1.

INTRODUCTION
This report examines tariff and non-tariff barriers that restrict trade between countries in various commodities. Many of these policies are now subject to important disciplines under the 1994 GATT agreement that is administered by the World Trade Organization (WTO).

1.1 BACKGROUND
Tariffs and Tariff Rate Quotas Tariffs, which are taxes on imports of commodities into a country or region, are among the oldest forms of government intervention in economic activity. They are implemented for two clear economic purposes. First, they provide revenue for the government. Second, they improve economic returns to firms and suppliers of resources to domestic industry that face competition from foreign imports. Tariffs are widely used to protect domestic producers incomes from foreign competition. This protection comes at an economic cost to domestic consumers who pay higher prices for importcompeting goods, and to the economy as a whole through the inefficient allocation of resources to the import competing domestic industry. Therefore, since 1948, when average tariffs on manufactured goods exceeded 30 percent in most developed economies, those economies have sought to reduce tariffs on manufactured goods through several rounds of negotiations under the General Agreement on Tariffs Trade (GATT). Only in the most recent Uruguay Round of negotiations were trade and tariff restrictions in agriculture addressed. In the past, and even under GATT, tariffs levied on some agricultural commodities by some countries have been very large. When coupled with other barriers to trade they have often constituted formidable barriers to market access from foreign producers. In fact, tariffs that are set high enough can block all trade and act just like import bans. A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota. The typical TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any imports that exceed that initial quantity. In a legal sense and at the WTO, countries are allowed to combine the use of two tariffs in the form of a TRQ, even when they have agreed not to use strict import quotas. In the United States, important TRQ schedules are set for beef, sugar, peanuts, and many dairy products. In each case, the initial tariff rate is 1

quite low, but the over-quota tariff is prohibitive or close to prohibitive for most normal trade. Explicit import quotas used to be quite common in agricultural trade. They allowed governments to strictly limit the amount of imports of a commodity and thus to plan on a particular import quantity in setting domestic commodity programs. Another common non-tariff barrier (NTB) was the so-called voluntary export restraint (VER) under which exporting countries would agree to limit shipments of a commodity to the importing country, although often only under threat of some even more restrictive or onerous activity. In some cases, exporters were willing to comply with a VER because they were able to capture economic benefits through higher prices for their exports in the importing countrys market.

1.2 ISSUES
In the Uruguay round of the GATT/WTO negotiations, members agreed to drop the use of import quotas and other non-tariff barriers in favor of tariff-rate quotas. Countries also agreed to gradually lower each tariff rate and raise the quantity to which the low tariff applied. Thus, over time, trade would be taxed at a lower rate and trade flows would increase. Given current U.S. commitments under the WTO on market access, options are limited for U.S. policy innovations in the 2002 Farm Bill vis a vis tariffs on agricultural imports from other countries. Providing higher prices to domestic producers by increasing tariffs on agricultural imports is not permitted. In addition, particularly because the U.S. is a net exporter of many agricultural commodities, successive U.S. governments have generally taken a strong position within the WTO that tariff and TRQ barriers need to be reduced. Non-Tariff Trade Barriers Countries use many mechanisms to restrict imports. A critical objective of the Uruguay Round of GATT negotiations, shared by the U.S., was the elimination of non-tariff barriers to trade in agricultural commodities (including quotas) and, where necessary, to replace them with tariffs a process called tarrification. Tarrification of agricultural commodities was largely achieved and viewed as a major success of the 1994 GATT agreement. Thus, if the U.S. honors its GATT commitments, the utilization of new nontariff barriers to trade is not really an option for the 2002 Farm Bill. 2

Domestic Content Requirements Governments have used domestic content regulations to restrict imports. The intent is usually to stimulate the development of domestic industries. Domestic content regulations typically specify the percentage of a products total value that must be produced domestically in order for the product to be sold in the domestic market (Carbaugh). Several developing countries have imposed domestic content requirements to foster agricultural, automobile, and textile production. They are normally used in conjunction with a policy of import substitution in which domestic production replaces imports. Domestic content requirements have not been as prevalent in agriculture as in some other industries, such as automobiles, but some agricultural examples illustrate their effects. Australia used domestic content requirements to support leaf tobacco production. In order to pay a relatively low import duty on imported tobacco, Australian cigarette manufacturers were required to use 57 percent domestic leaf tobacco. Member countries of trade agreements also use domestic content rules to ensure that nonmembers do not manipulate the agreements to circumvent tariffs. For example, North American Free Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit. Again, as is the case with other trade barriers, it seems unlikely that introducing domestic content rules to enhance domestic demand for U.S. agricultural commodities is a viable option for the 2002 Farm Bill.

1.3 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports. Under an importlicensing scheme, importers of a commodity are required to obtain a license for each shipment they bring into the country. Without explicitly utilizing a quota mechanism, a country can simply restrict imports on any basis it chooses through its allocation of import licenses. Prior to the implementation of NAFTA, for example, Mexico required that wheat and other agricultural commodity imports be permitted only under license. Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this mechanism to protect U.S. agricultural producers is unlikely an option for the 2002 Farm Bill. Import State Trading Enterprises Import State Trading Enterprises (STEs) are government owned or sanctioned agencies that act as partial or pure single buyer importers of a commodity or set of commodities in world markets. They also often enjoy a partial or pure domestic monopoly over the sale of those commodities. Current important examples of import STEs in world agricultural commodity markets include the Japanese Food Agency (barley, rice, and wheat), South Koreas Livestock Products Marketing Organization, and Chinas National Cereals, Oil and Foodstuffs Import and Export Commission (COFCO). STEs can restrict imports in several ways. First, they can impose a set of implicit import tariffs by purchasing imports at world prices and offering them for sale at much higher domestic prices. The difference between the purchase price and the domestic sales price simply represents a hidden tariff. Import STEs may also implement implicit general and targeted import quotas, or utilize complex and costly implicit import rules that make importing into the market unprofitable. Recently, in a submission to the current WTO negotiations, the United States targeted the trade restricting operations of import and export STEs as a primary concern. A major problem with import STEs is that it is quite difficult to estimate the impacts of their operations on trade, because those operations lack transparency. STEs often refuse to provide the information needed to make such assessments, claiming that such disclosure is not required because they are quasi-private companies. In spite of these difficulties, the challenges provided by STEs will almost certainly continue to be addressed through bilateral and multilateral trade negotiations rather than in the context of domestic legislation through the 2002 Farm Bill.

1.4 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging, product definitions, labeling, etc. In the context of international trade, such rules may also be used as non-tariff trade barriers. For example, imagine if Korea were to require that oranges sold in the country be less than two inches in diameter. Oranges grown in Korea happen to be much smaller 4

than Navel oranges grown in California, so this type of technical rule would effectively ban the sales of California oranges and protect the market for Korean oranges. Such rules violate WTO provisions that require countries to treat imports a nd domestic products equivalently and not to advantage products from one source over another, even in indirect ways. Again, however, these issues will likely be dealt with through bilateral and multilateral trade negotiations rather than through domestic Farm Bill policy initiatives.

