LESSON – 35

TRADE BARRIERS

Learning outcomes

After studying this unit, you should be able to:

Define Trade Barriers

Identify Tariff Barriers
Classify Tariff
Differentiate between Tariff Barriers and Non Tariff Barriers
Identify Non Tariff Barriers and Indian Export

Trade Barriers

Though there are a number of advocates of free trade, international trade is generally
characterised by the existence of various trade barriers. Trade barriers refer to the
government policies and measures which obstruct the free flow of goods and services
across national borders. The main objectives of imposing trade barriers are:

(i) To protect domestic industries or certain other sectors of the economy

from foreign competition
(ii) To guard against dumping;
(iii) To promote indigenous research and development;
(iv) To conserve the foreign exchange resources of the country
(v) To make the Balance of Payments 'position more favourable; and
(vi) To curb conspicuous consumption and mobilise revenue for the govern-
ment. .

Trade barriers may be broadly divided into two groups, namely, tariff barriers and non-
tariff barriers (NBTs).

TARIFF BARRIERS

Tariff in international trade refer to the duties or taxes imposed on intemationally lraded
commodities when they cross the national borders.

Tariff is a very important instrument of trade protection. However, mostly because of the
efforts of the GATT/WTO aimed at trade liberalisation, in the Industrial countries, there
has been a substantial reduction in the tariffs on manufactured goods over the last five
decades, or so. In the developing countries although the tariff rates are still fairly high,
many of them have also been progressively reducing the tariff levels.
Tariffs are generally regarded as less restrictive than other methods of protection like
quantitative restrictions. Therefore, organisations like the WTO generally prefer tariff to
non tariff barriers.

Classification of tariffs

There are different ways of classifying tariffs.

1. On the basis of the origin and destination of the goods crossing the national boundary,
tariffs may be classified into the following three categories:

Export Duties
An export duty is a tax imposed on a commodity originating from the duty levying
country destined for some other country.

Import Duties
An import duty is a tax imposed on a commodity originating abroad and destined for the
duty-levying country.

Transit Duties
A transit duty is a tax imposed on a commodity crossing the national frontier originating
from and destined for other countries.

2. With reference to the basis for quantification of the tariff, we may have the following
three-fold classification:

Specific Duties
A specific duty is a flat sum per physical unit of the commodity imported or exported.
Thus, a specific import duty is a fixed amount of duty levied upon each unit of the
commodity imported.

Ad- Valorem Duties

Ad- Valorem duties are levied as a fixed percentage of the value of the commodity
imported/exported. Thus, while the specific duty is based on the quantum of the
commodity imported/exported, the ad-valorem duty is based on the value of the
commodity imported/exported.

Compound Duties
When a commodity is subject to both specific and ad-valorem duties, the tariff is
generally referred to as compound duty.

3. With respect to its application between different countries, the tariff system
may be classified into the following three types:

Single-column Tariff
The single-column, also known as uni-linear tariff system, provides a uniform rate of
duty for all like commodities without making any discrimination between countries.
Double-Column Tariff
Under the double-column tariff system, there are two rates of duty on some or all
commodities. Thus, the double-column tariff discriminates between countries.

The double-column tariff system maybe broadly divided into (a) general and
conventional tm4J and (b) maximum and minimum tariff The general and conventional
tariff system consists of two schedules of tariffs the general and the conventional. The
general schedule is l1xed by the legislature at the very start while the conventional
schedule results from the conclusion of commercial treaties with other countries. The
maximum and minimum system consists of two autonomously determined schedules of
tariff-the maximum and the minimum. The minimum schedule applies to those countries
who have obtained the concession as a result of the treaty or through MFN (most
favoured nation) pledge unci the maximum schedule applies to all other countries.

Triple-Column Tariff
The triple-column tariff system consists of three autonomously determined tariff
schedules-the general, the intermediate and the preferential. The general and intermediate
rates are similar to the maximum and minimum rates mentioned above under the double-
column tariff system. The preferential rate was generally applied in the case of trade
between the mother country and its colonies.

4. With reference to the purpose they serve, tariffs may be classified into the following
categories:

Revenue Tariff
Sometimes the main intention of the government in imposing tariff may be to obtain
revenue. When raising revenue is the primary motive, the rates of duty are generally low
lest imports be highly discouraged, thus defeating the objective of mobilising revenue for
the government. Revenue tariffs tend to fall on articles of mass consumption.

Protective Tariff
Protective tariff is intended, primarily, to accord protection to domestic industries from
foreign competition. Naturally, the rates of duty tend to be very high in this case because,
generally, only high rates of duty curtail imports to a significant extent.

Countervailing and Anti-Dumping Duties

Countervailing duties may be imposed on certain imports when they have been
subsidised by foreign governments. Anti-dumping duties are applied to imports which are
being dumped on the domestic market at a price either below their cost of production or
substantially lower than their domestic prices. CounterVailing and anti-dumping duties
are, generally, penalty duties as an addition to the regular rates.

