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Instruments of Trade and Investment Policies and Trade Barriers

Commercial Policies
A countrys commercial policies are those designed to influence its trade relations with the rest of the world. Although international trade policy can be regarded as the result of opposing forces of free trade and protection it is pertinent to mention here that in theory many countries adhere to the free trade but in practice most have been reluctant to engage in unrestricted free trade With this they are creating different types of trade barriers to international trade.

Trade Barriers to international Trade and Investment

1. Tariff Barriers 2. Non-Tariff Barriers 3. Other Barriers
1. Export restrictions 2. Barriers to Trade in services 3. Foreign investment controls

Tariff Barriers
In simple terms, a tariff ( or customs duty) is a tax imposed by a government on physical goods as they move into or out of a country. It has a similar effect as an indirect tax in that it provides the government with a source of revenue, while in creasing the price of the goods. This means that the local producers are able to price their goods just under the price of the imported product

Types of Tariff
There are two type of customs duties and the third is combination of the two Ad Valorem Duty Specific Duty Compound Duty

Ad Valorem Duty
AV duty is stated in terms of a percentage of the value of an imported article For example 10% or 20% of the total value

Specific Duty
Is expressed in terms of an amount of money per quantity of goods For example 10% per Kilo or Per Gallon

Compound Duty
A combination of an AV Duty and a specific duty is called a compound duty. Whereas specific duties are based on factors such as weight or quantity, ad valorem duties are based on the value of the goods.

Non-Tariff Barriers
While import tariffs were traditional trade policy instruments, since the 1960 governments have increasingly resorted to a variety of non-tariff measures to restrict imports or subsidies export These measures are collectively designated as non-tariff trade barriers.

Types of Non-Tariff Barriers

Quotas International Cartels Dumping Export Subsidies


Quotas or quantitative restrictions are the most visible kind of non-tariff barrier. Unlike tariffs, these restrictions impose absolute limitations upon foreign trade and inhibit market responses, which makes them extremely effective.


Types of Quotas
Unilateral Quotas Negotiated Bilateral or Unilateral Quotas Tariff Quotas Embargo


Unilateral Quotas
These are fixed quotas that are adopted without prior consultation or negotiation with other countries.


Negotiated Bilateral or Unilateral Quota

Under this system, the importing country negotiates with supplying countries, or with groups of exporters in those countries, before deciding the allotment of the quota by definite shares.


Tariff Quotas
Under such a system a specified quantity of a product is permitted to enter the country at a given rate of duty or even duty free. Any additional quantity that may be imported, however, must pay a higher duty. Thus Tariff Quotas combines the features of both a tariff and a quota.


A particular type of quota that sets the limit at zero imports is called an embargo. Often an embargo is placed on imports for clearly political reasons rather than to serve any strictly economic. For example US has had an embargo on imports from Cuba since 1961


International Cartels
An international Cartel is an organization of suppliers of a commodity located in different nations (Or a Group of Government) that agrees to restrict output and exports of the commodity with the aim of maximizing or increasing the total profits of a organization. Although domestic cartels are illegal in the United States and restricted in Europe, the power of international Cartels cannot easily be countered because they do not fall under the jurisdiction of any one nation.

Examples includes
Most notorious of present day international cartels is OPEC (Organization of Petroleum Exporting Countries) which by restricting production and exports succeeded in quadrupling the price of crude oil between 1973 and 1974. Another examples is the international Air Transport Association, a cartel of major international airlines that meets annually to set international air fares and policies.

Cartels success lies in

An international cartel is more likely tobe successful if there are only a few international suppliers of an essential commodity for which there are no close substitutes Since the power of a Cartel lies in its ability to restrict output and exports, there is an incentive for any one supplier to remain outside the cartel or to cheat on it by unrestricted sales at slightly below the cartel price. Cartels are inherently unstable and often collapse or fail. If successful however a cartel could behave exactly as a monopolist.

Dumping is the export of a commodity at below cost or at least the sale of a commodity at a lower price abroad than domestically. Dumping describes the practice of selling a product in one national market at a lower price than it is sold in another national market.


Types of Dumping
Persistent Dumping Predatory dumping Sporadic/Specific Dumping


Persistent Dumping
Persistent Dumping or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than international market


Predatory Dumping
Is the temporary sale of a commodity at a below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad.


Sporadic/Specific Dumping
Specific Dumping is the occasional sale of commodity at a below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.


Trigger-Price Mechanism
In 1978 USA Govt. introduced a trigger-Price mechanism under which a charge that steel was being imported into the USA at lower price was subject to a speedy antidumping investigating. If investigation was proved, the USA Govt. would provide quick relief to the domestic steel industry in the form of a duty that would bring the price of the imported steel equal to that of the lowest cost country.

Export Subsidies
Export Subsidies is the form of dumping. Export subsidies are direct payments or the granting of tax relief and subsidized loans to the nations' exporters or potential exporters and lowinterest loans to foreign buyers so as to stimulate the nations exports. Although export subsidies are illegal by international agreement, many nations provide them in disguised and non-so-disguised forms

Barriers to Service Trade

Services account for about 20% of world trade and services trade has been growing more rapidly than merchandise trade Despite its higher growth rate, trade in services is severely curtailed by non-tariff trade barriers. Many developing countries have nationalized insurance companies, give their state insurance enterprises sole right to domestic insurance business.

Export Restrictions
Export controls may be in the form of bans or embargoes, quantitative restrictions, licensing, export taxes, minimum export prices, and the reservation of exports to designated trading entities. Malaysia has a ban on the export of timber logs presumably to encourage further processing within the country.

Foreign Investment Controls

Foreign investment controls range from the rejection of all foreign direct investment, to limits on the activities of foreign owned firms such as limits on profit remittances and other financial controls. Many governments, particularly in the developing countries, promote import substitution by imposing local content regulations on certain industries (For example Malaysia in the car making sector)