1.5 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates. To some degree, countries can and have used exchange rate policies to discourage imports and encourage exports of all commodities. The exchange rate between two countries currencies is simply the price at which one currency trades for the other. For example, if one U.S. dollar can be used to purchase 100 Japanese yen (and vice versa), the exchange rate between the U.S. dollar and the Japanese yen is 100 yen per dollar. If the yen depreciates in value relative to the U.S. dollar, then a dollar is able to purchase more yen. A 10 percent depreciation or devaluation of the yen, for example, would mean that the price of one U.S. dollar increased to 110 yen. One effect of currency depreciation is to make all imports more expensive in the country itself. If, for example, the yen depreciates by 10 percent from an initial value of 100 yen per dollar, and the price of a ton of U.S. beef on world markets is $2,000, then the price of that ton of beef in Japan would increase from 200,000 yen to 220,000 yen. A policy that deliberately lowers the exchange rate of a countrys currency will, therefore, inhibit imports of agricultural commodities, as well as imports of all other commodities. Thus, countries that pursue deliberate policies of undervaluing their currency in international financial markets are not usually targeting agricultural imports. Some countries have targeted specific types of imports through implementing multiple exchange rate policy under which importers were required to pay different exchange rates for foreign currency depending on the commodities they were importing. The objectives of such programs have been to reduce balance of payments problems and to raise revenues for the government. Multiple exchange rate programs were rare in the 1990s, and generally have not been utilized by developed economies. Finally, exchange rate 5

policies are usually not sector-specific. In the United States, they are clearly under the purview of the Federal Reserve Board and, as such, will not likely be a major issue for the 2002 Farm Bill. There have been many calls in recent congressional testimony, however, to offset the negative impacts caused by a strengthening US dollar with counter-cyclical payments to export dependent agricultural products. The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade The precautionary principle, or foresight planning, has recently been frequently proposed as a justification for government restrictions on trade in the context of environmental and health concerns, often regardless of cost or scientific evidence. It was first proposed as a household management technique in the 1930s in Germany, and included elements of prevention, cost effectiveness, and ethical responsibility to maintain natural systems (ORiordan and Cameron). In the context of managing environmental uncertainty, the principle enjoyed a resurgence of popularity during a meeting of the U.N. World Charter for Nature (of which the U.S. is only an observer) in 1982. Its use was re-endorsed by the U.N. Convention on Bio-diversity in 1992, and again in Montreal, Canada in January 2000. The precautionary principle has been interpreted by some to mean that new chemicals and technologies should be considered dangerous until proven otherwise. It therefore requires those responsible for an activity or process to establish its harmlessness and to be liable if damage occurs. Most recent attempts to invoke the principle have cited the use of toxic substances, exploitation of natural resources, and environmental degradation. Concerns about species extinction, high rates of birth defects, learning deficiencies, cancer, climate change, ozone depletion, and contamination with toxic chemicals and nuclear materials have also been used to justify trade and other government restrictions on the basis of the precautionary principle. Thus, countries seeking more open trading regimes have been concerned that the precautionary principle will simply be used to justify nontariff trade barriers. For example, rigid adherence to the precautionary principle could lead to trade embargoes on products such as genetically modified oil seeds with little or no reliance on scientific analysis to justify market closure. Sometimes, restrictions on imports from certain places are fully consistent with protecting consumers, the environment, or agriculture from harmful diseases or pests that 6

may accompany the imported product. The WTO Sanitary and Phytosanitary (SPS) provisions on technical trade rules specifically recognize that all countries feel a responsibility to secure their borders against the importation of unsafe products. Prior to 1994, however, such barriers were often simply used as excuses to keep out a product for which there was no real evidence of any problem. These phony technical barriers were just an excuse to keep out competitive products. The current WTO agreement requires that whenever a technical barrier is challenged, a member country must show that the barrier has solid scientific justification and restricts trade as little as possible to achieve its scientific objectives. This requirement has resulted in a number of barriers being relaxed around the world.

2.

NON

TARIFF

TRADE

BARRIERS

AND

NEW

PROTECTIONISM LEARNING OUTCOMES

2.1 ARGUMENTS FOR FREE TRADE
The important arguments in favour of free trade are as follows: (i) Free trade leads to the most economic utilisation of the productive resources of the world because under free trade each country will specialise in the production of those goods for which it is best suited and will import from other countries those goods which can be produced domestically only at a comparative disadvantage. (Iii) As there will be intense competition under free trade, the inefficient producers are compelled either to improve their efficiency or to quit. (Iv) Free trade helps to break domestic monopolies and free the consumers from exploitation. (v) Free trade benefits the consumers.in different ways. It enables them to obtain goods from the cheapest source. Free trade also makes available large varieties of goods. (v i) Further, under free trade there is no much scope for corruption which is rampant under protection. Know Non tariff Trade Barriers and Protectionism Identify the fall and rise of protectionism Free Trade Versus Protection Free trade refers to the trade that is free from all artificial barriers to trade like tariffs, quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers to the government policy of according protection to the domestic industries from foreign competition. There are a number of arguments for and against both free trade and protection. (ii) Under free trade, division of labour occurs on an international scale leading to greater specialisation, efficiency and economy in production.

2.2 ARGUMENTS FOR PROTECTION

Theoretically speaking, free trade has certain virtues, as we have seen above. But, in reality, government are encouraged to resort to some manner of protective measures of safeguard the national interest. There are a number of arguments put forward in favour of protection. Some of these arguments are very valid while some others are not. We provide below the gist of the popular arguments for protection.

(i) Infant Industry Argument The infant industry argument advanced by Alexander Hamilton, Frederick List and others asserts that a new industry having a potential comparative advantage may no_ get started in a country unless it is given temporary protection against foreign competition. An established industry is normally much more stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power, etc. Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequals and this would result in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of an unequally powerful foreign industry, it will be denying the country the chance to develop the industry for which it has sufficient potential. The intention is not to give protection for ever but only for a period to enable the new industry to overcome its teething troubles. The policy of protection has been well expressed in the following words: "Nurse the baby, Protect the child and Free the adult". The infant industry argument, however, has not been received favourably by some economists. They argue that an infant will always be an infant if it is given protection. Further, it is very difficult for a government to identify an industry that deserves infant industry protection. "The infant industry argument. boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective." J (ii) Diversification Argument It is necessary to have a diversified industrial structure for an economy to be strong and reasonably self-sufficient. An economy that depends on a very limited number of industries is subject to many risks. A depression or recession in these industries will seriously affect the economy. A country relying too much. on foreign countries runs a number of risks. Changes in political relations and international economic conditions may put the country into difficulties. Hence, a diversified industrial structure is necessary to maintain stability and acquire strength. It is, therefore, advised to develop a range of industries by according protection to those which require it. (iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by imposing import duty or quota. By imposing tariff the country expects to obtain larger quantity of imports for a given amount of exports, or conversely, to part with a lesser 9

quantity of exports for a given amount ofim-ports. But the terms of trade could be expected to improve only if the foreign supply is inelastic. If the foreign supply is very much elastic a tariff or a quota is unlikely to improve the terms of trade, there is also the possibility that the foreign countries will retaliate by imposing counter tariffs und quotas. The validity of this argument, is therefore, questionable. (v) Anti-Dumping Protection is also resorted to as an anti-dumping measure. Dumping, certainly, can do harm to the domestic industry; the relief the consumers get will only be temporary. It is possible that after ruining the domestic industry by dumping, the foreign firms will obtain monopoly powers and exploit the home market. Sometimes, dumping represents a transmission of the recession abroad to the home country. These factors point out the need to protect domestic industries against dumping. (vi) Bargaining It is argued that a country which already has a tariff can use it as a means of bargaining to obtain from other countries lower duties on its . exports. It has been pointed out, however, that the bargaining lever, instead of being used to gain tariff concessions from foreign powers, may be employed by others to extract additional protection from the home government. (vii) Employment Argument Protection has been advocated also as a measure to stimulate domestic economy and expand employment opportunities. Restric-tion of imports will stimulate import competing industries and its spread effects will help the growth of other industries. These, naturally, create more employment opportunities. This method of employment generation, however, has some problems. First, when we reduce imports from foreign countries employment and income will shrink abroad and this is likely to lead to a fall in the demand for our exports. Secondly, the foreign countries will be tempted to retaliate in order to protect their employment. (viii) National Defense Even if purely economic factors do not justify such a course of action, certain industries will have to be developed domestically due to strategic reasons. Depending on foreign countries for our defense requirements is rather foolish because factors like change in political relations can do serious damage to a country's defense interest. Hence, it is advisable to develop defense and other industries of strategic importance by providing protection if they cannot survive without protection. (ix) Key Industry Argument It is also argued that a country should develop its own key industries because the development of other industries and the economy depends a lot on 10