Impact of Tariff
Tariff affects an economy in different ways. An import duty generally has the following
effects:
Protective Effect
An import duty is likely to increase the price of the imported goods. This increase in the
price of imports is likely to reduce imports and increase the demand for domestic goods.
Import duties may also enable the domestic industries to absorb higher production costs.
Thus, as a result of the protection accorded by the tariff. the domestic industries are able
to expand their output.
Consumption Effect
The increase in prices resulting trom the import duty usually reduces the consumption
capacity of the people.

Redistribution Effect
If the import duty causes an increase in the price of domestically produced goods, it
amounts to redistribution of income between the consumers and producers in favour of
the producers. Further, a part of the consumer income is transferred to the exchequer by
means of the tariff.

Revenue Effect
As mentioned above, a tariff means increased revenue for the government (unless, of
course, the rate of tariff is so prohibitive that it completely stops the import of the
commodity subject to the tariff).

Income and Employment Effect

The tariff may cause a switch over from spending on foreign goods to spending on
domestic goods. This higher spending within the country may cause an expansion of
domestic income and employment.

Competitive Effect
The competitive effect of the tariff is, in fact, an anti-competitive effect in the sense that
protection of domestic industries from foreign competition may enable the domestic
industries to obtain monopoly power with all its associated evils.

Terms of Trade Effect

In a bid to maintain the previous level of imports to tariff imposing country, if the
exporter reduces the prices, the tariff imposing country is able to get their imports at a
cheaper price. This will, ceteris paribus, improve the terms of trade of the country
imposing the tariff.

Balance of Payments Effect

Tariffs, by reducing the volume of imports, may help the country to improve its Balance
of Payments position.

Diagrammatic Illustration of Effects of Tariff

Figure 10.1 illustrates the consumption, protective, revenue and redistributive effects of
tariff. DD1 is the domestic demand curve and SS1 the domestic supply curve. In the
absence of foreign trade the equilibrium price is P2 domestic demand and supply being
Q4' For simplicity, we assume that the foreign supply is perfectly elastic at price P.
Therefore, under tree trade the supply position is represented by P F. Under free trade, at
price P the total domestic demand is Q; Q2 of which is met I by domestic supply and Q2
Q is imported. Now, assume that the govemment imposes a tariff of PP1 per unit of
import so that the price rises from P to P1. Consequent upon the increase in price, the
total domestic demand falls to Q1. The increase in price enables the domestic supply to
increase from Q" to Q3. The remaining part of the domestic demand (Q3 Q1) is met by
import.

Under free trade, the total consumers' surplus is DPF but with the taritl it is reduced to
DP1F1; the total loss of consumers' surplus being P1P FF1. This loss to consumers is
absorbed in a Humber of ways.

When the tariff per unit is PP1, the total import is Q3 Q1 Therefore. government gets tariff
revenue equivalent to ABCF1 (PP1 X Q3 Q1). This is the revenue effect of the tariff.

At the higher, tariff imposed, price, the producers get an additiona1 retum of PP1 on
every unit. As the supply curve also represents the cost curve, the total gain to the
producers due to the imposition of the tariff is PP1 AE. This additional economic rent to
the producers represents a transfer of income from the consumers to the producers. This
is the redistributive effect of the tariff.

Protection enables the domestic producers to increase supply from Q2 to Q3 ABE

represents the sum of the additional cost per unit of output. This is the protective effect of
the tariff.

Due to the increase in price as a result of the protection, consumption has fallen nom Q to
Q1 causing a loss of consumer' surplus by C FF1 This is the consumption effect of the
tariff .

It must be noted that part of the loss of the consumer surplus represented by the revenue
effect and the redistribution effect are gained by the government and the producers.
Hence they do not represent a loss to the economy; they represent transfer of income nom
one sector to other sectors within the economy. Hence the total net loss imposed by the
tariff upon the economy is thus a sum of the protective effect and the consumption effect
(ABE + CFF1).

The effect of tariff on terms of trade can be illustrated with the help of offer curves. In
Fig. 10.2, OH is the offer curve of the home country exporting X goods and importing Y
goods and OF is the offer curve of the foreign country exporting Y goods and importing
X goods. The free trade equilibrium terms of trade is represented by the slope of OT.

Now Suppose that the home country imposes a tariff on its imports so that its offer curve
shifts from OH to OHI, This means that now the home country is getting a larger quantity
of imports for a given quantity of its exports, or conversely, it offers a lesser quantity of
exports for a given quantity of imports. New equilibrium is established by the intersection
of OH1 and OF at E1 and OT1 emerges as the new equilibrium terms of trade. OT1 is
more favourable than OT for the home country while it is more unfavourable for the
foreign country. It must, however, be noted that such an improvement in the terms of
trade of the home country is possible with the tariff only if the foreign country docs not
retaliate by imposing tariff on its imports from the home country.

