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Barriers to Trade

Some countries pursue an inward-looking strategy towards foreign trade These countries use several barriers to protect domestic industries from competition from foreign firms The barriers generally include tariff and nontariff strategies

Tariffs
A tariff is a tax imposed on goods involved in international trade Tariffs are imposed on goods imported, in which case they are called import duties Taxes are also imposed on goods when they leave the country (export tariff) or as they pass through one country bound for another (transit tariff).

Import tariff does two things:


a) It adds on to the cost of the imported item and hence to the price of that imported item It, thus, possibly reduces the competitiveness of that item vis--vis any competing domestic items Thus, tariff may act as a measure protecting the local industry b) It gives revenue to the government

Customs duties are generally assessed in three ways:

i) Ad Velorem Duty ii) Specific Duty iii) Compound Duty


i) Ad Velorem Duty Ad velorem means according to value Duty is assessed as percentage of the import value of goods (e.g. 30% of FOB price). ii) Specific Duty Specific duty is assessed on the basis of some units measurements, such as quantity (e.g. $ 10 per dozen)

or weight, either net weight or gross weight (e.g. $ 30 per kilogram net). iii) Compound Duty Compound duty is assessed as a combination of the specific duty & ad velorem duty ($ 30 per kilogram net, plus 30% of FOB price) Tariffs were a major barriers to imports during the early days of the General Agreement on Tariffs & Trade (GATT) Over the years, due to the increasing influence of GATT, tariffs have been successively reduced all over the world Therefore, tariffs have ceased to be the strong barriers to inter-national trade as they were earlier.

Export Duties
A country may levy export duties primarily as a means to restrict exports of a particular product for the following reasons: 1) To reserve the domestic supply for local industries 2) To make the raw materials inputs available to the local industry at a low price 3) To preserve natural resources & protect the countrys environment 4) To encourage foreign direct investment (FDI) in downstream industries

1) To reserve the domestic supply for local industries:


The intention is to protect the domestic industries by ensuring that they have the inputs available.

2) To make the raw materials & inputs available to the local industry at a low price: Export duties resemble import tariffs in that their primary effect is on the price of traded goods They resemble other domestic industryprotecting export restrictive measures such as minimum export pricing A country has a dominant position in a vital raw material, or a country that has dominance in the world market as such, could further extend its domination by artificial increasing

vital raw material or products

Export duties are intended to exploit its market power by fully cultivating dominant position It is in a price making situation This raises the world prices for that material & makes it difficult for the other players to compete internationally This militates against the concept or free trade.

3) To preserve the natural resources and protect the countrys environment: Export duty will tend to discourage the export & consequent depletion of the natural resource or harm to the environment. 4) To encourage foreign direct investment (FDI) in down-stream industries: As the raw material from country A would be available to a foreign processor from country B only at a higher price if he were to import & process it in his country B he tempted to set up the processing

unit in country A In any case, most tariff measures are now on the wane with the increasing power of WTO the inter-national trade regulating body.

Non-tariff Barriers (NTBs) to Inter-national Trade

With the regulatory organization like WTO in place & the subsequent erosion of tariffs as instruments of protecting domestic industries from foreign competition, the non-tariff barriers (NTBs) have proliferated as political & protective measures It is not that the resort to NTBs only when their macroeconomic conditions are deteriorating ; any economic & industrial re-structuring that happens within the country may give rise to cries for protection from various groups that are affected by the re-structuring A country may resort to various strategic internal & external trade policy measures to give a lift to the domestic industry; these policy measures may amount

to NTBs for other nations that would like to export their goods & services to that country

Non-tariff barriers are of two kinds:


A) Price-influencing NTBs B) Quantity-influencing NTBs

A) Price-influencing NTBs
i) Subsidies ii) Customs Valuation iii) Administered Minimum Price Levels iv) Customs Deposits & Special Fees

i) Subsidies Subsidy is a monetary help by the government to the


local firms so that they &/or their products are made competitive Due to the subsidy, the firms cost may come down & they may become more competitive price-wise &/or quality-wise The payments by the government may be direct to the firms or it could be indirect Agricultural subsidies, that are direct, are common occurrence in many countries However, when the local farmers are given such subsidies, the other countries exporting similar agricultural products may find it difficult to compete

with the local agriculturists In such cases, the subsidies become a non-tariff barriers to the other countries products At the Uruguay Round of GATT, the mutual allegations by France & USA of subsidies given to their farmers led to a near impasse in the negotiations.

