TRADE BARRIERS

BY ANIT KAUR
INTRODUCTION
Each country formulates its own foreign trade policy. The policy contains measures for
protecting domestic industries and the economy from the attack of foreign companies.
The government of India uses protective measures to achieve the national objectives.
These measures serve as man made barriers to foreign trade. They are known as trade
barriers. To conduct business smoothly, business firm which want to enter into
international business must be familiar with the trade barriers that exist between its
home country and those of the host country.
Trade barriers are classified into two broad categories :-
(i) Tariff barriers, and
(ii) Non- tariff barriers
TARIFF BARRIERS
Tariffs refer to the taxes and duties levied on the goods and services imported and
exported. Tariff barrier is a barrier between certain countries or geographical areas
which takes the form of abnormally high taxes levied by a government on imports
or occasionally on exports for purposes of protection, support of the balance of
payments , or the raising of revenue. Import duties are much more common than
export duties. Therefore, tariffs are often equated with import duties. In India,
customs duty is a tariff that is levied on the import of several products but only on
a few items of export. Both developing and developed countries even now use
tariffs in specific cases to protect local industries. However, the rates of tariffs
have declined sharply due to trade negotiations under GATT and WTO.
OBJECTIVES OF IMPORT DUTY
Tariff on imports is used to achieve the following purposes :-
1. To increase revenue for the Government.
2. To protect the domestic industries by increasing the cost of imported goods.
3. To curb import of a particular item or group of items.
4. To protect the industries from unfair competition.
5. To restrict the imports for conserving foreign exchange.
6. To safeguard domestic trade.
7. To protect the imports of goods for achieving the policy objectives of the
government.
8. To prevent the dumping of goods.
9. Domestic producer gets a better chance at competing with the foriegn
producer.
TYPES OF TARIFFS

There are 2 types of tariffs : unit tariffs and value tariffs

● Unit tariffs consists on a fixed amount per unit traded.

● Value tariffs consists of a proportion or percentage of the value of traded
goods.
EXPORT TAXES
● Export taxes are taxes on goods or services that become payable when the
goods leave the economic territory or when the services are delivered to non-
residents. They include ad valorem tax, specific tax, progressive tax.
● Export taxes raise money for governments and help in controlling the exports
of valuable resources.
● For example, Indonesia applies taxes on palm oil exports
● The main role of export taxation is to provide a government with funds to
finance its operations like roads and other infrastructure, defence and law
enforcement, education and a justice system.
DIFFERENT TYPES OF TRADE
BARRIERS
SPECIFIC DUTY
● Taxes that are levied as a fixed charge for each unit of goods imported.
● For example, A specific tariff of $10 on each imported bicycle with an
international price of $100 means that customs officials collect the fixed sum
of $10.
● In case of some goods, duty is payable on the basis of units, length, weight,
volume etc.
● For example, Duty payable on cigarettes is on the basis of length, Matches
(per 100 boxes/packs), Sugar (per quintal).
AD VALOREM DUTY
● These duties are imposed “according to value”.
● When a fixed percent of value of a commodity is added as a tariff, it is known
as ad valorem duty. Generally used for property tax on real estate, GST on
supply of goods and services.
● For instance, if the market value of a 2,000 square-foot home is $100,000, the
ad valorem tax levied will be based solely on the homes’s $100,000 value,
regardless of its relative physical size. Municipal property taxes are an
example of an ad valorem duty.
COMBINED OR COMPOUND DUTY

● It is a combination of the specific duty and ad valorem duty on a single

product.
● For instance, there can be a combined duty when 10% of value (ad valorem)
and Re 1/- on every meter of cloth is charged as duty.
SLIDING SCALE DUTY

● The import duties which may vary with the prices of commodities are called
sliding scale duties.
● These may either be on specific or ad valorem basis.
● Historically these duties are confined to agricultural products, as their prices
frequently vary, mostly due to natural factors.
● These are also called as seasonal duties.
PROTECTIVE TARIFF
● In order to protect domestic industries from stiff competition of imported
goods, protective tariff is levied on imports. Normally, a very high duty is
imposed to either discourage imports or to make the imports more expensive
as that of domestic products.
● The tariff may be imposed by the government to protect the home industries
from the cut - throat competition from the foreign produced goods. A high
rate of protective tariff can make the domestic producers more lethargic and
inefficient and unable to face foreign competition even in the long run.
REVENUE TARIFF
● A tariff which is designed to provide revenue to the home government is
called revenue tariff.
● Generally, this tariff is imposed with a view of earning revenue by imposing
duty on consumer goods, particularly on luxury goods whose demand is
inelastic.
● For example, Gucci, Rolex, Burberry, Chanel and so on.
COUNTERVAILING DUTY
● It is imposed on certain imports where products are subsidized by exporting
governments.
● As a result of government subsidy, imports become more cheaper than
domestic goods.
● To nullify the effect of subsidy, this duty is imposed in addition to normal
duties.
● For example, Export subsidies given by the chinese government will make the
Chinese products low priced in the Indian market.
ANTI-DUMPING DUTY
● When exporters attempt to capture foreign markets by selling goods at
rock-bottom prices, such practice is called dumping.
● As a result of dumping, dometic industries find it difficult to compete with
imported goods.
● To onset dumping effects, duties are levied in addition to normal duties called
Anti-dumping Duty.
● For example, a normal duty rating may be 3% but an anti-dumping duty may
be 27%.
IMPACT OF TARIFF
Tariff leaves a significant impact on different spheres of the economy :-

