Non-Tariff Barriers


Welcome everyone to a course of International Business. So, in the last lecture we had
started with the new unit called commercial policy or trade policy right and we slight we
understood that what is basically trade policy or commercial policy and why is it so
important.
The basic reason for commercial policy is that to be important is that the government has
to strengthen its trade and increase its trade relationship with the other countries and
during any policy related to the trade it has to be very careful that sometimes it does not
get you know involved in practices which might be criticized by the other countries and
it should also not affect our domestic players badly.
So, the government has to be on a balance right. So, in the last class we were discussed
started discussing about tariff and non-tariff barriers basically. So, we were doing tariff
barriers and which I said there are issues like specific duty, ad valorem duty right and
then protective tariff right. So, in protective tariffs I was saying that protective tariffs are
generally done because the government wants to protect its local industries and reduce
the imports to a maximum as maximum possible right. So, from there we continue today.
So, the some other types of tariff barriers. So, tariff means money right related to money.
(Refer Slide Time: 01:56)
So, revenue tariff. Now, what is revenue tariff? It says a tariff which is designed to
provide revenue to the home government is called revenue tariff. Generally, a tariff is
imposed with a view of earning revenue by imposing duty on the consumer goods right.
So, the government imposes some duty particularly on luxury goods whose demand is
inelastic right. So, when a luxury goods are costly goods and it is purchased by people
who have a high purchasing power right. So, on such kind of goods the generally a tariff
is imposed, so that the government can earn more revenue right. Example are Gucci,
Rolex, Burberry, Chanel and so on right.
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Another kind of duty or a tariff barrier is called countervailing. Now, the word
countervailing also you can understand. What it is saying? It is imposed on certain
imports where the products are subsidized by exporting governments. So, there are well
while importing certain items where the government has subsidize the government of the
local country. So, there is government A and government let say government A or let say
I say India versus any other country which is B or let say this is also China right.
So, China from China we are importing certain items right, but China suppose is giving a
lot of you know subsidy to its players to its local players. So, in that condition the they
have an unfair advantage, the producers in China have an unfair advantage. To reduced
this unfair advantage the Government of India would levy a countervailing duty right.
So, as a result of the government subsidy the imports become more cheaper than the our
domestic goods in India. So, Chinese imports become cheaper than our Indian domestic
goods.
To nullify the effect these duties imposed in addition to the normal duties ok. For
example, export subsidies given by the Chinese government will make the Chinese
products low priced in the Indian market. So, what happened in one case the Indian you
know government levied import duties right. So, they used a countervailing duty on the
vehicles on the 2 wheelers Chinese 2 wheelers. So, making them as costly as the Indian
ones. So, what happened? As a result, of it they become uncompetitive why? Because the
Indian players had a good service. You know a service the channel was well distributed.
So, the parts were easily available.
But at the same price when the Chinese vehicles were coming into India otherwise they
would have come 20 30 percent cheaper. So, that would have made it very difficult for
the Indian players to be successful because India is a price sensitive market. So, on the
other hand when they were the same price now and the services were not available. So,
there was no way the Chinese players could enter into the Indian market in the vehicles
in the 2 wheeler section ok.
The next is anti-dumping duty. Now, what is first let us understand when what is
dumping. When somebody produces a product in the local market and then dumps or and
sells it at another market at a very low price right.
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So, when exporters compete attempt to capture foreign markets by selling goods at rock
bottom prices such practice is called dumping. So, to capture the foreign market the
exporter is selling at a cost which is lesser right. So, this is generally done with a
intention of you know capturing the market. So, once they capture the market then they
can may be change the price.
As a result of dumping, domestic industries find it difficult to compete with the imported
goods. To offset the dumping effects duties are levied in addition to the normal duties
which are called anti-dumping. Indian government has levied anti-dumping duties on 99
such Chinese products right.
Example a normal duty rating may be 3 percent, but an anti-dumping duty maybe even
27 percent making it may be 30 percent right. So, anti dumping. So, to avoid dumping in
our you know domestic market, so it is done. So, these are all what we discussed were
called the tariff barriers right. Now, today we will also start with a non-tariff barriers.
