Lecture 35

LESSON – 35 TRADE BARRIERS

Learning outcomes

After studying this unit, you should be able to:

Define Trade Barriers Identify Tariff Barriers Classify Tariff Differentiate between Tariff Barriers and Non Tariff Barriers Identify Non Tariff Barriers and Indian Export

Trade Barriers Though there are a number of advocates of free trade, international trade is generally characterised by the existence of various trade barriers. Trade barriers refer to the government policies and measures which obstruct the free flow of goods and services across national borders. The main objectives of imposing trade barriers are:

(i) To protect domestic industries or certain other sectors of the economy from foreign competition

(ii) To guard against dumping; (iii) To promote indigenous research and development; (iv) To conserve the foreign exchange resources of the country (v) To make the Balance of Payments 'position more favourable; and (vi) To curb conspicuous consumption and mobilise revenue for the govern-

ment. . Trade barriers may be broadly divided into two groups, namely, tariff barriers and non-tariff barriers (NBTs). TARIFF BARRIERS Tariff in international trade refer to the duties or taxes imposed on intemationally lraded commodities when they cross the national borders. Tariff is a very important instrument of trade protection. However, mostly because of the efforts of the GATT/WTO aimed at trade liberalisation, in the Industrial countries, there has been a substantial reduction in the tariffs on manufactured goods over the last five decades, or so. In the developing countries although the tariff rates are still fairly high, many of them have also been progressively reducing the tariff levels.

Tariffs are generally regarded as less restrictive than other methods of protection like quantitative restrictions. Therefore, organisations like the WTO generally prefer tariff to non tariff barriers. Classification of tariffs There are different ways of classifying tariffs. 1. On the basis of the origin and destination of the goods crossing the national boundary, tariffs may be classified into the following three categories: Export Duties An export duty is a tax imposed on a commodity originating from the duty levying country destined for some other country. Import Duties

When a commodity is subject to both specific and ad-valorem duties, the tariff is generally referred to as compound duty.

An import duty is a tax imposed on a commodity originating abroad and destined for the duty-levying country.

Transit Duties A transit duty is a tax imposed on a commodity crossing the national frontier originating from and destined for other countries. 2. With reference to the basis for quantification of the tariff, we may have the following three-fold classification:

Specific Duties A specific duty is a flat sum per physical unit of the commodity imported or exported. Thus, a specific import duty is a fixed amount of duty levied upon each unit of the commodity imported. Ad- Valorem Duties Ad- Valorem duties are levied as a fixed percentage of the value of the commodity imported/exported. Thus, while the specific duty is based on the quantum of the commodity imported/exported, the ad-valorem duty is based on the value of the commodity imported/exported. Compound Duties

3. With respect to its application between different countries, the tariff system may be classified into the following three types: Single-column Tariff The single-column, also known as uni-linear tariff system, provides a uniform rate of duty for all like commodities without making any discrimination between countries.

Double-Column Tariff Under the double-column tariff system, there are two rates of duty on some or all commodities. Thus, the double-column tariff discriminates between countries. The double-column tariff system maybe broadly divided into (a) general and conventional tm4J and (b) maximum and minimum tariff The general and conventional tariff system consists of two schedules of tariffs the general and the conventional. The general schedule is l1xed by the legislature at the very start while the conventional schedule results from the conclusion of commercial treaties with other countries. The maximum and minimum system consists of two autonomously determined schedules of tariff-the maximum and the minimum. The minimum schedule applies to those countries who have obtained the concession as a result of the treaty or through MFN (most favoured nation) pledge unci the maximum schedule applies to all other countries. Triple-Column Tariff The triple-column tariff system consists of three autonomously determined tariff schedules-the general, the intermediate and the preferential. The general and intermediate rates are similar to the maximum and minimum rates mentioned above under the double-column tariff system. The preferential rate was generally applied in the case of trade between the mother country and its colonies. 4. With reference to the purpose they serve, tariffs may be classified into the following categories: Revenue Tariff Sometimes the main intention of the government in imposing tariff may be to obtain revenue. When raising revenue is the primary motive, the rates of duty are generally low lest imports be highly discouraged, thus defeating the objective of mobilising revenue for the government. Revenue tariffs tend to fall on articles of mass consumption. Protective Tariff Protective tariff is intended, primarily, to accord protection to domestic industries from foreign competition. Naturally, the rates of duty tend to be very high in this case because, generally, only high rates of duty curtail imports to a significant extent. Countervailing and Anti-Dumping Duties Countervailing duties may be imposed on certain imports when they have been subsidised by foreign governments. Anti-dumping duties are applied to imports which are being dumped on the domestic market at a price either below their cost of production or substantially lower than their domestic prices. CounterVailing and anti-dumping duties are, generally, penalty duties as an addition to the regular rates. Impact of Tariff Tariff affects an economy in different ways. An import duty generally has the following effects:

Protective Effect An import duty is likely to increase the price of the imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable the domestic industries to absorb higher production costs. Thus, as a result of the protection accorded by the tariff. the domestic industries are able to expand their output. Consumption Effect The increase in prices resulting trom the import duty usually reduces the consumption capacity of the people.