the output of the key industries. Hence, if we 40 not have our own source of supply of key inputs, we will be placing ourselves at the mercy of the foreign suppliers. The key industries should therefore be given protection if that is necessary for their growth and survival. (iv) Improving Balance of Payments This is a very common ground for protection. By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially, may have the problem of foreign exchange shortage. Hence, it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items. In developing countries, generally, there is a preference for foreign goods. Under such circumstances it is necessary to control unnecessary imports lest the balance ofi payments position become critical. The arguments mentioned above have been generally regarded as 'serious'. There are, however, a number of other arguments also which have been branded as 'nonsense', 'fallacious', 'special interest', etc. Common among them are the following: (xi) The Pauper Labour Argument The essence of this argument is that if in the home country the wage level is substantially high compared to foreign countries, the foreign producers will dominate the home market because the cheap labour will allow them to sell goods cheaper than the domestic goods and this will affect the interests of the domestic labour. This argument does not recognize the fact that high wages are usually associated with high productivity. Further, labour cost differences may not be a determining factor. (x) Keeping Money at Home This argument is well expressed in the form of a remark falsely attributed to Abraham Lincoln: "I do not know much about the tariff, but I know this much: When we buy manufactured goods abroad we get the goods and the foreigner gets money. When we buy the manufactured goods at home we get both the goods and the money". As Beveridge rightly reacted, this "...argument has no merits; the only sensible words in it are the firsteight word." The fact that imports are ultimately paid for by exports clearly shows that the 'keeping money at home' argument for protection has no sense in it. (xii) Size of the Home Market It is argued that protection will enlarge the market for agricultural products because agriculture derives large benefits not only directly from the protective duties levied on competitive farn1 products of foreign origin but also, indirectly from the increase in the purchasing power of the workers employed in industries similarly protected. It may be pointed out against this that protection of 11

agriculture will harm the non-agriculturists due to the high prices of agricultural products and the protection of industries will harm agriculturists and other consumers due to high prices encouraged by protection. (xiii) Equalisation of Costs of Production Some protectionists have advocated import duties to equalise the costs of production between foreign and domestic producers and to neutralise any advantage the foreigner may have over the domestic producers in terms of lower taxes, cheaper labour, or other costs. "This argument allegedly implies a spirit of 'fair competition', not the exclusion of imports. When, however, by reason of actual cost structure or artificial measures, costs of production become identical, the very basis of international trade disappears. The logical consequence of this pseudo-scientific method is the elimination of trade between nations. Thus, the equalisation of costs of production argument for protection is utterly fallacious and is one of the most deceitful ever advanced in support of protection. (xiv) Strategic Trade Policy Strategic trade policy which advocates protection and government cooperation to certain high-tech industries in the developed countries is somewhat similar to the infant industry argument applied to the developing countries. The argument is that government support should be ac-corded to gain comparative advantage in the high technology industries which are crucial to the future of the nation such as semiconductors, computers, telecommunications, etc. It is also argued that State support to certain industries become essential to prevent market monopolisation. For example, outside the former Soviet Union, only three firms build large passenger jets. If European governments do not subsidise the Airbus Industries, only the two American companies, Boeing Company and Mc-Donnell-Douglas Corporation, will remain. The oft cited examples of industries developed with the support of the strategic trade policy include the steel industry in Japan in the 1950s, semiconductors in the 1970s _nd 1980s, and the development of the supersonic aircraft, Concorde, in Europe in the 1970s and the development of the Airbus aircraft in the 1980s. As Salvatore observes, while strategic trade policy can theoretically improve the market outcome in oligopolistic markets subject to extensive economies and increase the nation's growth and welfare, even the originators and popularisers of this theory recognise the serious difficulties in carryingl it out. The following difficult\es are pointed out/ in particular. First, it is extremely difficult to choose the wimiers (i.e. choose the industries 12

that will provide large externaly economies in the future) and devise appropriate policies to successfully n\lrture them. Secondly, since most leading nations undertake strategic trade policies at the same time, their efforts are largely neutralised so that the potential benefits to each may be small. Thirdly, when a country does achieve substantial success with strategic trade policy, this comes at the expense of other countries (i.e., it is a 'beggar-thy-neighbour' policy) and so, other countries are likely to retaliate. The following defects are generally attributed to protection: (i) Protection is against the interest of consumers as it increases price and reduces variety and choice. (ii) Protection makes producers and sellers less quality conscious. (iii) It encourages domestic monopolies. (iv) Even inefficient firms may feel secure under protection and it discourages' innovation. (v) Protection leaves the arena open to corruption. (vi) It reduces the volume of foreign trade.

2.3 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid expansion of the world output and trade. World trade, in fact, grew much faster than the output. After the Second World War, there was a progressive trade liberalisation until the early seventies. Thanks to the efforts of GATT, the "tariff reductions in the industrial countries continued even after this. The average levels of tariff on manufactures in industrial countries is now about 3 per cent compared to 40 per cent in 1947.

2.4 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of world's resources, Although the period until the early 1970s was characterised by trade liberalisation in general, there were several exceptions. In the developed countries, heavy protection was given to the agricultural sector through import restrictions and domestic subsidies. Further, in manufactured goods, textiles and clothe ing were subject to heavy protection. There was also protection associated with regional trade agreements like the EEC. Imports to developing countries were in general highly restrictive due to reasons such as balance of 13

payments problems and the need to protect infant industries. In the industrial countries, anti dumping and counterveiling duties began to assume more importance since the midsixties. The overall trend in the industrial countries, however, was one of liberalisation. This trend was reversed in the seventies. Since about the mid-seventies, protectionism has grown alanllingly in the developed countries. This has taken mainly the fonn of non-tariff barriers (NTBs). The main reason for the growing protectionism in industrialised countries is the increasing competition they face from Japan and developing countries like, for example, the South-East Asian countries. Due to the fact that the competition has been very severe in the case of labour intensive products, the import competing industries in the advanced countries have been facing the threat of large retrenchments. Several other industries, like the automobile industry in the US, have also been facing similar problems. The demand for protection has, therefore, grown in the industrial countries in order to protect employment. Protective measures have also been employed to pressurise Japan and the developing countries to open up their markets for goods, services and investments of the industrial countries. As mentioned earlier, the NTBs affect the exports of developing countries much more than those of the developed ones. In other words, the main target of the developed country import restrictions in the last two decades, or so, has been the developing countries. By 1987, NTBs were estimated to have affected almost a third of OECD imports from developing countries.4 While developing countries as a group now face tariffs .10 per cent higher than the global average, the least developed countries face tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest potential for the poorest countries, such as textiles, leather and agricultural commodities. Labour intensive products like textiles, clothing and footwear are among the most highly protected imports. The restriction on the textiles and clothing, which account for nearly one-fourth of the developing country exports, has been' exercised mainly by the MultiFibre Arrangement (MFA) which denies the developing countries an estimated $ 24 billion a year in terms of export earnings. Tariff escalation (i.e. increase in tariffs with the level of processing) is yet another important factor which discourages developing countries' manufactured goods. For example, while the tariff on raw sugar is less than 2 per cent, it is around 20 per cent for processed sugar products. The tariff escalation 14

discourages the developing countries' graduation as exporters of manufactured goods from commodity exporters. Tariff escalation affects a wide variety of products such as jute, spices, vegetables, vegetable oils, tropical fruits beverages, etc. As the industrial countries face more competition, they increase protectionism. This encourages one to think that they wanted free trade only as long as they enjoyed a dominant position; when their dominance is challenged they increase the trade barriers giving one or another reason. One should not be surprised if tomorrow they restrict the imports from developing countries arguing that the cost advantage of the developing countries is because of the 'injustice' done to the labour by paying wages lower than that in the US or other industrial countries! Ironically, industrial countries are increasing trade restrictions while the developing countries are liberalising trade. Trade restrictions prove costly not only for the affected exporting country but also for the importing country restricting the trade. The consumers often pay a heavy price for protection. It is estimated that overall the American consumers pay as much as $ 75 billion a year more for goods on account of import fees and restrictions-a sum roughly equivalent to about a sixth of the US import bill. In Canada every dollar earned by workers who continue to hold their jobs because of protection of the textile and clothing industries costs society an estimated $ 70. In the United States, consumers paid $ 1,14,000 a year for each job saved in thc steel industry.

