domestic products and thus be unable to afford other types of products that they would
otherwise buy. (Hoxha et. al., 2011)

While there is disagreement on the effectiveness of the import quota, there is often
agreement on how the quota compares to the application of tariff rate surcharges on
imports. Typically, the tariff is seen as a more efficient way to place limits on the inflow of
international goods without placing undue hardship on producers who import goods. For
many, tariffs represent the best solution when it comes to maintaining a healthy economy,

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providing consumers with a variety of purchase options, and in promoting healthy
competition among suppliers. (Irwin, 2002)

Quantitative restriction on imports and exports is a direct administrative form of

government regulation of foreign trade. Licenses and quotas limit the independence of
enterprises with a regard to entering foreign markets, narrowing the range of countries,
which may be entered into transaction for certain commodities, regulate the number and
range of goods permitted for import and export. (Laborde et. al., 2011)

However, the system of licensing and quota imports and exports, establishing firm control
over foreign trade in certain goods, in many cases turns out to be more flexible and
effective than economic instruments of foreign trade regulation. This can be explained by
the fact, that licensing and quota systems are an important instrument of trade regulation of
the vast majority of the world. (Laborde et. al., 2012)

The consequence of this trade barrier is normally reflected in the consumers’ loss because
of higher prices and limited selection of goods as well as in the companies that employ the
imported materials in the production process, increasing their costs. An import quota can
be unilateral, levied by the country without negotiations with exporting country, and
bilateral or multilateral, when it is imposed after negotiations and agreement with
exporting country. Lumenga-Neso et. al., 2005)

An export quota is a restricted amount of goods that can leave the country. There are
different reasons for imposing of export quota by the country, which can be the guarantee
of the supply of the products that are in shortage in the domestic market, manipulation of
the prices on the international level, and the control of goods strategically important for the
country. In some cases, the importing countries request exporting countries to impose
voluntary export restraints. (Petri et. al., 2011)

4.0 Administrative barriers

Administrative barriers are regulations, rulings, standards and testing procedures which
may make exports to a foreign country difficult, costly or even impossible.
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Benjamin Arthur Levett, a lawyer who researched customs administration organization
and functioning, in his renown work "Trough the Customs Maze" published in 1922 had
pointed out that there are some other measures that are not found in the customs schedule
but can serve as obstacles to international trade. In the book he pointed out”Let me write
an administrative regulation and I do not care who sets the tariffs”. He wanted to reiterate
that administrative regulations could serve as serious obstacles to international trade as
well as customs tariffs. (Rodrik, 2007)

This finding has inspired Percy Bidwell to write a book titled "The Invisible Tariff"4
published in 1939 and who we regard as a first scientific tractate on so-called non-tariff
barriers. In Europe in 1936 Swiss scientist William Rappard in his paper "Danger of
economic and military armament" has stressed the negative effects of economic measures
different than customs tariffs that obstruct international trade. Even if the economic
science has discovered these measures in the beginning of 20th century they became
transparent only in second half of this century when tariffs have been significantly reduced
by GATT. (Romalis, 2007)

Administrative non-tariff barriers, which include all barriers to trade that, are derived from
national laws and regulations and administrative procedures that affect foreign trade.
Administrative barriers to trade are a special category of non-tariff barriers and their main
source are administrative regulations and procedures that have a restrictive effect on
international trade. Some authors specify that administrative barriers are administrative
measures in the process of levying customs, applying health regulations and other
regulations. (Schularick & Steger, 2010)

But the most comprehensive definition of administrative barriers to trade defines these
measures as obstacles to international trade derived from differences in national legal and
administrative regulations and administrative procedures that exporter had to carry out in
order to put its product on a foreign market.

All administrative barriers, by their origin, can be divided into two main groups:
1. Legal barriers to trade;
2. Procedural barriers to trade.