The tariff may cause a switch over from spending on foreign goods to spending on domestic goods. This higher spending within the country may cause an expansion of domestic income and employment.

Tariffs, by reducing the volume of imports, may help the country to improve its Balance of Payments position.

Figure 10.1 illustrates the consumption, protective, revenue and redistributive effects of tariff. DD estic demand curve and SS estic supply curve. In the

Redistribution Effect If the import duty causes an increase in the price of domestically produced goods, it amounts to redistribution of income between the consumers and producers in favour of the producers. Further, a part of the consumer income is transferred to the exchequer by means of the tariff. Revenue Effect As mentioned above, a tariff means increased revenue for the government (unless, of course, the rate of tariff is so prohibitive that it completely stops the import of the commodity subject to the tariff). Income and Employment Effect

Competitive Effect The competitive effect of the tariff is, in fact, an anti-competitive effect in the sense that protection of domestic industries from foreign competition may enable the domestic industries to obtain monopoly power with all its associated evils. Terms of Trade Effect In a bid to maintain the previous level of imports to tariff imposing country, if the exporter reduces the prices, the tariff imposing country is able to get their imports at a cheaper price. This will, ceteris paribus, improve the terms of trade of the country imposing the tariff.

Balance of Payments Effect

Diagrammatic Illustration of Effects of Tariff

1 is the dom 1 the dom

absence of foreign trade the equilibrium price is P estic demand and supply being Q For simplicity, we assume that the foreign supply is perfectly elastic at price P. Therefore, under tree trade the supply position is represented by P F. Under free trade, at price P the total domestic demand is Q; Q et I by domestic supply and QQ is imported. Now, assume that the govemment imposes a tariff of PPimport so that the price rises from P to Ptotal domestic demand falls to Q1. The increase in price enables the domestic supply to increase from Q" to Q aining part of the domestic demand (Q et by import.

When the tariff per unit is PP port is Q ent gets tariff revenue equivalent to ABCF

2 dom4'

2 of which is m 2 1 per unit of

1. Consequent upon the increase in price, the

3. The rem 3 Q1) is m

Under free trade, the total consumers' surplus is DPF but with the taritl it is reduced to DP1F1; the total loss of consumers' surplus being P1P FF1. This loss to consumers is absorbed in a Humber of ways.

1, the total im 3 Q1 Therefore. governm1 (PP1 X Q3 Q1). This is the revenue effect of the tariff.

At the higher, tariff imposed, price, the producers get an additiona1 retum of PP1 on every unit. As the supply curve also represents the cost curve, the total gain to the producers due to the imposition of the tariff is PP1 AE. This additional economic rent to the producers represents a transfer of income from the consumers to the producers. This is the redistributive effect of the tariff.

Protection enables the domestic producers to increase supply from Q2 to Q3 ABE represents the sum of the additional cost per unit of output. This is the protective effect of the tariff.

Due to the increase in price as a result of the protection, consumption has fallen nom Q to Q1 causing a loss of consumer' surplus by C FF1 This is the consumption effect of the tariff .

It must be noted that part of the loss of the consumer surplus represented by the revenue effect and the redistribution effect are gained by the government and the producers. Hence they do not represent a loss to the economy; they represent transfer of income nom one sector to other sectors within the economy. Hence the total net loss imposed by the tariff upon the economy is thus a sum of the protective effect and the consumption effect (ABE + CFF1).

The effect of tariff on terms of trade can be illustrated with the help of offer curves. In Fig. 10.2, OH is the offer curve of the home country exporting X goods and importing Y goods and OF is the offer curve of the foreign country exporting Y goods and importing X goods. The free trade equilibrium terms of trade is represented by the slope of OT.

