CONTRAINTS TO INTERNATIONAL MARKETING

TARIFF AND NON TARIFF BARRIERS

TRADE BARRIERS
Trade barriers are the artificial restrictions imposed by the governments on free flow of goods and services between countries.

 Tariffs, quotas, taxes, duties, foreign exchange restrictions, trade agreements and trading blocs are the techniques used for restricting free movement of goods from one country to the other Trade barriers are broadly classified into following two categories: Tariff barriers or Fiscal controls Non-tariff barriers or quantitative restrictions.

OBJECTIVES OF TRADE BARRIERS

To Protect Home Industries from Foreign Competition To Promote New Industries and Research and Development To Conserve Foreign Exchange Reserves To Maintain Favorable Balance of Payments To Protect Economy for Dumping To Curb Conspicuous Consumption To Make Economy Self-reliant To Mobilize Public Revenue To Counteract Trade Barriers Imposed by Other Countries

Methods of Valuing Imports

Free alongside (F.A.S.) price
The price of the imported good as the foreign countrys market price before loading the good for shipment to the importing country

Free on Board (FOB) price

The price of the imported good as the foreign countrys market price plus the cost of loading the good in the means of conveyance

 Cost, Insurance, and Freight (C.I.F.) price

The price of the imported good as the foreign countrys market price plus the cost of loading the goods into the means of conveyance plus all inter-country transportation costs up to the importing countrys port of entry. Most countries use the C.I.F. price for calculating ad valorem tariffs.

BUT the U.S. uses the FOB price for calculating ad valorem tariffs.

TARIFFS BARRIERS
Tariffs in international trade refer to the duties or taxes imposed on internationally traded commodities when they cross the national borders.

CLASSIFICATION OF TARIFFS
direction
Import tariffs Export tariffs

Tariff rates
Application Purpose Others

Specific duties Ad valorem duties Combined duties

Single column tariff Double column Triple column

Revenue tariff Protective tariff

Anti dumping duties Countervailing duties

ON THE BASIS OF DIRECTION

Export Duties An export duty is a tax imposed on a commodity originating from the duty-levying country destined for some other country. Import duties An import duty is a tax imposed on a commodity originating abroad and destined for the duty-levying country.

ON THE BASIS OF TARIFF RATES

Specific Duties A specific duty is a flat sum per physical unit of the commodity imported or exported, thus a specific import duty is a fixed amount of duty levied upon each unit of the commodity imported. Ad-Valorem Duties Ad-valorem duties are levied as a fixed percentage of the value of commodity imported/exported. Thus, while the specific duty is based on the quantum of commodity imported/ exported, the advalorem duty is based on the value of the commodity imported/exported. Compound Duties When a commodity is subject to both specific and ad-valorem duties, the tariff is generally referred to as compound duty.

ON THE BASIS OF APPLICATION

Single Column Tariff The single-column, also known as the uni-linear, tariff system provides a uniform rate of duty for all like commodities without making and discrimination between countries. Double Column Tariff Under the double-column tariff system, there are two rates of duty on some or on all commodities. Thus, the double column tariff discriminates between countries. The doublecolumn tariff system may be broadly divided into: (a) General and conventional tariff; (b) Maximum and minimum tariff.

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

On the basis of purpose

Revenue Tariff Sometimes the main intention of the government in imposing a tariff may be to obtain revenue. When raising revenue is the primary motive, the rates of duty are generally low, lest imports should be highly discouraged, defeating the objective of mobilizing revenue for the government. Protective Tariff Protective tariff is intended primarily, to accord protection to domestic industries from foreign competition. Naturally, the rates of duty tend to be very high in this case because generally, only high rates of duty curtail imports to a significant extent.

Others
Countervailing and Anti-Dumping Duties Countervailing duties may be imposed on certain imports when they have been subsidized by foreign governments. Antidumping duties are applied to imports which are dumped on the domestic market at prices either below their cost of production or substantially lower than their domestic prices. Countervailing and anti-dumping duties are, generally penalty.

IMPACT OF TARIFFS
Tariffs affect on economy in different ways. An import duty generally has the following effect: (i) Protective Effect An import duty is likely to increase the price of imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable domestic industries to absorb higher production costs. Thus, as a result of the production accorded by tariffs, domestic industries are able to expand their output. (ii) Consumption Effect The increase in prices resulting from the levy of import duty usually reduces the consumption capacity of the people.