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Legal barriers to trade are caused by different laws and administrative regulations in
national economies. Every national economy in the world with a full autonomy in
international trade relations can adopt laws and regulations that unilaterally define its trade
regime with other economies in the world. Many of the basic laws are adopted in the past
when international trade was not a significant source of economic growth of many
countries in the world and these laws became an element of the general business climate
and an obstacle to which the business community are accustomed. (Townsend & Ueda,
2010)

But nowadays economies tend to introduce new more complicated and more restrictive
laws, some of them even against their international legal obligations, with a sole aim to
protect domestic producer from foreign competition.

Procedural barriers to trade are second major group of administrative barriers and they
represent all administrative procedures that obstruct international trade and especially
imports. In World Trade Organization (WTO) they are referred to as trade procedures and
they include all activities, practices and formalities in connection to collection,
presentation, communication and data processing necessary for movement of goods in
international trade. (Valenzuela et. al., 2009)

All economies in the world require some administrative procedures before goods are sold
on the local market. Many of these procedures are important, like testing of goods, in order
to protect environment of the local economy and the health of its citizens. Usually
administrative procedures are divided into two groups: border barriers and intraeconomy
procedures. The border barriers are closely connected with the functioning of customs
authorities and other state organs present at the border, like sanitary and phytosanitary
inspectors. (Wacziarg, 2001)

Intraeconomy procedures incorporate all administrative procedures where state organs in

the departments of the government are in charge of issuing various approvals and
clearances that serve as a precondition for imports as well as for exports. Many of the
administrative procedures are usual and necessary for the protection of health and
wellbeing of a nation while some of the procedures are so obstructive to international

Page 8 of 15
trade, unnecessary for the standpoint of health protection and usually very recently
adopted. These administrative procedures have a protective character for a local economy.
We have to distinguish "naturally" occurring non-tariff barriers, which are caused from
differences in national standards and inefficient customs authorities’ clearance of goods,
from politically introduced measures that are intended to obstruct import in country which
introduce these measures. The necessary laws and procedures create the political and legal
framework of any company in the word and important think about them is that they are
transparent so company can calculate their effects in their business activities. But in the
second half of 20th century some countries started to introduce new laws and procedures
with a sole aim of obstructing international trade. These non-tariff barriers are not
“natural” barriers but rather policy oriented measures. (Wacziarg & Welch, 2008)

Developed countries are the main creators of these policy-oriented measures. Proving and
removing these barriers is very hard since there in many cases there are not written
document on introduction of such barriers or these documents are highly confidential. This
shows that many of the world economies, even developed ones, are not jet prepared for a
full liberalization of international trade. And since tariffs are consolidated by GATT/WTO
trade regime and traditional non-tariff barriers are also internationally regulated many
economies are using technical and administrative barriers to trade. In developing countries
you had a lot of examples of administrative obstructions of international trade flows but as
a difference to developed countries these obstructions are not policy created but rather
customs authorities in developing countries are inefficient by default. (Whalley, 2006)

5.0 Local content regulations

Local content regulations require that a specified portion of a product be produced

locally using locally sourced materials or components.

Dozens of countries—including Argentina, Brazil, Canada, China, India, Indonesia, Malaysia,

Mexico, Nigeria, Russia, Turkey, and Vietnam, among many others—have introduced local
content regulations, which mandate that a certain percentage of goods or services sold in a country
must be produced with local content. Countries define “local content” in a variety of ways, such as
the percentage of local components used in the assembly of a final product; the share of locally

Page 9 of 15
developed intellectual property embodied in the development of a product or service; or even the
share of locally produced or local content in the broadcasting and audio/visual sectors.

Countries’ local content regulations impact both private and public sector procurement activities.
Countries have implemented LCRs in virtually all sectors of economic activity, ranging from
information and communications technology, energy, and pharmaceuticals, to financial services
and media. In fact, some countries, such as Brazil, “have made local content requirements a
centerpiece of their industrial policy,” with LCRs touching sectors ranging from ICT, energy,
equipment and machinery, health, media, reinsurance, textiles, and even apparel and footwear. 16 In
fact, Brazil has introduced more new local content requirements than any other nation since 2008.

