UNIT III

Trade barriers

Trade barriers are regulatory measures that governments use to limit international trade. Some
examples of trade barriers include:

Subsidies: Discourage producers from importing or exporting, which can lead to a decrease in the availability of
goods

Import quotas: Limit the amount of a specific product that can be imported into a country

Import licenses: Used to discriminate against foreign products to protect a domestic industry

Regulatory barriers: Use specific guidelines to regulate trade

Voluntary export restraints: An agreement between an importing and exporting country where the exporting
country limits the number of exports

Anti-dumping duties: Levied when a country imports goods at a low price

Retaliatory tariffs: Used as a retaliatory measure when a country engages in unfair trade practices

Mutual recognition agreements: Provide for mutual recognition of test results and certificates for certain
products between trading partners

TARIFFS:
Meaning
A tariff is a duty or tax imposed by the government of a country upon the traded commodity as it
crosses the national boundaries. Tariff can be levied both upon exports and imports. The tariff or duties
imposed upon the goods originating in the home country and scheduled for abroad are called as the export
duties. The import duties or import tariffs are levied upon the goods originating from abroad and scheduled
for the home country. Sometimes a country may also resort to what is called as a transit duty. It is imposed
upon the goods originating in the foreign country and scheduled for a third country crossing the borders
of the home country.
Types of Tariffs:
(1) Classification on the Basis of Criterion for Imposition:
These can be of such types as:
(a) Specific Tariff:
Specific tariff is the fixed amount of money per physical unit or according to the weight or
measurement of the commodity imported or exported. Such duties can be levied on goods like wheat, rice,
fertilizers, cement, sugar, cloth etc.
(b) Ad Valorem Tariff:
‘Ad Valorem’ is the Latin word that means ‘on the value.’ When the duty is levied as a fixed
percentage of the value of the traded commodity, it is called as valorem tariff.
(c) Compound Tariff:
The compound tariff is a combination of specific and ad valorem tariff. The structure of compound
tariff includes specific duty on each unit of the commodity plus a percentage of ad valorem duty.
(d) Sliding Scale Tariff:
The import duties which vary with the prices of the commodities are termed as sliding scale duties.
These may either be on specific or ad valorem basis. In practice, these are generally on a specific basis.
(2) Classification on the Basis of Purpose for Which Tariff is Imposed:
(a) Revenue Tariff:
The tariff, which is imposed primarily for generating more revenues for the government is called
as the revenue tariff. Revenue duties are levied on luxury consumers goods.
(b) Protective Tariff:
 The tariff may be imposed by the government to protect the home industries from the cut-throat
competition from the foreign produced goods. The higher the tariff, greater may be the protective effect
of tariff. A perfect protective tariff is likely to prohibit completely the import from abroad.
(3) Classification on the Basis of Discrimination:
(a) Single column Tariff:
A uniform rate of duty is imposed on all similar commodities irrespective of the country which
they are imported.
(b) Double Column
(i) General and Conventional Tariff:
It is the list of tariffs which is announced by the government as its annual tariff policy at the
beginning of
the year. It is particular tariff rate which is charged from all countries.
(ii) Maximum and Minimum Tariff:
Under this system, a country has maximum and minimum tariff rates for every commodity. The
minimum tariff rates are applied to the products originating from the countries treated as ‘The Most
Favoured Nations’. The maximum tariff rates are applied for the purpose of improving the bargaining
position of the home country vis-a-vis the foreign countries.
(c) Multiple Column Tariff:
The multiple column tariff consists of three different rates of tariff – a general rate, an international
rate and a preferential rate. The general and international tariff rates can be considered equivalent to the
maximum and minimum tariff rates discussed above. The preferential tariff is generally applied by a
subject country to the products originating from the colonial countries.
(4) Classification on the Basis of Products:
(a) Import Duties:
If the home country imposes tariff upon the products of the foreign countries as they enter its
territory, the tariff is known as import tariff or import duty.
(b) Export Duties:
If the products of the home country become subject to tax as they leave its territory to be sold in
the foreign market, the tax or duty is called as export tariff or export duty.
(5) Classification on the Basis of Retaliation:
(a) Retaliatory Tariffs:
If a foreign country has imposed tariffs upon the exports from the home country and the latter
imposes tariffs against the products of the former, the tariffs resorted to by the home country will be
regarded as the retaliatory tariffs.

