ITL - M6

MODULE 6
BARRIERS TO INTERNATIONAL TRADE

6.1 INTRODUCTION
Free trade refers to the elimination of barriers to international trade. Barriers are part of the
protectionist regime which has been discussed in detail. The most common barriers to trade
are tariffs, quotas, and non-tariff barriers. A tariff is a tax on imported goods, while a quota is
a limit on the amount of goods that may be imported. Both tariffs and quotas raise the price
of and lower the demand for the goods to which they apply. Non-tariff barriers, such as
regulations calling for a certain percentage of locally produced content in the product, also
have the same effect, but not as directly. There is a distinction between the two types of trade
barriers which will be discussed in this chapter.

A tariff is a tax on imports, which is collected by the nation’s government and which raises
the price of the good to the consumer. Also known as duties or import duties, tariffs usually
aim limit imports whilst raising revenue. A quota is a limit on the amount of a certain type of
good that may be imported into the country. A quota can be either voluntary or legally
enforced. The effect of tariffs and quotas is the same: to limit imports and protect domestic
producers from foreign competition. A tariff raises the price of the foreign good beyond the
market equilibrium price, which decreases the demand for and, eventually, the supply of the
foreign good. A quota limits the supply to a certain quantity, which raises the price beyond
the market equilibrium level and thus decreases demand.

Tariffs come in different forms, mostly depending on the reason for their imposition which is
usually to restrict imports. A tariff may also be levied in order to bring the price of the
imported good up to the level of the domestically produced good. The stated goal of this type
of imposition is to level the playing field with domestically produced goods, thereby making
sure that no partiality exists.

A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the
point where its very existence is in peril.

A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In
the eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars
in which no one really benefits.

Non- tariff barriers include quotas, regulations regarding product content or quality, and other
conditions that hinder imports. One of the most commonly used nontariff barriers are product
standards, which may aim to serve as barriers to trade. For instance, when the United States
prohibits the importation of unpasteurized cheese from France, is it protecting the health of
the American consumer, however, it is argued that this regulation is just a measure to ensure
protection of domestic producers.

Other non-tariff barriers include packing and shipping regulations, harbour and airport
permits, and onerous customs procedures, all of which can have either legitimate or purely
anti-import agendas, or a mix of both.

6.2 TARIFF BARRIERS

Trade barriers are actions that are taken by government to increase the net export by restricting
imports of certain products or services, increasing domestic production, domestic income and
employment. The trade barriers could be beneficial to domestic firms by giving advantage to them
while competition with foreign imports however it could be harmful to domestic customers. While
domestics firms enjoys with higher sales, less competition, and more profits domestic consumers may
experience with higher domestic prices by restricting imports of products.

A tariff is a tax imposed by one country on the goods and services imported from another
country. Tariffs are used to restrict imports by increasing the price of goods and services
purchased from another country, making them less attractive to domestic consumers. There
are two types of tariffs: A specific tariff is levied as a fixed fee based on the type of item. Ad
volerum tariff is levied based on the item's value, such as a percentage of value of the item.
Governments may impose tariffs to raise revenue or to protect domestic industries from
foreign markets. This is done as tariffs increase the cost of foreign goods. By making
foreign-produced goods more expensive, tariffs can make domestically produced alternatives
seem more attractive. Governments that use tariffs to benefit particular industries often do so
to protect companies and jobs. Tariffs can also be used as an extension of foreign policy:
Imposing tariffs on a trading partner's main exports is a way to exert economic leverage.
Tariffs are paid to the customs authority of the country imposing the tariff.

Tariffs can have unintended side effects, however. They can make domestic industries less
efficient and innovative by reducing competition. They can hurt domestic consumers, since a

lack of competition tends to push up prices. They can generate tensions by favouring certain
industries, or geographic regions, over others. For example, tariffs designed to help
manufacturers in cities may hurt consumers in rural areas who do not benefit from the policy
and are likely to pay more for manufactured goods. Finally, an attempt to pressure a rival
country by using tariffs can devolve into an unproductive cycle of retaliation, commonly
known as a trade war.