Nominal and Effective Tariffs

Nominal tariff refers to the actual duty on an imported item. For example, if a commodity
is subject to an import duty of 25 per cent ad-valorem, the nominal tariff is 25 per cent.
Corden defines 1 the effective protective rate as the percentage increase in value
added per unit in an economic activity which is made possible by the tariff structure
relative to the situation in the absence of tariffs but the same exchange rates. It depends
not only on the tariff on the commodity produced but also on the input coefficients and
the tariffs on the inputs.
Effective protective rate of industry ‘j' (Ej) may be defined as the difference between the
industry's value added under protection (Vj') and under free market conditions (Vj)
expressed as a percentage of free market value added. .
Vj – Vj
Ej = ----------
Vj

Obviously, the protective effect of a tariff on domestic manufacturing is larger when the
import duty on the raw materials used in its manufacture is lower.

Optimum Tariff

As a country raises its tariff (import duty) unilaterally, the terms of trade may improve
and the volume of trade may decline. The improvement in the temlS of trade initially
tends to more than offset the accompanying reduction in the volume of trade. Hence a
higher trade indifference curve is reached and community welfare is enhanced. Beyond
some point, however, it is likely that the detrimental effect of successive reductions in
trade volume will begin to outweigh the p03itive effect of further improvements in the
tenus of trade so that community welfare begins to fall. Somewhere in between there
must be a tariff which optimises a country's welfare level under these conditions.

Thus, the optimum tariff is the rate of tariff beyond which any further gain from an
improvement in terms of trade would be more than offset by the accompanying decline in
trade volume. By raising the rate of tariff beyond the optimum rate, it may be still
possible to improve the country's terms of trade but the gain I)'om this improvement in
the terms of trade is more than offset by the decline in the volume of trade. \
Figure l0.3 illustrates optimum tariff. OH is the offer curve of the home country and OF
is the offer curve of the foreign country. Under free trade both the offer curves intersect
at E and aT is the equilibrium terms of trade. IC is the (rnde indifference curve of the
home country. Any tariff which distorts the home country’s offer curve in such a way that
it crosses the foreign country's offer (_lIrve between points E and S will lead to a higher
trade indifference level. If the m'w tariff distorted trade points is at S, the trade
indifference level will be unchanged because: S is on the same old indifference curve IC.

The highest possible trade indifference curve that the home country can reach is one that
is ta11gent to the foreign offer curve. In Fig. 10.3 it is the trade indifference curve II C]
which is tangent to OF at point EI' Hence if the home country can impose a tariff of such
magnitude that the tariff distOlied offer curve (OHI) intersects the foreign offer curve at
point E I' it will be the optimum tar(ft: because, given the foreign count.ry's offer curve
OF, there is no tariff the home country can impose that' will yield a higher level of
community welfare.

The magnitude of the optimum tariff depends upon the elasticity of the foreign offer
curve. The less elastic the foreign offer curve is, the higher will be the optimum tariff. if
the foreign offer curve is perfectly elastic, no tariff will yield the home country improved
terms of trade.

In the above analysis we have assumed that the foreign country does not retaliate against
the imposition of tariff by the home country. However, the foreign countly will be
tempted to retaliate and the retaliation and counter retaliations might set off a tariff war
affecting the interests of both the countries.

NON-TARIFF BARRIERS

Extent and Effects of NTBs

Non-tariff barriers (NTBs). Some of which are described as new protectionism measure (
as against tariffs which are regarded as traditional barriers ) have grown considerably,
particularly since the beginning of 1980s. The export growth of many developing
countries has been seriously affected by NTBs. According to a World Bank study, NTBs
in major industrial countries affect more than one-third of imports from developing
countries, as compared to more than one fomih from all countries.

Over the years, the NTBs have been becoming more and more extensive and intensive.
Today, they areI1ot confined to the labour intensive products where th_ developing
countries have an advantage but also cover sophisticated products. Japan and the Newly
Industrializing Countries (NICs) like S. Korea are also among the most affected countries
by NTBs. The NTBs have come to affect the intra-OECD (i.e. trade between developed
economies) also. The NTBs tend to offset favorable effects of the GATT negotiations,
particularly of the Tokyo Round, on trade liberalizations like the reductions in the
average levels of tariffs.
As a matter of fact, several advanced countries like the US, who were the high priests of
free trade, increasingly resort to several NTBs, particularly against the developing
countries and also certain economically powerful countries such as Japan.

The NTBs fall in two categories.

