INTERNATIONAL BUSINESS

Trade Barriers

Prof Bharat Nadkarni

 International Business

Trade Barriers
Trade Barriers are the artificial restrictions imposed by the
governments on free flow of goods and services between countries.
Tariffs, quotas, taxes, duties, foreign exchange restrictions, trade
agreements and trading blocs are the techniques used for
restricting free movement of goods from one country to the other.

Trade barriers can be broadly classified into two categories:

1. Tariff barriers or Fiscal controls

2. Non-tariff barriers or quantitative restrictions

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Objectives of Trade Barriers

1. To protect home industries from foreign competition
2. To promote new industries and Research & Development
3. To conserve Foreign exchange reserves
4. To maintain favourable Balance of Payment
5. To protect economy from dumping
6. To curb conspicuous consumption
7. To make economy self reliant
8. To mobilise public revenue
9. To counteract Trade barriers imposed by other countries
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Types of Tariff Trade Barriers
1. Classification of Tariffs on the Basis of Origin
a. Export Duty
b. Import Duty
c. Transit Duty

2. Classification on the Basis of Purpose

a. Revenue Tariff
b. Protective Tariff
c. Anti-Dumping Duty
d. Countervailing Duty
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Anti – Dumping Policy

Dumping is defined as the act of a manufacturer in one

country exporting a product to another country (1) at a price
which is either below the price it charges in its home market
or (2) it is less than normal manufacturing cost in another
country or (3) if it can be proven that there has been a
substantial increase of a specific good; dumping large
surpluses into a market will substantially lower the market
price as will introducing lower than market priced goods. The
term has a negative connotation as advocates of free markets
see “Dumping” as a form of protectionism.
Anti-dumping action means charging extra import duty on a
particular product from the particular exporting country in order
to bring its price closer to the “normal value” or to remove the
injury to domestic industry in the importing country.
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Types of Non-Tariff Trade Barriers
1. Quota
2. Import Licensing
3. Consular formalities
4. Trading Blocs
5. Customs Regulation
6. State Trading
7. Export Obligation
8. Exchange Control
9. Boycott
International Business

Foreign Exchange

Prof Bharat Nadkarni

 International Business

Theories for Determining Foreign Exchange Rates

1. Purchasing Power Parity

Purchasing power parity is a theory about exchange rate
determination based on a plain idea that the two currencies
involved in the calculation of the exchange rate have the same
purchasing power for the same good sold in the two countries.
2. Interest Rate Parity
The determination of exchange rate in a forward market finds
an important place in the theory of Interest Rate Parity (IRP).
The IRP theory states that equilibrium is achieved when the
forward rate differential is approximately equal to the interest
rate differential. In other words, the forward rate differs from
the spot rate by an amount that represents the interest rate
differential. In this process, the currency of a country with a
lower interest rate should be
 International Business

at a forward premium in relation to the currency of a

country with a higher interest rate.

• Interest Rate Arbitrage

This is borrowing a currency in one country, transferring in
to another (at spot rate), investing it in the converted
currency, and converting it back to original currency at
forward rate, repaying loan and making profit.
Profit depends upon spot-forward rate and interest rate
difference in two countries.

In perfect market there should not be any arbitrage

opportunity. But in practice such opportunities exist and as
arbitrageurs spot it and use it, these opportunities vanish
and equilibrium is established.
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3. The Fisher effect

According to Fisher, the interest rate has two components
viz., a real return and adjustment for price level changes.
The formula given by Fisher is :
Nominal Interest Rate = Real Interest Rate + Expected
Inflation Rate.
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Factors influencing Exchange Rates fluctuations

1. Change in the demand and supply of foreign exchange.
2. State of International trade.
3. Monetary policy – regulation of money supply and frequent
changes.
4. Capital movement.- FDI, Borrowings and Aid etc.
5. Industrial factors. – GDP growth
6. Inflation in domestic markets
7. Political conditions.
8. Capital markets and Stock exchange condition.
9. Banking condition.
10. National Income
11. Psychological factors.
12. Market factors – Seasonal variations etc.
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Documents for Letter of Credit

1. Copy of Contract / Purchase Order
2. Certificate of Origin
3. Certificate of Quality
4. Certificate of Quantity
5. Proforma Invoice
6. Packing List
7. Insurance Certificate
8. Bill of Lading / Airway Bill
Terms in Logistics
1. Draft
2. Unloading operations and quantity certificates
3. Inner and outer anchorage
4. Ship to Ship transfer
5. Tide Table
6. Ballasting
7. Demurrage
8. Ullage
9. Solid cargo
10. L N G
INCOTERMS ( Int’l commercial terms)
11. Ex-Works
12. F A S
13. F O B
14. C & F
15. C I F
Thank you