International Business - Professor Natasha

CHAPTER 3: TRADE BARRIERS

3.1 MEANING:
Trade barriers refer to the government policies & measures which obstruct the
free flow of goods & services across national borders. Trade barriers are imposed
on exports & imports. Trade barriers are manmade obstacles on the free
movement of goods in between different countries of the world. They are artificial
restrictions imposed on trading activities in between different countries. Such
barriers are usually imposed by the importing countries but they adversely affect
the volume of world exports & imports.

3.2 TYPES /FORMS OF TRADE BARRIERS:

There are 2 types of Trade Barriers: (I) Tariff Barriers & (II) Non Tariff Barriers
(A) TARIFF BARIER:
Introduction:
Tariff barriers have been one of the classical methods of regulating international
trade. Tariffs may be referred to as taxes on the imports.

Definition:
Tariff Barrier is a barrier to trade between certain countries or geographical areas
which takes the form of abnormally high taxes levied by a government on imports
for purposes of protection, support of the balance of payments, or the raising of
revenue It aims at restricting the inward flow of goods from other countries to
protect the country's own industries by making the goods costlier in that country.
Sometimes the duty on a product becomes so steep that it is not worthwhile
importing it. In addition, the duty so imposed also provides a substantial source of
revenue to the importing country. In India, Customs duty forms a significant part
of the total revenue, and therefore, is an important element in the budget. Some
countries use this method of imposing tariffs and Customs duties to balance its
balance of trade.

CLASSIFICATION/TYPES/FORMS OF TARIFF BARRIERS:

Tariff barriers are normally classified into four broad categories:
(I)Onthebasisoforigin&destinationofgoodscrossingthenationalboundary:
Here tariffs imposed are further classified into the following categories:
1. Export Duties: An export duty is a tax imposed on a commodity originating from
the duty levying country designed for use in some other country. Such duties are
normally levied for revenue. They are used extensively in countries which are
exporting primary products. Export duties can be used to protect domestic
producers. A duty may be impose on the export of raw materials in order to make
them costly to foreign manufacturer than domestic manufacturers. Such duties are
also imposed in order to conserve exhaustible natural resources for domestic
industries. Some countries even levy export duties in order to collect fund for
meeting the expenses of export promotion activities.

2. Import Duties: An import duty is tax imposed on a commodity originated in

foreign country and designed for duty –levying country. The purpose is to collect
revenue for the public treasury and also to provide protection to domestic
industries by discouraging large scale imports. In some countries, imports
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duties are used to restrict imports with a view to correcting disequilibrium in the
balance of trade and

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balance of payments.

3. Transit Duties: Transit duties are tax imposed on commodity while crossing the
national frontier originating from and designed for other countries. Countries with
favorable geographical position are in a position to collect substantial revenue by
imposing transit duties on the merchandise passing through their territories in
importing country or is borne either by the consumers in the importing country or
by the manufacturer in the exporting country depending upon the demand and
supply position in the two countries.
Example: India might impose a transit duty on the Nepalese imports from or
exports to England while crossing the Indian border either at the entry point or at
the exit point. Such transit duties are generally of significant concern for the land-
locked countries
Example: The shortest route for transport of goods between India & north East
states is across Bangladesh. At present, there are no arrangements in place with
regards to transit & India supplies its North east states via a much longer route. An
efficient transit agreement would have mutual benefits for India & Bangladesh.
India would benefit from lower transport costs & Bangladesh would benefit by the
contribution made by transit fees to their road infrastructure development.

(B)OnTheBasisOfQuantificationofTariff:
Here tariffs may be classified into following 3 categories:
1. Specific duty: is a tariff imposed on imports, defined in terms of specific amount
per unit, per kilogram, etc. & is based on the physical characteristics of goods. For
instance, a fixed sum of import duty may be levied on the import of every barrel of
oil, irrespective of quality and value. Example: ₹ 500 on each TV set imported.
Such duty is collected when goods enter in the country through sea or any other
means of transport. In practice, this type of duty is mostly levied on majority of items.

2. Ad valorem Duty: are levied as a fixed percentage of the value of the

commodity imported. Thus, while specific duty is based on the quantum of
the commodity imported, ad-valorem duty is based on the value of the commodity
imported.
The imposition of ad valorem duty is more justified in case of those goods whose
values cannot be determined on the basis of their physical and chemical
characteristics, such as costly works of art, rare manuscripts, etc. In practice, this
type of duty is mostly levied on majority of items.

3. Mixed or Combined or Compound Duty:

It is a combination of the specific duty and ad valorem duty on a single product.
For instance, there can be a combined duty when 10% of value (ad valorem) and
Re 1/- on every meter of cloth is charged as duty. Thus, in this case, both
duties are charged together.

(C)Onthebasisofpurposethey(Tariffs)serve:
Here, the tariffs are classified into the following 4 categories:
1. Revenue Tariff: A tariff which is designed to provide revenue to the home
government is called Revenue tariff. Generally, a tariff is imposed with a view of

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earning revenue by imposing duty on consumer goods, particularly, on luxury goods.

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2. Protective Tariff: In order to protect domestic industries from stiff competition

of imported goods, protective tariff is levied on imports. Normally, a very high duty
is imposed, so as to either discourage imports or to make the imports more
expensive as that of domestic products.

3. Anti-Dumping Duties: At times, exporters attempt to capture foreign markets by

selling goods at price below their normal price o even below their marginal cost,
such practice is called dumping. As a result of dumping, domestic industries find it
difficult to compete with imported goods. To offset anti-dumping effects, duties are
levied in addition to normal duties.