(b) Countervailing Tariffs:

Additional duty is levied to raise its price in order to protect producers of the same commodity in
the importing country from the cheap foreign commodity.
Non Tariff Barriers
NTB’s are obstacles to import other than tariff there are administrating vessels that are imposed
by domestic government to discriminate against foreign goods and infavour of own goods.
Types
1. Voluntary export restraints
It is as agreement by exporter countries exporter or government with an importing country to limit
their export to it. It is enter into by the importing country when its domestic industry is suffering from
large imports. The limit to imports may be set in terms of quantity value or market share.
2. Export Subsidies
It is a government grant given to an export company or producer to reduce the price per unit of
goods exported abroad. It enables the company to sell last quantity of its goods at lower price in the export
market then in the home market.
3. Government procurement
Government discriminates between domestic and foreign suppliers of goods and services required
by government department. The discrimination may be in various ways, in certain countries there is
legislation to buy domestic goods and services even ifthey are available from abroad from low rate.
4. Customs valuation and classification
Customs officials value imports at higher price above the specified tariff rate for goods, customs
valuation procedure is to delivery delay the clearness of goods by customs officials show as to increase to
cost of importing goods as an import tariff does.
5. Import licensing procedure
Many countries adopt complicated and expensive import licensing procedure to restrict imports.
In other cases importers are required to deposit large sums of money with government for getting import
license.
6. Local content revolution
In many developing countries import of manufactured goods like cars, electronics goods etc. are
restricted if they do not meet local content revaluation foreign content of cost in India are required to have
sufficient local content in the form of spare parts manufactured within India.
7. Technical barriers
It includes health and safety revolution, sanitary revolution. Industry standards, laboring and
packing regulations and so on such regulation of addition cost foreign suppliers of goods restricts their
imports.

EXPORT SUBSIDIES

An export subsidy is a financial aid given by the government to a firm or industry to encourage exports
and discourage domestic sales. The goal is to help local companies compete with foreign producers by
reducing the price of their goods.

Export subsidies can take many forms, including:

Direct payments to firms or industries

Low-cost loans for exports

Tax benefits, such as duty-free imports of raw materials

Government-financed marketing

India offers several export subsidies and incentives, including:

Merchandise Exports from India Scheme (MEIS)

This scheme provides exporters with duty credit scrips to offset losses on paid duties. The incentive is 2-
5% of the Free On Board (FOB) value of exports. However, MEIS is not WTO-compliant and will be
replaced by the Rebate of Duties & Taxes on Exported Products (RoDTEP) scheme.

Financial Assistance Scheme (FAS)

This scheme is run by APEDA to help exporters with the export of agricultural products.

Transport Subsidy

This scheme provides a subsidy of Rs. 50,000 per container for the export of agricultural commodities
by sea route to newly opened countries. The maximum subsidy per beneficiary is Rs. 1 Lakh per year.

GST refund

Exporters can claim a refund of the Integrated GST (IGST) paid on exports from the customs
department.

LUT Bond Scheme

Exporters can export goods without paying any GST by obtaining a 'Letter of Undertaking' (LUT) bond.

1% GST benefit

Merchant exporters can get export goods from local suppliers at a 0.1% concessional GST rate.
Export Promotion Scheme

This scheme allows the import of capital goods at zero custom duty.

