Instruments of trade Policy/control Trade barriers

Governments use several instruments to influence

exports and imports. The govts measures may limit a firms ability to sell abroad , such as by prohibiting the export of certain products to certain countries, or make it difficult to import / or ban the import of certain goods. Collectively these governmental restriction and incentives to trade are known as protectionism. The main are: Tariffs Subsidies Import quotas Voluntary export restrints Local content requirements Administrative policies, and Antidumping duties.

Tariffs
A tariff(also called a duty) is the most common type of

trade control and is a tax that governments levy on a good shipped internationally ie, Tariff is a tax levied on imports (or Exports) by the government

 Tariffs fall into two categories: Specific duty : levied as a fixed charge for each unit of a good
imported (eg. Rs 1000/= per ton of steel) Ad valorem duty : levied as a proportion of the value of the imported good.

If both , a specific duty and an ad valorem duty is imposed on the same product, the combination is a compound duty In most cases , tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods. When an import tariff is imposed the govt. gains, because the tariff increases govt. revenues; Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods.; consumers lose because they must pay more for certain imports. ie, tariffs are pro-producer and anti-consumer. They protect the producers from foreign competitors. This restriction of supply also raises domestic prices, and the consumers pay a higher price.
Tariff collected by the exporting country are called

Export tariff. If collected by a country through which the goods have passed, is called transit tariff; if collected by the importing country, it is an import

tariff.( most common). Import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that , in theory, could be produced more efficiently abroad. The consequence is an inefficient utilisation of resources. Eg, tariff on wheat imports into india has caused the land of Indian wheat farmers to be used in an unproductive manner. It makes sense for India to purchase their wheat from lowercost foreign producers and to utilise the land now employed in wheat production in some other way, such as growing foodstuffs that cannot be produced more efficiently elsewhere . Tariffs are levied on exports with two objectives ; first, to raise revenue for the govt. and second, to reduce exports from a sector, often for political reasons.

Subsidies
A subsidy is a govt. payment to a domestic producer. Subsidies take many forms like cash grants, low-

interest loans, tax breaks, govt. equity participation in domestic firms. Subsidies help in lowering production costs and thereby, help domestic producers in (1) competing against foreign imports and (2) gaining export markets.

 Agriculture sector is one of the largest beneficiaries

of subsidies in most countries. Eg. EU , Japan and the US pay a huge sum annually in farm subsidies. Non agricultural subsidies are also significant- eg. US Boeing( tax credits for R&D spending); EU- Airbus ( Loans at below- market interest rates.) Subsidies help the domestic producers in gaining international competitiveness, help domestic firms achieve a dominant position in those industries where economies of scale are important and the market is not large enough to profitably support more than a few firms. Downsize of subsidies In practice subsidies are not that successful at increasing the international competitiveness of domestic producers. Rather they tend to protect the inefficient and promote excess production; Reduce international trade by encouraging countries to produce products that could be grown/ produced more cheaply elsewhere and imported .

Import Quotas+
An import quota is a direct restriction on the quantity of some

good that may be imported into a country enforced by issuing import licenses to a group of individuals or firms. A tariff rate quota is one where a lower tariff rate is applied to

imports within the quota than those above the quota. VOLUNTARY EXPORT RESTRAINT a variant of import quota wherein a quota on trade is imposed by the exporting country , typically at the the request of the importing countys govt. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas may nfollow if they do not When imports are limited to a low percentage of the market by a quota of VER, the price is bid up for that limited foreign supply. The foreign producers/exporters realise higher prices. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a Quota rent.

LOCAL CONTENT REQUIREMENT

A local content requirement is a requirement that some specific

fraction of a good be produced domestically. The requirement may be in physical terms or in value. Used mainly by developing countries to shift their base from a simple assembly of products into a local manufacture of component parts. Developed countries also use this mainly to protect local jobs and industry from foreign competition Local content regulation protects a domestic producer of parts by limiting foreign competition (like import quota)., raises the prices of imported components, benefit producers and not consumers. ADMINISTRATIVE POLICIES Govts. Sometimes use informal or administrative policies to

restrict imports and boost exports Admin trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. Eg. Japan customs check , french imports to pass through a small and poorly staffed customs entry point.; Indian used cars import; Admin policies benefit producers and hurt consumers, who are denied access to possibly superior foreign products.

