trade barriers and their effects

Trade Barriers, their effects and role of international organizations to minimize such

barriers

3 sections

Section 1:

Muhammad AmadFahad Jan

Section 2:Azam Zahid

Section 3:Shahid RafiqKhanzada Muhammad Shakir

Introduction

• Protectionism?• Protectionism is the policy of protecting domestic industries

against foreign competition by means of tariffs , subsidies, import quotas, or other restrictions placed on the imports of foreign competitors.

• This policy is closely related with anti-globalization, and contrasts with free trade, where government barriers to trade and movement of capital are kept to a minimum.

Types of Trade Barriers

• To encourage the development of the domestic industry and protect existing industry government may impose such barriers to trade such as Tariffs, Quotas, Boycotts, Monetary Barriers and other Market Barriers.

• While such barriers may be imposed for economic or political purposes they are encouraged by local industry. Whether or not the barriers are economically logical or not, the fact is they exist. Types of barriers are as follows:

Tariff Barriers• A tariff simply means a tax imposed by a government on goods entering at

its borders. Tariffs may be used as a revenue generating tax or to discourage the importation of goods, or for both reasons.

• In general, tariffs:• Increase inflation, Government control and political considerations in

economic matters, the number of tariffs i.e. if one country imposes them the other affected country responds in the same manner.

• Weaken Supply and demand patterns and International relations because they can cause trade wars between nations.

• Restrict Manufacturer’s supply sources, choices available to consumers, competition.

Tariffs Cont’d• Pasta war between USA and EU• In a dispute with the European Union over pasta export

subsidies the United States ordered a 40 percent increase in tariffs on European Spaghetti and fancy pasta. The EU retaliated against the US walnuts and lemons. The pasta war raged on as Europe increased tariffs on US Fertilizer, paper products, and beef products. The US also replied in the same manner. The war ended when Europeans finally dropped pasta export subsidies.

• More recently US and EU have been battling a similar trade war over tariffs on bananas. Most recently less developed countries are increasingly voicing complaints about American and European tariffs on agricultural products.

Non Tariff Barriers• These Nontariff barriers include quality standards on

imported products, quotas, embargoes, boycotts, antidumping penalties, monetary barriers etc.

• Quotas:• A Quota is a specific unit or dollar limit applied to a particular

type of good.• Critics say quotas often lead to corruption (bribes to get a

quota allocation), smuggling (a reaction against a quota), and higher prices for consumers.

• In economics, quotas are thought to be less economically efficient than tariffs which in turn are less economically efficient than free trade

Quotas Cont’d

• Examples:• There is a limit on imported television sets in Great

Britain, and there are German quotas on Japanese ball bearings, Italian restrictions on Japanese motorcycles, and US quotas on sugar and textiles, peanuts etc.

• When the Japanese first let foreign rice into their country it was quota basis, but since 2000 the quotas have been replaced by tariffs.

• Like tariffs quotas tend to increase prices. US quotas on textiles are estimated to add 50 percent to the wholesale price of clothing.

Voluntary Export Restraints

• Similar to quotas are the Voluntary Export Restraints (VERs) or Orderly Market Agreements (OMAs). Common in textiles, clothing, steel, agriculture, and automobiles.

• A VER is called voluntary because the exporting country sets the limits however it is generally imposed under the threat of stiffer quotas and tariffs being set by the importing country if a VER is not established.

VER Cont’• Examples:• Japan has a VER on automobiles to the United States, that

is Japan has agreed to export a fixed number of automobiles annually.

• When televisions were still manufactured in the United States, Japan signed an OMA limiting Japanese color television exports to the United States to 1.56 million units per year. However, as a result of the OMA, Japanese companies began investing in television manufacturing in the United States and Mexico, and as a result they regained the entire market share that had been lost through the OMA, eventually dominating the entire market.

Boycotts and Embargoes

• A government Boycott is an absolute restriction against the purchase and importation of certain goods from other countries. While,

• An embargo is a refusal to sell to specific country. An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it.

Boycotts and Embargoes Cont’d• The United States uses boycotts and embargoes

against countries with which there is dispute. For example, Cuba, N.Korea, Iran, and Iraq had or have still sanctions imposed by the United States.

• Examples:• Nestle products were boycotted by a group of

countries that considered the way Nestle promoted the baby milk formula misleading to mothers and harmful to their babies in less developed countries.

• The United States embargo against Cuba.

References

• Philip, R. Cateora and John, L. Graham(2007), International Marketing 13th edition, pp. 37-41.