a) Indirect Subsidies b) Export Subsidies c) Conditional Subsidies

a) Indirect Subsidies Subsidies could be indirect, when some of the expenses of the inputs are borne by the government out of public funds Free electric power to the farmer is an example Seeds could also be supplied at low rate through government-controlled organizations Inter-national examples of indirect subsidy are the cases of Airbus Industries & Boeing While Boeings R&D expenses were - in a way

- paid for by the US governments defence


programme involving much R&D in aviation, USA alleges that the European funds were used

for indirectly subsidizing Airbus Industries Aviation industry cannot hold more than a few players Its volumes, in terms of the number of planes demanded world-wide, are limited In such a scenario, the players would like to hold on to their position by creating competitive advantages The industry being of strategic importance, the home governments chip in to help

b) Export Subsidies It is alleged that China currently sells corn below


the world price and below the cost of domestic procurement It is an export subsidy State trading enterprises in China, Canada & Australia, were said to be creating de facto export subsidies through the mechanism of pool pricing, cross-subsidization of commodities or even longterm supply agreements between governments Such support policies are trade distorting & WTO is making efforts to discourage such practices.

c) Conditional Subsidies Subsidies that require recipients to meet certain


export targets or to use domestic goods instead of imported goods are prohibited by the WTO They are prohibited on the grounds that they are specifically designed to distort inter-national trade, and are therefore, likely to hurt other countries trade If the dispute settlement procedure of WTO confirms that a subsidy is prohibited, it must be withdrawn immediately Otherwise, the complaining country can take counter-measures.

ii) Customs Valuation This is another major non-tariff barrier while the customs officers must levy the duty on
the declared invoice price, sometimes the custom officer may suspect that the invoice prices are under-valued The customs official, then, may assess the real price based on the price of identical or similar products at that point in time The custom officials arbitrary valuation of the goods becomes a non-tariff barrier, if the exporting country feels that the valuation has been higher than the real price

Countervailing Duties
The WTO Agreement says that if an importing country feels that it could be hurt because of the subsidies in the exporting country, the importing country can use the WTOs dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects Or the country can launch its own investigation & ultimately charge extra duty (known as countervailing duty) on subsidized imports that are found to be hurting domestic producers Many countries charge such countervailing duties

There are a few questions that need to be answered here: 1. Is the product really being subsidized? What is the meaning of being subsidized? Can it be calculated and thus established ? 2. Is the subsidy hurting the domestic industry ? How is the hurt decided ? The complaining country has to show that the subsidy has an adverse effect on its interests. Otherwise, as per WTO, the subsidy is permitted Since the subsidies play an important role in the economic development of the developing nations, particularly the Least Developed Countries (LDCs), WTO rules exempt LDCs & developing countries with less than US $ 1,000 per capita GNP from disciplines on prohibited export subsidies.

Anti-Dumping Actions
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be dumping the product Thus, the company is willing to suffer a loss in exporting, in its efforts to get a slice of the overseas markets A country may fear that the foreign company may use its financial strength to suffer such losses for extended periods of time until it captures the entire domestic market or a large portion of the market

Thereafter, the company being in a monopolistic situation can charge any price suitable to it & more than recoup the initial losses Dump the goods, capture the overseas market, marginalize the original domestic players & then start milking the market It is precisely this scenario that many countries dread; developing countries are perennially scared of the financial clout of the developed countries & their dumping of goods.

iii)Administered Minimum Price levels For the entry of a particular type of overseas

product, a minimum price may be set by the importing country This limits the competitive power of the overseas product in the importing country Therefore, the foreign product can compete mostly based on its quality but not on its cost efficiency Without the mention of a tariff, this policy acts as a tariff measure

iv) Customs Deposits & Special Fees


A way of increasing the cost of an imported item is by asking for payment of deposits with the customs in advance of the shipment Such requirements of advance payments, in addition to increasing the cost, act as financial hurdles to the foreign exporter Some levy special fees at the customs, making the import that much more expensive & less competitive For instance, in the countries of the Gulf region, Indian exporters had to pay legalization charges for documents, etc.

which ate into the earnings of small exporters who did not have large volumes of sales to take care of such add-ons to export cost Similarly, one of the NTBs affecting Indian goods exports to US has been, excessive fees for customs.

