Trade barriers

Trade
Barriers
(Classroom Deliberations)
CA. Dr. Prithvi Ranjan Parhi
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703- INTERNATIONAL TRADE AND BUSINESS
MODULE- I
International Trade: Concept, Importance, Benefits of International Trade, international
Marking vs. Domestic Marking (differences).
Theory of International Trade: theory of comparative Cost, factor proportion Theory.
MODULE-II
Multinational corporations (MNCs): Definition, Role of MNCs in International marking.
International Trade barriers: Meaning, tariff and non-Tariff Barriers, Impact of Non-tariff
barriers.
MODULE-III
Organizational and Agreements: WTO (Functions, Principle, agreements), IMF
(Purposes, Facilities Provided by IMF), World Bank (Purpose, Principle, Policies).
MODULE-IV
Foreign Trade of India: Organizational Setup (Autonomous Bodies, Attached and
subordinate offices), Major Export and Imports, Concept of Export House, EXIM Policy
(2002-2007) of India (Features and Objectives of the Policy).
MODULE-V
Foreign Exchange market: Concept, Functions, Methods of international Payment,
concept of Balance of Payment, Concept of Fixed and Flexible Exchange Rate and
Convertibility of Rupee.
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© CA. Dr Prithvi R Parhi

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Trade Barriers
• The major barriers to international trade are
natural barriers, such as
1. distance and
2. language;
3. tariff barriers, or taxes on imported goods; and
4. nontariff barriers.
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Trade Barriers
• Trade barriers are government-induced restrictions on international
trade.
• Economists generally agree that trade barriers are detrimental and
decrease overall economic efficiency.
• Most trade barriers work on the same principle: the imposition of some
sort of cost (money, time, bureaucracy, quota) on trade that raises the
price or availability of the traded products.
• If two or more nations repeatedly use trade barriers against each other,
then a trade war results. Barriers take the form of tariffs (which impose
a financial burden on imports) and non-tariff barriers to trade (which
uses other overt and covert means to restrict imports and occasionally
exports).
• In theory, free trade involves the removal of all such barriers, except
perhaps those considered necessary for health or national security. In
practice, however, even those countries promoting free trade heavily
subsidize certain industries, such as agriculture and steel.
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Tariff
• In simplest terms, a tariff is a tax.
• It adds to the cost of imported goods and is one of
several trade policies that a country can enact.
• It’s a trade barrier. E.g. Customs duty
Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries
and developing economies, but are also used by
more advanced economies with developed
industries.
• Here are five of the top reasons tariffs are used:
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Tariff
1. Protecting Domestic Employment
The possibility of increased competition from imported
goods can threaten domestic industries.
These domestic companies may fire workers or shift
production abroad to cut costs, which means higher
unemployment and a less happy electorate.
The unemployment argument often shifts to domestic
industries complaining about cheap foreign labor, and how
poor working conditions and lack of regulation allow
foreign companies to produce goods more cheaply.
In economics, however, countries will continue to produce
goods until they no longer have a comparative advantage
(not to be confused with an absolute advantage).
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2. Protecting Consumers
A government may levy a tariff on products that it feels could endanger its
population. For example, South Korea may place a tariff on imported beef
from the United States if it thinks that the goods could be tainted with
disease.
3. Infant Industries
The use of tariffs to protect infant industries can be seen by the Import
Substitution Industrialization (ISI) strategy employed by many developing
nations. The government of a developing economy will levy tariffs on
imported goods in industries in which it wants to foster growth. This increases
the prices of imported goods and creates a domestic market for domestically
produced goods, while protecting those industries from being forced out by
more competitive pricing. It decreases unemployment and allows developing
countries to shift from agricultural products to finished goods.
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4. National Security
Barriers are also employed by developed countries to protect certain industries
that are deemed strategically important, such as those supporting national
security. Defense industries are often viewed as vital to state interests, and
often enjoy significant levels of protection. For example, while both Western
Europe and the United States are industrialized, both are very protective of
defense-oriented companies.
5. Retaliation
Countries may also set tariffs as a retaliation technique if they think that a
trading partner has not played by the rules. For example, if France believes
that the United States has allowed its wine producers to call its domestically
produced sparkling wines "Champagne" (a name specific to the Champagne
