CHAPTER 9 – INTERNATIONAL TRADE

UNIT-1 (Theories) (b,b,c,c,b,b,b,d,b,d)

 WTO acts as an agent for IT and ensures friendly relations b/w countries and
promote IT.
 India needs more FOREX.
 FDI (Foreign Direct Investment) refers to incoming of foreign co. in India & doing
business.
 FPI refers to investment done by foreign co. only in shares.
 IT is the exchange of goods and services and resources between residents of different
countries.
 International Trade
 Employment creation
 Foreign capital
 Peace & harmony
 Advance technology, R&D
 Economic growth and development
 Access to new market
 Superior products at low cost
 BENEFITS
 IT contributes to economic growth and rising incomes.
 Leads to greater efficiency in the use of natural, human, industrial & financial
resources ensure productivity gains.
 It also tends to decrease domestic monopolies, which is beneficial to the
community.
 IT provides access to new markets, innovative products at lower prices and
wider choice for consumers.
 Enables nations to acquire FOREX.
 IT necessitates increased use of automation, supports technological change
and facilitates greater investment in R&D and productivity improvement in
the economy.
 Opening up to new markets facilitates export diversification to open new
production possibilities.
 Also contribute to human resource development.
 Strengthen bonds between nations, thus promotes harmony and cooperation
among nations.
 ARGUMENTS
 IT is not equally beneficial to all nations.
 Potential unequal market access and disregard for the principles of a fair-
trading system may even amplify the differences b/w trading countries.
  Economic exploitation is a likely outcome when underprivileged countries
become vulnerable to the growing political power of corporations operating
globally
 Substantial environmental damage and exhaustion of natural resources in a
shorter span of time could have serious negative consequences on the society
at large.
 Trade cycles and the associated economic crises occurring in different
countries are also likely to get transmitted rapidly to other countries.
 There are also many risks in trade which are associated with changes in
governments’ policies of participating countries, such as imposition of an
import ban, high import tariffs or trade embargoes.

 IMPORTANT THEORIES
 The Mercantilists’ View of International Trade
 Trending economic policy of Europe (16th to 18th century) where govt.
used power to control industry & trade and believed that national
power is achieved and sustained by having constant large qty. of
exports over imports.
 Uneven distribution of nation’s human and material resources lead to
flow of labour, raw material, capital and finished products across
national boundaries, resulting in mercantilism to result in favourable
BOP & trade & to be still relevant to today’s economy.
 The Theory of Absolute Advantage
 Adam Smith believed that trade between two countries would be
mutually beneficial if one country could produce one commodity at
absolute advantage (over the other commodity) and the other
countries could, in turn, produce another commodity at an absolute
advantage over the first.
 the principle of absolute advantage refers to the ability of a party (an
individual, or firm, or country) to produce a greater quantity of a
good, product, or service than competitors, using the same amount of
resources.
 Smith described this principle using labour as the only input.
 As absolute advantage is determined by a comparison of labour
productivity, a nation cannot have absolute advantage in anything
which results in no IT.
 Assumptions
 Trade b/w 2 countries.
 2 country and 2 commodity frameworks
 No transportation cost
 He assumed that labour is mobile within a country and
immobile b/w countries
  He assumed any trade would occur only when each of the 2
countries had an absolute lower cost in the prod. Of 1 of the
commodities.
 The Theory of Comparative Advantage
 David Ricardo
 Canada (Wheat- 10) (jute-20) (Cost Ratio-0.66 = 10/15)
(Benefit=1-0.66 = 0.34)
 India (Wheat- 15) (jute-25) (Cost Ratio-0.80 = 20/25)
(Benefit=1-0.80 = 0.20)
 Canada is expert in both the items but it is better in wheat prod.
 Canada has greater adv. In wheat prod. And India has less loss in jute
prod.
 The Heckscher-Ohlin Theory of Trade(Modern Theory)(Factor Endowment
Theory)
 Eli Heckscher and Bertil Ohlin
 They believed that countries with more capital should export capital
intensive products and countries with more labour should export
more labour extensive products.
 2 country, commodity, factor (labour & capital)
 Less labour wages in India due to labour extensive country.
 Less capital interest in USA due to more capital in the country.
 USA has more capital, when it supply capital to India then interest on
capital in India will be decrease and in USA it will increase till
equilibrium.
 India has more labour, when it supply labour to USA then wages in
USA will be decrease and in India it will increase till equilibrium.
 Globalization and New International Trade Theory
 the new trade theory adds to the positive sum: by enlarging markets,
international trade increases competition and allows greater
exploitation of economies of scale, both of which represent gains over
and above those due to comparative advantage.
 Paul Krugman received the 2008 Nobel Prize for economics for his
work in economic geography and in identifying IT patterns.
 Against the Heckscher-Ohlin theory Paul noticed that IT takes place
b/w countries with roughly the same ratio of capital to labour.
 According to NTT, two key concepts give advantages to countries that
import goods to compete with products from the home country:
 Economies of Scale: As a firm produces more of a product, its
cost per unit keeps going down. So if the firm serves domestic
as well as foreign market instead of just one, then it can reap
the benefit of large scale of production consequently the
profits are likely to be higher.
 Network effects refer to the way one person’s value for a
good or service is affected by the value of that good or service
 to others. The value of the product or service is enhanced as
the number of individuals using it increases. This is also
referred to as the ‘bandwagon effect’. Consumers like more
choices, but they also want products and services with high
utility, and the network effect increases utility obtained from
these products over others.