B) Quantity-influencing NTBs
i) Quotas ii) Voluntary Exports Restrictions (VER)

i) Quotas

Quotas are restrictions on the imports of a goods to a particular level in a given year The quotas could be by the maximum number/ quantity or by the maximum value of the goods One of the major intended effects of an import quota is to limit the competition for the domestic producers Quotas are generally allocated by country & by or product category, i.e. an importing country will have different quotas for different countries & differently for different products/productcategories

Multi-Fibre Arrangement (MFA)


A major example of quotas has been that of the quotas on textiles & garments called as multi-fibre arrangement (MFA), which was introduced in 1974 The developed countries wanted to shield their domestic textiles & clothing industries from the growing competition from developing-country producers, & hence these quotas Textile & clothing industry could be highly labourintensive and hence several developing countries had a competitive advantage over the industries in the developed countries Hence, these special quotas for textiles & garments Quotas have been negotiated on a country-by-country

basis & have been established at different levels For example, strict quotas generally operate on imports from India, Korea & Hong Kong, whilst the developed countries impose little restriction on textile & clothing imports from a group of Least Developed Countries The rapid expansion of the garment industry in Bangladesh during the 1980s was partly due to the fact that it was an LDC. Quotas could also be on the exports The reasons behind the export quotas could be to protect & conserve the national natural resources The other reason for export quotas could be to influence the world pricing of that commodity/product

Export Quotas & other Quotas


For instance, the Organization of Petroleum Exporting Countries (OPEC) decides on the amount of petroleum crude that could be produced & exported in a year by each member of their organization The intension is to regulate the supply of petroleum in the world & thus control the price Different types of quotas exist, such as, global quotas, bilateral (i.e between two countries) quotas, seasonal quotas, quotas linked with export performance (i.e a firm can import required inputs in proportion to or linked in some other way to its exports of products), quotas linked with the purchase of local goods (i.e to protect the local industries), quotas for sensitive

product categories, etc.

Export-linked import quotas were a very common practice in India Of course, that led to some queer situations where a large industrial house would export Basmati rice to meet its export obligations. There could be political reasons for the quotas on imports & exports Quotas could be one of the ways of expressing displeasure or (oppositely) favoritism about the political policies of the other country The expression of displeasure could be subtle or it could be loud

Political Reasons for the Quotas

When it is loud, the action is called a trade sanction When all the trade from & to a country is blocked, it is called an embargo For example, when India conducted nuclear tests, many major industrial nations declared trade sanctions In the case of Iraq, during the regime of Saddam Hussein, US had declared trade embargo that prevented even the medical supplies to reach that country.

Rules of Origin
As a result of the quota system, exporting countries - that have been restricted have used other means of beating the system They have diverted their goods to other countries that did not fall under those restrictions Thereafter, the goods were exported from that country to the desired original destination It involved a re-routing Such re-routing could avoid anti-dumping action & countervailing duties Some used more ingenuity If automobiles were restricted & not the spare

parts, they would export the spare parts (i.e. dismantled or completely knocked down or CKD automobile) & re-assemble them in that overseas country Just a few years ago, the world was concerned about mad cow disease that could be spread to humans with the consumption of infected beef & beef products The beef export from certain countries were prohibited due to this possibility of infection However, there was always a possibility of re-routing Due to these practices, the countries that restrict that imports also specify the rules of origin

for the in-coming shipments. Rules of origin are, therefore, important for following reasons: a) Protecting public health & safety b) Protecting the free trade agreements from misuse (e.g. diverting goods to a country that gets dutyfree treatment) c) Declaring to the customers in a transparent manner information about the product as to where it was made While the rules of origin specifications are also required to properly administer quotas, anti-dumping actions, counter-vailing duties, sanction against a particular country, etc., these uses of rules of origin go against the grain of free trade &, hence, should not be emphasized

