Instruments of

International Trade Policy

 Trade Protectionism
• Trade protectionism is a policy that protects
domestic industries from unfair competition from
foreign ones.
• The four primary tools are tariffs, subsidies, quotas,
and currency manipulation.
•  Protectionism is a politically motivated defensive
measure
 Tariff and Non-Tariff Barrier
• Tariff Barrier  : A tariff designed to make imports
more expensive than domestically produced
products. That is, a tariff barrier is a tax imposed
upon imports to protect local industries and
companies
• Non-Tariff Barriers (NTBs) refer to restrictions that
result from prohibitions, conditions, or specific
market requirements that make importation or
exportation of products difficult and/or costly.
 Tariff
• A tariff is a tax on an imported product that is designed to
limit trade in addition to generating tax revenue. It is a barrier
to trade.
– Specific tariffs are levied as a fixed charge for each unit of a
good imported
– Ad valorem tariffs are levied as a proportion of the value of
the imported good
– It increase government revenues
– It provide protection to domestic producers against foreign
competitors by increasing the cost of imported foreign
goods
– It force consumers to pay more for certain imports
• Tariffs are pro-producer and anti-consumer, and tariffs reduce
the overall efficiency of the world economy
 Tariff
• Preferential duties
– products form certain countries are subject to lower
tariffs than the normal tariff rate
– Generalized System of Preferences (GSP) for
developing countries
• Most-favoured-nation (MFN) treatment = normal
trade relations (NTR)
– “if country X grants country Y the status of most-
favoured nation, it means that Y’s exports will face
tariff that are no higher (nor lower) than those
applied to any other country that X calls a MFN”
 Subsidies
• A subsidy is a government payment to a domestic producer

• Subsidies help domestic producers

– compete against low-cost foreign imports
– gain export markets

• Consumers typically absorb the costs of subsidies

 Local Content Requirements
• A local content requirement demands that some specific
fraction of a good be produced domestically
– The requirement can be in physical terms or in value terms

• Local content requirements benefit domestic producers and

jobs, but consumers face higher prices
 Administrative Policies
• Administrative trade polices are bureaucratic rules that are
designed to make it difficult for imports to enter a country

• These polices hurt consumers by denying access to possibly

superior foreign products
 Administrative Policies
• Dumping is selling goods in a foreign market below their cost
of production, or selling goods in a foreign market at below
their “fair” market value
– It can be a way for firms to unload excess production in
foreign markets
– Some dumping may be predatory behavior to drive
indigenous competitors out of that market, and later
raising prices and earning substantial profits
 Administrative Policies
• Antidumping polices are designed to punish foreign firms that
engage in dumping

• The goal is to protect domestic producers from “unfair”

