Trade barrier: Tariffs Barrier, Non tariff Trade Barriers

Trade, Tariff and Trade barrier

Tariff

Tariff is a tax imposed on goods   coming into a country i.e. import and going out of a country i.e. export

A list of fixed prices charged by a service provider such as by a hotel, a mobile operator for their services.

Trade:

Trade refers to buying and selling of goods and services for money or money’s worth. It involves transfer or exchange of goods and services for money or money’s worth.

The manufacturers or producer produces the goods, then moves on to the wholesaler, then to retailer and finally to the ultimate consumer.

Importance of trade

Trade is essential for satisfaction of human wants, Trade is conducted not only for the sake of earning profit; it also provides service to the consumers. Trade is an important social activity because the society needs uninterrupted supply of goods forever increasing and ever changing but never ending human wants. Trade has taken birth with the beginning of human life and shall continue as long as human life exists on the earth. It enhances the standard of living of consumers. Thus we can say that trade is a very important social activity.

Different Types of Trade

Classification of trade

Trade can be divided into following two types, viz.,

1. Internal or Home or Domestic trade.
2. External or Foreign or International trade

Internal Trade

Internal trade is also known as Home trade. It is conducted within the political and geographical boundaries of a country. It can be at local level, regional level or national level. Hence trade carried on among traders of Delhi, Mumbai, etc. is called home trade.

Internal trade can be further sub-divided into two groups, viz.,

Wholesale Trade :  It involves buying in large quantities from producers or manufacturers and selling in lots to retailers for resale to consumers. The wholesaler is a link between manufacturer and retailer. A wholesaler occupies prominent position since manufacturers as well as retailers both are dependent upon him. Wholesaler act as a intermediary between producers and retailers.

Retail Trade : It involves buying in smaller lots from the wholesalers and selling in very small quantities to the consumers for personal use. The retailer is the last link in the chain of distribution. He establishes a link between wholesalers and consumers. There are different types of retailers small as well as large. Small scale retailers includes hawkers, pedlars, general shops, etc.

2. External Trade

External trade also called as foreign trade. It refers to buying and selling between two or more countries.

For instance, If Mr.X who is a trader from Mumbai, sells his goods to Mr.Y another trader from New York then this is an example of foreign trade.

External trade can be further sub-divided into three groups, viz.,

Export Trade : When a trader from home country sells his goods to a trader located in another country, it is called export trade.

For e.g. a trader from India sells his goods to a trader located in China.

Import Trade : When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade.

For e.g. a trader from India purchase goods from a trader located in China.

Entrepot Trade : When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods.

 Need and Importance of Foreign Trade

Following points explain the need and importance of foreign trade to a nation.

1. Division of labour and specialisation

Foreign trade leads to division of labour and specialisation at the world level. Some countries have abundant natural resources. They should export raw materials and import finished goods from countries which are advanced in skilled manpower. This gives benefits to all the countries and thereby leading to division of labour and specialisation.

2. Optimum allocation and utilisation of resources

Due to specialisation, unproductive lines can be eliminated and wastage of resources avoided. In other words, resources are channelised for the production of only those goods which would give highest returns. Thus there is rational allocation and utilization of resources at the international level due to foreign trade.

3. Equality of prices

Prices can be stabilised by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilises the prices, making allowances for transport and other marketing expenses.

4. Availability of multiple choices

Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world.

5. Ensures quality and standard goods

Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods. Thus quality and standardised goods are produced.

6. Raises standard of living of the people

Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services. By consuming new and better varieties of goods, people can improve their standard of living.

7. Generate employment opportunities

Foreign trade helps in generating employment opportunities, by increasing the mobility of labour and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc.

8. Facilitate economic development

Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector.

9. Assistance during natural calamities

During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.

10. Maintains balance of payment position

Every country has to maintain its balance of payment position. Since, every country has to import, which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.

11. Brings reputation and helps earn goodwill

A country which is involved in exports earns goodwill in the international market. For e.g. Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.

