Trade barriers

Presentation on Trade Barriers in International Business

1. Trade
Barriers
(Classroom Deliberations)
CA. Dr. PrithviRanjanParhi
12:32 PM © CA. Dr Prithvi R Parhi

2. 2 /132
703-INTERNATIONAL TRADE AND BUSINESS
MODULE-I
InternationalTrade:Concept,Importance,BenefitsofInternationalTrade,international
Markingvs.DomesticMarking(differences).
TheoryofInternationalTrade:theoryofcomparativeCost,factorproportionTheory.
MODULE-II
Multinationalcorporations(MNCs):Definition,RoleofMNCsinInternationalmarking.
InternationalTradebarriers:Meaning,tariffandnon-TariffBarriers,ImpactofNon-tariff
barriers.
MODULE-III
OrganizationalandAgreements:WTO(Functions,Principle,agreements),IMF
(Purposes,FacilitiesProvidedbyIMF),WorldBank(Purpose,Principle,Policies).
MODULE-IV
ForeignTradeofIndia:OrganizationalSetup(AutonomousBodies,Attachedand
subordinateoffices),MajorExportandImports,ConceptofExportHouse,EXIMPolicy
(2002-2007)ofIndia(FeaturesandObjectivesofthePolicy).
MODULE-V
ForeignExchangemarket:Concept,Functions,MethodsofinternationalPayment,
conceptofBalanceofPayment,ConceptofFixedandFlexibleExchangeRateand
ConvertibilityofRupee.
12:32 PM
© CA. Dr Prithvi R Parhi

3. 3 /132
Trade Barriers
•Themajorbarrierstointernationaltradeare
naturalbarriers,suchas
1.distanceand
2.language;
3.tariffbarriers,ortaxesonimportedgoods;and
4.nontariffbarriers.
12:32 PM
© CA. Dr Prithvi R Parhi

4. 4 /132
Trade Barriers
•Tradebarriersaregovernment-inducedrestrictionsoninternational
trade.
•Economistsgenerallyagreethattradebarriersaredetrimentaland
decreaseoveralleconomicefficiency.
•Mosttradebarriersworkonthesameprinciple:theimpositionofsome
sortofcost(money,time,bureaucracy,quota)ontradethatraisesthe
priceoravailabilityofthetradedproducts.
•Iftwoormorenationsrepeatedlyusetradebarriersagainsteachother,
thenatradewarresults.Barrierstaketheformoftariffs(whichimpose
afinancialburdenonimports)andnon-tariffbarrierstotrade(which
usesotherovertandcovertmeanstorestrictimportsandoccasionally
exports).
•Intheory,freetradeinvolvestheremovalofallsuchbarriers,except
perhapsthoseconsiderednecessaryforhealthornationalsecurity.In
practice,however,eventhosecountriespromotingfreetradeheavily
subsidizecertainindustries,suchasagricultureandsteel.
12:32 PM
© CA. Dr Prithvi R Parhi

5. 5 /132
Tariff
•Insimplestterms,atariffisatax.
•Itaddstothecostofimportedgoodsandisoneof
severaltradepoliciesthatacountrycanenact.
•It’satradebarrier.E.g.Customsduty
WhyAreTariffsandTradeBarriersUsed?
Tariffsareoftencreatedtoprotectinfantindustries
anddevelopingeconomies,butarealsousedby
moreadvancedeconomieswithdeveloped
industries.
•Herearefiveofthetopreasonstariffsareused:
12:32 PM
© CA. Dr Prithvi R Parhi

6. 6 /132
Tariff
1.ProtectingDomesticEmployment
Thepossibilityofincreasedcompetitionfromimported
goodscanthreatendomesticindustries.
Thesedomesticcompaniesmayfireworkersorshift
productionabroadtocutcosts,whichmeanshigher
unemploymentandalesshappyelectorate.
Theunemploymentargumentoftenshiftstodomestic
industriescomplainingaboutcheapforeignlabor,andhow
poorworkingconditionsandlackofregulationallow
foreigncompaniestoproducegoodsmorecheaply.
Ineconomics,however,countrieswillcontinuetoproduce
goodsuntiltheynolongerhaveacomparativeadvantage
(nottobeconfusedwithanabsoluteadvantage).
12:32 PM
© CA. Dr Prithvi R Parhi