However, what’s changed in recent years is not only the dramatic increase in countries’
use of local content requirements, but also the increase in sophistication of countries’
methods in applying LCRs, such as by basing the local content calculation in part on the
percentage of domestically produced intellectual property embodied in the product or in
linking local content requirements in public procurement to security exemptions
articulated in the GATT. (Winters, 2002)

For example, in February 2012, the Indian Ministry of Communications and Information
Technology (MCIT) announced a Preferential Market Access mandate for electronic
goods (the PMA Mandate) which imposed local content requirements on the procurement
of telecommunications and information technology products by both government and
private sector entities with “security implications for the country.” As originally
envisioned, a specified share of each telecommunications product’s market—starting at 30
percent in 2012 and rising to 100 percent by 2020—would have to be filled by India-based
manufacturers. For information technology products, the local content percentage started
at 25 percent, rising to 45 percent within five years. (Winters, 2004)

While local content regulations stipulate that a certain percentage of a product or service
sold into an economy must embody or incorporate a share of locally produced components
or intellectual property, another form of LBT mandates local production of a product or
service as a condition of market access. For instance, requirements that enterprises must
use local ICT infrastructure—such as local data centers—to provide digital services such
as Web search to an economy effectively manifest a requirement of local production as a
condition of market access. For example, the local data center laws Indonesia is currently
Page 10 of 15
developing will require foreign digital service providers to use local data centers when
providing digital services to the Indonesian economy. (World Bank, 2006)

Likewise, local data storage or data residency regulations—which mandate that data must
be stored and/or processed within a country—represent a fundamental localization barrier
to digital trade. By definition, they simultaneously impede cross-border data flows and act
as a constraint on the provision of digital services, such as cloud computing.

In other cases, countries outright declare that foreign enterprises must produce in full
locally in order to sell locally. For instance, Brazil requires that 100 percent of all films
and television shows be printed locally. This means that, instead of producing the actual
film reel elsewhere and shipping it to a Brazilian cinema, the actual tape for the film reel
must be printed locally inside Brazil. Brazil likewise prohibits importation of color prints
(e.g., the posters displayed in cinemas to promote movies). Such requirements of local
production as a condition of market access fundamentally contravene the foundational
principles of liberalized trade. (Yohe et. al., 2009)

5.0 Summary

Pre-announced, gradual reductions in non-trade barriers, especially if done multilaterally,

would yield huge economic benefits and relatively little economic cost, and hence
extremely high benefit/cost ratios. Moreover, such reforms would contribute enormously
to reducing global inequality and poverty. Furthermore, while some social and
environmental effects of such reform may be perceived as negative, many more will be
positive. Even where some of those effects are harmful, there are almost always cheaper
ways of obtaining better social and environmental outcomes than via non-trade barriers
measures. The reasons these inefficient measures persist is partly lack of understanding of
the benefits being foregone, but mostly it is because a small number of vested interests are
able to successfully lobby for their retention. (Zhai, 2008)

The challenge is to find politically feasible opportunities for ridding the world of non-trade
barriers. I suggest the most obvious way is currently before us in the form of the Doha
Development Agenda of multilateral trade negotiations under the World Trade
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Organization. Seizing that opportunity for reform could reduce government outlays by
hundreds of millions of dollars, and make it less attractive to seek preferential trade
agreements which are prone to making excluded countries worse off. A successful Doha
outcome would also make it less pressing to lower immigration barriers insofar as trade in
products is a substitute for international labor movements – although the global gains and
inequality-reducing consequences of more migration are likely to be so large as to make
that type of opening-up worthwhile too (see Anderson and Winters 2009).

Cuts in non-trade barriers also would provide a means for citizens to spend more on other
pressing problems (because under freer trade the world’s resources would be allocated
more efficiently), thereby indirectly contributing to opportunities to alleviate other
challenges facing the world; and they could also directly alleviate poverty and thereby
reduce environmental degradation and address other challenges such as communicable
diseases, conflicts and arms proliferation, education under-investment, and hunger and
malnutrition. All that is needed is the political will to agree to and implement such
reforms.
(4156 words)

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