Now Suppose that the home country imposes a tariff on its imports so that its offer curve shifts from OH to OHI, This means that now the home country is getting a larger quantity

of imports for a given quantity of its exports, or conversely, it offers a lesser quantity of exports for a given quantity of imports. New equilibrium is established by the intersection of OH1 and OF at E1 and OT1 emerges as the new equilibrium terms of trade. OT1 is more favourable than OT for the home country while it is more unfavourable for the foreign country. It must, however, be noted that such an improvement in the terms of trade of the home country is possible with the tariff only if the foreign country docs not retaliate by imposing tariff on its imports from the home country. Nominal and Effective Tariffs Nominal tariff refers to the actual duty on an imported item. For example, if a commodity is subject to an import duty of 25 per cent ad-valorem, the nominal tariff is 25 per cent. Corden defines 1 the effective protective rate as the percentage increase in value added per unit in an economic activity which is made possible by the tariff structure relative to the situation in the absence of tariffs but the same exchange rates. It depends not only on the tariff on the commodity produced but also on the input coefficients and the tariffs on the inputs. Effective protective rate of industry ‘j' (E ay be defined as the difference between the industry's value added under protection (V ) and under free market conditions (Vexpressed as a percentage of free market value added. . V

Obviously, the protective effect of a tariff on domestic manufacturing is larger when the import duty on the raw materials used in its manufacture is lower.

As a country raises its tariff (import duty) unilaterally, the terms of trade may improve and the volume of trade may decline. The improvement in the temlS of trade initially tends to more than offset the accompanying reduction in the volume of trade. Hence a higher trade indifference curve is reached and community welfare is enhanced. Beyond some point, however, it is likely that the detrimental effect of successive reductions in trade volume will begin to outweigh the p03itive effect of further improvements in the tenus of trade so that community welfare begins to fall. Somewhere in between there must be a tariff which optimises a country's welfare level under these conditions.

j) mj' j)

j – Vj Ej = ---------- Vj

Optimum Tariff

Thus, the optimum tariff is the rate of tariff beyond which any further gain from an improvement in terms of trade would be more than offset by the accompanying decline in trade volume. By raising the rate of tariff beyond the optimum rate, it may be still possible to improve the country's terms of trade but the gain I)'om this improvement in the terms of trade is more than offset by the decline in the volume of trade. \

Figure l0.3 illustrates optimum tariff. OH is the offer curve of the home country and OF is the offer curve of the foreign country. Under free trade both the offer curves intersect at E and aT is the equilibrium terms of trade. IC is the (rnde indifference curve of the home country. Any tariff which distorts the home country’s offer curve in such a way that it crosses the foreign country's offer (_lIrve between points E and S will lead to a higher trade indifference level. If the m'w tariff distorted trade points is at S, the trade indifference level will be unchanged because: S is on the same old indifference curve IC. The highest possible trade indifference curve that the home country can reach is one that is ta11gent to the foreign offer curve. In Fig. 10.3 it is the trade indifference curve II C] which is tangent to OF at point EI' Hence if the home country can impose a tariff of such magnitude that the tariff distOlied offer curve (OHI) intersects the foreign offer curve at point E I' it will be the optimum tar(ft: because, given the foreign count.ry's offer curve OF, there is no tariff the home country can impose that' will yield a higher level of community welfare. The magnitude of the optimum tariff depends upon the elasticity of the foreign offer curve. The less elastic the foreign offer curve is, the higher will be the optimum tariff. if the foreign offer curve is perfectly elastic, no tariff will yield the home country improved terms of trade. In the above analysis we have assumed that the foreign country does not retaliate against the imposition of tariff by the home country. However, the foreign countly will be tempted to retaliate and the retaliation and counter retaliations might set off a tariff war affecting the interests of both the countries. NON-TARIFF BARRIERS Extent and Effects of NTBs Non-tariff barriers (NTBs). Some of which are described as new protectionism measure ( as against tariffs which are regarded as traditional barriers ) have grown considerably, particularly since the beginning of 1980s. The export growth of many developing countries has been seriously affected by NTBs. According to a World Bank study, NTBs in major industrial countries affect more than one-third of imports from developing countries, as compared to more than one fomih from all countries. Over the years, the NTBs have been becoming more and more extensive and intensive. Today, they areI1ot confined to the labour intensive products where th_ developing countries have an advantage but also cover sophisticated products. Japan and the Newly Industrializing Countries (NICs) like S. Korea are also among the most affected countries by NTBs. The NTBs have come to affect the intra-OECD (i.e. trade between developed economies) also. The NTBs tend to offset favorable effects of the GATT negotiations, particularly of the Tokyo Round, on trade liberalizations like the reductions in the average levels of tariffs.