The first category includes those which are generally used by developing countries to
prevent foreign exchange outflows, or those which result from their chosen strategy of
economic development. These are mostly traditional NTB.\" such as import licensing,
import quotas, foreign exchange' regulations and canalisation of imports

The second category of NTBs are those which are mostly used by developed economies
to protect domestic industries which have lost intemational competitiveness and/or which
are politically sensitive for govemments of these countries. One of the 1110St important
new protectionism measures under this category is the Voluntary EXp0l1 Restraint
(VER).
The NTBs are less transparent, difficult to identify, and their impact on exporting
countries is almost impossible to quantify. They contravene widely accepted principles of
non-discrimination and transparency in measures to restrict trade. Above all, the costs to
the country imposing the NTB, and to the world as II whole, are higher than under and
equivalent tariff. Moreover, NTBs are unfair. because they do not treat exp0l1ers equally.
Often it is the expOliers with the least bargaining power whose exp0l1s are most
reduced.")
Although the NTBs are adopted to protect certain interests of the importina countries, the
fact remains that both the expOliing and importing countries UI'C adversely affected by
the protection. "Clearly the main costs of protection fa 11 011 the imp0l1ing countIy.
Non Tariff Barriers cause higher prices for consumers. lost tariff revenue for
governments, inefficient resource allocation, and diminished competition.

Non-Tariff Barriers seriously affect many exporting countries. As pointed out earlier,
developing country exports to developed countries face considerable NTBs. In several
cases, the impact is velY severe. For example, the VER covering the tapioca exports of
Thailand to the European Community, established in 1982, caused its tapioca exports to
decline by 40 per cent and its export earnings fell by about $ 300 million (representing
over 10 per cent of Thailand's total export earnings from the EC). However, such
draconian VERs which not only reduce the growth rate but also the level of exports have
not been widely applied to nonapparel exports of developing Asian countries other than
South Korea.

An Asian Development Bank studl has brought out that with the reduction of the average
tariff levels in the industrial countries, non-tariff barriers to imports of manufactures have
increased in relative importance in these countries, including in categories of labour
intensive and other products for which less developed countries have a strong
comparative advantage. This study has also observed that through the exercise of various
forms of administrative protection non-tariff barriers have increased in importance in
absolute terms and have been applied with increasing discrimination, causing bilateral
trade arrangements in many cases to reign over more globally efficient multilateral trade
arrangements and threatening the gains, especially to less developed countries of
negotiated tariff reductions.

Apparel exports of the developing countries are the most affected because of such
barriers. This has been mostly via the Multi-Fibre Arrangement (MFA) which
"...constitutes a restrictive system, imposing economic costs on the economies of the
developing as well as industrial countries. Several country studies cite instances of lost
apparel exports, declining production and employment due to reporting, certification and
other problems involved in administering bilateral MF A agreements, whereby the system
of administrative controls creates such uncertainties. especially for new exporters of
financially weak firms, that export production must be curtailed or abandoned by many
firms.

Another important cost of the MFA is rent seeking i.e., established exporters tend to
enjoy greater than perfectly competitive returns from their exports sales since quota rights
enable them to sell in protected markets.
Non-Tariff Barriers also cause diversion of production and exports. For example, some
Indian textile and apparel firms decided to set up manufacturing facilities in Nepal in
order to circumvent MFA quota controls of their exports from India and to avoid the local
costs of purchasing added quota rights. Similarly, exporters have attempted to diversify
their exports to non-quota countries.

NTBs and India's Exports

The problem of NTBs on Indian exports has been growing. The ADB study of' the effects
of NTBs on India's exports to developed countries has come to the following conclusion.

Conventional NTBs generally do not exist in 'developing country markets at least for
Indian exports. Their impact on exports of marine products and leather and leather goods
to developed economies is somewhat marginal. Their potential adverse effects on India's
emerging exports of temporate zone agro-products can be critical. Exports of metal goods
and readymade garments from India have suffered on account of the NTBs in developed
economies. Extension and intensification of NTBs is bound to severely restrict India's
export expansion in these two relatively important export sectors of the economy. Apart
from the actual imposition of these NTBs, the 'noise' created is often adequate to drive
out exporters and induce a fall in exports. NTBs and their administration bring about
undesirable change in the structure of domestic industry and in the distribution of rewards
between rent, profit and wage incomes. The uncertainty they create clearly has an adverse
effect on capacity creation and investment in the industry. As a factor responsible for an
investment shortage, NTBs prevent the industry from making full Lise of technological
potential and economies of scale.

These facts were unambiguously brought out in the findings of our survey of garment
firms in India.
The above mentioned study has also pointed out that in the case of NTDs, Indian
exporters have not taken full advantage of the scope which exists. Thull. improvements in
domestic capability will surely yield export expansion, at leulIl in the short run.

The problem of NTBs for Indian expOlis has increased recently. The threat under the
Super 301 and Special 301 is an indication of this. The indications are that India may
have to face more problems in the future. NTBs are often employed when a country's
expOlis to a country increase considerably, causing problems to the industries in
importing countries, or when the exporting country does not toe the economic or political
lines of the powerful importing country.