Now, what is non-tariff non-monetary barriers?
And interestingly I will tell you that the tariff barriers are sometimes easier to
understand and to tackle, but the non-tariff barriers have been found to be more difficult
sometimes right. Let see what are the non-tariff barriers.
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It is any barrier that raises an obstacle other than the tariff that raises an obstacle to the
free flow of goods in the overseas market. It does not affect the price of the imported
goods, it does not affect, but on the quantity of imports it affects. It is a non-tax measure
to favor the domestic firms against the foreign suppliers. So, for example, you see tax
relief, embargoes and quotas we will see what are what they are basically.
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Non-tariff barriers are some types are for example, to avoid this intellectual property
laws example patents and copyright, protection technical barriers for example, to in trade
including labeling rules and stringent sanitary standards these increase the product
compliance costs. So, when some country you know levys a technical barrier like
labeling rules you have to label you have to write everything so in detail. So, that people
are the consumer is aware.
So, such conditions increase the cost and it makes it very complicated for the exporter.
Preferential state procurement policy. Now, the government favours local producers
when finalizing the contracts for state spending. So, these are preferential treatment
given and this is non-tariff right.
Domestic subsidies aid for domestic business facing financial problems example
subsidies for car manufacturers or loss making airlines. For example, India the Indian
government has been doing it in the recent past. So, we have been you know trying to aid
the loss making airlines for example, Air India right. So, that they can still be
competitive in nature. Financial protectionism when I say Air India do not understand it
by price for example, I am talking about the flying zones right. So, the flying zones they
are given more licenses flying zones are permitted. So, that becomes more competitive
for them.
Financial protectionism example when a government instructs banks to give priority
when making loans to our domestic business its a protectionism measure. So, in fact, it
should be equal for everybody, but then when it is our own people our own domestic
people the banks are the government ask the banks to give them first mover advantage.
Murky or hidden protectionism example state measures that indirectly discriminate
against foreign workers, investors and traders. So, there are some measures that
indirectly discriminate against the foreign workers. So, and their investors. So, this kind
of hidden protectionism is also it is not advisable, but then it is sometimes required to
support the domestic market.
Finally, the government intervention currency markets to affect relative prices of import
and exports. So, the when that currency is controlled or is the government manages it.
So, to favour either our import. Suppose the country needs more of import and while
importing we know that the cost the money is going out. So, we would like that our
dollar should be as less as possible right. So, when I am importing what do I do? I am
paying in dollars right and when I am exporting I am getting; I am getting I am buying
dollars.
So, it will be only exports will only increase when the price is cheaper, correct. So, when
the price of the commodity or the price of the good is cheaper. So, the country is try to
devalue their currency. So, that as the currencies devalued it is comes the price come the
rate comes down. So, there foreign exporter foreign buyer can buy more of the goods for
same money.
So, earlier suppose in 100 dollars he was buying let say 10 units. Now, because there has
been of the devaluation of the currency the foreign player can buy 12 units because of
the same 100 dollars right. So, this is what the government tries to do right. So, manage
the exchange rates.
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Different types of non-tariff barriers are for example, import quota system. Now, what is
this? Under this system a country may fix in advance, the limit of import quantity of a
commodity how much you can import? You can only import up to a level. Besides that it
is not permitted that would be permitted for import from various countries. The quota
can be divided into the following categories. What are they? Tariff or customs quota,
unilateral quota, bilateral quota and multilateral quota, let us see.
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So, customs quota says that certain specified quantity of imports is allowed at duty free
or at a reduced rate of import duty. So, additional imports beyond the specified quantity
are permitted, but only at increased rate of duty. So, up to a certain level you are
permitted after that if you want to import, then the charge will be higher. A tariff quota
combines the features of a tariff and an import quota ok. What is unilateral quota? The
total import quantity is fixed without prior consultations with the exporting countries.
Already there is no consultation, but we are fixed it from our own side bilateral. In this
case, quotas are fixed after negotiation between the quota fixing importing country and
the exporting country right. So, both the countries for some reason they want to fix the
quota. A multilateral says a group of countries can come together and fix quotas for
exports as well as imports for each country. So, according to the condition of the country
and all they decide on this right.
