TOPIC 5: INSTRUMENTS OF TRADE POLICY

A tariff, the simplest of trade policies, is a tax levied when a good is imported. Specific
tariffs are levied as a fixed charge for each unit of goods imported. Ad valorem tariffs are taxes
that are levied as a fraction of the value of the imported goods

Tariffs are the oldest form of trade policy and have traditionally been used as a source of
government income.

Positive effects of Tariff

a) Generate revenue for the government
b) Provide additional investments in putting up domestic industries
c) Provide employment since there will be an increase in the production of local products by
local entrepreneurs

Negative effects of Tariff

a) Encourage smuggling of products to avoid paying tariffs
b) Cause price increase of imported products and products using imported materials
c) Penalize consumers while favoring producers
d) Cause producers to lose the incentive to improve the quality of their products and lower
their costs.

Other instrument of trade policy (Nontariff methods of international trade regulation)

Non-tariff barriers can be divided into the following groups: quantitative, hidden and financial
ones.

1. Quantitative restrictions
a) Quota is a quantitative measure of the export or import restricting of the goods by a
certain number or amount for a certain period of time.

By the direction of action, quotas are divided into two types:

- Export quotas are imposed by the government of the country to prevent from the
export of scarce products in the domestic market
- Import quotas are imposed by the government of the country to protect the domestic
market from the foreign competition

Positive effects of Quota

- Safeguard local products by limiting the number of counter-part imported
products
- Provide employment to people Negative effects of Quota
- May lead to administrative corruption since power may be used in setting and
controlling quota of products
- Cause price increased of imported products due to shortage of supply
- Encourage smuggling of products to have unlimited stock
- Discourage producers to improve the quality of their products and lower their costs.
b) Licensing - A license is permission, granted by public authorities for export or import of
goods in the assigned amount for a certain period of time.

c) “Voluntary” export restraints (VERs) is a quantitative restriction of exports, based on the

commitment of one of the trading partners to limit (or not to expand) the volume of
exports, adopted within the intergovernmental agreement on quota imposing on product
exports.

Types of licenses:
Depends on the type of rights which are certified in license
- export licenses
- import licenses

2. The hidden trade restrictions

a) Technical barriers are the national standards of quality, economic requirements, medical
restraints, packing and marking of goods requirements, requirements to implement the
complicated customs formalities, laws of consumer protection.

b) Internal taxes and charges. State and local governments may impose value added tax,
excise taxes, charges for customs clearance, registration, port charges etc.

c) Public procurements. The policy within the government procurements is that the public
authorities and enterprises must buy certain goods only from national firms, even if these
goods are more expensive than the imported ones.

d) Local content requirements. This method of the hidden trade policy involves the legal
establishment of a share of the final product, which should be produced by local
manufacturers, in case of selling this product in the domestic market.

3. Financial methods of trade policy

a) Dumping is the export of goods at prices lower than the cost of production, or, at
least, at lower prices than in the domestic market.

- Sporadic dumping is an episodic sale of surplus goods in the world market at the
lower prices than in the domestic market.
- Persistent dumping is a long-term sale of product in the world market at a lower price
than in the domestic market.
- Predatory dumping is a temporary intentional reduction of export prices in order to
drive out competitors from the market and introduce subsequently monopolistic
prices.
b) Subsidies is the payments provided by the government to domestic companies in
order to make them more competitive.
- Direct subsidies
- Indirect subsidies

Effects of trade policy

TOPIC 6: THE POLITICAL ECONOMY AND TRADE POLICY

The case of free trade

Many economists believe free trade produces additional gains beyond the elimination of
production and
consumption distortions. Finally, even among economists who believe free trade is a less-than-perfect
policy, many believe free trade is usually better than any other policy a government is likely to follow.

1. Producers and consumers allocate resources most efficiently when market prices are not distorted
through trade policy.

- With restricted trade, consumers pay higher prices.

- With restricted trade, distorted prices cause overproduction either by existing firms producing more or
by too many firms in the industry.