Forms of NTBs'

There are different forms of NTBs. The NTBs which have significant restrictive effects
are described as hardcore NTBs. These include import prohibitions, quantitative
restrictions, Voluntary Export Restraints (VERs), variable levies, Multi. Fibre
Arrangement (MFA) restrictions, and non-automatic licensing. Examples of NTBs
excluded from this group include technical barriers (including health and safety
restrictions and standards), minimum pricing regulations, and the use 01' price
investigations (for example, for countervailing and anti-dumping purposes) and price
surveillance.

A brief account of the NTB is given below.

Voluntary Export Restraints (VERs)

Voluntary Export Restraints (VERs) are bilateral arrangements instituted to restrain the
rapid growth of exports of specific manufactured goods. The United States and the
European Community have, thus, regulated the imports of several products. The recent
advances in VERs and other new protectionism measures data from the establishment of
the Multi-Fibre Arrangement (MFA) in the mid1970s. Other bilateral arrangements have
involved restraining the growth of specific exports from Japan and the newly
industrialising countries.

The VERs are usually highly discriminatory. The Uruguay Round Agreement has sought
to abolish VERso

Administered Protection

Administered Protection encompasses a wide range of bureaucratic government actions,

which have grown in absolute as well as relative importance over the last decade or more:
Most recent VERs are in fact regarded as the outgrowth of administered protection
actions.

Important administrative protection measures include the following:

Safeguards Safeguard actions which under the WTO Atiicles enable coun
tries to undertake temporary restrictions against 'influxes' threatening the viability of
domestic industries, have become a common form of administered protection. Although
such measures are resorted to provide some breathing space and flexibility for structural
adjustment, they often lead to some or other fOD11S of permanent barriers.

Health and Product Standards Several health and product standards imposed by the
developed countries hinder the exports of developing countries because of . the added
costs or technical requirements. The need for maintaining health and product standards is
unquestionable. The objection should be to their use with the deliberate intention of trade
restriction or discrimination.

The Agreement on Technical Barriers to Trade (also known as the Standards Code)
evolved by the Tokyo Round of the GATT lays down that when governments or other
bodies adopt technical regulation or standards for reasons of safety, health, consumer or
environmental protection, or for other purposes, these should not create unnecessary
obstacles to trade. Exporters from developing countries complain, however, that the Code
is not respected by developed countries in several cases.
Customs Procedures Certain customs procedures of many countries become trade
barriers. For example, studies point out that frequent changes of Japan's customs
regulations are in themselves a significant barrier to exporters, especially those not
affiliated with Japanese overseas joint-ventures.

The Tokyo Round formulated a Customs Valuation Code intended to provide a uniform
and neutral system for the valuation of goods for custom purposes which will conform to
the commercial realities and prevent the use of arbitrary or Fictitious values.

Consular Formalities A number of countries insist on certain consular formalities like

certification of export documents by the respective consulate of the importing country, in
the exporting country. This becomes a trade banier when the fees charged for this is very
high or the procedure very cumbersome.

Licensing Many countries regulate foreign trade, particularly imports, by licensing. In

most cases the purpose of import licensing is to restrict imports.

Government Procurement These often tend to hinder free trade. The Tokyo Round has,
therefore, fornmlated an agreement on government procurement with a view to secure
greater international competition in government procurements.

State Trading State trading also hinders free trade many a times because of the counter
trade practices, canalization etc. State trading was an important feature of the foreign
trade of the centrally planned economies and also many other developing countries. With
economic liberalisation in most of these countries, the role of State trading has declined.
Monetary Controls In addition to foreign exchange regulations, other monetary controls
are sometimes employed to regulate trade, particularly imports. For instance, to tide over
the foreign exchange crisis in 1990-91 and 1991-92, the Reserve Bank of India took
several measures which included a 25 per cent interest rate surcharge on bank credit for
imports subject to a commercial rate of interest of a minimum 17 per cent, the
requirement of substantially high cash margin requirement on most imports other than
capital goods, and restrictions on the opening of letters of credit for imports.

Environmental Protection Laws The growing concern for environmental protection has
led to the extension of environmental protection regulation to the imports. For example,
the US Congress has framed a legislation to prohibit the import of shrimp harvested with
commercial fishing technology which might adversely affect the endangered or
threatened sea turtles unless the President certified that the supplying country has a turtle
conservation programme comparable to that of the US.

Foreign Exchange Regulations Foreign exchange regulations are an important way of

regulating imports in a number of countries. This is done by the State monopolising the
foreign exchange resources and not releasing foreign exchange for import of items which
the government do not approve of for various reasolls. Restrictions on cunency
convertibility can also adversely affect imports.

QUANTITATIVE RESTRICTIONS (QUOTAS)

Quantitative restrictions or quotas are important means of restricting imports l1nd

exports. A quota represents a ceiling on the volume of imports/exports.
In this section, we confine ourselves to quantitative restrictions on imports i.e. import
quotas.

Types of Import Quotas

There are five import types of import quotas, including import licensing.

Tariff Quota
A tariff quota combines the features of tariff as well as of quota. Under a tariff quota,
imports of a commodity upto specified volume are allowed duty free or at a special low
rate, but any imports in excess of this limit are subject to duty/a higher rate of duty.