region of France) for too long, it may levy a tariff on imported meat from the
United States. If the U.S. agrees to crack down on the improper labeling,
France is likely to stop its retaliation.
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Other Reasons
• Revenue Generation
• Monitoring exchange rates
• Protecting culture
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Types of Tariffs and Trade Barriers
• Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as a
specific tariff. This tariff can vary according to the type of good
imported. For example, a country could levy a $15 tariff on each pair
of shoes imported, but levy a $300 tariff on each computer imported.
• Ad Valorem Tariffs
The phrase ad valorem is Latin for "according to value", and this type
of tariff is levied on a good based on a percentage of that good's
value. An example of an ad valorem tariff would be a 15% tariff levied
by Japan on U.S. automobiles. The 15% is a price increase on the
value of the automobile, so a $10,000 vehicle now costs $11,500 to
Japanese consumers. This price increase protects domestic producers
from being undercut, but also keeps prices artificially high for
Japanese car shoppers.
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Non-tariff barriers
• Licenses
A license is granted to a business by the government, and allows the business
to import a certain type of good into the country. For example, there could be
a restriction on imported cheese, and licenses would be granted to certain
companies allowing them to act as importers. This creates a restriction on
competition, and increases prices faced by consumers.
• Import Quotas
An import quota is a restriction placed on the amount of a particular good that
can be imported.
This sort of barrier is often associated with the issuance of licenses. For
example, a country may place a quota on the volume of imported citrus fruit
that is
allowed.
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• Voluntary Export Restraints (VER)
This type of trade barrier is "voluntary" in that it is created by the exporting country
rather than the importing one. A voluntary export restraint is usually levied at the
behest of the importing country, and could be accompanied by a reciprocal VER. For
example, Brazil could place a VER on the exportation of sugar to Canada, based on a
request by Canada. Canada could then place a VER on the exportation of coal to Brazil.
This increases the price of both coal and sugar, but protects the domestic industries.
• Local Content Requirement
Instead of placing a quota on the number of goods that can be imported, the
government can require that a certain percentage of a good be made domestically. The
restriction can be a percentage of the good itself, or a percentage of the value of the
good. For example, a restriction on the import of computers might say that 25% of the
pieces used to make the computer are made domestically, or can say that 15% of the
value of the good must come from domestically produced
components.
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Who Benefits? Who loses ?
The benefits of tariffs are uneven. Because a tariff is a tax, the government will see
increased revenue as imports enter the domestic market.
• Domestic industries also benefit from a reduction in competition, since import prices are
artificially inflated.
• Unfortunately for consumers - both individual consumers and businesses - higher import
prices mean higher prices for goods. If the price of steel is inflated due to tariffs,
individual consumers pay more for products using steel, and businesses pay more for
steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-
producer and anti-consumer.
The effect of tariffs and trade barriers on businesses, consumers and the government
shifts over time. In the short run, higher prices for goods can reduce consumption by
individual consumers and by businesses. During this time period, businesses will profit
and the government will see an increase in revenue from duties. In the long term,
businesses may see a decline in efficiency due to a lack of competition, and may also see
a reduction in profits due to the emergence of substitutes for their products. For the
government, the long-term effect of subsidies is an increase in the demand for public
services, since increased prices, especially in foodstuffs, leave less disposable income.
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Gainers
• Government
• Small Industries
Losers
• Customers
• Society ~ Efficiency Reduces
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How Do Tariffs Affect Prices?
• Tariffs increase the prices of imported goods.
• Because of this, domestic producers are not
forced to reduce their prices from increased
competition, and domestic consumers are left
paying higher prices as a result.
• Tariffs also reduce efficiencies by allowing
companies that would not exist in a more
competitive market to remain open.
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Effects of world trade without tariff.
• In the graph, DS means
domestic supply and DD
means domestic demand.
• The price of goods at
home is found at price P,
while the world price is
found at P*.
• At a lower price, domestic
consumers will consume
Qw worth of goods, but
because the home country
can only produce up to Qd,
it must import Qw-Qd
worth of goods.