As a matter of fact, several advanced countries like the US, who were the high priests of free trade, increasingly resort to several NTBs, particularly against the developing countries and also certain economically powerful countries such as Japan. The NTBs fall in two categories. The first category includes those which are generally used by developing countries to prevent foreign exchange outflows, or those which result from their chosen strategy of economic development. These are mostly traditional NTB.\" such as import licensing, import quotas, foreign exchange' regulations and canalisation of imports The second category of NTBs are those which are mostly used by developed economies to protect domestic industries which have lost intemational competitiveness and/or which are politically sensitive for govemments of these countries. One of the 1110St important new protectionism measures under this category is the Voluntary EXp0l1 Restraint (VER). The NTBs are less transparent, difficult to identify, and their impact on exporting countries is almost impossible to quantify. They contravene widely accepted principles of non-discrimination and transparency in measures to restrict trade. Above all, the costs to the country imposing the NTB, and to the world as II whole, are higher than under and equivalent tariff. Moreover, NTBs are unfair. because they do not treat exp0l1ers equally. Often it is the expOliers with the least bargaining power whose exp0l1s are most reduced.") Although the NTBs are adopted to protect certain interests of the importina countries, the fact remains that both the expOliing and importing countries UI'C adversely affected by the protection. "Clearly the main costs of protection fa 11 011 the imp0l1ing countIy. Non Tariff Barriers cause higher prices for consumers. lost tariff revenue for governments, inefficient resource allocation, and diminished competition. Non-Tariff Barriers seriously affect many exporting countries. As pointed out earlier, developing country exports to developed countries face considerable NTBs. In several cases, the impact is velY severe. For example, the VER covering the tapioca exports of Thailand to the European Community, established in 1982, caused its tapioca exports to decline by 40 per cent and its export earnings fell by about $ 300 million (representing over 10 per cent of Thailand's total export earnings from the EC). However, such draconian VERs which not only reduce the growth rate but also the level of exports have not been widely applied to nonapparel exports of developing Asian countries other than South Korea. An Asian Development Bank studl has brought out that with the reduction of the average tariff levels in the industrial countries, non-tariff barriers to imports of manufactures have increased in relative importance in these countries, including in categories of labour intensive and other products for which less developed countries have a strong comparative advantage. This study has also observed that through the exercise of various forms of administrative protection non-tariff barriers have increased in importance in

absolute terms and have been applied with increasing discrimination, causing bilateral trade arrangements in many cases to reign over more globally efficient multilateral trade arrangements and threatening the gains, especially to less developed countries of negotiated tariff reductions. Apparel exports of the developing countries are the most affected because of such barriers. This has been mostly via the Multi-Fibre Arrangement (MFA) which "...constitutes a restrictive system, imposing economic costs on the economies of the developing as well as industrial countries. Several country studies cite instances of lost apparel exports, declining production and employment due to reporting, certification and other problems involved in administering bilateral MF A agreements, whereby the system of administrative controls creates such uncertainties. especially for new exporters of financially weak firms, that export production must be curtailed or abandoned by many firms. Another important cost of the MFA is rent seeking i.e., established exporters tend to enjoy greater than perfectly competitive returns from their exports sales since quota rights enable them to sell in protected markets. Non-Tariff Barriers also cause diversion of production and exports. For example, some Indian textile and apparel firms decided to set up manufacturing facilities in Nepal in order to circumvent MFA quota controls of their exports from India and to avoid the local costs of purchasing added quota rights. Similarly, exporters have attempted to diversify their exports to non-quota countries. NTBs and India's Exports The problem of NTBs on Indian exports has been growing. The ADB study of' the effects of NTBs on India's exports to developed countries has come to the following conclusion. Conventional NTBs generally do not exist in 'developing country markets at least for Indian exports. Their impact on exports of marine products and leather and leather goods to developed economies is somewhat marginal. Their potential adverse effects on India's emerging exports of temporate zone agro-products can be critical. Exports of metal goods and readymade garments from India have suffered on account of the NTBs in developed economies. Extension and intensification of NTBs is bound to severely restrict India's export expansion in these two relatively important export sectors of the economy. Apart from the actual imposition of these NTBs, the 'noise' created is often adequate to drive out exporters and induce a fall in exports. NTBs and their administration bring about undesirable change in the structure of domestic industry and in the distribution of rewards between rent, profit and wage incomes. The uncertainty they create clearly has an adverse effect on capacity creation and investment in the industry. As a factor responsible for an investment shortage, NTBs prevent the industry from making full Lise of technological potential and economies of scale. These facts were unambiguously brought out in the findings of our survey of garment firms in India.