1. Source of Revenue :- Tariff serves as a source of revenue to the government

just as other taxes and duties do.
2. Protection of Domestic Industries :- Tariff is necessary for the protection of
domestic industries because the price of the imported goods in the hands of
the consumers is higher by the amount of the tariff.
3. Redistribution of Income :- Tariff helps in redistribution of income in favour of
the poor. If tariff is levied on the luxury goods and the income there from is
spend on the poor, it will help in the income distribution in favour of the poor.
4. Discouraging the Consumption of a particular Commodity :- Tariff may be levied
for discouraging the consumption of a particular commodity. However, the
success of this measure depends upon how sensitive commodity in question is to
price changes. If the imported goods have inelastic demand, consumers have to
increase the expenditure, which in turn hampers their savings. So tariff leads to
loss of consumers welfare. But if the composition of tariff compels foreign
exporter to lower the price to the extent of tariff, there is no loss caused to the
consumers.

5. Supports Domestic Producers :- The imposition of tariff supports domestic

producers by giving them the opportunity to raise the price of their output of
similar goods and to earn greater profits.
ADVANTAGES OF TARIFFS
1. Tariffs protect the domestic industry by making imported goods costlier.
Demand for the domestic product increases due to reduced supply of the
imported product.
2. The government of the importing country gets revenue in the form of import
duties.
3. Jobs in the domestic industry are saved.
4. Business of the ancillary industries, servicing and market intermediaries is
protected.
DISADVANTAGES OF TARIFFS
1. Consumers in the importing country have to pay higher prices both for the
imported product and the domestic product.
2. The industry of the exporting country loses the demand for its product.
3. Tariffs encourage inefficient production in the importing country. They also
discourage efficient production in the exporting country by eliminating price
competitiveness. Overall there is efficient allocation of resources in the world
economy.
4. Tariffs discourage competition, leading to decrease in product quality.
5. High Tariffs may lead to trade wars between nations.
NON - TARIFF BARRIERS
Non-tariff barriers refer to the measures, other than import duties which a country
adopts to restrict foreign trade either directly or indirectly. Apart from tariff, import
is restricted through non-tariff barriers. Any government regulation, policy, or
procedure other than a tariff that has the effect of restricting international trade, or
affecting overseas investment, becomes a non-tariff barrier. Unlike tariff, the
purpose is not to add to government revenue. But like tariff, Non-tariff barriers are
imposed to curtail imports, either to save scarce foreign exchange or to provide a
boost a domestic industries or to bring desired changes in the commodity pattern
of the import.
● A non-tariff barrier is any barrier other than a tariff that raises an obstacle to
free flow of goods in overseas market.
● It do not affect the price of the imported goods but only the quantity of
imports.
● It is a non-tax measure to favor the domestic firms against the foreign
suppliers.
Non-tariff barriers are worse than tariff barriers due to the following reasons :
(i) The magnitude and effects of tariffs are quite apparent. But non-tariff barriers
are hidden devices and their effect is not visible.
(ii) Tariffs bring revenue to the Government while non-tariff barriers do not
generate revenue.
DIFFERENT TYPES OF NON
-TARIFF BARRIERS
IMPORT QUOTA SYSTEM
Under this system, a country may fix in advance, the limit of import quantity of a
commodity that would be permitted for import from various countries during a
given period.