UNIT-2 (The Instruments of Trade Policy)

TARIFFS NON-TARIFF MEASURES (NTMs) EXPORT-RELATED MEASURES

 INTRODUCTION
 India became one of the most FTA engaged countries in the world.
 After negotiations with UK, UAE & European Union a free trade agreement
began with Mauritius on 1st April 2021.
 On 18 Feb 2022, a comprehensive economic partnership agreement (CEPA)
with the UAE was concluded and came in force since 1 may 2022.
 Under free trade, buyers and sellers from separate economies voluntarily
trade with minimum of state interference. The free interplay of market forces
of supply and demand decides prices.
 Protectionism, on the other hand, is a state policy aimed to protect domestic
producers against foreign competition through the use of tariffs, quotas and
non-tariff trade policy instruments.
 Trade liberalization refers to opening up of domestic markets to goods and
services from the rest of the world by bringing down trade barriers
 TARIFFS
 Also known as custom duties
 Imposed on exported and imported goods.
 Tariffs are identified as import duties being more pervasive than export duties
 Its main goal is to raise revenue for the govt. and to protect the domestic
import competing industries.
 FORMS
 Specific Tariff
 Fixed amt. of tax according to the weight or measurement of
the commodity imported or exported and can vary acc. To the
type of good imported
 Ad Valorem Tariff
Tax as according to fixed % on the value of the
product.
 Mixed Tariff
expressed either on the basis of the value of the
imported goods or on the basis of a unit of measure
depending on which generates more income.
 Compound Tariff
Tariff is calculated on the basis of both the values of
the imported goods (ad valorem and specific) tsq
+tapq, where ts – ad valorem, ta – specific,
p – price, q – quantity.
 Technical Tariff
Calculated on the basis of specific contents of
imported goods e.g. Batteries of solar panels.
 Tariff rate quotas
(TRQs) combine quotas and tariffs quota is the limit
to qty. of an item.
 Most Favoured Nation Tariff
MFN tariff is importing tariffs which countries
promise to impose on imports from other members
of the WTO, unless the country is part of
preferential trade agreement.
it is the highest tariff.
 Variable Tariff
a duty fixed to bring the price of an imported
commodity up to the level of domestic support
price of the commodity.
 Preferential Tariff
Under preferential trade agreement, under which
they promise to give another country’s products
lower tariffs than their MFN rate.
 Bound Tariff
Under this, a WTO member binds itself with a legal
commitment not to raise tariff rate above a certain
level.
Once bound a tariff rate becomes permanent and a
member can only increase its level after negotiating
with its trading partners.
It ensures transparency and predictability.
 Applied Tariff
An 'applied tariff' is the duty that is actually
charged on imports on a Most-Favoured Nation
(MFN) basis. A WTO member can have an applied
tariff for a product that differs from the bound tariff
for that product as long as the applied level is not
higher than the bound level.
 Escalated Tariff
Where nominal tariffs of manufactured goods are
higher than the nominal tariff rates on intermediate
raw materials.
 Done to protect are domestic industries.
 Prohibitive Tariff
so high tariff that no imports can enter.
 Import Subsidies
A % or payment per unit for importation of a good
(negative import tariff)
 Tariff as response to trade distortions
Unfair foreign trade practices which are distorting
in nature, make the affected importing countries to
respond quickly by measures in the form of tariff
responses to offset the distortion.
 Anti-dumping duties
It is a protectionist tariff that a domestic govt.
imposes on foreign imports if they are priced below
fair market value.
Dumping occurs when manufacturers sell goods in a
foreign country below the sales prices in their
domestic market or below their full average cost of
the product.
Dumping may also be resorted to as a predatory
pricing practice to establish monopoly position.
 Countervailing Duties
Countervailing duties are tariffs that aim to offset
the artificially low prices charged by exporters who
enjoy export subsidies and tax concessions offered
by the governments in their home country.
 EFFECTS
 Tariff barriers create obstacles for IT.
 Imported goods become expensive
 Tariffs encourage consumption of domestically produced.
 Producers can also charge higher prices for their products because
foreign competition has reduced.
 Price increase induces an increase in the output of the existing
firms and addition of new firms in the industry to enjoy higher
profits.
 Triff prevent countries from enjoying gains from trade arising from
comparative advantage.
 Increases govt. revenue of importing countries.
 NON-TARIFF MEASURES (NTMS)
 Invisible measures that interfere with free trade.
 NTMs consist of mandatory requirements, rules, or regulations that are
legally set by the government of the exporting, importing, or transit
country.
 Non-tariff barriers are discriminatory non-tariff measures imposed by
governments to favour domestic over foreign suppliers. Compared to
NTBs, non-tariff measures encompass a broader set of measures.
 Depending on their scope and/or design NTMs are categorized as:

