Trade Barriers To Protect The Domestic Industry

INTRODUCTION

Despite all the evident benefits of international trade, governments have a tendency to put up trade barriers to protect the domestic industry. There are two kinds of barriers: tariff and non-tariff.

Tariff Barriers

Tariff is a tax levied on goods traded internationally, that is on imports. As a result, the price level of imported products rises and the demand for them decrease, thus imports are less.

Non-tariff Barriers

Non-Tariff Barriers (NTBs) include all the rules, regulations and bureaucratic delays that help in keeping foreign goods out of the domestic markets. Baldwin [1] defined a “non-tariff distortion” as “any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income.

The WTO

After the World War II, many countries focused on protecting home industries. So, international trade was hampered by severe trade restrictions. To remedy this situation, twenty-three nations joined together in 1947 and signed the General Agreement on Tariffs and Trade (GATT), which stimulated free trade by regulating and lowering tariffs. The work of GATT is sustained by the World Trade Organization (WTO) which encourages global commerce and reduces trade barriers. Tariffs on goods and services have been reduced to low levels through eight successive rounds of the WTO; still there has been a significant increase of Non-Tariff Measurements which are seriously hindering trade. Countries use many mechanisms to restrict imports.

NTBs have gained importance as tariff levels have been reduced worldwide. They are the greatest single threat to a liberal world trading system and they are becoming more widespread: the percentage of industrial countries’ total imports subject to NTBs rose from 25% in 1981 to 27% in 1983 and they are even higher today. NTBs are therefore one of the most important issues in the round of international trade negotiations.

TYPES OF NON-TARIFF BARRIERS

Non- Tariff Barriers to trade can be categorized in six types:

Specific Limitations on Trade:

Quota shares

A quota is a restriction in value or in physical terms, imposed on import and export of certain goods for a certain period of time. For example, the US has imposed a quota on textiles imported from India and other countries.

Import licenses/ Restrictive licenses

Import licensing can be defined as administrative procedures requiring the submission of an application or other documentation, other than those required for customs purposes, to the relevant administrative body as a prior condition for importation of goods [2] . For example, in Washington, cheese and cheese products are subject to the requirements of the Food and Drug Administration and the Department of Agriculture and most importations of cheese require an import license and are subject to quotas administered by the Department of Agriculture, Foreign Agricultural Service [3] . In Mauritius, pesticides require import licence from the Ministry of Health, arms and ammunitions require import permit from the police and many others. [4] 

Exchange controls

This is monitoring the amount of foreign exchange available to residents for purchasing foreign goods domestically or while travelling abroad is another way of restricting imports. Foreign exchange restrictions and foreign exchange controls occupy a special place among the non-tariff regulatory instruments of foreign economic activity. Foreign exchange restrictions constitute the regulation of transactions of residents and nonresidents with currency and other currency values.

Import bans/ limitations

This is a government order forbidding imports of a specific kind or from a particular country. For example, in order to protect the domestic manufacturers against cheap competition from the neighboring country, the government of India imposed ban on the import of Chinese toys. Moreover, many countries, like for example India, have impose a ban on food imports from Japan fearing contamination. Furthermore following a milk scandal that led to the widespread poisoning of babies in China, India banned the import of milk and milk products from China.

Embargoes

Embargo is a particular type of quotas prohibiting the trade, in other words, when imports from a specific country are totally banned. It is mostly put in place due to political reasons. For example, the United Nations imposed an embargo on trade with Iraq as a part of economic sanctions in 1990.

Customs and Administrative Entry Procedures

Customs Valuation

There is a commonly held view that the invoice values of goods traded internationally do not reflect their real cost. This gave rise to a very subjective system of valuation of imports and exports for levy of duty. If the value ascribed to a particular product would turn out to be considerably higher than its real cost, it could end in affecting its competitiveness by increasing the total cost to the importer due to the excess duty. This would hence act as a barrier to international trade.

Antidumping practice

If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. Antidumping is prohibiting a country to dump, that is, to export goods at usual lower prices.