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Some other type of non-tariff barriers are product standards. Now, this is very important
again. Most developed countries impose product standards for imported items. So, what
they say? The product should meet a particular quality a particular standard. If the
imported items do not conform to the established standards, the imports are not allowed.
So, in terms of medicine this is an example diagram you can see. The pharmaceutical
products must conform to the pharmacopeia standards. So, there is a standard setup and
you have to meet it ok. This is also applicable to may other industries also right.
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Domestic content requirement. Now, what does it say? It requires a certain percentage of
a products total value to be produced domestically. So, during suppose you want to
import export to a country you can export, but then certain percentage of this product
should be made in the local market right, so domestically. Governments impose domestic
content requirements to boost this domestic production. By doing this they are giving a
form of protectionism to the local players.
For instance, information and communication ICT communication technology,
electronics and solar energy to spur an increase in the manufacturing sectors contribution
to India’s GDP. So, in terms of ICT and you know renewable energy sectors the
government wants that there should be a domestic content requirement ok. What is
preferential arrangement? Another kind of a non-tariff barrier.
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A trade pact between countries that reduces tariffs for certain products to the countries
who sign the agreement. So, if you are a member of or you are a part of the agreement,
then the tariff would be a different one a reduced tariff then what it would be for some
other countries were not a part of the agreement.
Imports from member countries are given preference whereas, those from other countries
are subject to various tariff and other regulations. Example, NAFTA right. European
Union, Generalized System of Preferences (GSP), ASEAN right. So, all these are
agreements which in which there are if you are a member of it you get a different rate if
you are not a member you are getting a different rate ok.
(Refer Slide Time: 14:48)
Foreign exchange regulation. The importer has to ensure that adequate foreign exchange
is available for import of the goods by obtaining a clearance from the exchange control
authorities prior to the concluding of contract with the supplier. So, what did he saying?
The foreign exchange regulation the body, it tells that if you want to import something
first you need to have a clearance from this authorities, so that they can you know tell
you how much you can import right. And how much foreign exchange you are holding
that also has to be very clearly mentioned you the otherwise you fall into a violation of
the foreign exchange act ok.
The next non-tariff barrier is labeling of products. Certain nations insist on specific
labeling. For instance, the European Union insists on product labeling in major
languages spoken in EU right European Union. Such formalities create problems for
exporters. Now, it seems very easy when you are in your own country, but just imagine
for another country where you do not know the language and other things it becomes a
problem to understand and their language, their you know customs and all right.
Packaging. Certain nations insist on particular type of packing materials right. For
instance, EU insists on recyclable packaging material otherwise the imported goods may
be rejected. So, there are certain rules also.
For example, when you are packing the packaging material should not be something that
is harmful to the environment right. If you are using this then many countries the then
they would stop. They would reject your products and they would not accept it right.
Consular formalities. What it is saying?
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A number of importing countries demand that the shipping documents now this is very
important should include consular invoice certified by their consulate stationed in the
exporting country. So, such as certificate of origin, certified invoices, import certificates
etcetera. So, the consulate in the exporting country where the export where from where
the exporting is being done from there they should be signed properly. So, that is again
creates a non-tariff barrier right. Voluntary import expansion. It is an agreement. What it
is saying?
It is an agreement to increase the quantity of imports of a product over a specific period
of times. For example, in the 80s VIE was suggested by the US as a way of expanding
the US export in the Japanese markets. So, they said we will only do business if we are
given a chance to expand with time. Under the assumption that Japan maintained barriers
to trade that restricted the entry of US exports. At that time Japan had already permitted
into the US market quite you know in extensively.
So, the US thought of using this technique to enter into the Japanese market similarly.
Japan was asked to increase its volume of imports on specific products including
semiconductors, automobiles, auto parts, medical equipment and flat glass ok.
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Voluntary export restraint. So, what is this saying? A restriction set by the government
on the quantity of goods that can be exported out of a country during a specific period.