6.3 HISOTRY OF TARIFFS

The history of tariffs can be traced back to pre-modern Europe. Much of it has originated
from the earliest trade theory, mercantilism which stated that a nation's wealth was believed
to consist of fixed, tangible assets, such as gold, silver, land, and other physical resources.
Trade was seen as a zero-sum game that resulted in either a clear net loss of wealth or a clear
net gain. If a country imported more than it exported, its gold would flow abroad, draining its
wealth. Cross-border trade was viewed with suspicion, and countries much preferred to
acquire colonies with which they could establish exclusive trading relationships, rather than
trading with each other. In fact, Mercantilism encouraged the existence of a trade surplus.
This is also known as the selfish trade regime due to its advocacy to make good the loss of
another nation.

This system, relied heavily on tariffs and even outright bans on trade. The colonizing country,
which saw itself as competing with other colonizers, would import raw materials from its
colonies, which were generally barred from selling their raw materials elsewhere. The
colonizing country would convert the materials into manufactured wares, which it would sell
back to the colonies. High tariffs and other barriers were put in place to make sure that
colonies purchased manufactured goods only from their colonizers.

Mercantilism advocated the protectionist regime which was criticized. The advocates of free
trade termed it as one of the most harmful measures to a global trading regime. Adam
Smith’s Absolute Advantage and David Ricardo’s Comparative Advantage maintain the free
trade regime. It maintains that if one country is better at producing a certain product, while
another country is better at producing another, each should devote its resources to the activity
at which it excels. The countries should then trade with one another, rather than erecting
barriers that force them to divert resources toward activities they do not perform well. Tariffs,

according to this theory, are a drag on economic growth, even if they can be deployed to
benefit certain narrow sectors under some circumstances.

These two approaches of protectionist strategies and the free trade were in existence
sometimes in turns and many a times in coherence. Free trade enjoyed prominence in the late
19th and early 20th centuries. Trade wars and lowering of economies due to depression and
crisis brought about the emergence of protectionism which was prominent from World War I
till World War II including high tariffs which were in dominance until the end of the war.

Free trade made a comeback culminating in the creation in 1995 of the World Trade
Organisation which acts as an international forum for settling disputes and laying down
ground rules. Free trade agreements were rampant. NAFTA and the European Union are
examples of this.

6.4 USES OF TARIFFS

Tariffs are often created to protect small scale industries and domestic industries especially
those in developing or Leas Developed Countries. the economies of the world are different
and their classification has been made keeping in mind these differences into developing,
developed and least developed countries. Developed countries enjoy an advantage over the
latter categories as they are seemingly stronger players in the international trade regime.
Many a times, the economies in the latter groups are unable to cope with the competition they
face from these develop d countries. In order to protect their home industries, tariffs may be
imposed. The fallacy is, that many a times developed countries also impose tariffs which
make their products ill affordable. This becomes a critical issue when such imposition is for
products that can benefit the world at large.

The levying of tariffs is often highly politicized. The possibility of increased competition
from imported goods can threaten domestic industries. These domestic companies may lay
off or even fire workers or shift production abroad to cut costs, which means higher rates of
unemployment and a less satisfied community in general. The unemployment argument often
shifts to domestic industries complaining about cheap foreign labour, and how poor working
conditions and lack of regulation allow foreign companies to produce goods more cheaply.

A government may also levy a tariff on products that it feels could endanger its population.
This is specially so in case of food products such as meat and tinned or processed foods.

The use of tariffs to protect infant industries can be seen by the strategy employed by many
developing nations known as the Import Standardisation Policy. 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 way
of competition. It decreases unemployment and allows developing countries to shift from
agricultural products to finished goods.

Critics of this regime usually argue that 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 hamper economic stability

Tariffs are also employed by developed countries to protect certain industries that are deemed
strategically important, such as those supporting national security. Defence industries are
often viewed as vital to state interests, and often enjoy significant levels of protection

Countries may also set tariffs as a retaliation technique, if they think that a trading partner has
not played by the rules. Retaliation can also be employed if a trading partner goes against the
government's foreign policy objectives. Many such retaliatory measures have been employed
by countries over time and have resulted in massive trade wars.

