TARIFF AND NON TARIFF BARRIERSPrepared by: Ashish Juneja

For SIMT KashipurSaturday, April 8, 2023

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PROTECTIONISM

Main feature of international trading environment is

Proliferation of trade barriers

world tariff average in manufacturing countries has gone down to level of 40 percent in 1947, 3 percent in industrial countries

Developed countries have been replaced by growing

protectionism

Reasons attributed to protectionism-currency crisis,

recession and high unemployment and trade deficit

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ARGUMENTS IN FAVOR OF PROTECTION

Protection of infant industry

Diversification of economic activities

Improving terms of trade

Improving balance of payments

Anti-dumping measure

Bargaining

Employment protection

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ARGUMENTS IN FAVOR OF PROTECTION (CONTD.)

Employment protection

National defense

Key industry

Strategic trade policy

Keeping money at home

The pauper labor

Size of home market

Equalization of cost of production

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DEMERITS OF PROTECTION

Against interest of consumers Protection makes producers less quality

conscious Encourage domestic monopoly Secure under protection and discourage

motivation Corruption Reduces volume of trade Uneconomic utilization of resources

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METHODS OF PROTECTION

Tariff Barriers

Non-Tariff Barriers

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TARIFF BARRIERS

Tariff in international trade refers to the taxes

or duties imposed on goods when they cross

international borders.

Tariff rates are generally high in developing

countries.

With liberalization tariff rates have reduced

and NTBs are part of trade liberalization.

Economists and organizations like WTO prefer

tariff to Non Tariff Barriers

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Impact of a Tariff on Steel

Price of Steel (US $ per kg)

Quantity of Steel Bought and Sold from Abroad

S

D

20

S + Tariff

Amount of the tariff per unit

500

28

350

NON-TARIFF BARRIERS

Any methods not covered by a tariff, most usually:RulesRegulationsVoluntary Export Restraints (VERs)LegislationExacting Standards or Specifications

NON-TARIFF BARRIERS Examples include setting exacting standards

on fuel emissions from cars, the documentation required to be able to sell drugs in different countries, the ingredients in products – some of which may be banned in the destination country

NTBs are difficult to prove – when do you accuse a country of protectionism – could be a legal or cultural issue?

The main method involved in NTBs is not to prevent trade but to make the cost of doing so prohibitive to the potential exporter

REASONS

Protect domestic industries Protect domestic employment Strategic reasons Political pressures Protect culture? Prevent ‘Dumping’ – selling goods

in the destination country below cost to break into that market

Impact of a Quota on Steel

Price of Steel (US $ per Kg)

Quantity of Steel Bought and Sold from Abroad

S

D

20

500

Pre-trade position before a quota.

Quota level

250

30The quota restricts the supply to a set amount (250 in the example) which is likely to result in a shortage of this good and a subsequent rise in its price.

NON TARIFF BARRIERS AND NEW PROTECTIONISM

Introduction

•Since the birth of GATT, in 1947, tariffs have been negotiated downwards•New measures of protection such as import quotas, voluntary export restraints and anti-dumping actions have come in.

IMPORT QUOTAS

Quota- quantitative restriction on the amount of a commodity to be imported/exported.

Effects of a Quota.-used usually to protect, domestic industry or for BOP reasons

PARTIAL EQUILIBRIUM EFFECTS -QUOTA

QUOTA

Before Quota

-Nation consumes 70X(AB), 10X(AC) produced domestically and 60X imported(CB) is imported

Quota-Imposition of an import quota of 30X(JH)

raises, the price to $2 so that Demand can match 20X domestically produced plus30X(JH), allowed by the imposition of a quota

-Consumption is reduced by 20X and domestic pdn is increased by 10X.

TARIFF & QOUTA

With a given import quota, increase in dd will result in higher domestic prices than an equivalent tariff

Also with a given import tariff an increase in dd will not change domestic price and pdn, but results in higher consumption and imports than quota

Involves distribution of import licenses, which may result in rent seeking and monopoly profits

Quota-limits imports to specific levels, while trade effect of a tariff is uncertain.

OTHER NON-TARIFF BARRIERS

1.Voluntary export restraint (VER)- Negotiated settlement, e.g in clothing, steel

2.Technical, Administrative and other Regulations Safety regulations-automobile and electrical Health regulations-food Labeling regulations-showing origin and contents Procurement policies Border taxes-rebates of internal taxes given to

exporters of a commodity International commodity agreements and

multiple exchange rates.

INTERNATIONAL CARTEL

International agreement in the restriction of output and exports among countries. E.g OPEC.

DUMPING

It is the sale of a commodity at below cost or at least the sale of a commodity at a lower price abroad than domestically

Examples Persistent Dumping-continuous tendency of

monopolist selling a product more expensive in a domestic market than international(face competition)

Predatory-selling cheaply abroad to drive out local producers and raise prices after death of local industry.

Sporadic-once off to off load unexpected production

EXPORT SUBSIDIES Direct payments to nation exporters/ low

interest loans to boost nation exports. Form of dumping

IF A SUBSIDY IS IMPOSED, DOMESTIC CONSUMERS SUFFER AS DOMESTIC PRICES RISE FROM 3.5 TO 4 AFTER IMPOSITION OF A EXPORT SUBSIDY

GATT

General Agreement on Tariffs and Trade

Created to promote free trade Principles included, non

discrimination,elimination of non tariff trade barriers,consultation among nations to resolve trade disputes,

Many other meetings followed including Tokyo Round,Uruguay Round , Marrakech Agreement

URUGUAY ROUND-1993

Focused on Tariffs 1-Qouta 2-Anti-dumping Subsidies Safeguards Intellectual property Services Other Industry Provisions Trade related investment measures WTO.

TRADE LIBERALISATION

TRADE LIBERALISATION Aims to free up world trade

and break down the barriers to international trade

Basic philosophy rests on the principle of comparative advantage

Talks to achieve trade liberalisation have been ongoing for many years

TRADE LIBERALISATION GATT – General Agreement on Tariffs

and Trade First signed in 1947 –

talks on-going since then! Uruguay Round 1994 – set up the World

Trade Organisation (WTO) as well as agreements covering a range of trade liberalisation measures

WTO provides the forum through which trade issues can be negotiated and works to help implement and police trade agreements

TRADE LIBERALISATION Potential benefits:

Promotes international specialisation and increases world output

Promotes efficient use and allocation of world resources

Allows developing countries access to the heavily protected markets of the developed world thus helping promote development

Facilitates the working of the international market system and the working of price signals to ensure efficient allocation of resources, international competition and the associated benefits to all

TRADE LIBERALISATION

World agreements are very difficult to achieve

Witness the issues over the removal or reduction of agricultural subsidies, tariffs on steel in the United States, the banana wars, etc!