Anti dumping policies

Dumping is defined as selling in a foreign market at below their

cost of production, or as selling goods in a foreign market at below their fair market value. Dumping is resorted to by firms to unload excess production in foreign markets. Dumping is resorted as a means to subsidise prices in a foreign market with a view to driving indigenous competitors out of that market. Antidumping policies are designed to punish foreign firms that engage in dumping, with the objective of protecting domestic producers from unfair foreign competition. Govt. impose antidumping duties called countervailing duties. These duties being punitive are fairly substantial and stay in place for up to five years. Standards and Labels Countries can devise classifications, labelling, and testing standards to allow sale of domestic products but obstruct that of foreign- made ones. Eg. US legislation to require missile defense system aboard aircrafts landing in the US that carry more than 800 passengers. SPECIFIC PERMISSION REQUIREMENTS Import license and foreign exchange control. ADMINISTRATIVE DELAYS

Intentional administrative delays raise the cost of carrying inventory.

Political & Non-Economic reasons arguments/ Rationales for intervention

Protecting Jobs and industries : eg. Tariffs placed on import of foreign steel in March 2002 by President George Bush, was intended to please many steel producers located in states that Bush needed to win elections in 2004. (prevent unemployment and protect infant industries) National security :the need to protect certain industries like defencerelated industries( Aerospace, advanced electronics, semiconductor). Eg. US govts provision of $100 million every year in subsidies to sematech (semiconductor). Nations apply trade restrictions to protect essential domestic industries during peace time so that country is not dependent on a foreign sources of supply during war. Retaliation : some argue that govts. should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to play by the rules of the game. Eg. The threat of imposing 100% tariff on chinese imports, the chinese agreed to tighter enforcement of intellectual property regulations. Maintain Essential Industry : Apply trade restrictions to protect essential domestic industries during during peace time so that a country is not dependent on foreign source of supply during war.

Protecting consumers : Many govts. Bring in regulations to

protect consumers from unsafe products. Eg. EUs ban of harmone treated beef, USs ban of military-style assault weapons, genetically engineered Cotton seeds produced by

Monsanto. Furthering foreign policy objectives : a govt. may grant preferential trade terms to a country it wants to build strong relations with. Also trade policy has been used to pressure or punish rogue states that do not abide by international law or norms. Protecting human rights: Protecting and promoting human rights is an important element of foreign policy for many democracies. Trade policy, like granting MFN status is used as a political weapon to force certain countries to change their internal policies towards human rights. Maintanance or extention of spheres of influence : Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way withi international bodies. (EUs preferential treatment of banana from certain former colonies) Protecting activities that help preserve the national idenity : Countries are held together partially through a unifying sense of identity that sets their citizens apart from those in other nations. To sustain this collective identity, countries limit foreign products and services in certain sectors. ( eg. Rice farming in Japan, south Korea , China; French protection of its cinema industry)

Economic Arguments/ Rationales for Intervention

Until the early 1980s, most economies saw little benefit in govt. intervention and strongly advocated a free trade policy. This position has changed at the margins with the development of strategic trade policy. Infant industry argument : this is the oldest argument for govt. intervention. Alexander Hamilton proposed it in 1792. according to this argument`, Many developing countries have a

potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that govts. should temporarily support new industries ( with tariff, import quotas, and subsidies) until they have grown strong enough to meet international competition. The infant industry argument presumes that the initial output costs for a small-scale industry in a given country may be so high as to make its output noncompetitive in world markets. Eventually competitiveness is not the reward for endurance but the result of the efficiency gains from achieving the economies of scale and their employees to translate experience into higher productivity. Secondly, the infant industry argument relies on an assumption that firms unable to make efficient long-term investment by borrowing from the domestic or international capital market. Consequently, govts. have been required to subsidise long-term investments. 2. Strategic trade policy :Some new trade theorists have proposed the
Strategic trade policy arguments. It is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms to gain first-mover advantages if such an industry are domestic rather r than foreign enterprises. Thus , according to the strategic trade policy argument, a govt. should use subsidies to support promising firms that are active in newly emerging industries. (eg. R&D grants given by US govt . In 1950s and 60s to Boeing; Research support given by Japanese govt. to major electronics companies in the development of LCD screens helped them subsequently capture first-mover advantage. 3. Prevent unemployment : Proposals for free trade affect different sections of workers. While it benefits workers in one industry , it harms workers of the industry where jobs shift to a foreign country. (eg. Unemployed US

steel workers pressured law makers to apply tariffs and quotas to restrict steel imports in order to preserve their jobs and pensions) 4. Promote industrialisation : countries with a large mnfg. base generally have higher per capita incomes. Many countries , such as US and Japan developed and industrial base by largely regulating imports from foreign producers. Many emerging economies try to emulate this strategy, using trade protection to spur local industrialisation. (Surplus workers can more easily increase mnfg. output than agri. Output :; Inflow of foreign investments in industrial area promote sustainable growth.; prices and sale of agri products fluctuate much, which is detrimental to economies; market for industrial products grow faster than markets for agricultural products; local industry reduces imports and promotes exports; Industrial activity helps the nation building process)