6.5 NON-TARIFF BARRIERS
A non- tariff barrier(NTB) is a way to restrict trade using trade barriers in a form other than a
tariff. Non-tariff barriers include general or product specific quotas, complex and discrimitory
rules of origin, embargoes, sanctions, and levies. As part of their political or economic strategy,
large developed countries frequently use nontariff barriers to control the amount of trade they
conduct with other countries.

Countries commonly use non-tariff barriers in international trade, and they typically base these
barriers on the availability of goods and services and political alliances with trading countries.
Overall, any barrier to international trade will influence the economy because it limits the

functions of standard market trading. The lost revenue resulting from the barrier to trade is called
an economic loss.

Countries can set various types of alternative barriers in place of standard tariffs. Such barriers
often release countries from paying added tax on imported goods and create other barriers that
have a meaningful yet different monetary impact. There are various types of non-tariff barriers
broadly classified as under:

• Quotas
• Subsidies
• Import licensing
• Rules for the valuation of goods at customs
• Pre-shipment inspection
• Rules of origin
• Investment measures
• Embargoes
• Voluntary trade restraints
• Foreign exchange restrictions

6.5 QUOTAS

Non-tariff barriers (NTBs) are restrictions that are not in the form of tariff. The most
important NTB is quota or quantitative restrictions. Under quota, import of a commodity is
restricted to a specific quantity. For example, if a quota of 1000 units is imposed on the
import of cars whose price is above Rs. 1 crore; only 1000 such cars will be imported. There
is no tax on imports. Import is controlled through license.

Under this system, the maximum quantity of different commodities, which would be allowed
to be imported over a period of time from various countries, is fixed in advance. The quantity
allowed to be imported or quota fixed normally depends upon the relations of the two
countries and the need of the importing country.

Quotas are very often combined with Licensing System to regulate the flow of imports over
the quota period as also to allocate them between various importers and supplying countries.

In this system a license or a permit has to be obtained from the Government to import the
goods mentioning the quantity and the country from which to import.

The difference between tariff and quota is very clear. In the case of a tariff, unlimited amount
of the commodity can be imported. Only condition is that importers should pay the tax. On
the other hand, in the case of quota, only a limited quantity can be imported. In this sense,
quota gives more protection to domestic producers against imports compared to tariff.
Similarly, they can well anticipate the import quantity while designing their production
strategies.
From the angle of international trade, quota is more dangerous than tariff as quantity of
imports is strictly limited. It discourages trade more compared to tariff. Even if consumers are
ready to pay higher price, commodity can’t be imported above the set limit. Here, tariff has
more flexibility.

The WTO instructs its members to abolish quota. Instead, tariff can be imposed and this tariff
should be kept within the limit set by the WTO

6.6 SUBSIDIES

The WTO SCM Agreement contains a definition of the term “subsidy”. The definition
contains three basic elements:
(i) a financial contribution
(ii) by a government or any public body within the territory of a Member
(iii) Which confers a benefit. All three of these elements must be satisfied in order for a
subsidy to exist.

The SCM Agreement creates two basic categories of subsidies: those that are prohibited,
those that are actionable (i.e., subject to challenge in the WTO or to countervailing
measures). All specific subsidies fall into one of these categories.

Two categories of subsidies are prohibited by Article 3 of the SCM Agreement. The first
category consists of subsidies contingent, in law or in fact, whether wholly or as one of
several conditions, on export performance (“export subsidies”). A detailed list of export
subsidies is annexed to the SCM Agreement. The second category consists of subsidies
contingent, whether solely or as one of several other conditions, upon the use of domestic
over imported goods (“local content subsidies”). These two categories of subsidies are
prohibited because they are designed to directly affect trade and thus are most likely to have
adverse effects on the interests of other Members.

The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) addresses
two separate but closely related topics: multilateral disciplines regulating the provision of
subsidies, and the use of countervailing measures to offset injury caused by subsidized
imports.