Arguments for Free Trade

1. Free trade increases the size of the economy as a whole. It allows goods and services to be produced
more efficiently. That’s because it encourages goods or services to be produced where natural
resources, infrastructure, or skills and expertise are best suited to them. It increases productivity,
which can lead to higher wages in the long term.
2. Free trade is good for consumers. It reduces prices by eliminating tariffs and increasing
competition. Greater competition is also likely to improve quality and choice. Some things, such
as tropical fruit, would not be available in the UK without trade.
3. Reducing non-tariff barriers can remove red tape, thus reducing the cost of trading. If companies
that trade in several countries have to work with only one set of regulations, their costs of
‘compliance’ come down. In principle, this will make goods and services cheaper.
4. In contrast, protectionism can result in destructive trade wars that increase costs and uncertainty
as each side attempts to protect its own economy. Protectionist rules can tend to favour big business
and vested interests, as they have the resources to lobby most effectively.
5. Under free trade division labour occurs on an international scale leading to greater specialization
, efficiency and economy in production.
6. Free trade helps to break domestic monopolies and free the consumers from exploitation.
Arguments for Protection:
1. Infant Industries:
The infant industry argument suggests that new industries should be given temporary protection
in order to enable them to build up this experience. This argument applies where the industry is small and
young, and where costs are high but fall as the industry grows an established. Industry is normally much
more stronger than an infant one because of the its longstanding experience, internal and external
economies resource position and market power etc. Hence infant is to competitive with such powerful
foreign competitors.
2. Diversification of Industries Argument:
A policy of production is also advocated to diversify a developing country’s industrial structure.
A country cannot rely on one or a few industries only; it is necessary that a large number of industries of
diverse varieties develop in the long run. This strategy will reduce the risk of losing foreign markets; for,
in case of failure to export one commodity, other goods may be exported.
3. Employment Protection:
The dynamics of the world economy mean that at any time some industries will be in decline. If
those industries were responsible for a significant amount of employment in a country in the past, their
decline would cause problems of regional unemployment. There s justification for a country to protect a
contracting industry to slow down its rate of decline so that time is given for people to find jobs elsewhere
in the economy.
4. Employment Creation:
Protection to home industries may create employment opportunities in the country, and thus reduce
the magnitude of unemployment. But this argument is also fallacious; for protection may create
employment in some home industries, but by reducing imports it reduces employment opportunities in the
foreign countries. By improving the balance of trade it can increase employment and income provided the
other countries do no retaliate. But even this argument is not convincing as protection cannot maintain
high employment indefinitely through export surplus.
5. Balance of Trade:
Some countries experience imbalance in their trade with the rest of the world. If they are importing
too many goods they may correct a temporary problem by imposing tariffs on imports. A suitable tariff
policy can create and maintain a favourable balance of trade. The restrictions on imports for the purpose
of protection will create a surplus in the balance of trade of the country.
6. Improving Balance of payments
This is very common for protection by restricting imports a country try to improve its balance of
payments position. The developing countries especially may have the problem of foreign shortage. Hence
it is necessary to control imports so that the limited foreign exchange will be available for importing the
necessary items.
7. Bargaining
It is argued that a country which already has a tariff can use it as a means of bargaining to obtain
from other countries lower duties on its exports.
8. Keeping money at home
When we buy manufactured goods abroad we get the goods and the foreigner gets money. When
we buy the manufactured goods at home we get both the goods and the money.
9. Key industry
It is also argued that a country should develop its key industries because the development of other
industries and the economy depends a lot on the output of the key industries. Hence if we do not have our
own source of supply of key inputs we will be placing ourselves at the mercy of the foreign supplies.
10. Equalisation of cost of production
Some protection have support import duties to equalize the cost of production between foreign and
domestic producers and to neutralize any advantage the foreigner may have over the domestic producers
in terms of low taxes, cheaper labour and other costs.
11. Pauper (very poor) Labour
The product of high wage labour of these countries will be undersold by the “pauper labour’
countries. Thus, in the advanced countries where the people enjoy high real wages, it is often felt that their
standard of living will be undermined if cheap goods are imported from low wage countries. Hence, to
protect a country’s high standard of living and maintain its high wages, tariffs become essential to rule
out competition from “pauper labour” countries.
Demerits of Protection
1. Protection is against the interest of consumers as it increase price and reduces variety and choice.
2. Protection makes producers and sellers less quality conscious.
3. It encourages domestic monopolies.
4. Even inefficient firms may feel secure under protection and it discourages innovation.
5. Protection leaves the arena open to corruption.
6. It reduces the volume of foreign trade.
7. Protection leads to uneconomic utilization of world resources.