15

3. REGIONAL TRADE BLOCS

The World Wide Web and technological advances in telecommunications link trade partners across the globe. Yet, this does not mean that trade barriers are non-existent. While the World Trade Organization (WTO) an aggressive global market. Regardless of the size of your business, it is essential to know the international trade regulations that govern your import and/or export operations. This report provides a brief description of role each regional trade block on economic growth date established, list of members, goals, population, and GDP (PPP). promotes global multilateral free trade, regional trade blocks provide their members with the mechanisms for competing in

3.1 REGIONAL TRADE BLOCKS

In general terms, regional trade blocks are associations of nations at a governmental level to promote trade within the block and defend its members against global competition. Defense against global competition is obtained through established tariffs on goods produced by member states, import quotas, government subsidies, onerous bureaucratic import processes, and technical and other non-tariff barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate in economic, political, security, climatic, and other issues affecting the region.

In terms of their size and trade value, there are four major trade blocks and a larger number of blocks of regional importance. The four major regional trade blocks are, as follows: ASEAN (Association of Southeast Asian Nations) Established on August 8, 1967, in Bangkok/Thailand. Member States: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar,

16

Philippines, Singapore, Thailand, and Vietnam. Goals: (1) Accelerate economic growth, social progress and cultural development in the region and (2) Promote regional peace and stability and adhere to United Nations Charter. Important Indicators for 2009: Population approximately 592 million; GDP US$1.492 trillion; and Total Trade US$1.536 trillion. (Preliminary figures as at 15 March 2010, ASEAN Website.) ASEAN Economic Community (AEC): Learn more about ASEAN Leaders' vision to transform ASEAN into a single market and production base that is highly competitive and fully integrated into the global community by 2015. EU (European Union) Founded in 1951 by six neighboring states as the European Coal and Steel Community (ECSC). Over time evolved into the European Economic Community, then the European Community and, in 1992, was finally transformed into the European Union. Regional block with the largest number of members states (27). These include Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the United Kingdom. Goals: Evolved from a regional free-trade association of states into a union of political, economic and executive connections. Population estimated at 501.2 million on 1 January 2010 (Eurostat) GDP (PPP) estimated at US$15.247 trillion (IMF 2008). MERCOSUR (Mercado Comun del Cono Sul - Southern Cone Common Market) Official site is available only in Spanish and Portuguese. Established on 26 March 1991 with the Treaty of Assuncin. 17

Full members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Associate members include Bolivia, Chile, Colombia, Ecuador, and Peru. Associate members have access to preferential trade but not to tariff benefits of full members. Mexico, interested in becoming a member of the region, has an observer status. Goals: Integration of member states for acceleration of sustained economic development based on social justice, environmental protection, and combating poverty. Population: More than 273 million people (July 2008 est., The CIA World Factbook) GDP (PPP) of more than US$2.774 trillion (2007 est., The CIA World Factbook). NAFTA (North American Free Trade Agreement) Agreement signed on 1 January 1994. Members: Canada, Mexico, and the United States of America. Goals: Eliminate trade barriers among member states, promote conditions for free trade, increase investment opportunities, and protect intellectual property rights. Population of over 444.1 million (July 2008 est.) - third largest world population by region. GDP (PPP) US$17.0 trillion (NaftaNow 2008 est.) Other regional trade blocks, regional economic partnerships and free trade associations include the following: ANDEAN (Andean Community Countries) Bolivia, Colombia, Ecuador, and Peru. Associate Members: Argentina, Brazil, Chile, Paraguay, and Uruguay. Observer Countries: Mexico and Panama. BSEC (Organization of the Black Sea Economic Cooperation) Albania, Armenia, zerbaijan, Bulgaria, Georgia, Hellenic Republic, Moldova, Romania, Russian Federation, Serbia, Turkey, and Ukraine. CARICOM (Caribbean Community) Antigua & Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts & Nevis, 18

Saint Lucia, Saint Vincent & The Grenadines, Surinam, and Trinidad & Tobago. CIS (Commonwealth of Independent States) Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. COMESA (Common Market for Eastern and Southern Africa) Burundi, Comoros, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe. ECOWAS (Economic Community of West African States) Benin, Burkina Faso, Cape Verde, The Gambia, Ghana, Guinea, Guinea Bissau, Ivory Coast, Liberia, Mali,Niger, Nigeria, Senegal, Sierra Leone, and Togo. EFTA (European Free Trade Association) Iceland, Liechtenstein, Norway, and Switzerland. GCC (Gulf Cooperation Council) Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)

MEFTA (Middle East Free Trade Area) Countries which have signed Free Trade Agreements (FTAs), Trade and Investment Framework Agreements (TIFAs), or receive active U.S. support for WTO accession include Algeria, Bahrain, Egypt, Iraq, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, and Yemen. Pacific Community comprised of the 22 Pacific island countries and territories of American Samoa, Cook Islands, Fiji Islands, French Polynesia, Guam, Kiribati, Marshall Islands, Micronesia, Nauru, New Caledonia, Niue, Northern Mariana Islands, Palau, Papua New Guinea, Pitcairn Islands, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, Vanuatu, Wallis and Futuna, and the founding countries of Australia, France, 19

New Zealand and the United States of America. SAARC (South Asian Association for Regional Cooperation) Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

SADC (Southern Africa Development Community) Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe. INTRA- REGIONAL COOPERATION ACP (African, Caribbean and Pacific Group of States) Created in 1975 with the signing of the Georgetown Agreement, establishing a partnership between the ACP and the European Union. Members: There are 79 member-states. Goals: To work together towards peace and stability, the eradication of poverty, sustainable development and increase competitiveness for gradual integration into the world economy, and to act as a unified political entity in international forums. ACS (Association of Caribbean States) Established in July 1994 in Colombia with the aim of promoting consultation, cooperation it focuses on trade, transport, sustainable tourism and natural disasters within the region. Members: Antigua & Barbuda, The Bahamas, Barbados, Belize, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, St. Kitts Nevis, St. Lucia, St. Vincent & the Grenadines, Suriname, Trinidad & Tobago and Venezuela. Associate members include Aruba, France, Netherland Antilles, and Turks and Caicos. APEC (Asia-Pacific Economic Cooperation) Initiated in January 1989 by Australia for more effective economic cooperation across the Asia-Pacific Region. 20 and concerted action among all countries of the Caribbean region. As a Zone of Cooperation,

Members: Australia, Brunei Darussalam, Canada, Chile, Peoples Republic of China, Hong Kong/China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Phillipines, Russia, Singapore, Chinese Taipei, Thailand, United States, and Viet Nam. IBSA India-Brazil-South Africa Trilateral Initiated in June 2003 with the first Foreign Affairs Ministers meeting in Brasilia, Brazil. Followed three months later by the meeting of the Heads of State in New York, USA. Goals: Among others, to develop South-South cooperation and work together at multilateral forums, such as the United Nations (UN) and World Trade Organization (WTO), for the promotion of an alternative perspective of world affairs. THE AMERICAS BEYOND NAFTA DR-CAFTA (Dominican Republic-Central America Free Trade Agreement) Negotiations for CAFTA began in January 2003 between the USA and Central America. It negotiations. The agreement was signed in May 2004. Countries which signed the agreement include: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States. FTAA (Free Trade Area of the Americas) Talks began at the Summit of the Americas held in Miami, USA, on 11 December 1994. Proposed agreement (an extension of the NAFTA Agreement): To eliminate or reduce trade barriers among the 34 democratic nations in the Americas. Countries involved in negotiations. Impasse in the negotiations is due to conflicting needs of the more- and less-developed nations. (1) Developed nations, under the leadership of the USA, seek expanded trade in services and increased intellectual property rights. (2) Less developed nations, led by Brazil, seek end to agricultural subsidies and freer trade in agricultural goods. 21 was renamed DR-CAFTA when the Dominican Republic, a Caribbean country, joined the

UNASUR/UNASUL (Union of South American Nations) formerly known as SACN (South American Community of Nations) Agreement signed in December 2004 by the presidents or their representatives of 12 South American nations. Members include the following nations:
o o o

Andean Community Bolivia, Colombia, Ecuador and Peru; Mercosur Argentina, Brazil, Paraguay, Uruguay and Venezuela; and Other Countries Chile (associate member of both South American blocks), Guyana Suriname (both members of CARICOM). and

3.2 AGREEMENTS, TARIFFS, BARRIERS AND OTHER TRADE ISSUES

Generalized System of Preferences (GSP), United Nations Conference on Trade and Development (UNCTAD) provides information on existing GSP schemes for the benefit of government officials, exporters, and others. NAFTA Trilateral Websites, U.S. Customs & Border Protection provides advisory information only on a wide range of customs-related issues. Office of the United States Trade Representative Trade Agreements. SICE The Foreign Trade Information System of the OAS (Organization of American States) offers the following world trade information:
o o o

Trade Agreements, classified by type and signatory country; Trade Policies; Trade Issues anti-dumping, competition policy, dispute settlement, electronic commerce, Tariffs; Update on the FTAA (Free Trade Area of the Americas) process; and Up-to-date trade news. 22 intellectual property rights, investment, services, technical barriers to trade, and more;

o o o

2009 National Trade Estimate Report on Foreign Trade Business by County Annual series, provided by the Office of the United States Trade Representative, that surveys significant foreign barriers to U.S. exports. The report provides, where feasible, quantitative estimates of the impact of these foreign practices on the value of U.S. exports. Information is also included on action taken to eliminate barriers.