12. Promotes World Peace

Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.

For e.g. an indian trader (from India) purchase some raw material or spare parts from a japanese trader (from Japan), then assembles it i.e. convert into finished goods and then re-export to an american trader (in U.S.A).

 Trade barrier

 Trade barriers are government-induced restrictions on international trade.

A barrier to trade is a government-imposed restraint on the flow of international goods or services through any regulation or policy that restricts international trade

Free trade

Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers.

International trade free trade and trade barrier

International trade increases the number of goods that domestic consumers can choose from, decreases the cost of those goods through increased competition, and allows domestic industries to ship their products abroad.

Developed nations have different means of production, technology and resources but saturated domestic market. They produce the product in large quantity with better quality with less price.  and they need to sell their product to other countries particularly the new market area in other country particularly developing and underdeveloped nations. So they advocate the free trade. Although these country have also trade barriers to restrict other country to exploit their market.

At the same time the developing country have unsaturated market, weak industrialization. Less developed technology, produce the product with lower quality and sells at higher price. So these country need to protect their produces and industries from developed nation and avoid free trade because in completion they cannot survive. So they advocate the free trade with caution. They restrict the import and export in selective manner by regulating through various trade barriers.

Both the free trade as well as trade barriers have their own advantage and disadvantaged to all developed and developing nations.

Due to globalization no country can stay isolated in the world. for the development and growth and survival of the country they are interdependent. There are various international level organizations that control and regulated the trade between the nations like WTO, World bank, IMF and other trade association between the nations.

Here we would focus on these two aspect trade barriers as well as free trade.

Trade barrier

 Trade barriers are government-induced restrictions on international trade.

A barrier to trade is a government-imposed restraint on the flow of international goods or services through any regulation or policy that restricts international trade

Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries and developing economies, but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used:

1. Protecting Domestic Employment 
   The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate. The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics, however, countries will continue to produce goods until they no longer have a comparative advantage (not to be confused with an absolute advantage).
2. Protecting Consumers 
   A government may levy a tariff on products that it feels could endanger its population. For example, South Korea may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with disease.
3. Infant Industries 
   The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods, while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.

•   Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant industries. If an industry develops without competition, it could wind up producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could sap economic growth.

1. National Security 
   Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies.
2. Retaliation 
   Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines “Champagne” (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported meat from the United States. If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government’s foreign policy objectives.

TARIFF BARRIERS

The trade barriers can be broadly divided into two broad groups:

(a) Tariff Barriers, and

(b) Non-tariff Barriers.

Tariff barrier

Under the tariff barrier mostly custom duty is imposed on products that move across borders. Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India.

While Customs Duties include both import and export duties, but as export duties contributed only nominal revenue, due to emphasis on raising competitiveness of exports, import duties alone constituted major part of the revenue from Customs Duties and include the following:

Basic Customs Duty

All goods imported into India are chargeable to a duty under Customs Act, 1962 .The rates of this duty, popularly known as basic customs duty, are indicated in the First Schedule of the Customs Tariff Act, 1975 as amended from time to time under Finance Acts.

The duty may be fixed on ad -valorem basis or specific rate basis. The duty may be a percentage of the value of the goods or at a specific rate. The Central Government has the power to reduce or exempt any good from these duties.

1.      Specific Duty: Specific duty is based on the physical characteristics of goods. When a fixed sum of money, keeping in view the weight or measurement of a commodity, is levied as tariff, it is known as specific duty.

For instance, a fixed sum of import duty may be levied on the import of every barrel of oil, irrespective of quality and value. It discourages cheap imports. Specific duties are easy to administer as they do not involve the problem of determining the value of imported goods. However, a specific duty cannot be levied on certain articles like works of art. For instance, a painting cannot be taxed on the basis of its weight and size.

2.      Ad valorem Duty: These duties are imposed “according to value.” When a fixed percent of value of a commodity is added as a tariff it is known as ad valorem duty. It ignores the consideration of weight, size or volume of commodity.