Unilateral Quota
In the case of unilateral quota, a country unilaterally fixes a ceiling on the quantity of
import of the commodity concerned.

Bilateral Quota
A bilateral quota results from negotiation between the importing country and a pal1icular
supplier country, or between the importing country and export groups withing the
supplier country.
Mixing Quota
Under the mixing quota, producers are obliged to utilise domestic raw materials upto a
certain proportion in the production of a finished product.

Import Licensing
Quota regulations are generally administered by means of import licensing.
Under the import licensing system, prospective importers are obliged to obtain an imp0l1
licence which is necessary to obtain the foreign exchange to pay for the imports. In a
large number of countries, import licensing has become a very powerful device for
controlling the quantity of imports either of particular commodities or aggregate imports.

Impact of Quota

Like fiscal controls, quantitative restrictions on imports also have a number of effects on
the economy. The following are, in general, the important economic effects of quotas.

Balance of Payments Effect

As quotas enable the country to limit the aggregate imports within specified limits, they
help to improve the balance of payments position of the country.

Price Effect
As quotas limit the total supply, it may cause an increase in the domestic prices.

Consumption Effect
If quotas lead to an increase in prices, it may compel people to reduce their consumption
of the commodity subject to quotas or some other commodities.

Protective Effect
By guarding domestic industries against foreign competition to some extent, quotas
encourage the expansion or domestic industries.

Redistributive Effect
Quotas will also have redistributive effect if the fall in supply due to the import
r<:striclions enables the domestic producers to raise prices. The rise in prices will r_sult
in the redistribution of income between the producers and consumers in favour of the
producers.

Revenue Effect

Quotas may also have a revenue effect. As quotas are administered by means of n
licence, government may obtain some revenue by charging a licence fee.

Diagrammatic Illustration of Effect of Quota

The effects of quota :an be diagrammatically represented on the same lines we

represented the effects of tariff. In Fig. 10.4, DD' is the domestic demand curve and SS'
the domestic supply curve. The foreign supply is assumed to be perfectly elastic. At price
P the total domestic demand is Q1; Q of which is met by domestic supply and QQ1
imported.

Now, suppose that the government fixes the import quota as Q3 Q2' The fall in domestic
availability of the commodity due to the restriction of imports pushes lip the domestic
price to PJ. The increase in price enables domestic producers to increase supply to Q3'
As under protective tariff, P1 PEA represents the redistributive effect, ABE
represents the protective effect and CFF1 represents the consumption effect.

Under the protective tariff, ABCF1 represents the revenue effect; but' what about under
the quota? If the foreign supply curve is perfectly elastic, as we have assumed here, and if
the government does not interfere in import procedure other than to impose the quota,
these revenues may go to importers. If, on the other hand, the government decides to sell
permission (in the form of import licenses) to import under the quota to the highest
bidder, then government will collect revenues identical to those accruing to it under a
tariff of equivalent import restrictive effect. If the government does not sell import
licences, there is also a possibility that the whole or part of the revenue (represented by
ABCF1) may be collected by the foreign exporters if they are able to raise the delivery
prices.

The effect of quota on terms of trade can be illustrated with the help of offer curves. In
Fig. 10.5 OH and OF are the free trade offer curves of the home country and foreign
country, respectively, and the equilibrium terms of trade is represented by the slope of
OT. Now suppose that the home country imposes a quota on imports of Y goods from the
foreign country in the amount or. The home country's offer of X goods becomes zero
once that quantity of imports has been reached. Hence, the home country's quota distorted
offer curve becomes ORYand OTl emerges as the new terms of trade representing a
substantial improvement over the free trade terms of trade for the home country.

The effect of quota on the terms of trade will depend upon the elasticity of the foreign
offer curves.

TARIFFS VERSUS QUOTAS

Both tariffs and quotas have celiain merits and demerits.

Let us first examine the superiority of quotas over tariffs.

1. As a protective measure, quota is more effective than the tariff. Tariff

seeks to discourage imports by raising the price of imported articles.
However it fails to restrict imports when the demand for imports is price
inelastic. Especially in the case of the developing countries, the demand
for many imports is price inelastic. Quota, on the other hand, is very
effective in restricting the imports within the required limits.
 2. When compared to tariffs, quotas are much more precise and their effects
much more certain. The reactions or responses to tariffs are not clear and
accurately predictable but the effect of quota on imports is certain.
3. It has been argued that "".quotas tend to be more flexible, more easily
imposed, and more easily removed instruments of commercial policy than
tariffs. Tariffs are often regarded as relatively permanent measures and
rapidly build powerful vested interests which make them all the more dif-
ficult to remove.
4. It has also been pointed out that quotas may also be employed as a
measure to prevent the international transmission of severe recessions.
Recession usually causes a decline in prices and this may encourage
exports. A country may make use of quotas to guard against such
recession induced exports into the country.