3.3 REMARKS
Decisions made at governmental levels regarding trade between nations can have a positive or negative impact on your business. Join and participate in the world trade association in your city or state. You will have access to information on world markets and trade opportunities, as well as contact with seasoned international traders. It is an investment that will reap benefits for the success of your business. It would be great for all businesses worldwide to be able to trade freely across borders without tariffs and national protection barriers. This would be possible if all trading partners were equal and if all products and services could compete on equal ground. Understanding the complex issues that hamper global multilateral trade would help us to appreciate the need for continued open discussion between trading partners.

3.4 ACTIVITIES OF TRADE BLOCKS

It is true that the principal objective of all trade blocks is promotion of trade; however the difference lies in their modes of operation. The activities of trade blocks can be evaluated by using three basic measures. The number of latest agreements, meetings and other activities undertaken by the regional trade blocks The pattern of future planning regarding trade promotion and focus on intergovernmental associations and quicker timeframe for policy implementation Number of practical achievements attained by the member countries In practice, the success of trading blocks crucially depends on the performance of the member countries. To ensure effective trade promotion the trading blocks need to be more flexible and accommodative. Besides trade promotion, the regional blocks are also 23

expected to take part in other domains of the member countries. Effective management of trade block activities ensures all-round development of the member nations. Regardless of the position taken on regionalism, the fact is very few countries develop and reduce inequality via regional trade alone. This is primarily due to the size of the market: globalization taps into a world market whereas trade blocs emphasize into regional markets, which are larger than the domestic market of a given country, but still smaller than the world market. Trade blocs have a range of reasons to protect the trade interests of their region: (1) To establish some form of regional control regarding trade that fulfills the interests of nations within that region; (2) To establish tariffs that protect intra-regional trade from outside forces; (3) To promote regional security and political concerns or to develop trade in such as way as to enhance the security in the region; (4) To promote South-to-South trade, e.g., between Africa and Asia, and between Latin American countries; (5) To promote economic and technical cooperation among developing countries (Malaysiaexports.com); They also use several measures to restrain global competition: (1) import quotas (limiting the amount of imports into the country so that domestic consumers buy products made by their countries in their region); (2) customs delays (establishing bureaucratic formalities that slow down the ability for the imported product from abroad to enter the domestic market; (3) subsidies (government financial assistances toward sectors of the home economy so that they have an influx of capital); (4) boycotts and technical barriers; (5) bribes and voluntary restraints.

3.5 ECONOMIC GROWTH

With global trade talks stalled and lower demand from major economies that were hit hard by the global economic crisis, regional trade agreements are emerging as a way for 24

middle-income countries to increase trade, spur growth, and lower unemployment rates. In a new report, Alejandro Foxley analyzes how three regionsEastern Europe, Latin America, and East Asiaare increasing trade within their borders and building a broader free trade system. Using the findings from three vastly different experiences, Foxley says that regional trade agreements work best when participating countries have few political differences, coordinate their monetary and fiscal policies, and embrace globalization. And bottom-up approaches in which companies develop regional supply chains are more effective in improving regional integration than top-down approaches imposed by governments. Policy Recommendations:

Eastern Europe: The European Unionwhich bought 80 percent of Eastern Europes exported goods in 2008can spur further regional growth by implementing policies that reduce deficits and regain lost competitiveness.

Latin America: With their relatively strong fiscal positions, Latin American countries can expand on existing agreements by ending administrative restrictions and tariffs and coordinating investment in transportation, energy, and telecommunications.

East Asia: Despite a high number of trade agreements that make it difficult to resolve disputes and navigate the relevant rules, East Asia enjoys a successful trading history. The region should now expand its trade bloc to include China, Japan, and South Korea.

Pursuing stronger regional trade agreements can help form the building blocks for global free trade deals. Increasing trade will not only help middle-income economies develop but also drive growth around the world as the financial crisis recedes.

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4.

INTERNATIONAL

BUSINESS

STRATEGIES,

MARKETING AND TRADE BLOCS

4.1 GLOBAL BUSINESS STRATEGIES
Regional integration agreements (RIA), also known as regional trading blocs, have become one of the major international relations developments in recent years. Most industrial or developing nations belong to one or more RIAs, and there are many. It has been said that more than one third of all world trade takes place within RIAs and that percentage increases daily. The most successful and well known RIA is the EU, the objective of which was to reduce barriers to trading between member nations and promote an economic union. Major developments in the growth of these organizations were to limit tariffs, quotas or other barriers which tend to segment economies. The goal was the free flow of goods, services and investment. Another development was to move toward a more open concept of trade as opposed to the old regional attitudes. In some cases, there has developed a deeper integration than might have been expected. Thirdly, highly industrialized nations can partner with lesser developed countries to bolster the economies of both. Whether the RIAs promoted the growth of global business, or global business caused the creation of the great number of RIAs might be a discussion item as both have mushroomed in the past decade and a little more. Central Asia is not as advanced in the formation of RIAs, but the area is clearly a force to be considered. The fact that China was a closed economy until very recent years must have impacted the growth and effectiveness of RIAs in that part of the world. There may also have been more resistance and more differences in the economies of the region, but global business has brought them along. This world region may be a little behind but the capital available (both financial and work force) will speed them through to the same success the EU enjoys. Clearly there is a political agenda to many of these agreements, but the basic purpose remains as open trade. The economic benefits of such trading blocs cannot be underestimated. Removal of trade barriers act as a market enlarger while increasing competition and efficiency. There are those who would say that RIAs are 26

discriminatory by nature, in that preference is given to members, but it seems that the power and the growth far outweigh this argument. Natural growth might suggest that smaller RIAs will combine to form larger RIAs and a true global economy may emerge as a result.

4.2 GLOBAL MARKETING

Small businesses , mostly based in Western Europe and the Americas , are facing a great deal of hardship due to regional trade blocs. These trade blocs, like the one in the Far East, combines company interests and are many time created by a nation, along with their neighboring nations, in order to compete more effectively in the global market. Another reason for the formation of these blocs is to impose more substantial sanctions against nations with whom they are at war or whether they are simply competing with one another in the global market. These informal coalitions have successful undermined a great many trade initiatives during the last few years. Although U.S. workers have seen a negative impact due to globalization, multinational companies which are based in North America have surprisingly prospered. Reversing this trend will require governmental and global scale cooperation and support. Even though the landscape of small business positioning in the global market is bleak, the future can bring about a profound change. Governments must provide aid their resident small business by joining with peer nations to help them to form coalitions of their own in order to have a louder voice with venues such as the World Trade Organization. By doing this, small businesses can more effectively stand up to the new bullies on the block.