foreign competition

• Firms that believe a foreign firm is dumping can file a

complaint with the government

• If the complaint has merit, antidumping duties, also known as

countervailing duties may be imposed
 Trade Policy of India
Prior to our Independence when India was under
British rule, much of our trade was done with Britain.
Therefore, UK used to hold the first position in India’s
foreign trade. However, after Independence, new
trade relationships were established. Now USA has
emerged as the most important trading partner
followed by Germany, Japan and UK. India is also
making efforts to increase the exports to other
countries also the direction of India’s exports and
imports.
Pre 1991 Trade Policy
 Trade Policy of India
• Foreign trade in India includes all imports and exports to
and from India. At the level of Central Government it is
administered by the Ministry of Commerce and Industry.
• The main objectives of the Foreign Trade Development
and Regulation Act are to provide the facilitating of
imports and augmenting of exports from India. 
• The foreign Trade of India is guided by the Export-Import
(EXIM) policy of the Government of India and is regulated
by the Foreign Trade (Development and Regulation)
Act,1992.
 Trade Policy of India
• The Foreign Trade Policy contains various decisions taken by
the government in the sphere of Foreign Trade with respect to
imports and exports from the country and more especially
export promotion measures, policies and procedures related
there to.
• It is the set of guidelines and instructions established by
Directorate General of Foreign Trade (DGFT ) in all the
matters related to the import and export of goods in India.
• The Foreign trade Policy for the period 2015-2020 as
announced on April 1,2015 . The Union Commerce Ministry,
Government of India announces the integrated Foreign Trade
Policy FTP in every five year and this policy is updated every
year on 31st March .
Objectives - Foreign trade Policy 2015-2020
• FTP 2015-20 provides a framework for increasing exports of goods and
services as well as generation of employment and increasing value addition
in the country, in line with the ‘Make in India’ programme.
• The Policy aims to enable India to respond to the challenges of the external
environment, keeping in step with a rapidly evolving international trading
architecture and make trade a major contributor to the country’s economic
growth and development.
• Simplification of the application procedure for availing various benefits.
• To encourage exports through a mix of measures including fiscal incentives,
institutional changes, procedural rationalization and efforts for enhance
market access across the world and diversification of export markets.
• To set in motion the strategies and policy measures which catalyze the
growth of exports.
• To arrest and reverse declining trend of exports is the main aim of the policy.
This aim will be reviewed after two and half years.
 Highlights - Foreign trade Policy 2015-2020
• Increase exports to $900 billion by 2019-20, from $466 billion in 2013-14.
• FTP to be aligned to Make in India, Digital India and Skills India initiatives.
• Raise India's share in world exports from 2% to 3.5%.
• Online procedure to upload digitally signed document by Chartered
Accountant/Company Secretary/Cost Accountant to be developed.
• Merchandise Export from India Scheme (MEIS) and Service Exports from
India Scheme (SEIS) launched.
• Higher level of support for export of defence, farm Produce and
ecofriendly products.
• E-Commerce exports of handloom products, books/periodicals, leather
footwear, toys and customised fashion garments through courier or
foreign post office would also be able to get benefit of MEIS (for values up
to INR 25,000).
• Unlike annual reviews, FTP will be reviewed after two-and-Half years.
 Import Quotas & Voluntary export restraints (VER)
• Import Quotas is a direct restriction on the quantity of some
good that may be imported into a country
– a government agency allocates the rights to import
– limits the number of goods (not the price) for a given time
period
• “Voluntary” export restraints (VER) are quotas on trade
imposed by the exporting country, typically at the request of
the importing country’s government
– foreign suppliers agree to “voluntary” refrain from sending
some exports
• Tariff rate quotas are a hybrid of a quota and a tariff where a
lower tariff is applied to imports within the quota than to
those over the quota
• A quota rent is the extra profit that producers make when
supply is artificially limited by an import quota
 Political & Economic arguments for
intervention
Political arguments - protecting the interests of certain groups
within a nation (normally producers),
often at the expense of other groups
(normally consumers)

Economic arguments - boosting the overall wealth of a nation

(to the benefit of all, both producers
and consumers)
 Political arguments for intervention
• Protecting Jobs
• Protecting industries deemed important for national security
• Protecting consumers from dangerous products –limit unsafe
products .
• Protecting the human rights of individuals in exporting
countries
• Retaliating to unfair foreign competition
• Furthering the goals of foreign policy
• Protecting the Environment – Concern over Global warming ,
Enforcement of environmental Regulations
 Economic arguments for intervention
• Infant industry argument - an industry should be protected until
it can develop and be viable and competitive internationally
– This has been accepted as a justification for temporary trade
restrictions under the WTO
• Critics argue that if a country has the potential to develop a
viable competitive position, its firms should be capable of raising
necessary funds without additional support of Government .