• 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.      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.
4.      Sliding Scale Duty: The import duties which vary with the prices of commodities are called sliding scale duties. Historically, these duties are confined to agricultural products, as their prices frequently vary, mostly due to natural factors. These are also called as seasonal duties.
5.      Countervailing Duty: It is imposed on certain imports where products are subsidised by exporting governments. As a result of government subsidy, imports become more cheaper than domestic goods. To nullify the effect of subsidy, this duty is imposed in addition to normal duties.
6.      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 earning revenue by imposing duty on consumer goods, particularly, on luxury goods whose demand from the rich is inelastic.

• Export Duties: Under Customs Act, 1962, goods exported from India are chargeable to export duty The items on which export duty is chargeable and the rate at which the duty is levied are given in the customs tariff act,1975 as amended from time to time under Finance Acts. However, the Government has emergency powers to change the duty rates and levy fresh export duty depending on the circumstances.

7.      Anti-dumping Duty: At times, exporters attempt to capture foreign markets by selling goods at rock-bottom prices, 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.
8.      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.

Note: Tariffs can be also levied on the basis of international relations. This includes single column duty, double column duty and triple column duty.

NON-TARIFF BARRIERS

A non tariff barrier is any barrier other than a tariff, that raises an obstacle to free flow of goods in overseas markets. Non-tariff barriers, do not affect the price of the imported goods, but only the quantity of imports. Some of the important non-tariff barriers are as follows:

1.      Quota System: Under this system, a country may fix in advance, the limit of import quantity of a commodity that would be permitted for import from various countries during a given period. The quota system can be divided into the following categories:

(a)    Tariff/Customs Quota    (b)       Unilateral Quota

(c)     Bilateral Quota               (d)       Multilateral Quota

•        Tariff/Customs Quota: Certain specified quantity of imports is allowed at duty free or at a reduced rate of import duty. Additional imports beyond the specified quantity are permitted only at increased rate of duty. A tariff quota, therefore, combines the features of a tariff and an import quota.
•        Unilateral Quota: The total import quantity is fixed without prior consultations with the exporting countries.
•        Bilateral Quota: In this case, quotas are fixed after negotiations between the quota fixing importing country and the exporting country.
•        Multilateral Quota: A group of countries can come together and fix quotas for exports as well as imports for each country.

2.      Product Standards: Most developed countries impose product standards for imported items. If the imported items do not conform to established standards, the imports are not allowed. For instance, the pharmaceutical products must conform to pharmacopoeia standards.
3.      Domestic Content Requirements: Governments impose domestic content requirements to boost domestic production. For instance, in the US bailout package (to bailout General Motors and other organisations), the US Govt. introduced ‘Buy American Clause’ which means the US firms that receive bailout package must purchase domestic content rather than import from elsewhere.
4.      Product Labelling: Certain nations insist on specific labeling of the products. For instance, the European Union insists on product labeling in major languages spoken in EU. Such formalities create problems for exporters.
5.      Packaging Requirements: Certain nations insist on particular type of packaging materials. For instance, EU insists on recyclable packing materials, otherwise, the imported goods may be rejected.
6.      Consular Formalities: A number of importing countries demand that the shipping documents should include consular invoice certified by their consulate stationed in the exporting country.
7.      State Trading: In some countries like India, certain items are imported or exported only through canalising agencies like MMTC. Individual importers or exporters are not allowed to import or export canalised items directly on their own.
8.      Preferential Arrangements: Some nations form trading groups for preferential arrangements in respect of trade amongst themselves. Imports from member countries are given preferences, whereas, those from other countries are subject to various tariffs and other regulations.
9.      Foreign Exchange Regulations: The importer has to ensure that adequate foreign exchange is available for import of goods by obtaining a clearance from exchange control authorities prior to the concluding of contract with the supplier.
10.    Other Non-Tariff Barriers: There are a number of other non – tariff barriers such as health and safety regulations, technical formalities, environmental regulations, embargoes, etc.