CHAPTER NO.

Instruments of Trade
and Investment Policies
and Trade Barriers
 Commercial Policies
• A country’s commercial policies are those designed to
influence its trade relations with the rest of the world.
• Although international trade policy can be regarded as
the result of opposing forces of free trade and
protection it is pertinent to mention here that in
theory many countries adhere to the free trade but in
practice most have been reluctant to engage in
unrestricted free trade
• With this they are creating different types of trade
barriers to international trade.
 Trade Barriers to international Trade and
Investment
1. Tariff Barriers
2. Non-Tariff Barriers
3. Other Barriers
1. Export restrictions
2. Barriers to Trade in services
3. Foreign investment controls
 Tariff Barriers
• In simple terms, a tariff ( or customs duty) is a
tax imposed by a government on physical goods
as they move into or out of a country.
• It has a similar effect as an indirect tax in that it
provides the government with a source of
revenue, while in creasing the price of the goods.
• This means that the local producers are able to
price their goods just under the price of the
imported product
 Types of Tariff
• There are two type of customs duties and the
third is combination of the two

• Ad Valorem Duty
• Specific Duty
• Compound Duty
 Ad Valorem Duty
• AV duty is stated in terms of a percentage of
the value of an imported article
• For example 10% or 20% of the total value
 Specific Duty
• Is expressed in terms of an amount of money
per quantity of goods
• For example 10% per Kilo or Per Gallon
 Compound Duty
• A combination of an AV Duty and a specific
duty is called a compound duty.
• Whereas specific duties are based on factors
such as weight or quantity, ad valorem duties
are based on the value of the goods.
 Non-Tariff Barriers
• While import tariffs were traditional trade
policy instruments, since the 1960
governments have increasingly resorted to a
variety of non-tariff measures to restrict
imports or subsidies export
• These measures are collectively designated as
non-tariff trade barriers.
 Types of Non-Tariff Barriers
• Quotas
• International Cartels
• Dumping
• Export Subsidies
 Quotas
• Quotas or quantitative restrictions are the
most visible kind of non-tariff barrier.
• Unlike tariffs, these restrictions impose
absolute limitations upon foreign trade and
inhibit market responses, which makes them
extremely effective.
 Types of Quotas
• Unilateral Quotas
• Negotiated Bilateral or Unilateral Quotas
• Tariff Quotas
• Embargo
 Unilateral Quotas
• These are fixed quotas that are adopted
without prior consultation or negotiation with
other countries.
Negotiated Bilateral or Unilateral Quota
• Under this system, the importing country
negotiates with supplying countries, or with
groups of exporters in those countries, before
deciding the allotment of the quota by
definite shares.
 Tariff Quotas
• Under such a system a specified quantity of a
product is permitted to enter the country at a
given rate of duty or even duty free.
• Any additional quantity that may be imported,
however, must pay a higher duty.
• Thus Tariff Quotas combines the features of
both a tariff and a quota.
 Embargo
• A particular type of quota that sets the limit at
zero imports is called an embargo.
• Often an embargo is placed on imports for
clearly political reasons rather than to serve
any strictly economic.
• For example US has had an embargo on
imports from Cuba since 1961
 International Cartels
• An international Cartel is an organization of suppliers of
a commodity located in different nations (Or a Group of
Government) that agrees to restrict output and exports
of the commodity with the aim of maximizing or
increasing the total profits of a organization.
• Although domestic cartels are illegal in the United
States and restricted in Europe, the power of
international Cartels cannot easily be countered
because they do not fall under the jurisdiction of any
one nation.
 Examples includes
• Most notorious of present day international
cartels is OPEC (Organization of Petroleum
Exporting Countries) which by restricting
production and exports succeeded in quadrupling
the price of crude oil between 1973 and 1974.
• Another examples is the international Air
Transport Association, a cartel of major
international airlines that meets annually to set
international air fares and policies.
 Cartel’s success lies in…
• An international cartel is more likely tobe successful if
there are only a few international suppliers of an
essential commodity for which there are no close
substitutes
• Since the power of a Cartel lies in its ability to restrict
output and exports, there is an incentive for any one
supplier to remain outside the cartel or to cheat on it by
unrestricted sales at slightly below the cartel price.
• Cartels are inherently unstable and often collapse or fail.
If successful however a cartel could behave exactly as a
monopolist.
 Dumping
• Dumping is the export of a commodity at
below cost or at least the sale of a commodity
at a lower price abroad than domestically.
• Dumping describes the practice of selling a
product in one national market at a lower
price than it is sold in another national
market.
 Types of Dumping
• Persistent Dumping
• Predatory dumping
• Sporadic/Specific Dumping
 Persistent Dumping
• Persistent Dumping or international price
discrimination, is the continuous tendency of
a domestic monopolist to maximize total
profits by selling the commodity at a higher
price in the domestic market than
international market
 Predatory Dumping
• Is the temporary sale of a commodity at a
below cost or at a lower price abroad in order
to drive foreign producers out of business,
after which prices are raised to take advantage
of the newly acquired monopoly power
abroad.
 Sporadic/Specific Dumping
• Specific Dumping is the occasional sale of
commodity at a below cost or at a lower price
abroad than domestically in order to unload
an unforeseen and temporary surplus of the
commodity without having to reduce
domestic prices.
 Trigger-Price Mechanism
• In 1978 USA Govt. introduced a trigger-Price
mechanism under which a charge that steel was
being imported into the USA at lower price was
subject to a speedy antidumping investigating.
• If investigation was proved, the USA Govt.
would provide quick relief to the domestic steel
industry in the form of a duty that would bring
the price of the imported steel equal to that of
the lowest cost country.
 Export Subsidies
• Export Subsidies is the form of dumping.
• Export subsidies are direct payments or the
granting of tax relief and subsidized loans to
the nations' exporters or potential exporters
and low-interest loans to foreign buyers so as
to stimulate the nation’s exports.
• Although export subsidies are illegal by
international agreement, many nations provide
them in disguised and non-so-disguised forms
 Barriers to Service Trade
• Services account for about 20% of world trade
and services trade has been growing more
rapidly than merchandise trade
• Despite its higher growth rate, trade in services
is severely curtailed by non-tariff trade barriers.
• Many developing countries have nationalized
insurance companies, give their state insurance
enterprises sole right to domestic insurance
business.
 Export Restrictions
• Export controls may be in the form of bans or
embargoes, quantitative restrictions, licensing,
export taxes, minimum export prices, and the
reservation of exports to designated trading
entities.
• Malaysia has a ban on the export of timber
logs presumably to encourage further
processing within the country.
 Foreign Investment Controls
• Foreign investment controls range from the
rejection of all foreign direct investment, to limits
on the activities of foreign owned firms such as
limits on profit remittances and other financial
controls.
• Many governments, particularly in the developing
countries, promote import substitution by
imposing local content regulations on certain
industries (For example Malaysia in the car making
sector)