7. 7 /132
2.ProtectingConsumers
Agovernmentmaylevyatariffonproductsthatitfeelscouldendangerits
population.Forexample,SouthKoreamayplaceatariffonimportedbeef
fromtheUnitedStatesifitthinksthatthegoodscouldbetaintedwith
disease.
3.InfantIndustries
TheuseoftariffstoprotectinfantindustriescanbeseenbytheImport
SubstitutionIndustrialization(ISI)strategyemployedbymanydeveloping
nations.Thegovernmentofadevelopingeconomywilllevytariffson
importedgoodsinindustriesinwhichitwantstofostergrowth.Thisincreases
thepricesofimportedgoodsandcreatesadomesticmarketfordomestically
producedgoods,whileprotectingthoseindustriesfrombeingforcedoutby
morecompetitivepricing.Itdecreasesunemploymentandallowsdeveloping
countriestoshiftfromagriculturalproductstofinishedgoods.
12:32 PM
© CA. Dr Prithvi R Parhi

8. 8 /132
4. National Security
Barriersarealsoemployedbydevelopedcountriestoprotectcertainindustries
thataredeemedstrategicallyimportant,suchasthosesupportingnational
security.Defenseindustriesareoftenviewedasvitaltostateinterests,and
oftenenjoysignificantlevelsofprotection.Forexample,whilebothWestern
EuropeandtheUnitedStatesareindustrialized,bothareveryprotectiveof
defense-orientedcompanies.
5.Retaliation
Countriesmayalsosettariffsasaretaliationtechniqueiftheythinkthata
tradingpartnerhasnotplayedbytherules.Forexample,ifFrancebelieves
thattheUnitedStateshasalloweditswineproducerstocallitsdomestically
producedsparklingwines"Champagne"(anamespecifictotheChampagne
regionofFrance)fortoolong,itmaylevyatariffonimportedmeatfromthe
UnitedStates.IftheU.S.agreestocrackdownontheimproperlabeling,
Franceislikelytostopitsretaliation.
12:32 PM
© CA. Dr Prithvi R Parhi

9. 9 /132
Other Reasons
•RevenueGeneration
•Monitoring exchange rates
•Protecting culture
12:32 PM
© CA. Dr Prithvi R Parhi

10. 10 /132
Types of Tariffs and Trade Barriers
•SpecificTariffs
Afixedfeeleviedononeunitofanimportedgoodisreferredtoasa
specifictariff.Thistariffcanvaryaccordingtothetypeofgood
imported.Forexample,acountrycouldlevya$15tariffoneachpair
ofshoesimported,butlevya$300tariffoneachcomputerimported.
•AdValoremTariffs
ThephraseadvaloremisLatinfor"accordingtovalue",andthistype
oftariffisleviedonagoodbasedonapercentageofthatgood's
value.Anexampleofanadvaloremtariffwouldbea15%tarifflevied
byJapanonU.S.automobiles.The15%isapriceincreaseonthe
valueoftheautomobile,soa$10,000vehiclenowcosts$11,500to
Japaneseconsumers.Thispriceincreaseprotectsdomesticproducers
frombeingundercut,butalsokeepspricesartificiallyhighfor
Japanesecarshoppers.
12:32 PM
© CA. Dr Prithvi R Parhi

11. 11 /132
Non-tariff barriers
•Licenses
Alicenseisgrantedtoabusinessbythegovernment,andallowsthebusiness
toimportacertaintypeofgoodintothecountry.Forexample,therecouldbe
arestrictiononimportedcheese,andlicenseswouldbegrantedtocertain
companiesallowingthemtoactasimporters.Thiscreatesarestrictionon
competition,andincreasespricesfacedbyconsumers.
•Import Quotas
Animportquotaisarestrictionplacedontheamountofaparticulargoodthat
canbeimported.
Thissortofbarrierisoftenassociatedwiththeissuanceoflicenses.For
example,acountrymayplaceaquotaonthevolumeofimportedcitrusfruit
thatis
allowed.
12:32 PM
© CA. Dr Prithvi R Parhi

12. 12 /132
•VoluntaryExportRestraints(VER)
Thistypeoftradebarrieris"voluntary"inthatitiscreatedbytheexportingcountry
ratherthantheimportingone.Avoluntaryexportrestraintisusuallyleviedatthe
behestoftheimportingcountry,andcouldbeaccompaniedbyareciprocalVER.For
example,BrazilcouldplaceaVERontheexportationofsugartoCanada,basedona
requestbyCanada.CanadacouldthenplaceaVERontheexportationofcoaltoBrazil.
Thisincreasesthepriceofbothcoalandsugar,butprotectsthedomesticindustries.
•LocalContentRequirement
Insteadofplacingaquotaonthenumberofgoodsthatcanbeimported,the
governmentcanrequirethatacertainpercentageofagoodbemadedomestically.The
restrictioncanbeapercentageofthegooditself,orapercentageofthevalueofthe
good.Forexample,arestrictionontheimportofcomputersmightsaythat25%ofthe
piecesusedtomakethecomputeraremadedomestically,orcansaythat15%ofthe
valueofthegoodmustcomefromdomesticallyproduced
components.
12:32 PM
© CA. Dr Prithvi R Parhi