The above mentioned study has also pointed out that in the case of NTDs, Indian exporters have not taken full advantage of the scope which exists. Thull. improvements in domestic capability will surely yield export expansion, at leulIl in the short run. The problem of NTBs for Indian expOlis has increased recently. The threat under the Super 301 and Special 301 is an indication of this. The indications are that India may have to face more problems in the future. NTBs are often employed when a country's expOlis to a country increase considerably, causing problems to the industries in importing countries, or when the exporting country does not toe the economic or political lines of the powerful importing country. Forms of NTBs' There are different forms of NTBs. The NTBs which have significant restrictive effects are described as hardcore NTBs. These include import prohibitions, quantitative restrictions, Voluntary Export Restraints (VERs), variable levies, Multi. Fibre Arrangement (MFA) restrictions, and non-automatic licensing. Examples of NTBs excluded from this group include technical barriers (including health and safety restrictions and standards), minimum pricing regulations, and the use 01' price investigations (for example, for countervailing and anti-dumping purposes) and price surveillance. A brief account of the NTB is given below. Voluntary Export Restraints (VERs) Voluntary Export Restraints (VERs) are bilateral arrangements instituted to restrain the rapid growth of exports of specific manufactured goods. The United States and the European Community have, thus, regulated the imports of several products. The recent advances in VERs and other new protectionism measures data from the establishment of the Multi-Fibre Arrangement (MFA) in the mid1970s. Other bilateral arrangements have involved restraining the growth of specific exports from Japan and the newly industrialising countries. The VERs are usually highly discriminatory. The Uruguay Round Agreement has sought to abolish VERso Administered Protection Administered Protection encompasses a wide range of bureaucratic government actions, which have grown in absolute as well as relative importance over the last decade or more: Most recent VERs are in fact regarded as the outgrowth of administered protection actions. Important administrative protection measures include the following:

Safeguards Safeguard actions which under the WTO Atiicles enable coun tries to undertake temporary restrictions against 'influxes' threatening the viability of domestic industries, have become a common form of administered protection. Although such measures are resorted to provide some breathing space and flexibility for structural adjustment, they often lead to some or other fOD11S of permanent barriers. Health and Product Standards Several health and product standards imposed by the developed countries hinder the exports of developing countries because of . the added costs or technical requirements. The need for maintaining health and product standards is unquestionable. The objection should be to their use with the deliberate intention of trade restriction or discrimination. The Agreement on Technical Barriers to Trade (also known as the Standards Code) evolved by the Tokyo Round of the GATT lays down that when governments or other bodies adopt technical regulation or standards for reasons of safety, health, consumer or environmental protection, or for other purposes, these should not create unnecessary obstacles to trade. Exporters from developing countries complain, however, that the Code is not respected by developed countries in several cases. Customs Procedures Certain customs procedures of many countries become trade barriers. For example, studies point out that frequent changes of Japan's customs regulations are in themselves a significant barrier to exporters, especially those not affiliated with Japanese overseas joint-ventures.

The Tokyo Round formulated a Customs Valuation Code intended to provide a uniform and neutral system for the valuation of goods for custom purposes which will conform to the commercial realities and prevent the use of arbitrary or Fictitious values. Consular Formalities A number of countries insist on certain consular formalities like certification of export documents by the respective consulate of the importing country, in the exporting country. This becomes a trade banier when the fees charged for this is very high or the procedure very cumbersome.

Licensing Many countries regulate foreign trade, particularly imports, by licensing. In most cases the purpose of import licensing is to restrict imports. Government Procurement These often tend to hinder free trade. The Tokyo Round has, therefore, fornmlated an agreement on government procurement with a view to secure greater international competition in government procurements. State Trading State trading also hinders free trade many a times because of the counter trade practices, canalization etc. State trading was an important feature of the foreign trade of the centrally planned economies and also many other developing countries. With economic liberalisation in most of these countries, the role of State trading has declined.

Monetary Controls In addition to foreign exchange regulations, other monetary controls are sometimes employed to regulate trade, particularly imports. For instance, to tide over the foreign exchange crisis in 1990-91 and 1991-92, the Reserve Bank of India took several measures which included a 25 per cent interest rate surcharge on bank credit for imports subject to a commercial rate of interest of a minimum 17 per cent, the requirement of substantially high cash margin requirement on most imports other than capital goods, and restrictions on the opening of letters of credit for imports. Environmental Protection Laws The growing concern for environmental protection has led to the extension of environmental protection regulation to the imports. For example, the US Congress has framed a legislation to prohibit the import of shrimp harvested with commercial fishing technology which might adversely affect the endangered or threatened sea turtles unless the President certified that the supplying country has a turtle conservation programme comparable to that of the US. Foreign Exchange Regulations Foreign exchange regulations are an important way of regulating imports in a number of countries. This is done by the State monopolising the foreign exchange resources and not releasing foreign exchange for import of items which the government do not approve of for various reasolls. Restrictions on cunency convertibility can also adversely affect imports. QUANTITATIVE RESTRICTIONS (QUOTAS) Quantitative restrictions or quotas are important means of restricting imports l1nd exports. A quota represents a ceiling on the volume of imports/exports. In this section, we confine ourselves to quantitative restrictions on imports i.e. import quotas. Types of Import Quotas There are five import types of import quotas, including import licensing. Tariff Quota A tariff quota combines the features of tariff as well as of quota. Under a tariff quota, imports of a commodity upto specified volume are allowed duty free or at a special low rate, but any imports in excess of this limit are subject to duty/a higher rate of duty. Unilateral Quota In the case of unilateral quota, a country unilaterally fixes a ceiling on the quantity of import of the commodity concerned. Bilateral Quota A bilateral quota results from negotiation between the importing country and a pal1icular supplier country, or between the importing country and export groups withing the supplier country.