6.7 IMPORT LICENSING

Although less widely used now than in the past, import licensing systems are subject to
disciplines in the WTO. The Agreement on Import Licensing Procedures says import
licensing should be simple, transparent and predictable. For example, the agreement requires
governments to publish sufficient information for traders to know how and why the licences
are granted. It also describes how countries should notify the WTO when they introduce new
import licensing procedures or change existing procedures. The agreement offers guidance on
how governments should assess applications for licences.

Some licences are issued automatically if certain conditions are met. The agreement sets
criteria for automatic licensing so that the procedures used do not restrict trade.

Other licences are not issued automatically. Here, the agreement tries to minimize the
importers’ burden in applying for licences, so that the administrative work does not in itself
restrict or distort imports. The agreement says the agencies handling licensing should not
normally take more than 30 days to deal with an application — 60 days when all applications
are considered at the same time.

6.8 RULES FOR THE VALUATION OF THE GOODS AT CUSTOMS

For importers, the process of estimating the value of a product at customs presents problems
that can be just as serious as the actual duty rate charged. The WTO agreement on customs
valuation aims for a fair, uniform and neutral system for the valuation of goods for customs
purposes — a system that conforms to commercial realities, and which outlaws the use of
arbitrary or fictitious customs values. The agreement provides a set of valuation rules,
expanding and giving greater precision to the provisions on customs valuation in the original
GATT. A related Uruguay Round ministerial decision gives customs administrations the right
to request further information in cases where they have reason to doubt the accuracy of the
declared value of imported goods. If the administration maintains a reasonable doubt, despite
any additional information, it may be deemed that the customs value of the imported goods
cannot be determined on the basis of the declared value.

6.9 PRE-SHIPMENT INSPECTION

Pre-shipment inspection is the practice of employing specialized private companies (or
“independent entities”) to check shipment details — essentially price, quantity and quality —
of goods ordered overseas. Used by governments of developing countries, the purpose is to
safeguard national financial interests (preventing capital flight, commercial fraud, and
customs duty evasion, for instance) and to compensate for inadequacies in administrative
infrastructures.

The Pre-shipment Inspection Agreement recognizes that GATT principles and obligations
apply to the activities of preshipment inspection agencies mandated by governments. The
obligations placed on governments which use preshipment inspections include non-
discrimination, transparency, protection of confidential business information, avoiding
unreasonable delay, the use of specific guidelines for conducting price verification and
avoiding conflicts of interest by the inspection agencies. The obligations of exporting
members towards countries using preshipment inspection include non-discrimination in the
application of domestic laws and regulations, prompt publication of those laws and
regulations and the provision of technical assistance where requested.

The agreement establishes an independent review procedure. This is administered jointly by
the International Federation of Inspection Agencies (IFIA), representing inspection agencies,

and the International Chamber of Commerce (ICC), representing exporters. Its purpose is to
resolve disputes between an exporter and an inspection agency.

6.10 RULES OF ORIGIN

“Rules of origin” are the criteria used to define where a product was made. They are an
essential part of trade rules because a number of policies discriminate between exporting
countries: quotas, preferential tariffs, anti-dumping actions, countervailing duty (charged to
counter export subsidies), and more. Rules of origin are also used to compile trade statistics,
and for “made in ...” labels that are attached to products. This is complicated by globalization
and the way a product can be processed in several countries before it is ready for the market.

The Rules of Origin Agreement requires WTO members to ensure that their rules of origin
are transparent; that they do not have restricting, distorting or disruptive effects on
international trade; that they are administered in a consistent, uniform, impartial and
reasonable manner; and that they are based on a positive standard (in other words, they
should state what does confer origin rather than what does not).

For the longer term, the agreement aims for common (“harmonized”) rules of origin among
all WTO members, except in some kinds of preferential trade — for example, countries
setting up a free trade area are allowed to use different rules of origin for products traded
under their free trade agreement. The agreement establishes a harmonization work
programme, based upon a set of principles, including making rules of origin objective,
understandable and predictable. The work was due to end in July 1998, but several deadlines
have been missed. It is being conducted by a Committee on Rules of Origin in the WTO and
a Technical Committee under the auspices of the World Customs Organization in Brussels.
The outcome will be a single set of rules of origin to be applied under non-preferential
trading conditions by all WTO members in all circumstances.