- However, because tariff rates are already low for most countries, estimated benefits of moving to free
trade are only a small fraction of national income for most countries.

2. Free trade allows firms or industries to take advantage of economies of scale.

3. Free trade provides competition and therefore opportunities for innovation.

The Cases Against Free Trade

1. The Terms of Trade Argument for a Tariff - For a large country, a tariff or quota lowers the price of
imports in world markets and generates a terms of trade gain.

2. The Domestic Market Failure Argument against Free Trade - Domestic market failures may exist that
cause free trade to be a suboptimal policy.
Types of market failures include:
- Persistently high under-employment of labor.

- Persistently high under-utilization of capital.

- Technological benefits for society from additional production that are not captured by individual firms.

- Environmental costs for society from additional production that are not paid for by individual firms.

Political Models of Trade Policy

1. Median Voter Theorem - The median voter theorem predicts that democratic political parties may
change their policies to court the voter in the middle of the ideological spectrum (the median voter).

2. Collective Action - there can be a very large group of individuals that as a whole would benefit from
eliminating a tariff, but for each of the individuals alone, would not feel that affected by the policy
International Negotiations and Trade Policy
International negotiation describes agreements across governments to engage in mutual tariff reduction.
Two main advantages of international negotiation:

1) it helps overcoming the domestic political difficulties of trade policy

2) it helps governments to avoid destructive trade wars.

International Trade Agreements: A Brief History

• In 1930, the United States passed a remarkably irresponsible tariff law, the SmootHawley Act. – Tariff
rates rose steeply and U.S. trade fell sharply.

• Initial attempts to reduce tariff rates were undertaken through bilateral trade negotiations (agreement
between two nations)

• Multilateral negotiations began soon after the end of World War II. In 1947, a group of 23 countries
began trade negotiations under a provisional set of rules that became known as the General Agreement on
Tariffs and Trade, or GATT.

• In 1995, the World Trade Organization, or WTO, was established as a formal organization for
implementing multilateral trade negotiations

WTO negotiations address trade restrictions in at least 3 ways:

1. Reducing tariff rates through multilateral negotiations.
2. Binding tariff rates
3. Eliminating nontariff barriers

The World Trade Organization is based on a number of agreements:

1. General Agreement on Tariffs and Trade
2. General Agreement on Tariffs and Services
3. Agreement on Trade-Related Aspects of Intellectual Property
4. The dispute settlement procedure

• The eighth round of global trade negotiations carried out under the GATT began in 1986, with a meeting
at the coastal resort of Punta del Este, Uruguay (hence the name Uruguay Round). The most important
results of Uruguay Round may be grouped under two headings, trade liberalization and administrative
reforms.

o Trade Liberalization - The Uruguay Round, like previous GATT negotiations, cut tariff rates around the
world. The numbers can sound impressive: The average tariff imposed by advanced countries fell almost
40 percent as a result of the round
o Administrative Reforms - From the GATT to the WTO

• The ninth major round of world trade negotiations began in 2001 with a ceremony in the Persian Gulf
city of Doha.

Preferential Trade Agreements are trade agreements between countries in which they lower
tariffs for each other but not for the rest of the world. The GATT forbids preferential trading agreements
in general, as a violation of the MFN principle, but allows them if they lead to free trade between the
agreeing countries.
TOPIC 7: TRADE POLICY IN DEVELOPING COUNTRIES

Trade policies in many developing countries were strongly influenced by the beliefs that
the key to economic development was the creation of a strong manufacturing sector, and that the
best way to create that manufacturing sector was to protect domestic manufacturers from
international competition.

The most important economic argument for protecting manufacturing industries is the
infant industry argument.

According to the infant industry argument, developing countries have a potential

comparative advantage in manufacturing, but new manufacturing industries in developing
countries cannot initially compete with well-established manufacturing in developed countries.