Links:• http://en.wikipedia.org/wiki/

United_States_embargo_against_Cuba• http://en.wikipedia.org/wiki/Embargo• http://en.wikipedia.org/wiki/Import_quota• http://en.wikipedia.org/wiki/Protectionism• http://www.britannica.com/EBchecked/topic/

479643/protectionism

TRADE BARRIERS CONT’D

• Monetary Barriers A government can effectively regulate its

international trade position by various forms of exchange-control restrictions.

1. Blocked Currency Blocked currency is used as a political

weapon or as a response to difficult balance-of-payments situations

TRADE BARRIERS CONT’D

2. The Differential Exchange Rate The differential exchange rate is a

particularly ingenious method of controlling imports.

Requires the importer to pay varying amounts of domestic currency for foreign exchange

TRADE BARRIERS CONT’D

3. Government Approval Government approval to secure foreign

exchange is often used by many countries experiencing shortages of foreign exchange.

Importers who want to buy a foreign good must apply for an exchange permit.

TRADE BARRIERS CONT’D

4. Standards Non tariff barriers of this category include

standards to protect health, safety, and product quality.

TRADE BARRIERS CONT’D

5. Antidumping Penalties Antidumping laws that have emerged as a

way of keeping foreign goods out of a market.

Designed to prevent foreign producer from using predatory pricing

References

• Philip, R. Cateora and John, L. Graham(2007), International Marketing 13th edition, pp. 41-44.

Links:• Norton, A., 2009. Israel has blocked currency transfers into Gaza [Online] (Updated

January 29 2009) http://bostonuniversity.blogspot.com/2009/01/israel-has-blocked-currency-transfers.html

• Mankiw, N. Gregory., 2008. Smart Taxes: An Open Invitation to Join the Pigou Club[Online] (Updated September 14 2009) http://en.wikipedia.org/wiki/Protectionism#Arguments_for_protectionism

• Lubin, D., 2006. Protectionism (Economics) [Online] (Updated March 22 2007)

http://www.britannica.com/EBchecked/topic/479643/protectionism

PROTECTIONISM

• Protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.

ARGUMENTS IN FAVOR OF PROTECTIONISM

• Protect jobs• Protect infant industry• Reduce reliance on imports• Encourage investments in domestic industry• Reduce BoP problems• Promote exports

PROTECTIONISM (contd)

• In Favor of Protectionism They raise the price of imported articles,

making them more expensive and therefore less attractive than domestic products.

It can also serve as a means of developing and also improving self-sufficiency.

• Protection of an infant industry. E.g., Japanese AC is more expensive than Pakistani brands.

• Protection of the home market. E.g., Europe imports only 10% of the Japanese cars, as

compared to its home market.

• National Defense. E.g., America does not provide Pakistan F22 or Cruise missile

technology to maintain its defense superiority.

PROTECTIONISM (contd)

• Against Protectionism It destroys the jobs created in an economy

where there is free trade. It can make difficulties for countries who

want to specialize in the production of goods and services.

• Resource Conservation. The natural resources are depleting globally.

• Decrease in FDI Barriers repel FDI, because no one would invest in a

strict and uncertain environment. They would rather go somewhere else to invest.

• Capital Accumulation Money would only be accumulated in the hands of

the rich/industrialists.

References

• Philip R. Cateora and John L. Graham(2007), International Marketing 13th edition, pp. 37.

Links:• http://www.infoplease.com/cig/economics/barriers-

international-trade.html• http://www.econlib.org/library/Topics/HighSchool/

BarrierstoTrade.html• http://news.bbc.co.uk/2/hi/business/533208.stm

General Agreement on Tariffs and Trade

• The General Agreement on Tariffs and Trade (GATT) was first signed in 1947 and lasted till 1994

• The aim was to provide an international Forum.

• GAAT is the Outcome of ITO.

• On 1 January, 1948 the agreement was signed by 23 countries

• The rules of the GATT are set out in the form of a contract. Creating rights and Obligation

General Agreement on Tariffs and trade 31

History of GAAT

• The Bretton Woods Conference had introduced the idea for an organization to regulate trade

• GATT's main objective was the reduction of barriers to international trade.

• The GATT was a treaty, not an organization

• The functions of the GATT were taken over by the World Trade Organization

General Agreement on Tariffs and trade 32

History……

• The history of the GATT can be divided into three phases mainly.