Rules of origin are the criteria used to define where a


product was made
It should be clear as to what confers the origin These rules & their implementation should be consistent, uniform, impartial & reasonable Therefore, some rules of origin require that a certificate indicating the country of origin must accompany an imported good Which country/countries produced the good should be clear from these certificates It is essential to harmonize i.e bring in uniformity in the rules of origin used by different WTO member countries

How do rules of origin become a non-tariff barrier? Developing countries have complained that they are being asked to prove the genuine country of origin This was particularly true regarding the textiles & clothing quotas under MFA Frequent changes in the rules of origin criteria by the importing country could also pose difficulties Thus, rules of origin could be used (misused) as a bureaucratic tool for increasing the hassles for the foreign exporters The more complex the rules, the more would they work as a non-tariff barrier.

ii) Voluntary Export Restrictions (VER) Instead of imposing quotas, an importing country
(generally an economically & politically powerfull developed country) may make an offer to the exporting country (a country in a weaker position &/or a developing country) to voluntarily have restrictions on its exports Such an offer is generally not refused About three decades ago, when Japanese automobiles started becoming popular in the American market, USA asked Japan to have voluntary restrictions on its automobiles export. Japan agreed.

iii) Safeguards
According to WTO Agreement on Safeguards, a WTO member may restrict imports of a product temporarily (take safeguard actions) if its domestic industry is seriously injured or threatened with injury caused by a surge in imports It may be noted that there has to be a surge in imports, the injury has to be serious, & the restrictions placed to safeguard have to be temporary The safeguard action should be applied only to the extent the seriously injured industry is helped to recover

Moreover, the emphasis is on transparency & on avoiding arbitrary methods When the safeguards are applied, the exporting countries should be suitably compensated, the compensations being decided after mutual consultation.

iv) Domestic Content Requirements Many countries require that a company, in order
to be eligible to import, has to show that it is going to use the required percentage of inputs product locally These mechanisms, also known as domestic content requirements, are allowable under the rules of the WTO (TRIMS Agreement) & were designed to assist transitional or developing countries However, such measures are used by many countries developing & developed

EU had domestic content requirements for Japanese automobiles manufactured in EU Thus, imports are not free; they are tied This is kind of barrier to trade.

v) Government Procurement In several countries, government is the largest


purchaser of goods of all kinds For instance, in India the influence of the government, its agencies & its public sector undertakings is enormous Same is the case with many developed countries as well However, because it is government purchase, it is many a time limited to purchases from the local suppliers This means, a large portion of trade is not open to inter-national competition

WTO is changing this situation through the Agreement on Government Trade Services (including construction services), procurement at the sub-central level (for example, states or provinces & departments), & procurement by public utilities are also covered under this agreement.

vi) Sanitary & Phytosanitary (SPS) Measures


A country has a right to ensure that its people are being supplied with food that is safe to eat safe by the standards of that country It has a right to prevent the spread of pests or diseases among animals & plants At the same time, it must ensure that these strict health & safety regulations are not being used as an excuse for protecting domestic producers WTO Agreements (SPS Agreement) allows countries to set their own standards But it also says that the regulations must be based on science

SPS Agreement allows countries to use different standards & different methods of inspecting products, provided these do not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail Sanitary (human animal health) phytosanitary (plant health) measures would apply to domestically produced food or local animal & plant diseases, as well as to products coming from other countries This is an consonance with WTOs fundamental principles of non-discrimination & national treatment