Effects of world trade with tariff
• When a tariff or other price-
increasing policy is put in place, the
effect is to increase prices and limit
the volume of imports.
• In Figure 2, price increases from
the non-tariff P* to P'.
• Because price has increased, more
domestic companies are willing to
produce the good, so Qd moves
right.
• This also shifts Qw left.
• The overall effect is a reduction in
imports, increased domestic
production and higher consumer
prices.

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Tariffs and Modern Trade
The role tariffs play in international trade has declined in modern times. One of the primary reasons
for the decline is the introduction of international organizations designed to improve free trade, such
as the World Trade Organization (WTO).
Such organizations make it more difficult for a country to levy tariffs and taxes on imported goods,
and can reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-tariff
barriers, such as quotas and export restraints.
Organizations like the WTO attempt to reduce production and consumption distortions created by
tariffs. These distortions are the result of domestic producers making goods due to inflated prices,
and consumers purchasing fewer goods because prices have increased.
Since the 1930s, many developed countries have reduced tariffs and trade barriers, which has
improved global integration and brought about globalization. Multilateral agreements between
governments increase the likelihood of tariff reduction, while enforcement on binding agreements
reduces uncertainty.
The Bottom Line
Free trade benefits consumers through increased choice and reduced prices, but because the global
economy brings with it uncertainty, many governments impose tariffs and other trade barriers to
protect industry. There is a delicate balance between the pursuit of efficiencies and the government's
need to ensure low unemployment.
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Trade Blocs
• An economic bloc consists of two or more countries joined together into a
closer economic union than each has with the rest of the world.
Types:
Free trade area
• NAFTA ( North American Free Trade Agreement) is an example of a free trade
area. In a free trade area member countries trade freely among themselves
but have different policies towards non-members.
Customs union
• Members of a customs union adopt common tariff policies towards non-
members.
Common market
• Members allow full freedom of labor and capital migration among themselves
in addition to having a customs union.
Economic union
• Members unify all their economic policies as well as policies toward trade and
factor migration.
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Are preferential trade agreements beneficial?
• Since they represent a move towards free
trade, preferential trade agreements create
trade (which is good).
• However, since preferential trade agreements
discriminate against non-members, they may
divert trade away from the low cost supplier
(which is bad).
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NAFTA
• NAFTA provides for the elimination of tariff and most non-tariff barriers to trade and
investment on trade between the U.S., Canada, and Mexico. Opponents point to the fact
that average hourly compensation in Mexican manufacturing is only 14% of the U.S.
figure and argue that low Mexican wages and poor enforcement of Mexican labor
standards will deprive U.S. workers of jobs and drive down U.S. wages.
• But, high U.S. labor productivity pays for high U.S. wages. And, opponents ignore the
jobs created by increased trade with Mexico. NAFTA should stimulate Mexican income
growth, so there will be more U.S. exports to Mexico. Exports to Mexico support
122,000 more jobs today than in 1993. Only a couple of thousand Americans have been
certified as having lost their jobs due to NAFTA.
• NAFTA opponents also argue that Mexico has lower environmental standards and that
this causes U.S. factories to move to Mexico. Also, NAFTA gives Mexico the right to
challenge the strict U.S. environmental regulations.
• In reality, Mexican standards are similar to those of the U.S. and rising Mexican incomes
will lead to demand for more environmental protection. And, any challenge to U.S.
environmental standards must be based on the absence of scientific evidence justifying
a trade barrier. In the end, NAFTA will probably cause Mexico to produce less chemicals,
rubber, and plastics (all dirty items) and more agricultural and labor-intensive products
(both relatively cleaner).
• U.S. exports to Mexico grew by 36.5 percent (or $15.2 billion) from 1993 to a record high
in 1996, despite a 3.3 percent contraction in Mexican domestic demand over the same
period.
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Trade Embargoes
• A trade embargo is a complete ban on trade.
• The majority of embargoes fail to alter the
policies of the target nations.
• Consider a total embargo on exports to Iraq.
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Thanx.
CA. Prithvi R Parhi
7008246670,8763434746
prithvi.baps@gmail.com
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Trade barriers

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