• The first phase, from 1947 until the Torquay (England) Round

• A second phase, encompassing three rounds, from 1959 to 1979

• The third phase, consisting only of the Uruguay Round from 1986 to 1994

General Agreement on Tariffs and trade 33

8 Rounds of GAAT

Name Start Duration CountriesSubjects covered

Achievements

Geneva April 1947 7 months 23 TariffsSigning of GATT, 45,000 tariff concessions affecting $10 billion of trade

Annecy April 1949 5 months 13 TariffsCountries exchanged some 5,000 tariff concessions

TorquaySeptember

19508 months 38 Tariffs

Countries exchanged some 8,700 tariff concessions, cutting the 1948 tariff levels by 25%

Geneva II

January 1956

5 months 26 Tariffs $2.5 billion in tariff reductions

General Agreement on Tariffs and trade 34

Conti………Dillon

September 1960

11 months 26 TariffsTariff concessions worth $4.9 billion of world trade

Kennedy May 1964 37 months 62 Tariffs, Anti-dumpingTariff concessions worth $40 billion of world trade

TokyoSeptember

197374 months 102

Tariffs, non-tariff measures, "framework" agreements

Tariff reductions worth more than $300 billion dollars achieved

UruguaySeptember

198687 months 123

Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, WTO

creation of WTO, and extended the range of trade negotiations, reductions in tariffs ( 40%) and agricultural subsidies, allow full access for textiles & clothing , extension of intellectual property rights.

Doha

November

2001

? 141

Tariffs, non-tariff measures, agriculture, labor standards, environment, competition, investment, transparency, patents etc

The round is not yet concluded.

General Agreement on Tariffs and trade 35

Effects of GAATstatic effects: the shifting of resources from inefficient to efficient firms as trade barriers fall -trade creation: production shifts from less efficient domestic producers to more efficient regional producers-trade diversion: trade shifts from more efficient external sources to less efficient suppliers within the bloc following the imposition of common external barriers

dynamic effects: the gains from overall market growth, the expansion of production, the realization of greater economies of scale and scope, and the increasingly competitive nature of the market

General Agreement on Tariffs and trade 36

RESEARCH FINDINGS

• Michal Tomz June 14, 2004, Stanford University.

• GAAT also gave rights and obligation to three other types of non formal member countries. E.g. Colonies, Overseas territories and Independent states

• Netherlands, France, US and UK signed on behalf of there Colonies, States and overseas territories.

• Our analysis show that GAAT substantially increased trade, as fewer countries remains out of the treaty.

General Agreement on Tariffs and trade 37

References • Rose, Andrew K. “Do We Really Know That the WTO Increases Trade?” American Economic Review 94, no. 1

(March 2004a): 98-114.  

• Bagwell, Kyle and Robert W. Staiger. “An Economic Theory of GATT.” American Economic Review 89, no. 1 (March 1999): 214-48.  

• Bagwell, Kyle and Robert W. Staiger. “Economic Theory and the Interpretation of GATT/WTO.” American Economist 46, no. 2 (Fall 2002): 3-19.

• Robert C. Feenstra. Advanced International Trade: Theory And Evidence. Princeton, NJ: Princeton University Press, 2004.

• GATT. The Activities of GATT 1960/61. Geneva: General Agreement on Tariffs and Trade, April 1961.

• Irwin, Douglas A., “The GATT in Historical Perspective.” American Economic Review 85, no. 2 (May 1995): 323-328.

• Maggi, Giovanni. “The Role of Multilateral Institutions in International Trade Cooperation.” American Economic Review 89, no. 1 (March 1999): 190-214.

Links • http://www.google.com.pk/search?

hl=en&q=general+agreement+on+tariffs+and+trade&btnG=Search&meta=&aq=0&oq=General+ag

• http://www.slideworld.org/slidesearch.aspx?q=General+Agreement+on+Trade+and+Tarrifs&cx=006439031743921743230:go7verdhb_8&cof=FORID:11&newwindow=1

• http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade

• http://www.ciesin.org/TG/PI/TRADE/gatt.html

• http://www.britannica.com/EBssschecked/topic/228333/General-Agreement-on-Tariffs-and-Trade

40

WORLD TRADE ORGANISATIONWORLD TRADE ORGANISATION

41

World Trade Organization (WTO)

• Creation of WTO on 1st of January, 1995 HQ in Geneva, Switzerland. Presently having 150 member countries, of which around 100 are developing countries.

• The WTO deals with the rules of trade b/w member countries.

• WTO agreements set the legal ground rules for international commerce for member countries.

• Its top level decision making body is Ministerial conference headed by Director General, and the body meets at least once every two years.

42

WTO….

It is a place,It is a place,

it’s a negotiating forum, it’s a negotiating forum,

It’s a set of rules,It’s a set of rules,

And it helps to settle disputes.And it helps to settle disputes.

43

Domestic support

The support of domestic prices, or subsidize production in some other way refers to encourage over-production. This squeezes out imports or leads to export subsidies and low-priced dumping on world markets.

Developed countries agreed to reduce domestic support by 20% over six years. Developing countries agreed to make 13% cuts over 10 years. LDC’s do not need to make any cuts.

44

Export subsidies: limits on spending and quantities

• The agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive.

