NON TARIFF BARRIERS

Submitted By Chethana.B2nd M.A. in EconomicsManasagangotriMysore. Submitted To

Dr.M.IndiraProfessor of economicsManasagangotriMysore.

NON-TARIFF BARRIERSMeaning:

NTBs are obstacles to imports other than tariffs.They are administrative measures that are imposed by a domestic govt to discriminate against foreign goods and in favour of home goods. with the reduction of tariff barriers under GATT, there has been a growing emergence of NTBs adversely affecting free trade notion and norms.

TYPE OF NTBsThe following are the major NTBs being practised;

Import QuotasVoluntary export restraints(VERs)Export subsidyCountervailing dutyGovt procurementCustoms valuation and classificationImport licensing proceduresLocal content regulationsTechnical barriers

IMPORT QUOTAS• Like tariffs,import quotas are another

protectionist device and an old form of trade restriction that came into existence since the mercantilist era.

• An import quota implies a fixed quantity or value of a commodity that has been allowed to be imported in the country during a given period of time.

• In practice,quotas may be fixed either in terms of the physical volume or monetary value of imports or a combination of the two.

• Quotas assigned in quantitative terms are referred to as direct quotas and those expressed in value units implying exchange control,are called indirect quotas.

OBJECTIVES OF IMPORT QUOTAS1. To regulate imports in an effective manner.2. To check imports in order to correct an

adverse balance of payments.3. To protect domestic industries from severe

foreign competition .4. To maintain and stabilize domestic price level

by restricting import inflows.

5. To control speculation in imports. 6.To discourage the import of luxury goods.

7.To strengthen a country’s bargaining power by limiting import demands.

8.To save the country’s foreign exchange for importing essential raw materials, capital goods and other important items.

TYPES OF IMPORT QUOTAS 1.Tariff quota: under this system, a given quantity of a

good is permitted to enter duty free or upon payment of relatively low duty. But imports in excess of that quantity are charged a relatively high rate of duty.

2.UNILATERAL QUOTA: It is imposed without prior negotiation with foreign governments.

3.BILATERAL QUOTA: In this system, quotas are set through negotiation between the importing country and the exporting country.

4.MIXING QUOTA: It is a type of regulation which requires producers to utilize a certain proportion of domestic raw materials along with imported parts to produce finished goods domestically.

5.IMPORT LICENSING: Under this, prospective importers are required to obtain a licence from the proper authorities for importing any quantity within the specified quotas.

S+Qs

QUANTITY

PRICEA B

M N

a b

P1

P

D

O Q Q1 Q2 Q3 X

Y

EFFECT OF IMPORT QUOTAS

1.Price effect:• In the above figure D and S are the domestic

demand and supply curves. PB is the foreign supply curve under free trade which intersects the domestic demand curve D at point B and OP price is determined. Thus the total domestic demand for the commodity is OQ3. But the domestic supply is OQ. So QQ3 quantity of the commodity is being imported under free trade at OP price. Suppose the govt fixes an imports quota equal to the amount of Q1Q2. Now the total supply curve of the commodity S+Q which consists of the domestic supply plus the quota amount. It intersects the domestic demand curve at N so that the quota raises the domestic price from OP to OP1. Thus PP1 is the price effect of the quota.

2.Protective effect:• In the above figure when Q1Q2 amount of

import quota is fixed, the domestic production of the commodity increases from OQ to OQ1. Thus QQ1 is the protective effect of the import quota.

3.Consumption effect: In the figure where under free trade the

domestic consumption of the commodity is OQ3. With the fixation of the quota of Q1Q2 amount ,the total domestic consumption falls to OQ2.

4.Revenue effect• The determination of the revenue effect of an

import quota is quite complicated and difficult to determine. If the govt auctions the import licences at the price PP1 Q1Q2 quantity allowed of the commodity,the revenue effect of the import quota will be equal to the area aMNb in the above figure.

5.Redistributive effect:• When the Q1Q2 amount of quota will be imposed,then

the prices will be rises.So the domestic producers earn higher profits than earlier.It is shown in the above figure area of PP1MA.

6.Balance of payments effect: The balance of payment effect of an import quota is

favorable to the quota imposing country. In the above figure where under free trade QQ3 commodity is imported at OP price. The total value of imports is represented by the rectangle AQQ3B. This represents a balance of payments deficit because the amount paid by the importers. To correct this BOP deficit, an import quota of Q1Q2 is fixed so that the imports are reduced to this quantity.