(iii) Redistribution Effect If the import duty causes and increase in the price of domestically produced goods, it amounts to redistribution of income between the consumers and producers in favor of the producers. (iv) Revenue Effect As mentioned above, a tariff means increased revenue for the government (unless, of course, the rate of tariff is so prohibitive that it completely stops the import of the commodity subject to the tariff).

(v) Income and Employment Effect The tariff may cause a switchover from spending on foreign goods to spending on domestic goods. This higher spending within the country may cause an expansion in domestic income and employment. (vi) Competitive Effect The competitive effect on the tariff is, in fact, an anticompetitive effect in the sense that the protection of domestic industries against foreign competition may enable the domestic industries to obtain monopoly power with all its associated evils.

(vii) Term of Trade Effect In a bid to maintain the previous level of imports to the tariff imposing country, if the exporter reduces his prices, the tariff-imposing country is able to get imports at a lower price. This wills, ceteris paribus, improve the terms of trade of the country imposing the tariff. (vii) Balance of Payments Effect Tariffs, by reducing the volume of imports, may help the country to improve its balance of payments position.

NON TARIFF BARRIERS

All forms of discrimination against imports other than import duties

Administered protection(Non Quantitative) Quantitative

Quotas: numerical limits placed on specific classes of imports Voluntary export restraints (VERs): Export quotas imposed by exporting nation

Administered Protection
Administered protection encompasses a wide range of bureaucratic government actions, which have grown in absolute as well as relative importance over the last decade or more Important administrative protection measures include the following:

Health and Product Standards : Several health and product standards imposed by the developed countries hinder the exports of developing countries because of the added costs or technical requirements. The need for maintaining health and product standards is unquestionable.

Customs Procedures : Certain customs procedures of many countries become trade barriers. For example, studies point out that frequent changes of Japans customs regulations are themselves a significant barrier to exporters, especially those not affiliated with Japanese overseas joint ventures.

Consular Formalities : A number of countries insist on certain consular formalities like certification of export documents by the respective consulate, of the importing country, in the exporting country. This becomes a trade barrier when the fees charged for this is very high or the procedure is very cumbersome

Licensing: Many countries regulate foreign trade particularly imports, by licensing. In most cases, the purpose of import licensing is to restrict imports.

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

State Trading : State trading also hinders free trade many a time because of the counter trade practices, canalization, etc. State trading was an important feature of the foreign trade of the centrally planned economics and many developing countries. With the economic liberalizations in most of these countires, the role of state trading has declined.

Monetary Controls: In addition to foreign exchange regulations, other monetary controls are sometimes employed to regulate trade, particularly imports. For instance, to tide over the foreign exchange crisis in 1990-91 and 1991-92, the Reserve Bank of India took several measures which included as 25 per cent interest rate surcharge on bank credit for imports subject to a commercial rate of interest of a minimum 17 per cent, the requirement of substantially high cash margin requirement on most imports other than capital goods, and restrictions on the opening of letters of credit for imports.

Foreign Exchange Regulations : Foreign exchange regulations are an important way of regulating imports in a number of countries. This is done by the State monopolizing the foreign exchange resources and not realizing foreign exchange for import of items which the government do not approve of for various reasons.

Quantitative restrictions Voluntary Export Restraints

Importing countries persuade exporting countries to voluntarily limit their exports.
Example: 1.68 million Japanese cars permitted annually beginning in 1981.

There is an implied threat of tariffs or quotas if exporting country doesnt comply. VERs exist for political reasons, not economically valid ones.

Quantitative Restrictions - Quotas

Quantitative restrictions or quotas are an important means of restricting imports and exports. A quota represents a ceiling on the physical volume of the import/export of a commodity Types of Import Quota There are four important types of import quotas, including import licensing. These are:

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

(ii) Unilateral Quota In a unilateral quota, a country unilaterally fixes a ceiling on the quantity of the import of particular commodity.