Mixing Quota Under the mixing quota, producers are obliged to utilise domestic raw materials upto a certain proportion in the production of a finished product. Import Licensing Quota regulations are generally administered by means of import licensing. Under the import licensing system, prospective importers are obliged to obtain an imp0l1 licence which is necessary to obtain the foreign exchange to pay for the imports. In a large number of countries, import licensing has become a very powerful device for controlling the quantity of imports either of particular commodities or aggregate imports. Impact of Quota Like fiscal controls, quantitative restrictions on imports also have a number of effects on the economy. The following are, in general, the important economic effects of quotas. Balance of Payments Effect As quotas enable the country to limit the aggregate imports within specified limits, they help to improve the balance of payments position of the country. Price Effect As quotas limit the total supply, it may cause an increase in the domestic prices. Consumption Effect If quotas lead to an increase in prices, it may compel people to reduce their consumption of the commodity subject to quotas or some other commodities.

Quotas may also have a revenue effect. As quotas are administered by means of n licence, government may obtain some revenue by charging a licence fee.

Protective Effect By guarding domestic industries against foreign competition to some extent, quotas encourage the expansion or domestic industries. Redistributive Effect Quotas will also have redistributive effect if the fall in supply due to the import r<:striclions enables the domestic producers to raise prices. The rise in prices will r_sult in the redistribution of income between the producers and consumers in favour of the producers. Revenue Effect

Diagrammatic Illustration of Effect of Quota

The effects of quota :an be diagrammatically represented on the same lines we represented the effects of tariff. In Fig. 10.4, DD' is the domestic demand curve and SS'

the domestic supply curve. The foreign supply is assumed to be perfectly elastic. At price P the total domestic demand is Q1; Q of which is met by domestic supply and QQ1 imported.

Let us first examine the superiority of quotas over tariffs.

Now, suppose that the government fixes the import quota as Q3 Q2' The fall in domestic availability of the commodity due to the restriction of imports pushes lip the domestic price to PJ. The increase in price enables domestic producers to increase supply to Q3' As under protective tariff, P1 PEA represents the redistributive effect, ABE represents the protective effect and CFF1 represents the consumption effect.

Under the protective tariff, ABCF1 represents the revenue effect; but' what about under the quota? If the foreign supply curve is perfectly elastic, as we have assumed here, and if the government does not interfere in import procedure other than to impose the quota, these revenues may go to importers. If, on the other hand, the government decides to sell permission (in the form of import licenses) to import under the quota to the highest bidder, then government will collect revenues identical to those accruing to it under a tariff of equivalent import restrictive effect. If the government does not sell import licences, there is also a possibility that the whole or part of the revenue (represented by ABCF1) may be collected by the foreign exporters if they are able to raise the delivery prices. The effect of quota on terms of trade can be illustrated with the help of offer curves. In Fig. 10.5 OH and OF are the free trade offer curves of the home country and foreign country, respectively, and the equilibrium terms of trade is represented by the slope of OT. Now suppose that the home country imposes a quota on imports of Y goods from the foreign country in the amount or. The home country's offer of X goods becomes zero once that quantity of imports has been reached. Hence, the home country's quota distorted offer curve becomes ORYand OTl emerges as the new terms of trade representing a substantial improvement over the free trade terms of trade for the home country. The effect of quota on the terms of trade will depend upon the elasticity of the foreign offer curves. TARIFFS VERSUS QUOTAS Both tariffs and quotas have celiain merits and demerits.

1. As a protective measure, quota is more effective than the tariff. Tariff

seeks to discourage imports by raising the price of imported articles. However it fails to restrict imports when the demand for imports is price inelastic. Especially in the case of the developing countries, the demand for many imports is price inelastic. Quota, on the other hand, is very effective in restricting the imports within the required limits.

2. When compared to tariffs, quotas are much more precise and their effects much more certain. The reactions or responses to tariffs are not clear and accurately predictable but the effect of quota on imports is certain.

3. It has been argued that "".quotas tend to be more flexible, more easily imposed, and more easily removed instruments of commercial policy than tariffs. Tariffs are often regarded as relatively permanent measures and rapidly build powerful vested interests which make them all the more dif-ficult to remove.

