Lecture Note on International Business Management for MBA Students

CHAPTER TWO

TRADE BARRIERS AND TRADE STRATEGIES

TRADE BARRIERS

Trade barriers are broadly classified into tariff barriers and non-tariff barriers.

1) Tariff Barriers

Tariff refers to the duties imposed on imported goods and these duties are of two types, i.e. revenue
duty and protective duty.

 If the tariff is imposed to raise the revenue of the state, such tariff is called revenue duty.
 On the other hand, if the duty is levied to protect domestic industry, then it is called
protective duty.
1.1. Direct Effect of a Tariff Duty:

When an import duty is levied by a country, the impact can be observed in the following ways:

a) The price of imported goods in the importing country rises and the price of the exported
goods in the exporting country may fall so that
b) The difference in the price of good in question in the importing and exporting country
would be just equal to the duty imposed, unless the import of duty is so high as to arrest
imports altogether. When any trade takes place, the difference in the price of the good in the
two countries cannot be more than or less than the duty. If the difference were greater than
that, further import would be accelerated and if it were less, imports would be reduced. Here
it is to remember that this price difference generally takes place through a rise in the home
price in the importing country and a fall in the foreign price.
c) The production of goods in the importing country increases while the production in the
exporting country decreases.
1.2. Indirect effects of a tariff duty
a) The indirect effect of tariff can be seen in the displacement of the stream of demand. If the
elasticity of demand for the imported good is equal to unity, the same amount as before, will
be spent upon the taxed good but the relative demand for other goods may change. If the
elasticity of demand for the good is less than unity, a large amount of money than before will

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 Lecture Note on International Business Management for MBA Students

be spent upon it and less will be available for other goods. If it is greater than unity, a smaller
amount will be spent upon the good and more than before will be spent upon other goods.
b) Once tariff is levied obviously it fetches revenue to the government. But here how the
government spends that money influences the indirect effects of tariff.
c) When import duties are levied, imports decline and exports also on decline, since there will
be a diversion of factors of production from export industries to protect industries.
2. Non-Tariff Barriers (NTBS)

The non tariff barriers are of two types. The first one relates to the trade barriers which are generally
used by developing countries to prevent out flows of foreign exchange. These are mostly traditional
NTBS and Quotas, licensing, foreign exchange regulations and canalization of imports may be cited
as examples. The second type of NTBS are those which are adopted by developed nations to protect
domestic industries having low international competitiveness and/or which are politically sensitive
for governments of these nations. Voluntary Export Restraint can be cited as an example for this
category.

2.1. The imports NTBS:

Quotas have been used as a means of restricting imports and exports. There are import quotas and
export quota. A quota on the export of a product from a country may be levied, if the government is
under impression that exports in excess of that will affect interests of the domestic consumers.
Sometimes, an export quota is also the result of an international commodity agreement. However,
the aim of import quota is to restrict the quality of imports. This is intended to protect the interests
of domestic producers or conserve foreign exchange resources.

2.1.1. Licensing:

Quota regulations are to be governed by means of licensing. Under the system of import licensing,
the prospective importers are under obligation to procure a license from the appropriate authorities.
This license helps them to obtain the required foreign exchange to pay for imports. Thus import
licensing is a very powerful instrument to control the quality of import. Likewise, exports of certain
products are also regulated by licensing.

2.1.2. Voluntary Export Restraint (VER):

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 Lecture Note on International Business Management for MBA Students

These are bilateral arrangements to restrain the speed growth of exports of specific manufactured
goods. Under this, exporting country voluntarily restricts the export of the identified product so as
to help the other country to minimize its trade deficit or to protect domestic industry. Here, you
should remember that VER is adopted under the pressure from importing country.

2.1.3. Administered Protection

Administered protection includes a wide range of bureaucratic government actions which have
grown in absolute and relative importance in the last three decades. Some of the important
administrative protection measures are listed below:

 Safeguards
 Health standards
 Customs procedures
 Consular formalities
 Government procurement
 State trading
 Monetary controls
 Environmental protection laws
 Foreign exchange regulations
2.2. Impact of NTBS:

The NBTS are less transparent, difficult to identify and their impact on exporting countries is almost
impossible to quantify. Over the years, they have become more extensive and intensive. The pity is
that today, they are not confined to the labor intensive products where the developing countries
have an edge but also cover sophisticated products. It is strange enough to mention that several
advanced countries like USA who were the strong advocates of free trade increasingly reassert to use
several NTBS specifically against developing nations.

TRADE STRATEGIES

Trade strategy refers to the system of government, influence on the volume and composition of
imports and exports, directions of trade, business attitudes, etc. much has been debated on the trade
strategy to be adopted by a developing country. Here, people look at the choices b/n an inward
looking and an outward looking strategy.

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 Lecture Note on International Business Management for MBA Students

In the case of inward looking strategy, industries are developed largely to supply the domestic
market with assigned foreign trade a minimal role. However, the concept of outward looking
strategy concentrates on industries in which the country has a comparative advantage, with heavy
dependence on the world market for the dispose of expanded output of exportable products.

Inward Looking Strategy

This is characterized by a bias of trade and industrial policies in favor of domestic production as
against foreign trade. Import substitution is the key aspect of such policy. Therefore, it is also called
as the import substitution strategy.

Features:

 The developing countries mostly prefer to adopt this strategy, since they cannot widen their
export base of primary products due to low price and income elasticities in world market.
 LDCs, in order to promote their economic development, produce for themselves goods
which they import earlier.
 Protection of domestic industries form foreign competition is a must.

The strength of import substitution strategy is influenced by the factors like

a) Effective rate of protection

Outward Looking Strategy:

The limitation of inward looking strategy led some economists to favor an outward looking strategy
for LDCs. Under this strategy, much emphasis is laid on the principle of comparative advantage as a
guide to allocate resources. Simply b/se of this, the LDCs should not specialize in primary products.
They may export these products, as long as they fetch attractive prices. However, it is not advisible
to expand these product export base due to unfavorable terms of trade. Hence, they should create
new productive capacities in the manufacturing sector and produce such goods in which they
maintain competitiveness in world markets. Moreover, they should identify industries having
potential comparative advantage and develop them.

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