Documentation requirements

This is when complicated and unnecessary documentation requirements are asked by the importing countries. In Mauritius, according to the Mauritius chamber of commerce and Industry of Mauritius, these imports documents are required; invoice, showing the FOB and CIF value of goods; packaging lists; bill of lading; bill of entry; and where applicable; insurance certificate, certificate of inspection, certificate of origin and imports permits [5] .

Rules of origin

Determining where a product comes from is no longer easy when raw materials and parts across the globe are used as inputs in the manufacturing plants. Rules of origin are important in implementing such trade policy instruments as anti-dumping and countervailing duties, origin marking, and safeguard measures.

Technical barriers to trade

Technical Barriers

Countries generally specify some quality standards to be met by imported goods for various health, welfare and safety reasons. In Mauritius, rice (imported by traders other than the State Trading Corporation) should not exceed 10% broken rice, bakery additives shall not contain potassium bromate as an ingredient [6] , etc. This facility can be misused for blocking the import of certain goods from specific countries by setting up of such standards, which deliberately exclude these products. The process is further complicated by the requirement that testing and certification of the products regarding their meeting the set standards be done only in the importing country.

The Precautionary Principle

The precautionary principle, is a government restrictions on trade in the context of environmental and health concerns, often regardless of cost or scientific evidence. 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.

Sanitary and phyto-sanitary conditions

This is a restriction on imports from certain places in order to protect consumers, the environment, or agriculture from harmful diseases or pests that may accompany the imported product. For instance, in Mauritius, agricultural goods require a phytosanitary certificate from the ministry of Agriculture, prepared foods, drugs, and chemicals with potential adverse effects on health require phytosanitary certificate from the Ministry of Health. [7] 

Packaging conditions, labeling conditions and product standards.

Countries usually impose standards on classification, labeling and testing of products in order to be able to sell domestic products, but also to block sales of products of foreign manufacture. These standards are occasionally entered under the excuse of protecting the safety and health of local populations. In Mauritius, the establishment in charge for the control of standards mainly for food and other items is the Mauritius Standards Bureau.

In addition, European exporters and investors are facing an increasing number of unjustifiable non-tariff barriers in the form of product certification, labeling standards, import approval requirements and customs clearance delays.

Also, many of the Chinese standards such as the CCC standard require certification by the Chinese authorities before a product can be put on the Chinese market. Important information has to be submitted and the factory has often to be inspected at the expense of the exporter.

Government Participation in Trade

Complex regulatory environment

Some countries have complex regulatory framework, for e.g. complex business registration and license, and thus this hamper free trade. For instance, rules recently enacted in China, prohibit European financial information agencies and operators to sell directly their services customers in China.

Government procurement policies

This is another type of NTB where governments pretty frequently follow the policy of procuring their requirements (including that of government-owned companies) only from local producers, or at least extend some price advantage to them. This closes a big potential market to the foreign producers.

Subsidies to Local Goods

This occurs when governments directly or indirectly subsidize local production in an effort to make it more competitive in the domestic and foreign markets. For example, tax benefits may be extended to a firm producing in a certain part of the country to reduce regional imbalances, or duty drawbacks may be allowed for exported goods, or, as an extreme case, local firms may be given direct subsidies to enable them to sell their goods at a lower price than foreign firms.

Countervailing duties

This is a duty placed on imported goods that are being subsidized by the importing government. This helps to even the playing field between the domestic producers and the foreign producers receiving subsidies.

“Buy national” policy

This is a policy hosted by the government to help the national economy. For instance, in 2009, the Paraguayan Finance Ministry specified changes to public procurement policy in relation to the national stimulus plan. That is, public bodies that seek to spend money from the stimulus money are to give preference to national goods and services. More specifically, domestic goods shall receive a preferential margin of 70 percent over imported products. In terms of labor, the announcement declares that at least 70 percent of the labor involved in stimulus projects shall come from local employees living in the territory of the contracting public authority.

Charges on imports

Variable import levy

A variable import levy is a levy on imports that raises their price to a level at least as high as the domestic price. Such levies are adjusted frequently in response to changes in world market prices, and are imposed to defend administered prices set above world market prices. Under the Uruguay Round Agreement on Agriculture, the variable levies of the EU have been converted into fixed tariffs or tariff-rate quotas.