(iii) Bilateral Quota A bilateral quota results from negotiations between the importing country and a particular supplier country, or between the importing country and export groups within the suppliercountry

(iv) Mixing Quota Under the mixing quota, the producers are obliged to utilize domestic raw materials up to a certain proportion in the production of a finished product

Import Licensing
Quota regulations are generally administered by means of import licensing. In India, for instance, the import of almost all the items is prohibited except under, and in accordance with, a license or a customs clearance permit issued under the Imports(Control) Order, 1955, or an Open General Licence issued by the Government or under any other provision under the above order.

 Under the import licensing system, the prospective importers are obliged to obtain a license from the licensing authorities: the possession of an import license is necessary to obtain the foreign exchange to pay for the imports, In a large number of countries, import licensing has become a very powerful device for controlling the quantity of imports-either of particular commodities or aggregate imports.

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

 (i) Balance of Payments Effect As quotas enable a country to restrict the aggregate imports within specified limits, quotas are helpful in improving its balance of payments position. (ii) Price Effect As quotas limit the total supply, they may cause an increase in domestic prices.

 (iii) Consumption Effect If quotas lead to an increase in prices, people may be constrained to reduce their consumption of the commodity subject to quotas or some other commodities. (iv) Protective Effect By guarding domestic industries against foreign competition to some extent, quotas encourage the expansion of domestic industries.

v) Redistributive Effect Quotas also have a redistributive effect if the fall in supply due to important restrictions enables the domestic producers to raise prices. The rise in prices will result in the redistribution of income between the producers and consumers in favor of the producers. (vi) Revenue Effect Quotas may have revenue effect. The government may obtain some revenue by charging a license fee.

Comparison of an Import Quota to an Import Tariff 1. With a given import quota, an increase in demand will result in a higher domestic price and greater domestic production than with an equivalent import tariff. However, with a given import tariff, an increase in demand will leave the domestic price and domestic production unchanged but will result in higher consumption and imports than with an equivalent import quota.

2. The quota involves the distribution of import licenses. The government does not auction off these licenses in a competitive market, firms that receive them will reap monopoly profits. These profits will make potential importers devote efforts to lobbying and even bribing to obtain the licenses (rent seeking activities). Thus import quotas not only replace market mechanism but also result in waste from the point of view of the economy as a whole and contain the seeds of corruption.

3. An import quota limits imports to the specified level with certainty, while a tariffs effect is uncertain. The reason is that the elasticity of supply and demand often unknown, making it difficult to estimate the import tariff required to restrict imports to a desired level. Furthermore, foreign exporters may absorb all or part of the tariff by increasing their efficiency or accepting lower profits. Exporters cannot do this with an import quota since quantity of imports is clearly specified. For this reason domestic producers prefer quotas to tariffs. However, since quotas more restrictive than tariffs, society should resist these efforts.

Organizations Promoting International Trade

The General Agreement on Trade and Tariff (GATT) came into existence in 1947 It sought substantial reduction in tariff and other barriers to trade and to eliminate discriminatory treatment in international commerce. India signatory to GATT 1947 along with twenty two other countries Eight rounds of negotiations had taken place during five decades of its existence

WORLD TRADE ORGANISATION (WTO) Came into existence on 1-1-1995 with the conclusion of Uruguay Round Multilateral Trade Negotiations at Marrakesh on 15th April 1994, to :

Transparent, free and rule-based trading system Provide common institutional framework for conduct of trade relations among members Facilitate the implementation, administration and operation of Multilateral Trade Agreements Rules and Procedures Governing Dispute Settlement Trade Policy Review Mechanism Concern on Non-trade issues such as Food Security, environment, health, etc.

 Represents 149 negotiated trade agreements among countries Key Functions Cooperating with other International Organizations
Providing a forum for trade negotiations Handling trade disputes between nations

Administering WTO agreement Monitoring Providing national trade technical assistance and policies training for people in developing countries

What is NAFTA?

Began on January 1, 1994

Between Canada the United States and Mexico

 What is ASEAN?

Established on August 8th, 1967

10 member countries -Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippians, Singapore, Thailand, and Vietnam

 What is the EU?

27 member states: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

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. establish convertible currencies to facilitate international trade 3. lend money to members in financial trouble

World bank
1. 2. 3. 4. 5. lending money to countries to finance development projects in education, health, and infrastructure; providing assistance for projects to the poorest developing countries; lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance; provide investors with investment guarantees against noncommercial risk, so developing countries will attract FDI; and provide conciliation and arbitration of disputes between governments and foreign investors