The quota system can be divided into the following categories :-

1. TARIFF OR CUSTOMS QUOTA

2. UNILATERAL QUOTA
3. BILATERAL QUOTA
4. MULTILATERAL QUOTA
1. TARIFFS/CUSTOMS QUOTA :- Certain specified quantity of imports is allowed
at duty free or at a reduced rate of import duty. Additional imports beyond the
specified quantity are permitted only at increased rate of duty. A tariff quota
combines the features of a tariff and an import quota.
2. UNILATERAL QUOTA :- The total import quantity is fixed without prior
consultations with the exporting countries.
3. BILATERAL QUOTA :- In this case, quotas are fixed after negotiations between
the quota fixing importing country and the exporting country.
4. MULTILATERAL QUOTA :- A group of countries can come together and fix
quotas for exports as well as imports for each country.
PRODUCT STANDARDS
● Most developed countries impose product standards for imported items.
● If the imported items do not conform to established standards, the imports
are not allowed.
● For instance, the pharmaceutical products must conform to pharmacopoeia
standards.
DOMESTIC CONTENT REQUIREMENTS
● It requires a certain percentage of product’s total value to be produced
domestically.
● Governments impose domestic content requirements to boost domestic
production.
● For instance, information and communication technologies (ICT), electronics
and solar energy to spur an increase in the manufacturing sector’s
contribution to India’s Gross Domestic Product (GDP).
PREFERENTIAL ARRANGEMENTS
● A trade pact between countries that reduces tariffs for certain products to the
countries who sign the agreement.
● Imports from member countries are given preferences, whereas, those from
other countries are subject to various tariffs and other regulations.
● For example, NAFTA (The North American Free Trade Agreement), EU
(European Union), GSP (Generalized System of Preferences), ASEAN
(Association of Southeast Asian Nations).
VOLUNTARY EXPORT RESTRAINT (VER)
● A restriction set by a government on the quantity of goods that can be
exported out of a country during a specified period of time because these
restraints are typically implemented upon the insistence of the importing
nations.
● VER’s arise when industries seek protection from competing imports from
particular countries.
● An example of such a voluntary export restraint agreement was the 1981 VER
deal between U.S. and Japan. The Japanese car makers “voluntarily” reduce
their shipment of cars to the U.S. The agreement was designed to help,
protect and revitalize the car industry of the U.S.
EMBARGO
● An embargo is a government order that restricts commerce with a specified
country or the exchange of specific goods.
● It has imposed due to unfavourable political or economic circumstances
between nations.
● This is an extreme form of trade barrier that prohibits import from a particular
country due to severe failure of diplomatic relations.
● For example, The U.S. has an embargo with Cuba that has lasted over 50
years.
SUBSIDIES
Subsidies are government payment to a domestic producer. They may take the
form of cash grants, low-interest loans, tax breaks and government equity
participation in local firms. Subsides may be either domestic subsidy given
normally to producers of import- competing goods or they may be export subsidy
given to exporters to make them internationally competitive. By lowering costs,
subsidies help domestic producers in two ways : they help them compete against
low- cost foreign imports and gain access to export markets.
TECHNICAL BARRIERS
Technical barriers to trade include health and safety regulations, quality standards,
packing and labelling requirements and technical standards. These regulations
increase the cost of foreign suppliers. A country sets standards for the imported
goods to protect its citizens against hazardous and substandard products. A
Government may lay down unusually high standards to prevent imports from other
countries or from a particular country. The regulation that the products must be
tested and certified only in the importing country increases cost and time delay for
exporters.
Technical barriers may include :-
1. CLASSIFICATION OR LABELLING REQUIREMENT OR TESTING STANDARD :-
Many countries set particular classification or labelling requirements or
testing standard, which often prevent imports.
2. BUY LOCAL LEGISLATION :- Many countries have a “buy local “ legislation that
forbids, atleast, government departments from using the imported products.
3. LICENSING :- Some countries have a legislation ensuring that a particular
commodity can be imported only using an import license. The license is
issued by the government with proper care and after taking into account the
availability of foreign exchange.
4. COUNTER-TRADE :- Many countries adopt the practice of counter-trade. They
import commodities only in exchange for their own products. In such cases
their imports are limited to the value of their exports.
ADMINISTRATIVE REGULATION BARRIERS
Government uses several administrative measures to restrict imports and boost exports.
Administrative regulations are bureaucratic rules and procedures which make it difficult
for imports to enter the country. These regulations may be in the following forms:
(a) Long and complicated forms which importers have to fill in.
(b) Delay and red tape in customs clearance.
(c) Elaborate and expensive import licensing procedure.
(d) Complicated procedures for obtaining permit.
(e) Imports from a particular country to be routed only through the specified port which
will create congestion and long delays in document clearance.
(f) Samples to be provided at the time of applying for import license.
All such rules and procedures involve time, cost and uncertainty thereby hampering
imports.
OTHER NON-TRADE BARRIERS
1. MINIMUM DEPOSIT REQUIREMENT :- It requires the importer to deposit with
the Government a substantial value of the import. The deposit may be for the
period of the import license and is interest free.
2. FOREIGN EXCHANGE REGULATION :- The importer has to ensure that
adequate foreign exchange is available for import of goods by obtaining a
clearance from exchange control authorities prior to the concluding of
contract with the supplier.
3. PRODUCT LABELLING :- Certain nations insist on specific labelling of the
products. For instance, the European Union insists on product labelling in
major languages spoken in EU. Such formalities create problems for
exporters.
4. PACKAGING REQUIREMENTS :- Certain nations insist on particular type of
packaging materials. For instance, EU insists on recyclable packaging materials,
otherwise, the imported goods may be rejected.
ALL THE BEST!!