VOLUNTARY EXPORT RESTRAINTS(VERs)

• A VER is an agreement by an exporter country’s exporters or govt with an importing country to limit their exports to it. It is entered into by the importing country when its domestic industry is suffering from large imports.

VERs have been adopted by countries because the use of quotas and tariffs has been forbidden by the GATT. But the VERs do not come under the GATT rules.

quantity

price

Sd

Sv

Pv

Pw

Q Q1 Q2 Q3O

Z Ra b

Dd

X

Y

• The above figure shows effects of VERs, where Dd is the domestic demand curve and Sd is the domestic supply curve. At price OPw OQ is supplied by domestic producers and OQ3 is imported. Now if instead of an import quota of Q1Q2,a VER of the same quantity is adopted by an exporting country, its effect will be equivalent to that of an import quota. The only difference between VER and import quota is the rent which goes to the suppliers of the exporting country. With VER, the domestic demand curve Dd remains the same, but the supply curve Sd shifts to Sv, so that equillibrium occurs at a higher price OPv. At the price OPv the quantity OQ1 is domestically supplied which is greater than earlier and QQ1 is VER on its imports.

EXPORT SUBSIDY• An export subsidy is a govt grant to an export firm

to reduce the price per unit of goods exported abroad. It enables the firm to sell a larger quantity of its goods at a lower price in the export market than in the home market.

• Export subsidy may be direct and indirect. But direct export subsidies are prohibited under the GATT agreement. Therefore, govt resort to indirect export subsidies in various forms such as subsidised credit, refunds an tariffs on their inputs, priority in the allocation of scarce raw materials, market research, tax concessions, etc……..

H G K L

S

D

Quantity

price E

Ps

Pw

O Q1 Q2Q3 Q4

• In the above figure D and S are the domestic demand and supply curves,for some exportable goods. with the world price Opw which is the above the domestic price(E),the domestic demand is OQ1 and domestic supply is OQ2.Supply being greater than demand,the country exports Q1Q2 quantity.To encourge the expansion of exports,the govt gives Pw-Ps subsidy for each unit exported.This rises the domestic price to OPs. At this price,the demand for the goods falls to OQ3,but its supply increases to OQ4. Finally we can say that, if the country subsidising its products, then its net welfare loss is greater.

COUNTERVAILING DUTY• A countervailing duty is an import duty or

tariff imposed by an importing country to raise the price of a subsidised export product to offset its lower price.

This analysis assumes that,1. The export good is subsidised.2. The supply of the good is perfectly elastic. 3. The importing countries imposes the duty on

this good equal to the export subsidy.

Q Q1

Pw

Ps

Quantity

Price

O

FE

GH

C

E1

S

S1

• In the above figure Dm and PwS curves are import demand and supply curves. Before the subsidy, OQ quantity of the good is being exported and imported at OPw price. When the subsidy given to the good, the supply curve PWs shifts down to PsS1 by the full amount of the subsidy .Assuming that there is no change in demand for imports with the fall in price to OPs, the new equilibrium is established at point E1 and imports increase from OQ to OQ1. Even though the subsidy benefits(F+G) the foreign consumers of the good, the importing country suffers a loss in production of this good due to its lower price equal to the area H.TO offset this,it imposes a countervailing duty equal to the export subsidy. As a result, the price of the product increases.

GOVT PROCUREMENT

• Govts discriminates between domestic and foreign suppliers. The discrimination may be in various ways. In certain countries, there is legislation to buy domestic goods and services even if they are available from abroad at low rates.

CUSTOMS VALUATION AND CLASSIFICATION

• Various commodities are described in the customs list and separate tariffs rate are prescribed for each category. The customs officials often charge high tariff rates by their own categorisation of goods with high rates. Such procedures restrict imports because they make them dearer and non-competitive in the local market. They are meant to create uncertainty among importers.

IMPORT LICENCING PROCEDURES

• Many countries adopt complicated and expensive import licencing procedures to restrict imports.

• Such procedures restrict imports. For example licence ……etc..

LOCAL CONTENT REGULATIONS

In many developing countries,import of manufactured products like cars, TVs, computers, …etc..are restricted If they do not meet local content regulations.

TECHNICAL BARRIERS Technical barriers are of various types which restrict imports. They include health and safety regulations, sanitary regulations, labelling and packaging regulations….etc..

CONCLUSION

• In this way NTBs work as a barriers to international trade. After the forbidden of tariffs by GATT, NTBs are the major obstacles to international trade. Through this many countries restricting and regulating imports in order to protect domestic industries from foreign competition.