13. 13 /132
Who Benefits? Who loses ?
Thebenefitsoftariffsareuneven.Becauseatariffisatax,thegovernmentwillsee
increasedrevenueasimportsenterthedomesticmarket.
•Domesticindustriesalsobenefitfromareductionincompetition,sinceimportpricesare
artificiallyinflated.
•Unfortunatelyforconsumers-bothindividualconsumersandbusinesses-higherimport
pricesmeanhigherpricesforgoods.Ifthepriceofsteelisinflatedduetotariffs,
individualconsumerspaymoreforproductsusingsteel,andbusinessespaymorefor
steelthattheyusetomakegoods.Inshort,tariffsandtradebarrierstendtobepro-
producerandanti-consumer.
Theeffectoftariffsandtradebarriersonbusinesses,consumersandthegovernment
shiftsovertime.Intheshortrun,higherpricesforgoodscanreduceconsumptionby
individualconsumersandbybusinesses.Duringthistimeperiod,businesseswillprofit
andthegovernmentwillseeanincreaseinrevenuefromduties.Inthelongterm,
businessesmayseeadeclineinefficiencyduetoalackofcompetition,andmayalsosee
areductioninprofitsduetotheemergenceofsubstitutesfortheirproducts.Forthe
government,thelong-termeffectofsubsidiesisanincreaseinthedemandforpublic
services,sinceincreasedprices,especiallyinfoodstuffs,leavelessdisposableincome.
12:32 PM
© CA. Dr Prithvi R Parhi

14. Gainers
•Government
•Small Industries
Losers
•Customers
•Society ~ Efficiency Reduces
12:32 PM
© CA. Dr Prithvi R Parhi

15. 15 /132
How Do Tariffs Affect Prices?
•Tariffsincreasethepricesofimportedgoods.
•Becauseofthis,domesticproducersarenot
forcedtoreducetheirpricesfromincreased
competition,anddomesticconsumersareleft
payinghigherpricesasaresult.
•Tariffsalsoreduceefficienciesbyallowing
companiesthatwouldnotexistinamore
competitivemarkettoremainopen.
12:32 PM
© CA. Dr Prithvi R Parhi

16. Effects of world trade without tariff.
•Inthegraph,DSmeans
domesticsupplyandDD
meansdomesticdemand.
•Thepriceofgoodsat
homeisfoundatpriceP,
whiletheworldpriceis
foundatP*.
•Atalowerprice,domestic
consumerswillconsume
Qwworthofgoods,but
becausethehomecountry
canonlyproduceuptoQd,
itmustimportQw-Qd
worthofgoods.
12:32 PM © CA. Dr Prithvi R Parhi

17. Effects of world trade with tariff
•Whenatarifforotherprice-
increasingpolicyisputinplace,the
effectistoincreasepricesandlimit
thevolumeofimports.
•InFigure2,priceincreasesfrom
thenon-tariffP*toP'.
•Becausepricehasincreased,more
domesticcompaniesarewillingto
producethegood,soQdmoves
right.
•ThisalsoshiftsQwleft.
•Theoveralleffectisareductionin
imports,increaseddomestic
productionandhigherconsumer
prices.
12:32 PM © CA. Dr Prithvi R Parhi

