Barriers and solutions to international trade
INTRODUCION
This essay provides an overview of the barriers to international trade faced by economies today with examples of barriers faced in various countries, and their solutions. International trade promotes high standard of living for trading nations and hence, despite its various ill effects, it is best to practice international trade as it provides economic and social benefits to economies bringing about an upturn in global economy.
This essay attempts to bring to light, the general barriers international trade faces presently and its solutions with recent examples.
INTERNATIONAL TRADE: AN INTRODUCTION
Trade among countries has existed for a long period now. The trade between Asia and Europe marks this fact as Morrison (2006, pp.314-315) examines that these two continents have engaged in Trade since a long period. He also suggests that with time, international trade has come a long way as far as volume and patterns of trade between nations is concerned. Morrison (2006) has referred to figures by the World Trade Organisation (2004, cited in International Trade Statistics 2003, World Trade Developments 2002) from the official website of the WTO that Asia’s share of global merchandise exports has gradually increased, Northern America’s share has slightly decreased and Western Europe’s share has recovered from a downfall in 2001, but not as much as it did in 1990. Morrison further suggests, from 2000 to 2002, China’s exports and imports rose by 30 per cent and today, China is one of the world’s largest traders. Therefore, we may note that International trade plays a very essential role in globalization trends in the world economy.
UNDERSTANDING ‘TRADE PROTECTIONISM’
Protectionism is ”The deliberate use or encouragement of restrictions on imports to enable relatively inefficient domestic producers to compete successfully with foreign producers, or to protect and preserve those industries and producers considered of critical national interest.” (McCracken, 2005)
Coughlin et al (1988) state that Protectionist Trade Policies are meant to improve the position of domestic products as compared to its foreign equivalents, and that this may be done through various policies – by increment of the market price of the foreign product or by barring access of foreign products to the domestic market. They explain that protectionist trade policies aim to expand domestic production in the protected industries for the benefit of the owners, suppliers and workers of the protected industry. However this may lead to a downturn in the consumption of protected goods due to either associated rise in its price or consumers start using less of other goods as a result of the decline in outputs and increase in prices. Coughlin et al hence, argue that domestic consumers are said to be impaired as the price of the protected goods keep increasing.
Hence, imposing of tariffs lead to domestic producers’ and the government’s gain, while domestic consumers’ and other domestic producers’ loss. These trade policies also affect foreign interests.
‘FREE TRADE’ & ITS THEORIES
Free Trade is ”trade between nations that is unhampered by Government constraints such as tariffs, restrictions, and other barriers.” (Financial Times Limited, 2009)
Theory of Absolute Advantage
Barnat (2005) highlighted certain points from Adam Smith’s The Wealth of Nations 1776 that explain what this theory talks about. He mentioned that the country’s practicing or willing to practice free trade should work towards maximising the efficiency of the goods and products they deal in, and that this theory is based on the assumption that the nation producing a certain good is ‘absolutely’ better at production of that good or commodity than the rest of its trading partners, hence calling this the ‘absolute advantage’ of the nation over the other nations.
The theory of Absolute Advantage suggests specialization through free trade as it benefits the consumers if they can afford foreign-made products at a comparatively cheaper price than domestic products. (Warhurst, 2009)
Theory of Comparative Advantage
Barnat (2005, cited in Ricardo, 1817) had postulated that in Ricardo’s theory of comparative advantage even if a certain nation is able to produce all its goods at a comparatively lower cost than another country then it benefits the trade of both the countries, based on the comparative costs.
Coughlin et al (1998, cited in Ricardo’s Principles of Political Economy and Taxation, 1817) demonstrated that two countries viz. England and Portugal were shown to produce the same two goods wine and cloth and the only production costs were labour costs. It was shown that England was comparatively less efficient to produce both goods as it was comparatively costlier to produce those goods in England. Therefore, it was said in this demonstration that Portugal had an absolute advantage in these two goods. According to this example, labour was the only resource considered to produce these goods when labour is among the many resources used to produce these goods. Also, the production costs of the additional units have been taken to be constant in this demonstration, but unit production as mentioned by Coughlin et al here, is subject to decrease or increase depending on the production.
Elwell (2005) suggests that the gains from trade are mutual despite either nations’ absolute advantage or disadvantage in the efficiency with which they produce all tradable goods. The difference in rate of production of one good must be limited for the expansion of another good among countries such that there is a comparative advantage among the two nations such that both benefit efficiently from trade. A nation is not to compete but look at the mutual benefits from trade. Therefore, each country must produce what they do best relatively. Comparative advantage is evident in activities that make use of profuse productive resource. Elwell explains this statement with the help of an example of the U.S. and China. He states that China, with a relative abundance of low skilled labor would find it beneficial to engage in production that requires low skilled labor, in trade. On the other hand, the U.S. specializes in production of goods that require high skilled labor.