 TECHNOLOGICAL MEASURES: Technical measures refer to product-

specific properties such as characteristics of the product, technical
specifications and production processes. These measures are intended for
ensuring product quality, food safety, environmental protection, national
security and protection of animal and plant health.

 Sanitary &b Phytosanitary Measures (SPS)

 To protect human, animal or plant life from risks arising from
pests, contaminants, toxins or disease-causing organisms.
 Include ban or prohibition of import of certain goods
 Technical Barriers to trade (TBT)
 Covers both food & non-food traded products, refer to
mandatory ‘Standard and Technical Regulations’ that
define specific characters a product should have.
 The specific procedure of checking is also covered in TBT,
which involves compulsory quality, quantity and price
control of goods.
 Used to protect consumers and preserve natural resources.
 Eg. Food laws, industrial standards, organic certification etc
 NON-TECHNOLOGICAL MEASURES: Non-technical measures relate to
trade requirements; for example; shipping requirements, custom
formalities, trade rules, taxation policies, etc. These are further
distinguished as:
(a) Hard measures (e.g. Price and quantity control measures),
(b) Threat measures (e.g. Anti-dumping and safeguards) and
(c) Other measures such as trade-related finance and investment
measures.

Furthermore, the categorization also distinguishes between:

(i) Import-related measures which relate to measures imposed by
the importing country.
 Import quotas
Direct restriction on amount of imported goods
Enforced by issuing licenses
Referred to as binding quota as set below the free
trade level of imports.
Divided into two:
→ ABSOLUTE QUOTA:
→ TARIFF-RATE QUOTA
  Price control measures
To control or influence the prices of imported
goods.
 Non-automatic licensing and prohibitions
Limit the qty. of goods that can be imported,
regardless of whether they originate from different
sources or from one particular supplierk
 Financial measures

 Measures affecting competition

 Government procurement policies

 Trade related investment measures

 Distribution restrictions

 Restriction on post-sales services

 Administrative procedures

 Rules of origin

 Safeguard measures

 Embargos

(ii) Export-related measures which relate to measures imposed by

the exporting country itself.
 Export taxes
 Export subsidies and incentives
 Voluntary export restraints
(iii) In addition, to these, there are procedural obstacles (PO) which are
practical problems in administration, transportation, delays in testing,
certification etc which may make it difficult for businesses to adhere to a
given regulation.