The meanings of these two principles are: a) Non-discrimination: Treat all countries equally b) National treatment: Treat other nations products (once these enter your country) just as you treat your own Only when these principles are violated, does an SPS measure become an NTB For the proposes of the SPS Agreement, sanitary & phytosanitary measures are defined as any measures applied: to protect human or animal life from risks arising from additives, contaminants, toxins or disease-causing organism in their food;

to protect human life from plant-or animal-carried diseases; to protect animal or plant life from pests, diseases or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests These include sanitary & phytosanitary measures taken to protect the health of fish & wild fauna, as well as of forests & wild flora Measures for environmental protection (other than as defined above), to protect consumer interests, or for the welfare of animals are not covered by the SPS Agreement The sanitary & phytosanitary measures can take many forms, such as requiring products to come from a

disease-free area, inspection of products, specific treatment or processing of products, setting of allowable maximum levels of pesticide residues or permitted use of only certain additives in food Referring to NTBs on sanitary & phytosanitary (SPS) conditions, an official report from India said that processed food imports into Japan were affected by Japanese standards affecting food additives, even though these additives might be generally recognized as safe elsewhere This Japanese case would be WTO-compatible

vii) Technical Barriers to Trade (TBT) Just like SPS measures, in order to safeguard the genuine interests of its domestic consumers, a country may specify technical regulations & standards that mention specific characteristics of a product, such as its size, shape, design, functions & performance, or the way a product is labelled or packaged before it enters the marketplace The idea is to bring in more transparency regarding the products characteristics, process, & the location of the major process undergone For instance, if a garment (says the Gucci brand) is made mostly in Vietnam, the product label must mention that it is Made in Vietnam

Otherwise, a consumer may assume that it is made in EU Included in this set of measures are also the technical procedures, which confirm that products fulfil the requirements laid down in regulations & standards All these measures are, indeed, fair However, when used to discriminate between countries & to protect domestic industries from foreign competition, these go against the basic objective of free trade The technical standards then become technical barriers to trade (TBT)

Since, there could be myriad technical specifications & labelling requirements, these could pose substantial difficulties to the foreign exporters trying to access the market It is not the difficulty, which is in question, as long as it is applied uniformly across all countries & within its own territory It is the discrimination, if any that is in question Is there an intention to pose a hurdle to the exporting country so as to discourage it from exporting ? Then, it becomes a barrier to trade.

viii) Environmental Standards These days, with rapid industrialization & the
depletion of natural resources, environment is a major concern Some of the important inter-national environmental agreements are: Montreal Protocol for the protection of the o-zone layer, the Basel Convention on the trade or transportation of hazardous waste across inter-national borders, & the Convention on Inter-national Trade in Endangered Species (CITES) But, the environmental issues could be misused With the ostensible explanation of protecting

ones environment &/or the global environment, a country may ban/restrict trade from another country as creating conditions that are environmentally & ecologically unsafe It is necessary to distinguish between genuine ecological concerns & the intentions to protect domestic industries through green trade restrictions on imports

ix) Labour Standards Many a time a country may prohibit or restrict


imports from another country on the grounds that the exporting country is departing from the core labour standards Thus, carpets from Islamic Republic of Iran may be banned or restricted as the carpet industry in Iran uses child labour to a considerable extent The pertinent questions are: Should a countrys exports be restricted because it uses child labour or forced labour ? Does a country have a right to restrict such trade? Can this be treated as a case of different economic & value systems ?

Should a country impose its value systems on

another country?
If a country has less labour rights, does it gain any unfair advantage ? Several developed countries have used labour standards to restrict the imports from another country But, many developing nations believe that efforts to brings labour standards into the arena of multilateral trade negotiations are little more than a smokescreen for protectionism & that it is an effort to undermine the advantage of the developing countries in terms of their low wages.

x) Bureaucratic Delay Tactics There could be other barriers erected to trade by


using the bureaucratic procedural delays These in-ordinate delays constitute trade barriers The Sri Lankan Minister of Trade & Commerce had once said about India that so many questions are asked at the Customs, that the exporters are fed up In the case of the European Union, the NTBs include delayed or extended administrative & inspection procedures, & delayed laboratory test reports; delays would mean a loss of opportunity to sell for the exporter

In an interesting case, it is said that when the French decided that the imports of Japanese VCRs were excessive, they simply applied the rules & gave each VCR a complete inspection The number of VCRs entering the country dropped from thousands to six per day An official report from India on the subject of NTBs has said that about 35 per cent of Indias total exports to the US in value terms confronted NTBs in 2002 & so is the case with the incidence of NTBs in regard to Indias exports to other developed countries such as the European Union & Japan