Exchange Barriers

The Government Interventions to Foreign Exchange

Prepared by Amit Wadhwani Yogesh Chauhan

Introduction
Barrier in terms of trade is any hurdle to trade. Implementation Government Purpose Safeguard the interests of domestic industries Types of barriers
Environmental Barriers Tariff Barriers Not Tariff Barriers

Tariff Barriers
Implementation Usually on imported goods Purposes
Restricting the amount of imported goods Protecting domestic industries Revenue generation Attain positive balance of payment

Non Tariff Barriers

All other restrictions other than tariff barriers Types
Quotas restriction on units or amount of trade Licensing requirement of special license for trade Sanctions/Embargoes/Boycotts Boycott of foreign products Tough custom clearance procedures

Non Tariff Barriers (contd.)

Types (contd.)
Applying standard norms Government participation in trade Charges on imports Voluntary export restraints Differing product classification Exchange barriers

Exchange Barriers
Implementation Government; To control the access of foreign exchange, hence trade Purpose
Controlling unwanted trade Protecting domestic trade Maintain domestic currencys value Avoid inflation and deflation

Types of Exchange Barriers

Types
Licensing Multiple Exchange Rates Import Deposit Requirements Quantity Controls Convertibility Restrictions Exchange Control Exchange Rate Manipulation Lending-Borrowing system Changes in Monetary Policy

Licensing
Special license has to be obtained from central bank to get foreign exchange Traders dealing in international market cannot get currency exchanged without license Central bank/other Government agency decided the issuance of license Usually implemented in developing and under developed countries License is given easily to importers of essential commodities e.g. Licensing schedule in New Zealand till 1988

Multiple Exchange Rates

Government charges different exchange rates for different transactions High exchange rates for the transactions it does not favor and low exchange rates for the transactions it favor e.g. Jamaica

Import Deposit Requirements

Importers have to deposit certain percentage of import value prior to realization of imports Makes the importers rethink the importance of imports e.g. Government of Columbia implemented 95% IDR 20 days prior to realization of imports in 1939.

Quantity Controls
Limiting the amount of foreign exchange by the Government Limits the trader to trade in limited quantity of goods. Also implemented on tourism sector e.g. Chile 1989; Trip to Latin America and Caribbean Countries US$ 1000, Trip to other countries US$ 3000

Convertibility Restrictions
Government may limit the currency convertibility. Types of currencies in terms of convertibility
Fully Convertible Partially Convertible Unconvertible

US$ to Russian Rubles is possible, vice versa is not possible as Ruble is unconvertible Lack of currency convertibility is a major problem for investors investing in Soviet Union

Exchange Control
Government monopoly on all dealings in foreign exchange
South Africa still applies exchange control on its trading communities No firm is allowed to hold foreign exchange more than seven days of receipt Importers need to get permission to buy foreign exchange and exporters needs to pay foreign earnings back within seven days to commercial banks

Exchange Rate Manipulation

Government sells its currency in foreign exchange market hence lowering its value This increases the cost of imports and lowers the cost of exports Leads to positive balance of payments In long term may lead to high inflation

Lending-Borrowing System
Government buys and sells specific currencies in domestic market to maintain its flow in the country. This helps to maintain a steady exchange rate between two currencies
e.g. Reserve Bank of India buys United States Dollars when it is in excess in the countrys market and Indian Rupees value is increasing against US$ and vice versa

Changes in Monetary Policy

Government may make changes in monetary policy to attain specific exchange rates Experts do not find it appropriate to make changes to monetary policy with the aim of attaining exchange rates

Concluding Note
Exchange barriers are important to safeguard the domestic industries of a country Exchange control beyond a limit can cause slow development of the country