Quotas, however, have certain defects and tariffs are superior to quotas in some respects.

1. The effects of quotas are more rigorous and arbitrary and they tend to distort
international trade much more than tariffs. That is why WTO condemns quotas
and prefers tariffs to quotas for controlling imports.
2. Quotas tend to restrict competition much more than tariffs by helping impOliers
and exporters to acquire monopoly power. If the import quotas are allocated only
to a few importers, it may enable them to amass fortunes by exploiting the market.
Similarly, quotas tend to promote concentration among foreign exporters.
Professor Kindleberger points out that "A significant difference between a tariff
and a quota is that conversion of a tariff into quota which admits the same
volume of imports may convert a potential into an actual monopoly and reduce
welfare.
POINTS TO PONDER:
___________________________________
Trade Barriers
Meaning:
___________________________________
Trade barriers refer to the government
policies and measures which obstruct the free ___________________________________
flow of goods and services across national
borders.
___________________________________
___________________________________
___________________________________
___________________________________

___________________________________
Objectives of Trade Barriers
Following are the main objectives of Trade
___________________________________
Barriers:
To protect domestic industries or certain
other sectors of the economy from foreign
___________________________________
competition
To guard against dumping; ___________________________________
To promote indigenous research and
development;
To conserve the foreign exchange ___________________________________
resources of the country
___________________________________
___________________________________

___________________________________
Tariff Barriers
Meaning:
___________________________________
Tariff in international trade refer to the
duties or taxes imposed on intemation-ally ___________________________________
lraded commodities when they cross the
national borders.
___________________________________
___________________________________
___________________________________
___________________________________
 ___________________________________
Classification of tariffs
Tariffs can be classified as follows:
___________________________________
Export duties
Import duties ___________________________________
Transit duties
Specific duties ___________________________________
Compound duties
___________________________________
___________________________________
___________________________________

Terms of Trade Effect
Following are the terms of trade effects:
Balance of Payments Effect
Nominal and Effective Tariffs
Optimum Tariff
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________

___________________________________
Non Tariff Barriers
Meaning:
___________________________________
Non-tariff barriers (NTBs). Some of
which are described as new protectionism ___________________________________
measure ( as against tariffs which are
regarded as traditional barriers ) have grown
considerably, particularly since the beginning ___________________________________
of 1980s.
___________________________________
___________________________________
___________________________________
QUESTIONS FOR SELF ASSESSMENT:

1. Explain, with the help of diagrams, the impact of tariffs.

2. What are non-tariff barriers? Examine the impact of NTBs on exports of developing
countries.
3. Why are NTBs regarded as more harmful than tariff barriers to trade? Give a brief
account of the important NTBs.
4. Discuss the trends in NTBs since the early 19705 and their impact.
5. Explain the impact of quota.
6. Write short notes on the following:
(i) Types of tariffs.
(ii) Nominal and effective tariff.
(iii) Optimum tariff.
(iv) New protectionism.
(v) Impact of NTB on India's exports.
(vi) Superiority of quotas over tariffs.
(vii) Defects of quotas.

SUGGESTED READINGS

Asian Development Bank, Foreign Trade Barriers and Export Growth, Manila: ADB.

Ellsworth, P.T. and Clark J. Leith, The International Economy, New York: Macmillan
Publishing Co. Inc.

Johnson, Harry G., Aspects of the Theory of Tariffs, London: George Allen and Unwin.

Salvatore, Dominick, International Economics, New York: Macmillan Publishing Co.

Inc.

Walter, Ingo, International Economics, New York; The Ronald Press Co.

Appendix 10.1

SUPER 301 AND SPECIAL 301

Certain sections of the Omnibus Trade and Competitiveness Act, 1988, of the USA, viz.,
Super 301 and Special 301, have become very controversial because of the way they have
been used (or threatened to be used) against other countries for economic reprisals.

The avowed objective of these sections of the Act is to expand global trade by opening
markets. It is part of the strategy of reciprocal market access. In other words, they aim at
improving the United States' competitiveness by trade reprisals. The Section 301 of the
Act deals with the steps the US government must take if'it perceives a threat to the
trading interests of the US by the unjustifiable or unreasonable or discriminately trade
partners.

The major allegation is that the Section 301 is used to humble successful trade rivals and
those countries which do not toe the US political and economic lines. For instance, it is
alleged that the major provocation for including India and Brazil in the watch list under
this Section was the strong stand which they took in the Uraguay round to uphold the
cause of the developing countries, opposing the stand of the US and other developed
countries. It had been reported that the Assistant USTR (United States Trade
Representative) stated that "Pali of our intent in using the instrument (Super 301) is to
prod India to be less obstructionist in Geneva as a spokesperson for developing
countries,'"

It is interesting to note that in the US and West European countries there has been a
growing demand for more protective measures in the light of the challenge of their trade
supremacy, particularly by the Pacific rim countries. The growing demand for local
content regulation and other NTBs including reprisals under Section 301 are all
manifestations of these.