Because these restraints are typically implemented upon the insistence of the importing
nations. So, you say the importing nations says that we you can export only up to a
certain limit right. So, the quantity of goods that particular country who is exporting they
have they make a barrier, they make a condition that you cannot export more than this
amount of the product. This arise when industries seek protection from competing
imports.
So, for example, Indian industries want some support from the government right the they
seek protection from competing imports from let say China right. An example of such a
voluntary export restraint agreement was the 1981 VER between US and Japan. The
Japanese car makers voluntarily reduced their shipment of cars to the US. They reduced
it right. At that time Japanese had already as I said they entered into the US market and
they had established themselves. The agreement was designed to help, protect and
revitalize the car industry of the US.
So, the US car industry at that time had already got a shock from the Japanese
automakers and they were feeling the pain. So, the government of US had talked to the
Japanese government to reduce voluntarily the export of the cars.
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The another type of non-tariff barrier is embargo. Now, this is what it says? It is a
government order. It says it is a government order that restricts commerce with a specific
country or a specified country or the exchange of specific goods. For example, India and
Pakistan. It has imposed due to unfavorable political or economic circumstances between
the nations. So, India and Pakistan there is no there is nothing secret in that that we do
not have a very good political climate right favorable political climate. So, this is an
extreme form of trade barrier.
Obviously, because now you are saying just stop it nothing doing there is no regulation,
there is no policy just stop it that prohibits import from a particular country due to severe
failure of the diplomatic relations. So, no wonder than you know India and Pakistan I can
think of no better example. The US has an embargo with Cuba. When Fidel castro was
there and US always had a problem with Cuba that lasted over 50 years right. So, they
had a embargo.
(Refer Slide Time: 20:44)
Now, this is some of the differences between the tariff and non-tariff barriers. These are
some of the differences for example, it says what is the advantage difference between
tariff and non-tariff. You see in tariff the government receives revenue, customs
authorities do valuation, procedures and classification.
Since import duty levied monopolistic organizations are curbed. So, the monopoly is
curbed right. Subject to legislative enactment under terms of GATT General Agreement
or Tariff and Trade and inflexible. Importers exploitation of more profits is stopped
curbed. Simple to operate favours efficiency of firms when you have a tariff barrier.
But, what is the arguments against non-tariff barrier? No revenue receipts, but only
protection of the domestic industry right. No such problem; that means, customs
authorities do valuation this problem is not there because there is no monetary
involvement. Monopolistic organizations command high prices through low output.
So, the organizations command a high price through a lower output in terms of non when
there is a non-tariff barrier. Flexible and discussed at official levels only. Importers make
more profits and exploit the market. So, the importers make more profit because of the
non-tariff barrier and they exploit the market.
More official involved and less simple it is complicated right. Discriminates against
newcomers. So, non-tariff barriers can be sometimes more prohibitive, more dangerous
because it is something that cannot be easily understood right. So, for example, as I said
the production standards right the compliance of the policies the labeling. Now, these are
issues which come under the non-tariff barrier and then it becomes it makes the extreme
the trade more complicated and cumbersome. Why are trade and tariff barriers used?
(Refer Slide Time: 22:43)
So, we have been discussing all throughout. First we have understood that it helps in
protecting the domestic employment. So, the domestic employment is not hampered. So,
the possibility of increased competition from imported goods can threaten the domestic
industries. So, the government wants to create some regulations so that these domestic
employment is saved.
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Protecting the consumers. A government may levy a tariff to in order to protect the
consumer from the unfair practice right. So, and educating them about the right and
responsibilities. Example Japan and South Korea banned on US beef after the mad cow
disease in 2003. So, in order to protect the consumers the government of Japan and South
Korea banned US beef because this mad cow disease was one which was widespread at
that time right.
(Refer Slide Time: 23:34)
Infant industries to save them. The use of tariffs to protect infant industries by the import
substitution, industrialization strategy. So, what was what is the import substitution
strategy says? Now, instead of producing something in the local market, if it is cheaper
outside. So, we would substitute it through imports. This increases the price of the
imported goods and creates a domestic market for domestically produced goods right. It
decreases unemployment and allows a developing countries to shift. So, this import
substitution method this was being done by the governments.