4.3

TRADE BLOCS KNOWLEDGE FROM TRADE

BLOCKS
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On a daily basis we are exposed to a myriad of acronyms. A large number of these refer to some form of regional economic integration such as CMA, COMESA, FTA, IDZ, SACU and SADC, to name a few. These different acronyms are also associated with different stages of economic integration. In recent years there has been a definite move by the majority of countries in the world to align themselves economically with their neighbours through the creation of trade blocs (not trade blocks) of one sort or the other. It is quite evident that a movement is currently afoot where these trade blocs are engaging in discussions with each other to pursue further economic integration. As a consequence, a trend is developing where regional trade blocs are competing with each other on a multilateral basis, rather than individual countries competing with each other on a bi-lateral basis. With the increasing prominence of regional economic integration, are you able to name the seven (7) forms of economic integration, and in addition, also the five stages of economic integration? Before you contemplate reading the next column consider this. If you are not able to distinguish between the forms and stages of economic integration, how can you even contemplate doing business in a country that is a signatory to a form of economic integration? In our experience the incorrect use of the various forms of economic integration in the general media is quite prevalent, which attributes to even more misunderstanding. In an effort to remedy this, and to gain a better understanding of the forms of economic integration and their respective characteristics the following table has been devised: In order to gain a better understanding of each the discussion has been related to an example where possible in the South African or Southern African context. Free Trade Zone: This relates to designated areas established within a single customs authority or country. In SA legislation has been introduced in respect of Industrial Development Zones (IDZ). The IDZ differs from the Export Processing Zones (EPZs) in a number of ways, most notably in respect of the labour dispensation.

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Free Trade Area: SA is a signatory to three FTAs, namely the SA-European Union Free Trade Agreement, the Southern African Development Community (SADC) FTA, and the Southern African Customs Union (Sacu)-European Free Trade Area (EFTA) FTA. Customs Union: SA is a member of the oldest Customs Union on record Sacu. The five-member customs union includes Botswana, Lesotho, Namibia and Swaziland (BLNS countries). Common Market: In southern Africa there exists the Common Market for Eastern and Southern Africa (Comesa) of which SA is not a member. Economic Union: The next stage in the economic integration process is the Economic Union whose acronym EU should not be confused with that of the European Union. This form of economic integration implies that the member countries give up some of their soverentity in pursuit of economic unity. In the instance of SA we are one of the fourmember countries of the Common Monetary Area (CMA). The other members being Lesotho, Namibia and Swaziland. The agreement entails that the currencies in these countries are pegged against the rand. Political Union: This is the ultimate from of economic integration in that the soverentity of member countries is resident in that of the union. An example of such a union is the former Union of Soviet Socialist Republics (USSR), until its disintegration in 1991. The establishment of a European parliament is a first step in the road towards the formation of a European Political Union.

4.4 THINK GLOBAL THINK REGIONAL

Think global, act local is the familiar slogan that perpetuates a narrow view of globalization strategy: Multinational corporations (MNCs) develop one global product for the world market, and are able, through their vast economies of scale, to dominate local markets everywhere. But this perspective fails to acknowledge that most business activity by large firms takes place in regional blocks, not in a single global market. For many firms, we propose a new slogan: Think regional, act local, forget global. 29

Most MNCs headquartered in North America earn the majority of their sales in their home region of North America, or by selling to members of the Triad, which encompasses North American Free Trade Agreement (NAFTA) and European Union (EU) nations, Japan, and the Asian tigers. In only a few industries consumer electronics, for example is a global strategy superior. In fact, for most manufacturing and virtually all services, a national or regional approach is more sensible than a global one. And for a growing number of MNCs, a regional strategy works best. Sectors such as bulk chemicals, automobiles, and pharmaceuticals have shifted from a national to a regional focus in North America, with companies setting up regional headquarters responsible for NAFTA countries. Statistics reveal the power of regional markets. For instance, more than 85 percent of automobiles sold in North America are built in North American factories; more than 90 percent of the cars produced in the EU are sold in that region; and more than 93 percent of all cars registered in Japan are manufactured domestically. In specialty chemicals, more than 90 percent of all paint is produced and sold regionally by MNCs in the Triad. The same is true for steel, heavy electrical equipment, and energy. Nearly all activity in New Economy services, which employ about 70 percent of the work force in North America, Western Europe, and Japan, is essentially local or regional. Companies can source goods, technology, information, and capital from around the world, but business activity tends to be centered in certain cities or city regions in a few parts of the world. Prominent examples of new industry clusters include 3G telecommunications in Japan; textiles in the area surrounding Milan, Italy; and the hightech cluster called Silicon Fen around Cambridge, in the United Kingdom. The United States has Silicon Valley and Bostons Route 128 for high-tech industry; Houston, Tex., for energy; and Wichita, Kan., for aerospace. The importance of clusters has given cities and states more clout to compete nationally and worldwide to attract new R&D labs, plants, and head offices. What does the regionalization of business mean for managers of MNCs? First, businesses need to view the world as four entities: city clusters, nations, regions, and the globe. Second, with few exceptions, regions are becoming the focus of strategy analysis and 30

organization. DuPont and Procter & Gamble Company, for example, have rolled their three separate country subsidiaries for the U.S., Canada, and Mexico into one regional organization. This is true of other MNCs operating in the NAFTA region. The same is happening in Europe with the EUs push toward greater economic integration. Many foreign subsidiaries will assume the role of sales and service organizations, responding to the local needs of foreign customers. However, subsidiaries that take on a more demanding leadership role in a region, and in the parents global network, can add considerably more value to the firm worldwide. One of the theoretical advantages of being global is the ability to tap into learning and innovation worldwide; an MNCs leading subsidiaries can make this happen. In addition, leading subsidiaries can take on global and regional responsibilities for R&D, manufacturing, product management, and key marketing functions. The top executives of foreign subsidiaries have a special role to play in turning their operations into more than mere sales and service outlets. Specifically, subsidiary leaders can promote the development of world-class business capabilities that position their unit of the company to win broader regional responsibilities for achieving corporate goals. For example, a subsidiarys capability could be its skill in developing and manufacturing a product line. Pratt & Whitney Canada manages a critical line of engines for P&W worldwide. Nokia in the U.K. leads the Finnish telecommunications companys product development for several key products. Panasonic in Spain handles key aspects of panEuropean strategy, and so on. Lead subsidiaries, especially those operating in the Triad, usually have earned their roles rather than been given them by an authoritarian head office. Our research suggests foreign operations build their stature in the global corporate network by working diligently to establish world-class capabilities, and by communicating those competencies to the head office as well as other lead subsidiaries. Globalization presented as a single world market for free trade does not exist; Triadbased production and distribution is todays reality. We believe corporate strategies that are aligned with this reality will be the most successful long into the future. 31

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5. TARIFF AND NON-TARIFF BARRIERS BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions, restrictions on trade can promote growth, especially of developing countries, according to a study published in the Journal of Development Economics. The study by Halit Yanikkaya, an academic at the College of Business and Administrative Services, Celal Bayar University (Turkey), has examined the growth effects on 108 economies of a large number of measures of trade openness, using the same yardsticks or measures of openness and over the same periods, and applying econometric models and regressions. The study has used two broad categories: measures of trade volumes and measures of trade restrictions and measures their effects on growth in the 108 economies. The study and the results of the data analysed challenges what the author calls the unconditional optimism in favour of trade openness among the economic profession and policy circles. It finds that on the basis of trade volumes, there is a positive and significant association between trade openness and growth. According to the conventional view and studies on the growth and trade restrictions, trade restrictions have an adverse association between trade barriers and growth. The study finds a contrary evidence and says: our estimation results from most specifications (of tariff and trade barriers) show a positive and significant relationship between trade barriers and growth. Equally important, the study adds, these results are essentially driven by developing countries, and thus consistent with the predictions of the theoretical growth literature that certain conditions, developing countries can actually benefit from trade restrictions.