• Strategic trade policy - there may be important first mover

advantages, governments can help firms from their countries
attain these advantages
- governments can help firms overcome barriers to entry into
industries where foreign firms have an initial advantage
 GATT
• The General Agreement on Tariffs and Trade
(GATT) is a legal agreement between many
countries, whose overall purpose was to
promote international trade by reducing or
eliminating trade barriers such as tariffs or
quotas.
• It was signed by 23 nations in Geneva on 30
October 1947, and took effect on 1 January
1948. 
 History of GATT
• During Bretton Woods Conference at the end of the
WWII, finance ministers from the Allied nations
gathered to discuss creation of a new monetary system
that would support postwar reconstruction, economic
stability, and peace resulting in the formation IMF ,
IBRD & ITO.
• The IMF, IBRD and ITO, were formed in 1945 but
USA didn’t ratify ITO
• 23 countries met in Geneva in 1947 & signed a
agreement on tariff & international trade.(GATT)
 Fundamental Principles of GATT
• Non Discrimination
• Prohibition of quantitative restrictions
• Concept of Consultation aims to avoid damage
to trading interests of contracting parties
• GATT provides frame work within which the
negotiation can be held for reduction of tariff
another barrier to trade and structure for
embodying results of such negotiations .
 Objectives
• To raise the standard of living.
• To ensure full employment and a large and
steadily growing volume of real income and
effective demand.
• To develop the full use of the resource of the
world
• To expand production and international trade
 Evaluation
• Regular meetings of GATT members are known as “negotiating rounds
• The first 6 rounds concentrated on reducing tariffs while the 7th round of
Tokyo moved on to tackle non tariff barriers.
• The 8th round helped in establishing the WTO a global organization to
regulate trade between nations.
• Tariffs on manufactured products fell from a trade-weighted average of
roughly 35% before the creation of GATT in 1947, to about 6.4% at the
start of the Uruguay round in 1986.
• The volume of trade among GATT members surged: In 2000 the volume of
trade among WTO members stood at 25 times its 1950 volume.
• Strength increased from 23 to 125 countries.
GATT Negotiating Rounds
 Tokyo Round
• A first attempt for reforming the system,
• Progressive reduction of tariffs, average tariff on
industrial products became 4.7%,
• Discussion of fundamental problems: Agricultural
product trade, Safeguards (emergency import
measures),
• A series of agreements and arrangements on non-tariff
trade barriers - Small number of GATT members
subscribed to them,
• Several Codes on Plurilateral Commitments (Eg.
Government Procurement, Civil Aircraft, Dairy
Products).
 URUGUAY ROUND
• Launched in 1986 to address the problems of GATT
• Major reforms introduced-
• WTO established
• A new dispute resolution mechanism built up,
• GATT’s authority expanded to new areas, agreements
regarding trade in textiles, agriculture, services, and
intellectual property,
• New set of rules regarding administered protection
came into effect.
 Formation of WTO
• The world trade organization was established on
1st January 1995.
• It is the embodiment of the Uruguay round
results & the successor to GATT.
• India is one of the founder members.
• The head of WTO is located in Geneva of
Switzerland.
• The WTO has 164 members and 23 observer
governments. 
• The World Trade Organization (WTO) is the
only global international organization dealing
with the rules of trade between nations. At its
heart are the WTO agreements, negotiated
and signed by the bulk of the world's trading
nations and ratified in their parliaments.
Difference between GATT and WTO
 Functions
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• It acts as a watch dog of international trade
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations
• Providing technical assistance and training for developing
countries.
Structure of WTO
 Administration of Agreements
• GATT
• GATS (General Agreement on Trade in Services)
• TRIP’S (Trade Related Aspects of Intellectual
Property Rights )
• TRIM’S (Trade Related Investment Measures )
• Disputes settlement mechanism
• Antidumping measures
• Agreement on agriculture
 GATS( General Agreement on Trade in
Services)
4 modes of international delivery of services:
• Cross border flow (Trans border data flows,
transportation services)
• Commercial presence
• Consumption abroad
• Movement of personnel (Entry & temporary
stay of foreign consultants)
TRIP’S (Trade Related Aspects of Intellectual Property Rights )

• IPR are the rights given to persons over the

creation of their minds for certain time period.
• To encourage & reward creative work .
• To ensure Fair competition.
• Technological innovations .
• Consumer protection.
• Transfer of technology .
 TRIPS covers rights for :

• Copy rights & related rights

• Trademarks
• Geographical indications
• Industrial design
• Layout design
• Patents
• Undisclosed information (trade secrets etc..)
TRIM’S (Trade Related Investment Measures )

No country shall apply TRIMS which is

inconsistent with WTO articles . The following
are inconsistent :-
• Local content requirement
• Trade & foreign exchange
• Trade balancing requirement
• Domestic sales requirement.
 Dispute Settlement
• WTO members have agreed that if they believe
fellow-members are violating trade rules, they will
use the multilateral system of
settling disputes instead of taking action unilaterally.
That means abiding by the agreed procedures, and
respecting judgement
• The first ruling does not extend beyond 1 year.
• The appeal is generally disposed off before 60 days.
 Anti Dumping Measures
• It means selling the product at below the on going
market price or at the price below the cost of
production.
• This law is applicable if the margin of dumping is
more than 2% of the export price or the volume of
dumped products is more than 3% of the product.
• Anti-Dumping action may be suspended or
terminated if the exporter agrees to remove the
dumping or the injurious effect of it.
 Agreement on Agriculture
3 principal commitments
• Market Access - no import restrictions & limitations
• Domestic support - Elimination of govt support to
domestic company’s.
• Export subsidies - phase out support given to exporters
Other important aspects are:-
• Tariffication - means removal of tariff quotas.
• Tariff binding - means fixing the max rate of import duty,
above which a country does not raise the duty
unilaterally.
 Benefits OF WTO
• The system helps promote peace .
• Disputes are handled constructively .
• Free trades cuts the cost of living .
• Provides more choice of products and services.
• Trade raises Income.
• Trade stimulates Economic Growth .
• Government are shielded from lobbying .
• The basic principal makes life more efficient .
• Rules make life easier for all .
• The system encourages good governance .