Also, the production of goods can be practiced such that a part of the good is produced in one country while another country can deal in producing another part required for the production of the good hence practicing the theory of comparative advantage. For example – American hardware companies send their products to China since it is much more cost effective due to low waged labor in China. This acts as a comparative advantage for both countries.
Due to political motives, various governments still try to obstruct the system of free trade in spite of its acceptance globally, in Henderson’s view.
BARRIERS TO INTERNATIONAL TRADE
Tariff Barriers
Tariffs according to Coughlin et al (2009) are taxes imposed on goods entering a country from another country. They suggest that tariff revenues are paid to the government of the country that allows the goods to enter its nation and this revenue is used to finance government services. Therefore, as Sumner et al (2002?) state, Tariffs are among the oldest form of government intervention and are implemented for the purpose of providing revenue to the government and they also provide economic returns to firms and suppliers of resources of the domestic industry that face competition from imported products. Sumner et al further suggest that in 1948, when average tariff on manufactured goods increased by 30 percent in many developed countries, these economies negotiated for the reduction of tariff on manufactured goods under the General Agreement on Tariff Trade (GATT), however, only in the most recent negotiations on this issue in Uruguay, the trade and tariff restrictions were addressed. Tariffs are capable of hampering nation-to-nation trade, or as Sumner et al add, if tariffs set are very high then it can block international trade and hence, act like import bans.
Quota System
Henderson (2009), states, in the quota system, there is a lot more bureaucracy involved and in this case, the government is not the source from where the revenue is generated.
Under the quota system as suggested by Coughlin et al (2009), the prices increase in the home market and this enables domestic producers to increase production and consumers to reduce consumption. Coughlin et al further state that the quota generates a revenue gain to the owner of import licenses.
Non-Tariff Barriers (NTB)
The Non-tariff barriers can be classified further as the regulatory barriers, subsidies and exchange controls.
Subsidizing domestic producers is one way to restrict terms under which foreigners can compete in the home market as suggested by Coughlin et al (2009). They also state that restricting access to foreign money to buy foreign goods is known as Exchange Control.
Example – Karugia et al (2009) state that the main type of non tariff barriers faced in East Africa during Maize and Beef trade were customs documentation and administrative procedures, quality inspection, transiting procedures and immigration, which are all cumbersome and expensive. He states that these barriers reduce the possible benefits of trade preferences, lead to huge welfare loss as cost of business activities increase. As a result of this, trade among the East African nations, in beef and maize was found to be very low as Karugia et al suggest.
Tariff-Rate Quota
Sumner et al (2002) have also discussed what is called a Tariff-Rate Quota (TRQ). It is said to be the combination of the ideas of tariff and quota. The implementation of a TRQ is a very good idea for the benefit of both countries – that importing and the one exporting, and the concerned governments.
Policies like the Tariff-Rate Quota help implement trade practice between countries in a healthy manner as it not only implements low tariff prices but also keeps a check on the quantity of products being imported.
According to TRQ, a low tariff is set against imports of a fixed quantity and if the quantity of the imports increases, a higher tariff is set against the goods. Sumner et al have given the example of United States that follows this policy for various products like beef, sugar, peanuts and other dairy products. In these cases, the initial tariff is said to be low but the over-quota tariff is very highly priced and in some cases, even unaffordable.
GLOBAL TRADE IN PRESENT ECONOMIC CLIMATE
Post the economic crisis, the general belief of countries is to be very careful as far as dealing with international trade is concerned and to protect their economies, nations are practicing protectionism, however, free trade is in the interest of most countries, but it is not in the economic interest of the nations to practice free trade in times of crisis.
There are some basic solutions for the removal of trade barriers put forward by Crean (2009, ed. Baldwin and Evenett, 2009) one of which is G20 leadership – such that countries lift each other up rather than pull each other down through protectionism. He adds that the G20 can play an important role in encouraging open trade flows between countries. Here is a notable example as proposed by Crean – To help open markets in Washington, Australia helped build support to execute considerable measures last year with the agreement of G20 leaders by putting forward an Action Plan for the purpose of restoring growth, addressing the progress of the WTO Doha negotiations and to put a halt to protectionism.
He proposes, it is important to avoid inefficient incentives while crafting the fiscal and industry support packages and also, huge subsidies will give rise to competitive response. Crean further suggests, it is of utmost importance especially in these times post economic crisis to preserve open trade flow among nations. He adds growth and prosperity are transmitted within countries through trade. He mentioned, according to Organization of Economic Co-operation and Development (OECD) analysis, a 10 percent increase in trade is associated with a 4% rise in per capita income, however, the crisis has now brought about a slowdown in trade.