The US axe is often directed against countries with substantial trade surplus with the US
like Japan, and countries for which the US is the major export market (including
developing countries like India).
Jagdish Bhagwati observes that since the late 1970s, in the US and the EC, protectionism
has increasingly taken the covert shape. Weapons like the Section 101 may allegedly be
used for covert protectionism like harassment of successful Ibl'eign rivals. First the rivals
may be accused of indulging in unfair trade and then they may be taken through time
consuming and expensive procedures.

The Section 301 has been used by the US to pressurise other countries for economic
liberalisation and opening up of the economies for US goods. services, technology and
capital. Countries as varied as Japan, China, South Korea, India, Brazil etc. have been
subject to such pressures. As noted earlier, countries which have a substantial trade
surplus with the US like Japan, Korea and China and others like India and Brazil for
whom the US market is very important and whom have caused irritation to the US have
been the prime targets.

The US, of course, has theoretically, some economic logic for asking its trade partners to
open up their economies to the US business as the US does for foreign business.
However, the developing countries whose economies are not strong enough to face
unrestricted foreign competition cannot afford to be liberal in many areas. But the
economic compulsions of the US, reflected in the persistent huge trade deficit and- the
threat of deindustrialization, make the adoption of certain measures to protect its interests
inevitable. According to the US diplomatic sources, "The Congress has been frustrated by
the trade deficit which is touching $ 140 billion. So it decided to use American economic
strength to rectify it.,,3 The thinking went thus: "India and others use their economic
barriers everyday to achieve what they want, so why can't we use our market force to
achieve what we want. Maybe it is a threat, and the wrong way to achieve what we want,
but the world should know that we are getting fed Up.

The major factor which provides strength to exert pressure on other countries through the
Section 301 is the economic dependence of these nations on the US. The US which
accounts for nearly 15 per cent of the total world imports is the major export market of
many countries. With reference to China's surrender to the US pressure, it is observed
that "China today derives some 25 to 30 per cent of its GNP from exports. Its export
surplus with the United States currently stands at $ 12.5 billion. It is, therefore,
understandable for China to give in on patents in order to maintain its high level of
exports to the United States.") Brazil, which makes nearly one-fourth of the total foreign
sales of its goods in the US. also has a large trade surplus with the US.

The US, which absorbs about one-third of the total exports of Japan, has a highly
alam1ing level of trade deficit with Japan. Japan which competes with the US in many
high technology industries has been increasingly gaining economic ground against the
US. It is, therefore, quite natural that Japan receives considerable attention from the US
trade strategists. Japan has often been alleged guilty of dumping and other unfair trade
practices. Fmiher, Japan has been charged with adversarial trade. However, some studies
show that Japan is not more protectionist than the US. For instance, according to a World
Bank study. the extent of NTBs in Japan is similar to that in the US. Japan uses more
NTBs to protect agriculture than America, but America protects more of its manufactured
goods this way.6 It may be noted that Japan which has long been accused by the US of
unfair trade practices has recently very strongly retaliated by describing the US as the
biggest unfair trader of the world. Although the US has always been among the strongest
advocates of free trade, it has taken care to protect its domestic industries and agricultural
sectors seriously affected by foreign competition and the extent of trade protection has
considerably increased over the years.

Although the US is the most important export market for India, absorbing about 15 per
cent of the total exports, Indian goods form only an insignificant share of the total
imports of the US. Although India has a very small trade surplus with the US for many
years, in 1990-91 the US had a small surplus with India. It is, therefore, difficult to think
that the US faces any serious problem in the trade with India so as to walTant any drastic
reprisal. However, as indicated earlier, the stand taken by India in the Uruguay Round
and on certain other occasions against the American policies might have provoked
actions against India. Further, several businessmen and others feel that an important
reason for India' problem with the US is the lack of effective lobbying at the US
Congress (for India) while several countries like S. Korea and Pakistan manage this very
effectively.

Ironically, the US, which wants other countries to open their economies for free flow of
foreign goods, services and capital, has always been keen to guard its own vulnerable
industries against foreign competition. Jim Powell points out through the Wall Street
Journal: The US officials have enforced restrictions against imported cars for 8 years,
against Brazilian castor oil for 13 years, against bicycle speedometers for 17 years,
against carbon and alloy steel for 20 years, against clothing for 32 years, against imported
peanuts and dairy products for 36 years, against sugar for 55 years, against rubber
footwear, oranges, ceramic tiles and cookware for 59 years, against glassware for 66
years.

It appears that by using the Section 301 of the Trade and Competitiveness Act, the US
wanted India to change its policies with respect to foreign investment. protection of
intellectual property rights and the services sector.
It may be noted that the economic policy reform started since July 1991 has very
significantly changed the economic policy environment in respect, interalia of foreign
investment and trade. As a matter of fact most these changes arc in the genuine interest of
India.