4. It has also been pointed out that quotas may also be employed as a measure to prevent the international transmission of severe recessions. Recession usually causes a decline in prices and this may encourage exports. A country may make use of quotas to guard against such recession induced exports into the country.

Quotas, however, have certain defects and tariffs are superior to quotas in some respects.

1. The effects of quotas are more rigorous and arbitrary and they tend to distort

international trade much more than tariffs. That is why WTO condemns quotas and prefers tariffs to quotas for controlling imports.

2. Quotas tend to restrict competition much more than tariffs by helping impOliers and exporters to acquire monopoly power. If the import quotas are allocated only to a few importers, it may enable them to amass fortunes by exploiting the market. Similarly, quotas tend to promote concentration among foreign exporters.

Professor Kindleberger points out that "A significant difference between a tariff and a quota is that conversion of a tariff into quota which admits the same volume of imports may convert a potential into an actual monopoly and reduce welfare.

POINTS TO PONDER: ___________________________________

Trade Barriers

Meaning:Trade barriers refer to the government

policies and measures which obstruct the free flow of goods and services across national borders.

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Objectives of Trade Barriers

Following are the main objectives of Trade Barriers:To protect domestic industries or certain other sectors of the economy from foreign competitionTo guard against dumping; To promote indigenous research and development; To conserve the foreign exchange resources of the country

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___________________________________ Tariff Barriers

Meaning:Tariff in international trade refer to the

duties or taxes imposed on intemation-allylraded commodities when they cross the national borders.

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___________________________________ Classification of tariffs

Tariffs can be classified as follows:Export dutiesImport dutiesTransit dutiesSpecific dutiesCompound duties

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___________________________________ Terms of Trade Effect

Following are the terms of trade effects:Balance of Payments EffectNominal and Effective TariffsOptimum Tariff

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___________________________________ Non Tariff Barriers

Meaning:Non-tariff barriers (NTBs). Some of

which are described as new protectionism measure ( as against tariffs which are regarded as traditional barriers ) have grown considerably, particularly since the beginning of 1980s.

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QUESTIONS FOR SELF ASSESSMENT: 1. Explain, with the help of diagrams, the impact of tariffs. 2. What are non-tariff barriers? Examine the impact of NTBs on exports of developing countries. 3. Why are NTBs regarded as more harmful than tariff barriers to trade? Give a brief account of the important NTBs. 4. Discuss the trends in NTBs since the early 19705 and their impact. 5. Explain the impact of quota. 6. Write short notes on the following: (i) Types of tariffs. (ii) Nominal and effective tariff. (iii) Optimum tariff. (iv) New protectionism. (v) Impact of NTB on India's exports.

Appendix 10.1

(vi) Superiority of quotas over tariffs. (vii) Defects of quotas.

SUGGESTED READINGS Asian Development Bank, Foreign Trade Barriers and Export Growth, Manila: ADB. Ellsworth, P.T. and Clark J. Leith, The International Economy, New York: Macmillan Publishing Co. Inc. Johnson, Harry G., Aspects of the Theory of Tariffs, London: George Allen and Unwin.

Salvatore, Dominick, International Economics, New York: Macmillan Publishing Co. Inc. Walter, Ingo, International Economics, New York; The Ronald Press Co.

SUPER 301 AND SPECIAL 301 Certain sections of the Omnibus Trade and Competitiveness Act, 1988, of the USA, viz., Super 301 and Special 301, have become very controversial because of the way they have been used (or threatened to be used) against other countries for economic reprisals.

The avowed objective of these sections of the Act is to expand global trade by opening markets. It is part of the strategy of reciprocal market access. In other words, they aim at improving the United States' competitiveness by trade reprisals. The Section 301 of the Act deals with the steps the US government must take if'it perceives a threat to the