4. Countervailing Tariffs or Duties: It is imposed on certain imports where products

are subsidized by exporting governments. As a result of government subsidy,
imports become cheaper than domestic goods. To nullify the effect of subsidy, this
duty is imposed in addition to normal duties.

(D)OnTheBasisOfTradeRelationsBetweenTheImportingCountryAndExporting Country:

Here, tariffs are classified into following 3 categories:

1. Single Column Tariff: Under this system, the tariff rates are fixed for
various commodities and the same rates are charged for imports from all
countries. In brief, rates are uniform for all countries and discrimination between
countries sending goods is not made.

2. Double Column Tariff: Under this double column tariff, two rates of duty on all
or some commodities are fixed. The lower rate is made applicable to a friendly
country or the country with which bilateral trade agreement is entered into. The
higher rate is made applicable to all other countries that is, countries with which
such bilateral trade agreements are not made.

3. Triple Column Tariff: Under this triple column tariff 3 rates are fixed. They are:
a) General rate,
b) Intermediate rate,
c) Preferential rate.
The general & intermediate rates are similar to minimum & maximum rates
mentioned in double column tariff system. The preferential rate was generally
applicable in case of trade between the mother country & its colonies.

(B) NON TARIFF BARRIERS:

MEANING
Quantitative restrictions which can be imposed in order to restrict imports from
abroad are called non-tariff barriers. Non-tariff barrier are normally useful for
reducing the total quantity which can be imported from abroad. It includes
different rules, regulations and restrictions imposed by the government on imports.
Non-tariff barriers, do not affect the price of the imported goods, but only
the quantity of imports.

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TYPES/FORMS OF NON TARIFF BARRIERS:

1. Quota System: (Quantitative Restriction)
Meaning:
Under quota system, the country fixes in advance the limit of import quantity of a
commodity that would be permitted from various countries during a given period.
Such quotas are usually administered by requiring importers to have licenses to
import particular commodities.

Types of Quotas:
There are different types of quotas and a country may introduce any type of quota
as per the need of the situation. The types of quotas are as noted below:
(1) Tariff Quota: A tariff quota combines the features of the tariff as well as quota.
Here, the imports of a commodity up to a specified volume are allowed duty free or
at a special low rate duty. Imports in excess of this limit are subject to a higher
rate of duty.

(2) Unilateral Quota: In unilateral quota system, a country on its own fixes a ceiling
on quantity of import of a particular commodity.

(3) Bilateral Quota: In bilateral quota, negotiations are made between the
importing countries and a particular supplier country and the quantity to be imported
is decided.

(4) Multilateral Quota: Multilateral quota is an extension of bilateral quota. In this

type, a group of countries come together & fix quotas for exports & imports for
each member country.

(5) Mixing quotas: Under the mixing quota, the producers are obliged to utilize
domestic raw materials up to a certain proportion in the manufacturing of a
finished product.

Effects of Quotas:
Quotas, as an instrument of quantitative trade barrier, bring the following effects;
(1) Reduction of Imports: Quotas bring down total imports to a country and thereby
improves the balance of trade and balance of payments position of a country.

(2) Protection to Domestic Industries: Like tariffs, quotas give protection to

domestic industries.

(3) Revenue to Government: Quotas give additional revenue to the government.

2. Import Licensing:
An import license is a document issued by a national government authorizing the
import of certain goods into its territory. Its objective is to protect a domestic
industry from foreign competition. Each license specifies the products that can be
imported & the volume of imports allowed, and the total volume allowed should
not exceed the quota. Licenses can be sold to importing companies at a
competitive price, or simply a fee.
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Example: If a business wishes to import agricultural products such as vegetables,

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then the government may be concerned about the impact of such importations of
the local market and thus impose a restriction.

3. Consular Formalities:
Consular formalities are one non-tariff barrier on trade, particularly imports. Some
importing country imports strict rules regarding consular documents necessary for
importing goods. Such documents include import certificate, Certificate of origin and
certified consular invoice. Penalties are provided for non-compliance of such
documentation formalities. The purpose of consular formalities is to restrict
imports to some extent and not to allow free imports of commodities which are
not necessary or harmful to national economy or social welfare.

4. Preferential Treatment through Trading Blocs:

Some countries from small regional and offer special concessions and preferential
treatment to member-countries. As result, trade develops among the member
countries and give benefits to all participating members. However trade with non
members is discouraged. This naturally acts as non-tariff trade barrier. Even trade
agreements and join commissions are used as non-tariff barriers as they restrict
free movement of goods at the international level.

5. Customs Regulations:
Customs regulations & administrative regulations are very complicated in many
countries & are used as invisible tariffs for discouraging imports. There are many
Commodity Acts dealing with the regulation of flow of drugs, medicines, minerals,
etc.

6. Prior import restrictions:

Many countries insist that importers should deposit even up to 100% value of their
imports in advance with a specified authority (normally Central Bank of that country).
Importers are given permission to import goods only after payment of the deposit.
The objective is to restrict imports from abroad by discouraging domestic
importers to import liberally.

7. State Trading:
State trading refers to import-export activity by the government. In India, State
Trading exists with private trading. State Trading is useful for restricting imports
as final decision about imports are always taken by government.

8. Foreign Exchange Regulations:

Many countries introduce foreign exchange regulations for restricting imports.
Under exchange control, countries impose restrictions on the use of foreign
exchange earned through exports. Under Foreign Exchange Regulation, Foreign
Exchange earned needs to be surrendered to the government. Government
provides foreign exchange to businessmen as per priorities fixed from time to time.

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