18. 18 /132
Tariffs and Modern Trade
Theroletariffsplayininternationaltradehasdeclinedinmoderntimes.Oneoftheprimaryreasons
forthedeclineistheintroductionofinternationalorganizationsdesignedtoimprovefreetrade,such
astheWorldTradeOrganization(WTO).
Suchorganizationsmakeitmoredifficultforacountrytolevytariffsandtaxesonimportedgoods,
andcanreducethelikelihoodofretaliatorytaxes.Becauseofthis,countrieshaveshiftedtonon-tariff
barriers,suchasquotasandexportrestraints.
OrganizationsliketheWTOattempttoreduceproductionandconsumptiondistortionscreatedby
tariffs.Thesedistortionsaretheresultofdomesticproducersmakinggoodsduetoinflatedprices,
andconsumerspurchasingfewergoodsbecausepriceshaveincreased.
Sincethe1930s,manydevelopedcountrieshavereducedtariffsandtradebarriers,whichhas
improvedglobalintegrationandbroughtaboutglobalization.Multilateralagreementsbetween
governmentsincreasethelikelihoodoftariffreduction,whileenforcementonbindingagreements
reducesuncertainty.
TheBottomLine
Freetradebenefitsconsumersthroughincreasedchoiceandreducedprices,butbecausetheglobal
economybringswithituncertainty,manygovernmentsimposetariffsandothertradebarriersto
protectindustry.Thereisadelicatebalancebetweenthepursuitofefficienciesandthegovernment's
needtoensurelowunemployment.
12:32 PM
© CA. Dr Prithvi R Parhi

19. 19 /132
Trade Blocs
•Aneconomicblocconsistsoftwoormorecountriesjoinedtogetherintoa
closereconomicunionthaneachhaswiththerestoftheworld.
Types:
Freetradearea
•NAFTA(NorthAmericanFreeTradeAgreement)isanexampleofafreetrade
area.Inafreetradeareamembercountriestradefreelyamongthemselves
buthavedifferentpoliciestowardsnon-members.
Customsunion
•Membersofacustomsunionadoptcommontariffpoliciestowardsnon-
members.
Commonmarket
•Membersallowfullfreedomoflaborandcapitalmigrationamongthemselves
inadditiontohavingacustomsunion.
Economicunion
•Membersunifyalltheireconomicpoliciesaswellaspoliciestowardtradeand
factormigration.
12:32 PM
© CA. Dr Prithvi R Parhi

20. 20 /132
Are preferential trade agreements beneficial?
•Sincetheyrepresentamovetowardsfree
trade,preferentialtradeagreementscreate
trade(whichisgood).
•However,sincepreferentialtradeagreements
discriminateagainstnon-members,theymay
diverttradeawayfromthelowcostsupplier
(whichisbad).
12:32 PM
© CA. Dr Prithvi R Parhi

21. 21 /132
NAFTA
•NAFTAprovidesfortheeliminationoftariffandmostnon-tariffbarrierstotradeand
investmentontradebetweentheU.S.,Canada,andMexico.Opponentspointtothefact
thataveragehourlycompensationinMexicanmanufacturingisonly14%oftheU.S.
figureandarguethatlowMexicanwagesandpoorenforcementofMexicanlabor
standardswilldepriveU.S.workersofjobsanddrivedownU.S.wages.
•But,highU.S.laborproductivitypaysforhighU.S.wages.And,opponentsignorethe
jobscreatedbyincreasedtradewithMexico.NAFTAshouldstimulateMexicanincome
growth,sotherewillbemoreU.S.exportstoMexico.ExportstoMexicosupport
122,000morejobstodaythanin1993.OnlyacoupleofthousandAmericanshavebeen
certifiedashavinglosttheirjobsduetoNAFTA.
•NAFTAopponentsalsoarguethatMexicohaslowerenvironmentalstandardsandthat
thiscausesU.S.factoriestomovetoMexico.Also,NAFTAgivesMexicotherightto
challengethestrictU.S.environmentalregulations.
•Inreality,MexicanstandardsaresimilartothoseoftheU.S.andrisingMexicanincomes
willleadtodemandformoreenvironmentalprotection.And,anychallengetoU.S.
environmentalstandardsmustbebasedontheabsenceofscientificevidencejustifying
atradebarrier.Intheend,NAFTAwillprobablycauseMexicotoproducelesschemicals,
rubber,andplastics(alldirtyitems)andmoreagriculturalandlabor-intensiveproducts
(bothrelativelycleaner).
•U.S.exportstoMexicogrewby36.5percent(or$15.2billion)from1993toarecordhigh
in1996,despitea3.3percentcontractioninMexicandomesticdemandoverthesame
period.
12:32 PM
© CA. Dr Prithvi R Parhi

22. 22 /132
Trade Embargoes
•Atradeembargoisacompletebanontrade.
•Themajorityofembargoesfailtoalterthe
policiesofthetargetnations.
•ConsideratotalembargoonexportstoIraq.
12:32 PM
© CA. Dr Prithvi R Parhi

23. 23 /132
Thanx.
CA. PrithviR Parhi
7008246670,8763434746
[email protected]
12:32 PM
© CA. Dr Prithvi R Parhi