BARRIERS TO INTERNATIONAL TRADE

GOVERNMENT CONTROLS OVER TRADE

Tariffs: import duties or taxes imposed on goods
entering the customs territory of a nation

Why impose?
revenue collection, protection of domestic
industry, political control

2
 Protectionism: Logic and Illogic
Countries use protectionist measures to shield a country’s
markets from intrusion by foreign competition and imports.

Arguments for Protectionism include:

1. maintain employment and reduce unemployment.

2. increase of business size, and
3. protection of the home market.
4. need to keep money at home.
5. encouragement of capital accumulation.
6. maintenance of the standard of living and real
wages.
7. conservation of natural resources.
8. protection of an infant industry
9. industrialization of a low-wage nation
10. national defense
 Arguments for
 National Defense
 Certain industries need protection
 Imports may not be available during wartime

 Prevent valuable technologies from being used to

strengthen competition, especially militarily
 Protect Infant or Dying Industry
 In the long run will have a comparative advantage
 Meant to be temporary for emerging industry or to
protect jobs of dying industry
 Protect Domestic Jobs from Cheap Foreign Labor
 Productivity per worker greater in developed
countries
 Scientific Tariff or Fair Competition
 Bring cost of imported goods up to domestically
produced goods to prevent unfair advantage
 Retaliation
 Import restrictions placed by another country may
result in similar restrictions by domestic government
 The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to Increase:
1. Inflationary pressures
2. Special interests’ privileges
3. Government control and political considerations in
economic matters

Tariff Barriers tend to Weaken:

1. Balance-of-payments positions
2. Supply-and-demand patterns
3. International relations (they can start trade wars)

Tariff Barriers tend to Restrict:

1. Manufacturer’ supply sources
2. Choices available to consumers
3. Competition
 Monetary Barriers

Three types of monetary barriers include:

1. Blocked currency: Blockage is accomplished by refusing

to allow importers to exchange its national currency for the
sellers’ currency.
2. Differential exchange rates: It encourages the
importation of goods the government deems desirable and
discourages importation of goods the government does not
want by adjusting the exchange rate. The exchange rate for
importation of a desirable product is favorable and vice-
versa
3. Government approval: In countries where there is a
severe shortage of foreign exchange, an exchange permit
to import foreign goods is required from the government
 Non-Tariff Barriers

(1) Specific Limitations on Trade:

1. Quotas
2. Import Licensing requirements
3. Proportion restrictions of foreign to domestic goods (local content
requirements)
4. Minimum import price limits
5. Embargoes

(2) Customs and Administrative Entry Procedures:

1. Valuation systems
2. Antidumping practices
3. Tariff classifications
4. Documentation requirements
5. Fees
 Non-Tariff Barriers

(3) Standards:
1. Intergovernmental acceptances of testing methods and standards
2. Packaging, labeling, and marking

(4) Government Participation in Trade:

1. Government procurement policies
2. Export subsidies
3. Domestic assistance programs
 Non-Tariff Barriers

(5) Charges on imports:

1. Prior import deposit subsidies
2. Administrative fees
3. Special supplementary duties
4. Variable levies
5. Border taxes

(6) Others:
1. Marketing agreements
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 is the selling of a product abroad for less than

 The average cost of production in the exporting nation
 The market price in the exporting nation
 The price to third countries

 Result of
 Excess production
 Cyclical or seasonal factors
 Attempt to force domestic producers out of business
Dumping is classified as either:

1) 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 internationally (where it
must meet the competition of foreign producers).

2) Predatory Dumping: is the temporary sale of a commodity at

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.

3) Sporadic Dumping: is the occasional sale of a commodity at

below cost or at below price abroad than domestically in
order to unload an unforeseen and temporary surplus of the
commodity without having to reduce domestic prices.
 Domestic producers demand protection against any
type of dumping, so they discourage imports and
increase their own production and profits.

 Examples: Japan was accused of dumping steel and

TV sets in the US, while European nations were
accused from dumping cars, steel and agricultural
products.

 When dumping is proved, the violating nation or firm

usually choose to raise prices rather than face
dumping duties.
 General Agreement on Tariffs and Trade (GATT)

1. GATT created as an agency to serve as watchdog over world

trade and provide a process to reduce tariffs
2. GATT also provided a mechanism to resolve trade disputes
bilaterally

GATT covers three basic areas:

1. trade shall be conducted on a nondiscriminatory basis;
2. protection shall be afforded domestic industries through
customs tariffs, not through such commercial measures as
import quotas; and
3. consultation shall be the primary method used to solve global
trade problems.

3. GATT now replaced by the World Trade Organization

 World Trade Organization (WTO)

Unlike GATT, is an institution, not an agreement

1. It sets many rules governing trade between its 132

members

2. WTO provides a panel of experts to hear and rule on

trade disputes between members, and, unlike GATT,
issues binding decisions
 The International Monetary Fund (IMF)

1. IMF was created to assist nations in becoming and remaining

economically viable
2. It assists countries that seek capital for economic development
and restructuring
3. IMF loans come with stipulations that borrowing countries slash
spending and impose controls to curb inflation
4. It helps maintain stability in the world financial markets

Objectives of the IMF include:

1. stabilization of foreign exchange rates
2. Facilitate international trade
3. lend money to members in financial trouble
 The world is moving toward more free trade.
 There are many communities and groups that monitor and
promote trade
 International Economic Communities reduce trade barriers
and promote regional economic cooperation.
 Free-trade area: Members trade freely among selves without
tariffs or trade restrictions.
 Customs union: Establishes a uniform tariff structure for
members’ trade with nonmembers.
 Common market: Members bring all trade rules into agreement.
 International Economic Communities

North American Free Trade Agreement (NAFTA)

• World’s largest free-trade zone: United States, Canada, Mexico.
• U.S. and Canada are each other’s biggest trading partners.

Central America-Dominican Republic Free Trade Agreement

(CAFTA)
• Free-trade zone among United States, Costa Rica, the Dominican Republic,
El Salvador, Guatemala, Honduras, and Nicaragua.
• $33 billion traded annually between U.S. and these countries.

European Union
• Best-known example of a common market.
• Goals include promoting economic and social progress, introducing
European citizenship as complement to national citizenship, and
giving EU a significant role in international affairs.
 Countervailing duties
 Voluntary export restraints
 Standard disparities
 International Cartels
 Ad Valorem
 Comparison of an Import Quota to an Import
Tariff
 Social dumping, Environmental dumping,
Cultural dumping
 Department of Commerce:
http://www.commerce.nic.in