World Bank has predicted that 2009 will be the first year in over a quarter century in which international trade is forecast to fall, Crean sites. He has spoken of the export statistics of China and Japan and certain other countries and noted how drastically the crisis has affected the trade of these countries. He argues that protectionism gradually only lessens competitiveness, growth, employment and real incomes.
I am now going to focus on the barriers to international trade in businesses in the U.S. and EU and talk about the measures they have decided on taking to attain a healthier global trading system bearing in mind the current economic climate. Also, I will further add what steps Canada and EU have decided on taking to address the trade barriers.
Trade Barriers and Solutions: US & EU
The U.S. Trade Representative (USTR) 2009, states, the National Trade Estimate Report 2009 describes significant barriers to trade in the US. The barriers, as cited in the report, according to USTR, obstruct access to markets for the products of American workers, irrespective of the workers employment status – self or employed by company. The various tariff and non tariff barriers by foreign governments that need to be addressed are highlighted in the report – difficulty in testing and requirements of certification on thousands of consumer goods, inspection and registration of a wide range of import products by new means, ineffective enforcement against counterfeiting and copyright piracy; subsidies being exported illegally was another issue of concern, onerous import requirements or bans not based in science and also said to not be competitive internationally; approval processes for biotech products were said to be cumbersome and ineffective; imported products are made to pay rates 10 to 43 times higher than before as according to discriminatory excise taxes; foreign participation in the telecom market is very limited, and many other such issues were raised.
The USTR states that exports contribute about 13 per cent to the US Economy; therefore, measures by the USTR and the Government for the sake of the economy of the country, is necessary.
The report, as USTR suggests, states what measures could be taken by the United States Trade Representative to embark upon these barriers. After reading this article, I have tried to pull together the matter in brief. The article suggests that the USTR is reviewing the functioning of the existing trade agreements, including enforcement of labour and environment provisions. The USTR is going to prioritize the trade barriers put forward by the report, in order of importance and hence, deal with each barrier according to relevance tackling the most vital barrier at first. They are planning on handling these cases by multilateral and bilateral dispute resolution. The USTR is also working with the Congress to improve the trading system in the country. The US Trade Representative Ron Kirk (2009) proposed the opening of new markets around the world. The USTR suggests that manufacturers and service providers and the American workers should make use of the benefits of previous trade agreements through strong enforcement.
Kirk, in 2009, as cited in the USTR (2009) suggests that the proposals made will also help in the economic recovery procedure and incremental gains in market access and in reduction of trade barriers and thus, will help Americans attain good salary jobs.
Castle (2009) states that European exporters have faced many new trade barriers since the global economic crisis however, measures to prevent protectionism have been taken by the EU. He adds that global trade volumes in August 2009 were 18 per cent below its peak in 2008 due to the economic crisis. Castle (2009, cited in Ashton, 2009) states that classical tariff increases, import and export bans or ceilings, non-tariff barriers and government procurement and investment measures are the major trade barriers faced in the EU with classical barriers alone affecting about 5 per cent of the EU exports. Another trade restricting measure according to the Foreign Manufacturers Legal Accountability Act of 2009 in the US that states that it aims to protect US customers and businesses from defective products manufactured abroad, is, another barrier between EU and US trade as Castle (cited in Ashton, 2009) has mentioned.
Castle further cites, one of the bills state that it is unsafe to grant unfair tax disadvantages to subsidiaries of the EU companies in the US in the insurance sector.
The EU and U.S. are each other’s most important trading and investment partners and hence it is important for these two sides to work towards the reduction of these barriers. As cited by Palmer (2009), the two sides have agreed on meeting for identification of labeling, energy efficiency and nanotechnology for increased cooperation on regulation; and that these two sides have plans for a new US-EU Energy Council and also to set up a dialogue dealing in creating jobs in various sectors such as IT and energy.
Addressing Trade Barriers: Canada & EU
Another notable example of nations that have pledged to remove trade barriers is that of Canada and The EU. Czech Trade (2009) suggests, these two nations have signed a summit to remove trade barriers and that the Canadian Government is trying their best to remove trade barriers for Canadian exporters and open Canada’s market to foreign companies such as the EU. Canada is one of EU’s main trading partners and the fact that Canada has maintained a healthy economy despite the global economic crisis, has helped EU promote its business and trade relations with Canada. It has been said to be believed that both countries will benefit largely in terms of economy post this summit in the next couple of years.
Cohen (2009) suggests that there is a Canada-EU Free Trade deal expected by 2011 as intended by Former Quebec premier Pierre Marc Johnson.