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Several empirical studies of the 80s and 90s provided an affirmative answer for the view that open economies grew faster than closed ones, and that outward-oriented economies have consistently higher growth rates than inward-oriented ones. These led to a strong bias in favour of trade liberalisation and under-pinned the World Bank/IMF policy conditionalities and advice to developing countries and the Washington Consensus of the 1990s. Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the tragic failures of the import substitution strategies especially in the 1980s, and the overstated expectations from trade liberalization. The World Bank- sponsored studies, by Dollar and others, said they had found positive correlations between open economies and faster growth across countries. The first major challenge from academia came from Dani Rodrik, and followed by a cross-country empirical analysis, using the same measures of openness across a range of countries, which brought out that these studies had reached the conclusion of open economies growing faster because they used different yardsticks for countries and over different time-periods: But when the same yardsticks were used and over the same timeperiods, the results showed that fast growth had taken place in some of the countries with higher trade restrictions (India and China), but which had adopted a measured approach to trade liberalization (after creating capacity domestically, and calibrating liberalization measures). Since then a number of studies have come out challenging the view that liberalization of trade and investments is always a plus and there is growth in the long-run. These studies have brought out that openness to external trade and trade liberalization are two different concepts, and that the latter promoted growth (and brought in foreign direct investment and associated technology) only under certain conditions, and when the host-country State played an active role. The Yanikkaya study notes that while there is a near consensus about the positive correlation between trade flows and growth, the theoretical growth literature (which studied growth effects of trade restrictions) came to the view that the effects were very 34

complicated in the most general case, and mixed in how trade policies play a special role in economic growth. This, the author attributes to the way openness is described very differently in various studies, making classification of countries on basis of openness a formidable task. Hence, using different measures of openness produces differing results. The Yanikkaya study looks at the growth effects on a large number of measures of trade openness. Two broad measures of trade openness are used and studied: one is on effect of various measures on trade volumes, which indicate a positive and significant association between openness and growth, and is in line with conclusions of empirical and theoretical growth literature. However, the estimation results for various measures for trade barriers, contradicts the conventional view on the growth effects of restrictions, and suggests an adverse association between trade barriers and growth. The estimation results from most measures of trade restrictions show a positive relationship between trade barriers and growth, a result driven by developing countries. These results are consistent with the predictions of theoretical growth literature, namely, that under certain conditions, developing countries can actually benefit from trade restrictions. In a survey of the literature, the study finds that international trade theory (based on static trade gains) provides little guidance to the effects of international trade on growth and technical progress, the new trade theory argues that gains from trade can arise from several fundamental sources differences in comparative advantage and economy-wide increasing returns. While there are many studies about the effects of trade policies on growth - during the failed import substitution strategies of the 1980s and the export-promotion policies - there is a lack of clear definition of trade liberalization or openness.

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The most difficult has been measuring openness. An ideal one would be an index that includes all trade barriers distorting international trade, such as average tariff rates and indices of non-trade barriers. Such an index, incorporating effects of both tariff and nontariff measures has been developed by J.E.Anderson and J.P.Neary. But it is not available for a large number of economies. Other studies, like those by Dollar and, Sachs and Warner used available data. If the growth engine is driven by innovation and introduction of new products, then developing countries should benefit more by trading with developed countries than with other developing countries. However, the Yanikkaya study results do not support this, both providing growth regressions positively and significantly. The study finds that a developing country benefits through technology diffusion by trading with a developed country, and since the US is the leader in technology, developing countries benefit through this bilateral trade. Also, countries with higher population densities tend to grow faster than those with lower densities. In using measures of trade restrictions - several of whom it acknowledges are not free from measurement errors - the study reaches some very different conclusions than conventional trade theory suggests. Thus, it finds that trade barriers in the form of tariffs can actually be beneficial for economic growth. In the current context (of the Doha Round and the drive of Europe and the US to tear down and harmonise developing country tariffs), this is a significant and telling result, providing support for the viewpoint of developing countries in these talks. The framework for modalities for tariff liberalisation in industrial products in the NAMA negotiations put forward by the chairman (and WTO secretariat) is misguided and needs to be opposed and jettisoned. When export taxes and total taxes on international trade are used as a measure of trade restrictions, the study finds that save for fixed effect estimates, there is a significant and positive association between trade barriers and growth. This is similar to the results for average tariffs. On non-tariff barriers, there are difficulties of estimation because of data limitations; hence these are excluded in most empirical studies. But studies by J.Edwards (cited in the 36

Yanikkaya study) found such restrictions having an insignificant relationship with growth, and came to the view that NTBs are poor indicators of trade orientation, since a broad coverage of NTBs did not necessarily mean a higher distortion level. Using several new measures of trade openness and restrictions now available, and applying them on a framework model explained in details (but needs econometric knowledge for the lay trade person to test and see), the Yanikkaya study, says that there is considerable evidence for the hypothesis that trade restrictions can promote growth, especially in developing countries, under certain conditions. The study makes clear that it has no intention of establishing a simple and straightforward positive association between trade barriers and growth, but rather to show that there is no such relationship between trade restrictions and growth. Such a relationship depends mostly on the characteristics of a country. Restrictions can benefit a country depending on whether it is developed or developing (a developed one seems to lose), whether it is a big or small country, and whether it has comparative advantage in sectors receiving protection

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6. CASE STUDY
6.1 NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA: FICCI
Indias exports of pharmaceuticals could make a significant dent in the Chinese market and help meet overall trade expectations of US$ 30 billion by 2009, provided Non Tariff Barriers in the shape of procedural, legal and cultural barriers that hinder market access are removed, according to FICCI. Based on feedback received from pharma exporting companies, FICCI has called for urgent steps to streamline customs procedures as well as efficient and effective use of technology for electronic data interface in customs administration and information exchange. A bilateral pre-shipment inspection agreement would also benefit both countries. FICCI has suggested that recognition agreements on standards should be arrived at and full details of standards should be made easily available. It has recommended that the various non-tariff barriers be identified and addressed and both countries act to remove them in a time bound framework. Easier trade financing and greater cooperation between the EXIM banks of the two countries would also work to the benefit trade between the two countries. In this context, it is important to note that Indian exports of drug, pharmaceuticals and fine chemicals to markets such as the US, Europe, Africa and South America have grown by 19% year-on-year in the last three years while the world average growth rate for this sector is about 6%. In contrast, in the last three years Indias exports to China have grown at just 3%. From US$ 94 million in 2002-03, Chinese imports from India have grown to US$ 106 million in 2003-04 to US$ 109 million in 2004-05. This accounts for barely 2%3% of Indian exports of drugs and pharmaceuticals to the world. This indicates that the high-performing Indian pharma sector has not found the environment conducive for achieving similar growth with China.

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The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include:

Procedures for product and company registration and for procuring Import Drug License are expensive and time consuming. Over and above the official cost of US 7000 per product, they can cost anywhere between US$ 20,000 to $40,000 per product. Besides, it may take 18 months to three years to procure an Import Drug Licence. These licences and registration are essential for beginning to export or ship goods even to factories owned by the companies that are situated in China. This is a considerable deterrent for Indian entrepreneurs to initiate exports to China.

Long customs procedures, re-inspections and discriminatory packaging & labelling regulations that even specify the colour used for packaging, result in delays and higher costs and most of all consume energy and patience.

The banking procedures for foreign players, particularly for remittance of foreign exchange, are tough and tedious. Even the sight payments are remitted after a minimum of 30 to 45 days due to the foreign exchange declaration system of Chinese banks.

Once in the Chinese market, the drug distribution is mostly through hospitals. In practice, locally produced drugs are preferred and this manifests in the form of red tape for Indian pharma products.

Intellectual Property Rights acts as another restrictive non-tariff trade barrier. China surpassed the US as the worlds most litigious country for IP disputes in 2005, with 13,424 cases filed with Chinese courts compared to 10,905 cases filed in the US during the same period. International companies were involved in only 268 of the IP cases filed in China last year, which represents an increase of 76% over the number in 2004. This overly cautious approach in seeking IP enforcement by international companies in China is partly due to their unfamiliarity with Chinese civil litigation.

Lack of transparency in information about local markets and trade statistics add to the low awareness of foreign businesses in China. This lack of transparency

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clouds insight into the Chinese market and hampers marketing strategies of Indian pharma companies in China.

In all of the above, language is a major barrier to trade. There are very few Chinese-speaking people in India that can be resourced as interpreters. Although the number of Chinese who are learning English is growing, communication remains a major impediment to trade.

While China has consistently complained about anti-dumping cases in India. India has responded by delivering on its words and this is no longer a bone of contention between the two nations. It is for the Chinese now to set the ground rules right and ensure that all non-tariff barriers are removed. At the same time, China needs to ensure that the quality standards are maintained in pharmaceutical products. India has the largest number of USFDA approved plants outside the US. There more than 75 plants which are also WHO GMP (Good Manufacturing Practices) certified and could easily cater to the demand for high quality pharma products.

