TRADE BARRIERS

The main objectives of imposing trade barriers are to protect domestic industries from foreign competition, to guard against dumping, to promote indigenous research and development, to conserve the foreign exchange resources of the country, to make the balance of payments position more favourable, and to discriminate against certain countries. Trade barriers may be broadly classified into tariff and nontariff barriers. Tariffs Tariffs in international trade refer to the duties or taxes imposed on internationally traded commodities when they cross the national borders. Classification of Tariffs There are different ways of classifying the tariffs. (i) On the basis of the origin and destination of the goods crossing the national boundary, tariffs may be classified into the following three categories: Export Duties An export duty is a tax imposed on a commodity originating from the duty-levying country destined for some other country. Import duties An import duty is a tax imposed on a commodity originating abroad and destined for the dutylevying country. Transit Duties A transit duty is a tax imposed on a commodity crossing the national frontier originating from, and destined for, other Countries. (ii) With reference to the basis for quantification of the tariff, we may have the following threefold classification: Specific Duties A specific duty is a flat sum per physical unit of the commodity imported or exported, thus a specific import duty is a fixed amount of duty levied upon each unit of the commodity imported. Ad-Valorem Duties Ad-valorem duties are levied as a fixed percentage of the value of commodity imported/exported. Thus, while the specific duty is based on the quantum of commodity imported/ exported, the ad-valorem duty is based on the value of the commodity imported/exported. Compound Duties When a commodity is subject to both specific and ad-valorem duties, the tariff is generally referred to as compound duty. (iii) With respect to its application between different countries, the tariff system may be classified into following three types: Single Column Tariff The single-column, also known as the uni-linear, tariff system provides a uniform rate of duty for all like commodities without making any discrimination between countries.

Double Column Tariff Under the double-column tariff system, there are two rates of duty on some or on all commodities. Thus, the doublecolumn tariff discriminates between countries. The double-column tariff system may be broadly divided into: (a) General and conventional tariff; (b) Maximum and minimum tariff. The general and conventional tariff system consits of two schedules of tariff- the general and the conventional. The general schedule is fixed by the legislature at the very start and the conventional schedule results from the conclusion of commercial treaties with other countries. The maximum and minimum system consists of two autonomously determined schedules of tariff ± the maximum and the minimum. The minimum schedule applies to those countries which have obtained a concession as a result of a treaty or through M.F.N. (most favoured nation) pledge. The maximum schedule applies to all the other countries. Triple-Column Tariff The triple-column tariff system consists of three autonomously determined tariff schedules ± the general, the intermediate and the preferential. The general and intermediate rates are similar to the maximum and minimum rates mentioned above under the double-column tariff systems. The preferential rate is generally applied in trade between the mother country and the colonies. (iv) With reference to the purpose they serve, tariffs may be classified into the following categories. Revenue Tariff Sometimes the main intention of the government in imposing a tariff may be to obtain revenue. When raising revenue is the primary motive, the rates of duty are generally low, lest imports should be highly discouraged, defeating the objective of mobilizing revenue for the government. Revenue tariffs tend to fall on articles of mass consumption. Protective Tariff Protective tariff is intended primarily, to accord protection to domestic industries from foreign competition. Naturally, the rates of duty tend to be very high in this case because generally, only high rates of duty curtail imports to a significant extent. Countervailing and Anti-Dumping Duties Countervailing duties may be imposed on certain imports when they have been subsidized by foreign governments. Antidumping duties are applied to imports which are dumped on the domestic market at prices either below their cost of production or substantially lower than their domestic prices. Countervailing and anti-dumping duties are, generally, penalty duties and an addition to the regular rates. Impact of Tariff Tariffs affect on economy in different ways. An import duty generally has the following effect: (i) Protective Effect

An import duty is likely to increase the price of imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable domestic industries to absorb higher production costs. Thus, as a result of the production accorded by tariffs, domestic industries are able to expand their output. (ii) Consumption Effect The increase in prices resulting from the levy of import duty usually reduces the consumption capacity of the people. (iii) Redistribution Effect If the import duty causes and increase in the price of domestically produced goods, it amounts to redistribution of income between the consumers and producers in favour of the producers. Further, a part of the consumer income is transferred to the exchequer by means of the tariff. (iv) Revenue Effect As mentioned above, a tariff means increased revenue for the government (unless, of course, the rate of tariff is so prohibitive that it completely stops the import of the commodity subject to the tariff). (v) Income and Employment Effect The tariff may cause a switchover from spending on foreign goods to spending on domestic goods. This higher spending within the country may cause an expansion in domestic income and employment. (vi) Competitive Effect The competitive effect on the tariff is, in fact, an anti-competitive effect in the sense that the protection of domestic industries against foreign competition may enable the domestic industries to obtain monopoly power with all its associated evils. (vii) Term of Trade Effect In a bid to maintain the previous level of imports to the tariffimposing country, if the exporter reduces his prices, the tariff-imposing country is able to get imports at a lower price. This wills, ceteris paribus, improve the terms of trade of the country imposing the tariff. (vii) Balance of Payments Effect Tariffs, by reducing the volume of imports, may help the country to improve its balance of payments position. Nominal Tariff and Effective Tariff Nominal tariff refers to the actual duty on an imported item. For example, if a commodity X is subject to an import duty of 25 percent ad valorem, the nominal tariff is 25 per cent. Corden defines the effective protective rate as the percentage increase in value added per unit on an economic activity which is made possible by the tariff structure relative to the situation in the absence of tariffs but the same exchange rates. It depends not only on the tariff on the commodity produced but also on the input coefficients and the tariffs on the inputs. The effective protective rate of industry j (Ej) may be defined as the difference between the industry¶s value added under protection (Vj) and under free market conditions (Vj) expressed as a percentage of the free market value added.
Vj ± Vk Ej = ---------Vj

Obviously, the protective effect of a tariff on domestic manufacturing is larger if the import duty on the raw materials used in its manufacture is lower. Optimum Tariff If a country raises its tariff (import duty) unilaterally, its terms of trade may improve and its volume of trade may decline. The improvement in the terms of trade initially tends to more than offset the accompanying reduction in the volume of trade, Hence a higher trade indifference curve is reached and community welfare is enhanced. Beyond some point, however, it is likely that the detrimental effect of successive reductions in the trade volume begins to outweigh the positive effect of further improvements in their terms of trade; as a result, community welfare begins to fall. Somewhere in between there must be a tariff which optimizes a country¶s welfare level under these conditions. Thus, the optimum tariff is the rate of tariff beyond which any further gain from an improvement in the terms of trade will be more than offset by the related decline in volume. By raising the rate of tariff beyond the optimum rate, it may still be possible to improve the country¶s terms of trade; but the gain from this improvement in the terms of trade is more than offset by the related decline in the volume of trade.

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