The import substituting industrialization

Many developing countries attempted to accelerate their development by limiting imports

of manufactured goods, in order to foster a manufacturing sector serving the domestic market
The infant industry argument

According to the infant industry argument, developing countries have a potential

comparative advantage in manufacturing, but new manufacturing industries in developing
countries cannot initially compete with well-established manufacturing in developed countries.

Reasons behind the infant industry argument

a) To encourage and stimulate domestic production
b) To promote national security and reduce reliance on production from abroad
c) To be a source of government revenue once the infant industry reaches maturity
d) To attract foreign investment
e) To create employment and develop the domestic market
f) To encourage the consumption of domestically produced goods
g) To prevent trade dumping

Two market failures as reasons why infant industry protection may be a good idea

The imperfect capital markets justification for infant industry protection is as follows: If
a developing country does not have a set of financial institutions (such as efficient stock markets
and banks) that would allow savings from traditional sectors (such as agriculture) to be used to
finance investment in new sectors (such as manufacturing), then growth of new industries will be
restricted by the ability of firms in these industries to earn current profits. Thus, low initial
profits will be an obstacle to investment even if the long-term returns on the investment will be
high

The appropriability argument for infant industry protection can take many forms, but all
have in common the idea that firms in a new industry generate social benefits for which they are
not compensated.
Promoting manufacturing through protection
1. Tariffs
2. Production Subsidies
3. Import-substituting industrialization

Although there are doubts about the infant industry argument, many developing countries
have seen this argument as a compelling reason to provide special support for the development
of manufacturing industries. The strategy of encouraging domestic industry by limiting imports
of manufactured goods is known as the strategy of import-substituting industrialization.

Problems of import substituting industrialization

a) Import-substituting industrialization began to lose favor when it became clear that countries
pursuing import substitution were not catching up with advanced countries.

b) Poor countries lack skilled labor, entrepreneurs, and managerial competence and have
problems of social organization that make it difficult for these countries to maintain reliable
supplies of everything from spare parts to electricity.

Trade and growth: Takeoff in Asia

Figure 11-3 illustrates the Asian takeoff by showing the experiences of three countries:
South Korea, the biggest of the original group of Asian “tigers”; China; and India. In each case,
we show per-capita GDP as a percentage of the U.S. level, an indicator that highlights the extent
of these nations’ economic “catchup.” As you can see, South Korea began its economic ascent in
the 1960s, China at the end of the 1970s, and India circa 1990.

What caused these economic takeoffs? Each of the countries shown in Figure 11-3
experienced a major change in its economic policy around the time of its takeoff. This new
policy involved reduced government regulation in a variety of areas, including a move toward
freer trade.
TOPIC 8: INTERNATIONAL TRADE AGREEMENTS
Legal regulation of international trade agreements
Essence of international trade agreements - The internationalization of industrial
production on the basis of mutual supplies of products and services, results of creative activity is
characteristic of modern world economic relations. Such nature of economic cooperation
determines the forms, methods, content of international trade.
International trade operations are the actions that are aimed at organizing, conducting and
regulating the exchange of goods, services, intellectual products between two or more
contractors around the world. The main international trading operations are export-import
operations, which refer to commercial activities related to the purchase and sale of products that
have material form.
Export operations are activities that are associated with the sale and removal of goods
abroad to transfer them into the ownership of foreign contractor.
Import operations are activities that are associated with the purchase and importation of
foreign goods for their subsequent realization in the domestic market
Implementation of international trade operations involves the use of certain legal forms
and specific methods of its implementation. The legal form of international trade is an
international trade agreement, defined as an agreement between two or more contractors located
in different countries, on supply of a certain quantity and quality trade items2, services, exchange
of scientific and technical knowledge, lease.
Contract is considered to be international only on condition that its parties are in different
countries
International trade agreement, depending on the object of purchase and sale is made in
several forms, these are: the form of a purchase and sale contract of goods in material form, the
contract of purchase and sale of services, the contract of purchase and sale of products of
intellectual work.
Parties (contractors) of international trade agreements are the firms, businesses alliances
(associations), government agencies and organizations, international economic organizations of
the UN system.
a) The firm is the enterprise that pursues commercial goals while economic
activity.
b) Business alliances are non-profit associations of certain groups of
entrepreneurs, the purpose of which is not to receive profit, but to represent the interests
of these groups of entrepreneurs in government agencies and assist in organizing
international activities, including the expansion of international trade
 c) Public authorities (ministries and agencies) and organizations have the right to
participate in international trade agreements only after receiving a special permission of
the government of the country.
d) International organizations of the UN system, acting as counterparties of
exports and imports of goods and services in the global market, are mainly engaged in
construction of investment projects.
Regulation and unification of international trade agreements
The practice of international trade is characterized by a significant degree of legal
unification the aim of which is reducing the legal barriers in international trade by developing
and application of international legal documents adopted at the international level. It concerns
primarily international contracts for sale of goods.
Such international economic organizations as UNCITRAL, UNIDROIT, UNCTAD,
UNECE are engaged into the unification and harmonization of international trade law