6.2 SOUTH ASIA AND THE ASIAN RESURGENCE IN ECONOMIC GROWTH

The Asian resurgence is one of the most significant developments of our time. The rise of Asia began with the extraordinary economic progress of Japan in the 1950s and 60s; was followed by the remarkable advance of the Asian Tigers (Hongkong, Taiwan, South Korea and Singapore) and other countries of South East Asia; and now, the impressive growth of China and India. The Twenty First century will reportedly be the Asian century just as the Twentieth was the American century and the Nineteenth the European century. By 2050, China is expected to be the largest economy in the world and India the second largest. By that time Asia might hold seven of the ten leading national economies. The Asian Development Bank projects Asia as a region that will achieve an average growth rate of 7% in 2007 compared to the global economic growth forecast of 3.3%. Samuel Huntington in his seminal work The Clash of Civilizations and the remaking of the World Order perceives the ascendancy of Asia in contrast to the decline of the West 40

and attributes the latter to low economic growth, stagnating population, declining savings rates, huge Government deficits and in many Western countries including the United States, social aspects such as low work ethics, family decay, drugs and crime. At the present however, the West is overwhelmingly dominant. Western economies are still growing and the West is still the leader in the field of science and technology. Neither the rise of Asia nor the decline of the West is irreversible. President George Bush in his State of the Union Address earlier this year remarked in a dynamic world economy we are seeing new competitors like China and India America should not fear our economic future because we intend to shape it In the Huntington thesis, Western strategy to maintain and strengthen its global supremacy is focused on Euro-American unity, it exploits differences among non Western nations and attempts to develop common interests with what it calls swing civilizations which are major actors in world affairs likely to have ambivalent and fluctuating relations with the West and its challengers such as Japan, Russia and India. Western supremacy is sought to be safeguarded through a three pronged strategy: (i) a globalised economy which the West dominates; (ii) non-proliferation of nuclear weapons and W.M.Ds which should be exclusively controlled by Western powers; and (iii) protection of the cultural and ethnic integrity of the Euro-American societies by drastically restricting the number of immigrants and refugees from non European countries. Western strategy to sustain it pre-eminent position also involves defining its interests as the interests of the world community, an euphemism which is meant to give global legitimacy to actions reflecting the interests of the United States and other Western Powers. Hence, democracy is promoted but not if it brings Islamic fundamentalists to power; non proliferation is preached to Iran and North Korea but not to Israel; human rights are an issue with China but not with Saudi Arabia. India is not aligned with any major power and its foreign policy assesses every issue on its merits and in the light of national interests. India seeks to maintain cordial relations with all the major countries and indeed with all countries of the world. 41

The Indo-USA Joint Statement issued after the meeting of Prime Minister Manmohan Singh and President George Bush in Washington states that as a responsible State with advanced nuclear technology India should acquire the same benefits and advantages as other such States. President Bush told the Prime Minister that he will work to achieve full, civil nuclear energy cooperation with India as it realizes its goals of promoting nuclear security. In turn, our Prime Minister conveyed that India would be ready to assume the same responsibilities and practices and acquire the same benefits and advantages as other leading countries with advanced nuclear technology such as the United States. At the moment, the Indo-US nuclear deal appears to be stuck in a groove with both sides attempting to iron out the differences. India-Russia relations reveal Russias changing foreign policy perceptions. President Putin appears to be keen on rebuilding the strategic partnership that existed between Russia and India during the cold war period. The post cold war era which saw some devaluation in the earlier Indo-Soviet relationship primarily by the Russian side seems to be getting over. Russia recognizes India as a privileged strategic partner and agrees on joint research and development and production of weapon systems. For India, this is a quantum jump in weapons technology lessening Indias burden on defence R & D, greater self reliance and possibilities of joint international marketing. In his message to our Prime Minister, on the occasion of the 60 th anniversary of the diplomatic ties between the two countries last April, President Putin said At a time when a new system of international relations is being formed, Russia and India have succeeded through their joint efforts in putting in place a solid legal base and effective mechanisms to continue strengthening their bilateral ties. External Affairs Minister, Pranab Mukherjee added Indo-Russian relations are a natural continuation of Indo-Soviet friendship, which had a significant strategic content for nearly half a century. Russia and India have agreed to undertake strategic cooperation for oil and natural gas exploitation. India has already a 20% share in the Sakhalin oil development and exploitation rights for four oil fields and pipeline projects. Russia is the second largest oil producer in the world and Indias energy needs are fast multiplying. India also needs to diversify its dependence on the Middle East oil. Russia is the only permanent member of the UN Security Council that has supported unambiguously Indias claim to be a permanent member of the Council with veto powers. 42

As a goodwill gesture, China formally abandoned its claim to Sikkim. Both countries can greatly benefit from mutual cooperation and capitalize on each others economic strengths; for instance, manufacturing and computer hardware in China, services and software in India. If India and China cooperate in the IT sector we shall be able to lead the world, the Chinese Prime Minister said, It will signify the arrival of the Asian century in the IT industry. India and relations with its neighbours Pakistan GDP grew at 8.4% in 2009, its fastest rate of growth in the last decades Growth softened to 7% last year and is projected to pick up at 7.3% this year. India-Pakistan relations suffered a major setback due to the attack on Parliament in December 2001. Sometime thereafter, however, diplomatic ties were restored to the level of High Commissioner, transport and communication links were also revived. The Composite Dialogue process was started after commitment from President Musharraf in January 2004 not to permit the territory under Pakistans control to be used to support terrorism in any form. The ceasefire along the LOC and in Siachen which came into force in November, 2003 has held despite a few infractions. The Dialogue Process between the two countries derives strength from the significant people to people exchanges over the last few years. A sustained growth of bilateral trade depends on many factors including the wiping out the trust deficit at the political level.

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CONCLUSION
When export taxes and total taxes on international trade are used as a measure of trade restrictions, the study finds that save for fixed effect estimates, there is a significant and positive association between trade barriers and growth. This is similar to the results for average tariffs. On non-tariff barriers, there are difficulties of estimation because of data limitations; hence these are excluded in most empirical studies. Such restrictions having an insignificant relationship with growth, and came to the view that NTBs are poor indicators of trade orientation, since a broad coverage of NTBs did not necessarily mean a higher distortion level. Using several new measures of trade openness and restrictions now available, and applying them on a framework model explained in details (but needs econometric knowledge for the lay trade person to test and see), the Yanikkaya study, says that there is considerable evidence for the hypothesis that trade restrictions can promote growth, especially in developing countries, under certain conditions. The study makes clear that it has no intention of establishing a simple and straightforward positive association between trade barriers and growth, but rather to show that there is no such relationship between trade restrictions and growth. Such a relationship depends mostly on the characteristics of a country. Restrictions can benefit a country depending on whether it is developed or developing (a developed one seems to lose), whether it is a big or small country, and whether it has comparative advantage in sectors receiving protection.

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REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS Carbaugh, Robert J. International Economics, South-Western, 1995. Cross, Frank B. Paradoxical Perils of the Precautionary Principle, Revision 851, Washington and Lee Home Page, Volume 53:3, 1996. New Principle to Protect Human Health and the Environment, Health Alert, Earth Guardian, CQS, 1999. ORiordan, Tim and James Cameron. Interpreting the Precautionary Principle, Earthscan Publications, Ltd., Island Press, 1994. INTERNET WEBSITES http://www.farmfoundation.org/2002_farm_bill/sumner.pdf http://www.giftsociety.org/docs/IJGBC_Issue2_2006/IJGBC_2_Paper2.pdf http://www.annd.org/Reflections%20by %20ANND/Documents/1942005/CSOs_and_Regional_and_International_Blocks .pdf http://www.twnside.org.sg/title/5421a.htm http://www.ficci.com/press/230/press6.htm http://www.indialaws.info/encyclopedia/learnlaw.aspx?ID=306 http://www.rocw.raifoundation.org/management/mba/managrial_economics/lectu re-notes/lecture-34.pdf http://cii.in/documents/WTO/cii_position.pdf

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