So, when the governments when the players domestic players start doing this, then it will
affect badly the domestic producers. So, in order to avoid that situation and save that
infant industries, this import substitution method has been largely criticized right. For
example you see the Brazilian automobile industry I have given an example of the
Brazilian automobile industry right. So, they used this technique. So, that it would help
them in saving the infant industry ok.
Retaliation. Action taken by one country whose exports are adversely affected by the
rising of tariff or other traders. So, I start I said one example Indian government has a
levied retaliation tax on 29 US products recently in this few months.
(Refer Slide Time: 25:01)
So, US government versus the Chinese government. This is a trade war which is going
on between the 2 countries and one more example which I give is between India and
China. Although we are sharing a very good relationship with US at the moment still the
Indian government has levied you know a retaliation tax on 29 US products. National
security is also an issue. So, barriers are also employed by developing countries to
protect industries that are deemed strategically important. So, defense for example, right.
(Refer Slide Time: 25:32)
So, defense industries are often viewed as vital to state interests and often enjoys
significant levels of protection. Let see this example. Both Russia and United States are
industrialized and are very protective of the defense oriented companies right. So, these
are some of the examples for in terms when it comes to national security, tariffs and
trade barriers are used right.
(Refer Slide Time: 25:59)
Now, this is the foreign trade policy from 15 20. So, this was unveiled by Miss Nirmala
Sitharaman our Minister of State for Commerce and Industry, Government of India right.
So, what it is comprise of? With the Merchandise Exports from India Scheme, Service
Exports from India right.
(Refer Slide Time: 26:17)
So, what are the highlights of this Foreign Trade Policy, let see. First it provides a
framework for increasing exports and of goods and services as well as generation of
employment and increasing value addition through the Make in India program. So, the
when Prime Minister Modi came into power the government came into the BJP
government came into power.
So, the first thing they talked about is the make in India campaign. They wanted the
things to be made in India right. So, that they would create employment and an increased
value addition right.
(Refer Slide Time: 26:54)
It introduces two schemes as you can as you saw in the diagram. Merchandise Exports
from India MEIS for export of specified goods to the specific markets and Service
Exports from India Scheme SEIS for increasing exports of notified services. Duty credit
scripts issued under this and the goods imported against these scrips are fully
transferable. You are its transferable.
The rate of rewards in MEIS range from 2 percent to 5 percent while SEIS range from 3
percent to 5 percent and it focused on the paperless working environment and it helps to
measure the boost of exports of defense and hi-tech items. Trade facilitation and
enhancing the ease of doing business.
So, these were the major highlights of the Foreign Trade Policy of 15-20 ok. So, let me
talk about trade protectionism. So, we have been discussing it from some time. So, what
it is saying? It is an economic policy that restricts the unfair protection competition from
foreign industries.
(Refer Slide Time: 27:56)
And why it is required? It is sometimes politically motivated; it is politically motivated.
For example, when Donald Trump came to power he talked about the Americans and the
local inhabitants of America and to provide jobs to them. So, he discourage the
outsourcing companies the companies to outsource the products from outside countries.
So, this resulted in a big fear among the exporters right. The essence of protectionism is
to protect locally made products against foreign rivals.
(Refer Slide Time: 28:31)
Now, what is the mechanism? So, tariff quota. So, increase price limit supply. So, we
have done all these things. So, this is finally, the nutshell right. So, what of what we have
discussed? So, we have discussed about tariff and non-tariff barriers and we talked about
how they are impacting the flow of goods from one country to another and why the
government wants to protect certain industries.
Maybe it is political reason maybe it is just the need of the hour because the government
has to keep employment going. Otherwise what happens? If due to lack of employment
there will be less of savings and all. People might get involved in activities which are not
very good for the country and they might there would be low consumption in the
domestic market. So, as a result of it could affect badly adversely the entire economy of
any country. So, when we talk about you know trade and commercial policies.
So, it is very important to keep in mind how to protect the domestic market and also
participate in a free trade mechanism with the outside world right. So, this entire unit
talks about the policies regarding the free trade and protectionism and the tariff and the
non-tariff barriers right. So, this is all we have for today.
Thank you very much.