1. The United Nations Convention on Contracts for the International Sale of Goods was
developed by the United Nations Commission on International Trade Law (UNCITRAL),
in order to unify the conditions of international trade agreements which are concluded
and eliminate the significant differences in the national legislation. This Convention was
adopted at the United Nations Conference on Contracts for the International Sale of
Goods, held in Vienna in 1980 and so called the Vienna Convention.
The features of the Vienna Convention are in next facts:
• it contains the uniform rules of conclusion and execution of contracts for the
international sale of goods;
• it helps to speed up, facilitate and reduce the cost of negotiating;
• it creates the preconditions for unambiguous interpretation of the rights and
obligations of the parties;
• it promotes the liquidation of discriminatory unequal relations in international
trade;
• it defines the obligations of the seller and the buyer under the contract;
• it regulates the relations between the counterparties regarding the objects of the
contract in the event of disputes between the parties relating to the countries which
are not parties to the Convention;
• it establishes a list of objects of the contract for the sale of goods, which are not
covered by its action;
•it determines the signs of the contract for the sale of goods to which the Convention
does not apply.
One of the most important documents, developed by UNCITRAL, is also the Convention
on the Limitation Period in the International Sale of Goods (1974). It establishes the uniform
norms on time limits, which should begin in disputes arising from contracts and also the
limitation periods.
 2. International Institute for the Unification of Private Law (UNIDROIT) takes a significant
place in the development and establishment of common rules of international trade.
The Convention on the Law Applicable to Contracts for the International Sale of Goods
(referred to as The Hague Convention) plays an important role in the unification of the
procedure of concluding and performing the contract for the international sale of goods. It
was developed by UNIDROIT and presented and opened for signature at the extraordinary
session of the Hague Conference on Private International Law (HCCH) in 1985. The session
was attended by almost all economically developed countries and 30 developing countries of
Asia, Africa and Latin America.

3. The General Conditions of the sales are also used in preparation of foreign trade
contracts, developed by the United Nations Conference on Trade and Development
UNCTAD / WTO.
International trade terms (INCOTERMS -2010)
Parties of a contract are often not aware of the differences in trade regimes, where are the
commercial enterprises of partners. It can lead to disputes, litigation, that entails the loss of time
and financial loss.
International Chamber of Commerce (ICC) developed commercial terms in 1936, that
are the universal set of basic conditions, knowledge and using of which facilitates the
implementation of trading operations. These terms were created to get rid of these problems,
clearly define the duties of the parties and reduce the risk of legal complications, in the contracts
for the sale of goods. They are based on international trade practice and customs. The collection
was called “International rules for the interpretation of trade terms INCOTERMS” (International
Commercial Terms).
The 11 terms of INCOTERMS 2010 are divided into two categories
1. The basic terms of delivery for any mode or modes of transport: ЕXW, FCA, CIP,
CPT, DAT, DAP, DDP.
2. The basic terms of delivery for sea and inland waterway transport: FAS, FOB, CFR,
CIF.
THE INCOTERMS 2020