An annex to the agreement sets out a “common declaration” dealing with the operation of
rules of origin on goods which qualify for preferential treatment.

6.11 INVESTMENT MEASURES

The Trade-Related Investment Measures (TRIMs) Agreement applies only to measures that
affect trade in goods. It recognizes that certain measures can restrict and distort trade, and
states that no member shall apply any measure that discriminates against foreigners or foreign
products (i.e. violates “national treatment” principles in GATT). It also outlaws investment

measures that lead to restrictions in quantities (violating another principle in GATT). An
illustrative list of TRIMs agreed to be inconsistent with these GATT articles is appended to
the agreement. The list includes measures which require particular levels of local
procurement by an enterprise (“local content requirements”). It also discourages measures
which limit a company’s imports or set targets for the company to export (“trade balancing
requirements”).

Under the agreement, countries must inform fellow-members through the WTO of all
investment measures that do not conform with the agreement. Developed countries had to
eliminate these in two years (by the end of 1996); developing countries had five years (to the
end of 1999); and least-developed countries seven. In July 2001, the Goods Council agreed to
extend this transition period for a number of requesting developing countries.

The agreement establishes a Committee on TRIMs to monitor the implementation of these
commitments. The agreement also says that WTO members should consider, by 1 January
2000, whether there should also be provisions on investment policy and competition policy.
This discussion is now part of the Doha Development Agenda.

6.12 EMBARGOES

Embargoes are outright prohibition of trade in certain commodities. As well as quotas,
embargoes may be imposed on imports or exports of particular goods in respect of certain
goods supplied to or from specific countries, or in respect of all goods shipped to certain
countries. Although an embargo may be imposed for phytosanitary reasons, more often the
reasons are political (see economic sanctions and international sanctions). Embargoes are
generally considered legal barriers to trade, not to be confused with blockades, which are
often considered to be acts of war.

6.13 VOLUNTARY TRADE RESTRICTIONS

In the past decade, a widespread practice of concluding agreements on the "voluntary" export
restrictions and the establishment of import minimum prices imposed by leading Western
nations upon exporters that are weaker in an economic or political sense. These types of
restrictions involve the establishment of unconventional techniques when trade barriers are
introduced at the border of the exporting country instead of the importing country.

Thus, the agreement on "voluntary" export restraints is imposed by the exporter under the
threat of sanctions to limit the export of certain goods to the importing country. Similarly, the
establishment of minimum import prices should be strictly observed by the exporting firms in
contracts with the importers of the country that has set such prices. In the case of reduction of
export prices below the minimum level, the importing country imposes anti-dumping duty,
which could lead to withdrawal from the market. “Voluntary" export agreements affect trade
in textiles, footwear, dairy products, consumer electronics, cars, machine tools, etc.

6.14 FOREIGN EXCHANGE RESTRICTIONS

Foreign exchange restrictions and foreign exchange controls occupy an important place
among the non-tariff regulatory instruments of foreign economic activity. Foreign exchange
restrictions constitute the management of transactions between national and foreign
operators, either by limiting the supply of foreign currency (to restrict imports) or by state
manipulation of exchange rates (to boost exports and limit imports).

6.15 CONCLUSION

Trade barriers are restrictions on international trade imposed by the government. They either
impose additional costs or limits on imports and/or exports in order to protect local industries.
There are three types of trade barriers: Tariffs, Non-Tariffs, and Quotas. Tariffs are taxes that
are imposed by the government on imported goods or services. Meanwhile, non-tariffs are
barriers that restrict trade through measures other than the direct imposition of tariffs. And
last but not least, quotas are restrictions that limit the quantity or monetary value of specific
goods or services that can be imported over a certain period of time. There are advocates who
favour the imposition of these barriers by focusing on the advantages that have been
mentioned before. However, the disadvantages of the rise of protectionism by way of
imposition is tremendous. The usage of thee trade barriers by high income countries or
developed countries leaves no room for competition by countries who do not enjoy that
status. This makes the trading scheme lop sided and fosters animosity which ultimately leads
to disharmony can even lead to trade wars.

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