CONCLUSION
Trade should satisfy the theory of comparative advantage benefitting both nations engaged in trading activities. It has a positive effect on economies, both economically and socially, but it also has its ill effects for example, as Elwell (2005) suggests, while it helps benefit the economic condition of relatively efficient activities, it hampers the relatively less competent activities. However, impressing barriers prevent nations from economic gain. Elwell further suggests that tariffs, quotas and non tariff barriers result in a loss of the exporting sector and gain of the importing sector. But, it is also important to note that this may lead to an increase in prices and reduced goods available to the consumer, thereby, leading to the downfall of the economy.
It is true that it is important for the domestic industry to protect, improve and sell their products but it is also important to note the profits foreign goods bring to both economies and thus, it is important for the benefit of every economy to work towards addressing the barriers they face today.
Trade, either in the form of import or export contributes largely to the economy of the country. Just like the U.S. Government and the U.S. Trade Representatives are working hand in hand to fight the barriers hence working towards the security of the country’s economy, other economies should also address their respective barriers. The G 20 must also help trade flow in developing countries. Developed countries should aim to remove all trade barriers and try giving up on protectionist measures like The EU and The U.S. have pledged to do for the economic benefits of either country. Also, ideas like the free trade deal between Canada and the EU should be encouraged and worked upon by other nations as well, hence, encouraging trade among nations which in turn, shall benefit the global economy.
Reference:
Books
- Morrison, J. (2006) International Business Environment: Global and Local market places in the changing world”, Second Edition, Palgrave.
- Crean, S. (2009) The collapse of global trade, murky protectionism and the crisis [pdf] London, Center for Economic Policy Research
Available at http://www.voxeu.org/reports/Murky_Protectionism.pdf [Last Accessed 01 December 2009] - Elwell, C. K., 2005 Trade, trade barriers and trade deficits: Implications for U.S. economic welfare [e-book] Available at www.au.af.mil/au/awc/awcgate/crs/rl32059.pdf [Last Accessed 06 December 2009]
- Barnat R. (1998-2007) Theory of Absolute Advantage [Online] Available at http://applications-of-strategic-management.24xls.com/en110 [Last Accessed 01 December 2009]
- Castle, S. (2009) EU finds Trade Barriers Rising since Global Crisis, New York Times [Online] 06 Nov., Available at http://www.nytimes.com/2009/11/06/business/global/06trade.html?_r=1 [Last Accessed 01 December 2009]
- Cohen, T. (2009) Canada-EU free trade deal expected by 2011, CB Online, Source – The Canadian Press [Online] 17 Nov., Available at: http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b172534122&page=1 Last Accessed 01 December 2009]
- Coughlin C., Chrystal K., Wood G (1988) Protectionist Trade Policies: A Survey of Theory, Evidence and Rationale [pdf] Available at http://research.stlouisfed.org/publications/review/88/01/Protectionist_Jan_Feb1988.pdf [Last Accessed 01 December 2009]
- Czech Trade (2009) Canada and EU pledge to remove barriers [Online] 20 May, Available at http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b172534122&page=1 Last Accessed 01 December 2009]
- Henderson, R. (2009) Trade Barriers – A Guide to International Trade Barriers [Online] Available at http://ezinearticles.com/?Trade-Barriers—A-Guide-to-International-Trade-Barriers&id=3247030 [Last Accessed 01 December 2009]
- Karugia et al (2009) The Impact of Non Tariff Barriers on Maize and Beef Trade in Africa [Online] Available at www.resakss.org/index.php?pdf=42386 [Last Accessed 06 December 2009]
- Palmer D., (2009) U.S., EU pledge work on regulatory trade barriers Thomas Reuters 2009 [Online] 27 Oct., Available at http://www.reuters.com/article/ousivMolt/idUSTRE59Q53K20091027?pageNumber=1&virtualBrandChannel=11617 [Last Accessed 01 December 2009]
- Sumner et al (2002?) Tariff and Non Tariff Barriers to Trade [pdf] Available at http://www.farmfoundation.org/news/articlefiles/816-sumner.pdf [Last Accessed 01 December 2009]
- Financial Times Limited (2009) Free Trade, Financial Times Lexiton [Online] Available at: http://lexicon.ft.com/term.asp?t=free-trade [Last Accessed 01 December 2009]
- McCracken, M. (2009) Explain Protectionism [Online] Available at: http://www.teachmefinance.com/Financial_Terms/protectionism.html [Last Accessed 01 December 2009]
- USTR Official Website (2009) USTR Identifies International Trade Barriers, Outlines Efforts to Open Markets for U.S. [Online] Available at http://www.ustr.gov/about-us/press-office/press-releases/2009/march/ustr-announces-delay-trade-action-beef-hormones-dis-0 [Last Accessed 01 December 2009]