trading interests of the US by the unjustifiable or unreasonable or discriminately trade partners. The major allegation is that the Section 301 is used to humble successful trade rivals and those countries which do not toe the US political and economic lines. For instance, it is alleged that the major provocation for including India and Brazil in the watch list under this Section was the strong stand which they took in the Uraguay round to uphold the cause of the developing countries, opposing the stand of the US and other developed countries. It had been reported that the Assistant USTR (United States Trade Representative) stated that "Pali of our intent in using the instrument (Super 301) is to prod India to be less obstructionist in Geneva as a spokesperson for developing countries,'" It is interesting to note that in the US and West European countries there has been a growing demand for more protective measures in the light of the challenge of their trade supremacy, particularly by the Pacific rim countries. The growing demand for local content regulation and other NTBs including reprisals under Section 301 are all manifestations of these. The US axe is often directed against countries with substantial trade surplus with the US like Japan, and countries for which the US is the major export market (including developing countries like India). Jagdish Bhagwati observes that since the late 1970s, in the US and the EC, protectionism has increasingly taken the covert shape. Weapons like the Section 101 may allegedly be used for covert protectionism like harassment of successful Ibl'eign rivals. First the rivals may be accused of indulging in unfair trade and then they may be taken through time consuming and expensive procedures. The Section 301 has been used by the US to pressurise other countries for economic liberalisation and opening up of the economies for US goods. services, technology and capital. Countries as varied as Japan, China, South Korea, India, Brazil etc. have been subject to such pressures. As noted earlier, countries which have a substantial trade surplus with the US like Japan, Korea and China and others like India and Brazil for whom the US market is very important and whom have caused irritation to the US have been the prime targets. The US, of course, has theoretically, some economic logic for asking its trade partners to open up their economies to the US business as the US does for foreign business. However, the developing countries whose economies are not strong enough to face unrestricted foreign competition cannot afford to be liberal in many areas. But the economic compulsions of the US, reflected in the persistent huge trade deficit and- the threat of deindustrialization, make the adoption of certain measures to protect its interests inevitable. According to the US diplomatic sources, "The Congress has been frustrated by the trade deficit which is touching $ 140 billion. So it decided to use American economic strength to rectify it.,,3 The thinking went thus: "India and others use their economic barriers everyday to achieve what they want, so why can't we use our market force to

achieve what we want. Maybe it is a threat, and the wrong way to achieve what we want, but the world should know that we are getting fed Up. The major factor which provides strength to exert pressure on other countries through the Section 301 is the economic dependence of these nations on the US. The US which accounts for nearly 15 per cent of the total world imports is the major export market of many countries. With reference to China's surrender to the US pressure, it is observed that "China today derives some 25 to 30 per cent of its GNP from exports. Its export surplus with the United States currently stands at $ 12.5 billion. It is, therefore, understandable for China to give in on patents in order to maintain its high level of exports to the United States.") Brazil, which makes nearly one-fourth of the total foreign sales of its goods in the US. also has a large trade surplus with the US. The US, which absorbs about one-third of the total exports of Japan, has a highly alam1ing level of trade deficit with Japan. Japan which competes with the US in many high technology industries has been increasingly gaining economic ground against the US. It is, therefore, quite natural that Japan receives considerable attention from the US trade strategists. Japan has often been alleged guilty of dumping and other unfair trade practices. Fmiher, Japan has been charged with adversarial trade. However, some studies show that Japan is not more protectionist than the US. For instance, according to a World Bank study. the extent of NTBs in Japan is similar to that in the US. Japan uses more NTBs to protect agriculture than America, but America protects more of its manufactured goods this way.6 It may be noted that Japan which has long been accused by the US of unfair trade practices has recently very strongly retaliated by describing the US as the biggest unfair trader of the world. Although the US has always been among the strongest advocates of free trade, it has taken care to protect its domestic industries and agricultural sectors seriously affected by foreign competition and the extent of trade protection has considerably increased over the years. Although the US is the most important export market for India, absorbing about 15 per cent of the total exports, Indian goods form only an insignificant share of the total imports of the US. Although India has a very small trade surplus with the US for many years, in 1990-91 the US had a small surplus with India. It is, therefore, difficult to think that the US faces any serious problem in the trade with India so as to walTant any drastic reprisal. However, as indicated earlier, the stand taken by India in the Uruguay Round and on certain other occasions against the American policies might have provoked actions against India. Further, several businessmen and others feel that an important reason for India' problem with the US is the lack of effective lobbying at the US Congress (for India) while several countries like S. Korea and Pakistan manage this very effectively. Ironically, the US, which wants other countries to open their economies for free flow of foreign goods, services and capital, has always been keen to guard its own vulnerable industries against foreign competition. Jim Powell points out through the Wall Street Journal: The US officials have enforced restrictions against imported cars for 8 years, against Brazilian castor oil for 13 years, against bicycle speedometers for 17 years,

against carbon and alloy steel for 20 years, against clothing for 32 years, against imported peanuts and dairy products for 36 years, against sugar for 55 years, against rubber footwear, oranges, ceramic tiles and cookware for 59 years, against glassware for 66 years. It appears that by using the Section 301 of the Trade and Competitiveness Act, the US wanted India to change its policies with respect to foreign investment. protection of intellectual property rights and the services sector. It may be noted that the economic policy reform started since July 1991 has very significantly changed the economic policy environment in respect, interalia of foreign investment and trade. As a matter of fact most these changes arc in the genuine interest of India.