• Developed countries agreed to cut the value of export subsidies by 36% over the six years and 24% over 10 years for developing countries. Developed countries also agreed to reduce the quantities of subsidized exports by 21% over the six years and 14% over 10 years for developing countries. LDC’s do not need to make any cuts.

45

LDC’s and those depending on food imports

• WTO members have to reduce their subsidized exports but some importing (poorest countries) depend on supplies of cheap, subsidized food from the major industrialized nations.

• A special ministerial decision sets out objectives, for the provision of food aid and also refers to the possibility of assistance from IMF and World Bank to finance foods for the import countries.

46

Services growth through WTO• GATS is the first setup of multilateral rules governing

international trade in services represent the fastest growing sector of the global economy accounts for 60% of global Output, 30% of global employment and nearly 20% of global trade.

• GATS has three elements: 1- cross-border supply” {services supplied from one

country to another (e.g. international telephone calls)}. 2- “consumption abroad” {consumers or firms making

use of a service in another country (e.g. tourism)}. 3- “commercial presence” {foreign company setting up

subsidiaries or branches in other countries (e.g. foreign banks)}.

47

Textiles: back in the mainstream

• Textiles are one of the hardest-fought issues in the WTO but now the system of import quotas that has dominated in trade is being phased out.

• A Textiles Monitoring Body (TMB) supervises the agreement’s implementation. It consists of a chairman and 10 members, If member countries remain unresolved with the disputes on textile, then the disputes can be brought to the WTO’s regular Dispute Settlement Body.

48

Technical regulations and standards

• Technical regulations and industrial standards are important, but they vary from country to country. Having too many different standards makes life difficult for producers and exporters.

• Standards can become obstacles to trade.

• Technical Barriers to Trade Agreement (TBT) tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles.

49

Impact of WTO on Pakistan

• In Pakistan, almost every second businessman appears to be suffering from an unknown fear of the World Trade Organization. The smaller the trader, the greater the fear and vice versa.

• WTO dictates the governments on issues such as food safety, subsidies, health care etc.

• The WTO is essentially designed to protect the vital interests of the core capitalist states, such as the US, EU and Japan and not developing economies like Pakistan.

50

• WTO---unbalanced agreement, favors rich countries, triad corporations & not small, comparatively poor ones.

• All sectors comes under WTO, but makes constraints on Pakistan to reduce subsidies on agricultural products especially.

• IMF and World Bank also having constraints on Pakistan by giving loans in energy sector.

• Developed countries like US, EU & Japan are providing domestic support to their Agriculture sector while asking developing countries to eliminate subsides. The USA, in fact has recently increased its agriculture subsides.

51

Trade creation by WTO:• Resources of building the global economy,• Heartland labor capital network,• Make your city a fair trade zone,• Common agreement on investment & society,• Universal declaration of human rights related to trade activities,• International forum on globalization (think tank for

investigation of performance of WTO,• Fair trade campaign (benefits 800,000 farmers),• Ecuador uses WTO rules to make medicines more accessible.• African nations in EU trade deal -- The five countries that make

up the East African Community have agreed a plan that will gradually open their markets to the European Union (EU).

52

Trade diversion:• From Melbourne to Paraguay: a struggle to

Deglobalized world,• Global agreement against WTO by violating human

rights,• US, EU, Japan refuses to cut down their subsidies given

to their farmers,• Poorest nations hit hardest by WTO agenda,• Civil society calls on rich countries to stop imposing

duties on poor countries,• Leave the poor poorer and un impressed,• Fair trade for none,• Free trade threatens small countries farmers, etc….

References:

•Sam, Phan Van and Thu, Vo Thanh “Managing the Challenges of WTO Participation”, Case

Study 45, Preparation by Vietnams Banking Sector for WTO Accession, (2003).

•Tsogtbaatar, Damedin “Managing the Challenges of WTO Participation”, CASE STUDY 29,

Mongolia’s WTO Accession: Expectations and Realities of WTO Membership, (2003).

•The General Council “Established Working Parties To Examine, Respectively, The

Membership Applications Of Afghanistan And Iraq”. WTO news: News Items, (13 December

2004).

•Azeem, Syed Book-“Multi National Corporations”, Vol 5, pp. 164-179, 225-260, (2007).

•Azeem, Syed Book- “WTO and Globalization”, Vol 3, pp. 17-35, (2003).

•Das, Bhagrait Lal Book- “What is WTO”, (1998).

•Lanoszka, Anna. "Trade Liberalization, the WTO, and the Environment: Developing

Countries and the Issues of Trade and Development" Paper presented at the annual meeting

of the International Studies Association, Le Centre Sheraton Hotel, Montreal, Quebec, Canada,

Mar 17, 2004 <Not Available>. 2009-05-26.

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