TRADE BARRIERS - (TARIFF BARRIERS)

A trade barrier is defined as any hurdle, impediment or road block that hampers the smooth flow of goods, services and payments from one destination to another. They arise from the rules and regulations governing trade either from home country or host country or intermediary. Trade barriers are man-made obstacles to the free movement of goods between different countries, and impose artificial restrictions on trading activities between countries. Despite the fact that all international organizations such as GATT, WTO and UNCTAD advocate reduction or elimination of barriers, they still continue in different forms. Free and fair international trade is an ideal situation as it is beneficial to all countries. However, different countries impose various types of barriers. The contribution of GATT in removing such trade barriers has not been satisfactory as even now, both developed and developing countries, present such trade barriers. Such barriers are usually imposed by the country that imports the goods, but they adversely affect the volumes of both imports and exports. The volume of exports is reduced due to such trade restrictions and the tariff results in an escalation in prices. OBJECTIVES OF TRADE BARRIERS 1. To protect domestic industries from foreign goods. 2. To promote new industries and research and development activities by providing a home market for domestic industries. 3. To maintain favorable balance of payment, by restricting imports from foreign countries. 4. To conserve foreign exchange reserves of the country by restricting imports from foreign countries. 5. To protect the national economy from dumping by other countries with surplus production. 6. To mobilize additional revenue by imposing heavy duties on imports. This also restricts conspicuous consumption within the country. 7. To counteract trade barriers imposed by other countries. 8. To encourage domestic production in the domestic market and thereby make the country strong and self-sufficient. Since trade barriers are harmful for the growth of free trade, efforts were made to reduce such trade barriers, and international organisations initiated collective efforts of all countries involved in trade. WTO ministerial conferences held in concern or Doha Qatar or Hong Kong are focused on breaking barriers of trading in different forms. TYPES OF TRADE BARRIERS Broadly, Trade barriers are classified as tariff barriers and non-tariff barriers. They are now an inseparable part of global business and the location of a business operation and pricing

decisions are determined by tariffs. A country may use both tariff and non-tariff barriers order to restrict the entry of foreign goods.

Tariff Barriers A tariff barrier is a levy collected on goods when they enter a domestic tariff area (DTA) through customs. Tariff refers to the duties imposed on internationally traded commodities when they cross national boundaries and may be in the form of heavy taxes or custom duties (operated through a price mechanism) on imports, so as to discourage their entry into the home country for marketing purposes. Tariffs enhance the price of the imported goods, thereby restricting their sales as well as their import. Governments impose tariffs only on imports and not on exports as they are interested in export promotion. Only a few exported items of any country are taxed. The aim of a tariff is thus to raise the prices of imported goods in domestic markets, reduce their demand and thereby discourage their imports. Tariff barriers are major determinant factor to build or get away from the business. In India, over the past ten years the prime import duty has been reduced to 15% from 100% on many consumer durables and electrical items.

Classification of Tariffs A) On the basis of origin and destination of the goods crossing national boundaries 1. Export duty: An export duty is a tax levied by the country of origin, on a commodity designated for use in other countries. The majority of finished goods do not attract export duty. Such duties are normally imposed on the primary products in order to conserve them for domestic industries. In India, export duty is levied on oilseeds, coffee and onions. 2. Import duty: An import duty is a tax imposed on a commodity originating in another country by the country for which the product is designated. The purpose of heavy import duties is to earn revenue, to make imports costly and to provide protection to domestic industries. Countries impose heavy import duties to restrict imports and thereby remove the deficit in the balance of trade and balance of payment. 3. Transit duty: A transit duty is a tax imposed on a commodity when it crosses the national frontier between the originating country and the country which it is cosigned to. African and Latin American nations impose such transit duties at any point of time. Sri Lanka is another country enjoying such benefits from Indian companies. B) On the basis of quantification of tariffs 1. Specific duty: A specific duty is a flat sum collected on physical unit of the commodity imported. Here, the rate of the duty is fixed and is collected on each unit imported. For example, Rs. 800 on each TV set or washing machine or Rs. 3000 per metric ton on cold rolled steel coils. 2. Ad-valorem duty: This duty is imposed at a fixed percentage on the value of a commodity imported. Here the value of the commodity on the invoice is taken as the base for calculation of the duty, e.g., 3% advalorem duty on the C&F value of the goods imported. In the advalorem duty, the percentage of the duty is decided but the actual amount of the duty changes as per the FOB value of a product. 3. Compound duty: A tariff is referred to as compound duty when the commodity is subject to both specific and ad-valorem duty. C) On the basis of the purpose they serve 1. Revenue tariff: It aims at collecting substantial revenue for the government, but does not really obstruct the flow of imported goods. Here, the duty is imposed on items of mass consumption, but the rate of duty is low. 2. Protective tariff: Protective tariff aims at giving protection to home industries by restricting or eliminating competition. Protective tariffs are usually high so as to reduce imports. However, if the protective duties are too high, it may hurt consumers, as imports will stop, leading to shortages in the consumer market. 3. Anti-dumping duty: Dumping is the commercial practice of selling goods in foreign markets at a price below their normal cost or even below their marginal cost so as to capture

foreign markets. Many countries follow dumping practices. It is international practice which has a do or die instinct associated with the companys policy. It is harmful to less developed countries where the cost of production is high. 4. Countervailing duty: Such duties are similar to anti-dumping duties but are not so severe. Countervailing duties are imposed to nullify the benefits offered, through cash assistance or subsidies, by the foreign country to its manufacturers. The rate of such duty will be proportional to the extent of cash assistance or subsidy granted. D) On the basis of trade relations 1. Single column tariff: Under this system tariff rates are fixed for various commodities and the same rates are made applicable to imports from all other countries. 2. Double column tariff: Under this system two rates of duty are fixed on all or some commodities. The lower rate is made applicable to a friendly country or to a country with which the importing country has a bilateral trade agreement. The higher rate is applicable to all other countries. 3. Triple column tariff: Here, three different rates of duties are fixed. They are general tariff, international tariff and preferential tariff. The first two categories have minimum variance but the preferential tariff is substantially lower than the general tariff and is applicable to friendly countries where there is a bilateral relationship. Mutual understanding of products and tariffs is concluded through a cartel. It is also called preferential tariff. Benefits of tariff to the home country 1. Imports from abroad are discourage or even eliminated to a considerable extent. 2. Protection is given to the home industries and manufacturing sector. This facilitates an increase in domestic production. 3. Consumption of foreign goods is reduced to a minimum and the attraction for imported goods is brought down. 4. Tariff brings in substantial revenue to the government. In addition it also creates employment opportunities within the country, by promoting domestic industries. 5. Tariffs aim to reduce the deficit in the balance of trade and balance of payment of a country.