Border taxes

It is a tax system for imports and exports, especially one that compensates for internal taxes in Common Market countries by levying fees or paying rebates.

Others

Voluntary Export Restraints

This is an act of limiting exports. It happens when a country facing a persistent huge trade deficit against another country pressurized the latter to adhere to a self-imposed limit on the exports. For instance, after facing consistent trade deficits over a number of years with Japan, the US persuaded it to impose such limits on itself.

Direct and Indirect Restrictions on Foreign Investments

A country may directly restrict foreign investment to some specific sectors or up to a certain percentage of equity. Indirect restrictions may come in the form of limits on profits that can be repatriated or prohibition of payment of royalty to a foreign parent company. These restrictions discourage foreign producers from setting up domestic operations. Foreign companies are generally interested in setting up local operations when they foresee increased sales or reduced costs as a consequence. Thus, restrictions against foreign investments add impediments to international trade by giving rise to inefficiencies.

PROBLEMS CAUSE BY NTBs

The reduction of tariffs in progressive rounds of trade liberalization at the multilateral and regional levels has been mirrored by the rise to prominence of NTBs. NTBs for instance specific limitations on trade and charges on imports such as quotas, import ban and so on, will directly affect trade negatively as they will impact on exporting countries by decreasing or prohibition their exports. Although embargo is usually introduced for political purposes, the consequences, in essence, could be economic.

This decrease or ban in exports, if it was of an important quantity/ value, will create serious economic catastrophe for the exporting countries and may result in Balance of Payments deficiency, a decrease in GDP, an increase in the level of unemployment and if nothing is done to remedy the situation, the country can go in a recession.

NTBs in the customs and administration entry procedures category and in the standards category do not directly hamper free trade but they add to business cost. These testing procedures being expensive, time consuming and cumbersome to the exporters, act as a trade barrier. This will eventually raise their costs, leading to higher prices thus making them less competitive at international level, and small and medium enterprises may be discouraged to export. A vivid example is in Iran where NTBs negatively impact on the trade of pistachio and shrimp products. The most important reasons for the reduced export of these products are Sanitary Phyto-Sanitary (SPS) and Technical Barriers (TB). According to WTO rules, countries are allowed to adopt regulations under the SPS and TB agreements in order to protect human, animal and plant health as well as the environment, wildlife and human safety. [8] 

However, by imposing NTBs, both counties will lose, that is, the country which imposes the NTMs also loses. This can be demonstrated by the following facts: for instance, Japanese consumers pay five times the world price for rice because of import restrictions protecting Japanese farmers. American consumers also suffer from the same double burden, paying six times the world price for sugar because of trade restrictions. Hence, allowing free trade in a way will benefit everyone. European consumers pay dearly for restrictions on food imports and heavy taxes for domestic farm subsidies. [9] 

HOW TO REDUCE NTBS

The action should start from the top, that is, from the WTO itself. The WTO has already reached some agreements like the “Anti-dumping Agreement, SPS agreements, technical barriers agreements and many other agreements.

Moreover, RTAs is the first step to reduce NTBs, as it is easier to get the consensus of all an RTA members on a matter that the consensus of all the WTO members. In addition, RTAs normally constitute of country members with a similar/ more or less the same economic background. For instance, in ASEAN, most members are from developing countries while EU has members from developed countries. As a result, removing NTBs will benefits all the members equivalently.

For example, there has already been an agreement on the general features of the process for eliminating NTBs in ASEAN. The process Involves, verification of information on NTBs, prioritisation of products/NTBs, developing specific work programmes, and obtaining a mandate from the ASEAN Economic Ministers to implement the work programme. [10] 

In addition, different RTAs have different methods of reducing NTMs. Such as, the Working Party on Regulatory Cooperation and Standardization Policies aims at building a shared regulatory framework and at achieving greater security for consumers and workers, better protection for the environment and reduced cost for international trade. [11] They also developed standards for agricultural produce that define minimum quality requirements in order to facilitate the trading process.

CONCLUSION

Free trade, will surely benefits many countries. Thus in order to allow trade to occur freely, tariffs as well as non-tariff barriers need to be reduced.

However, sometimes for safety reasons, some NTMs are required. For instance the import ban on food from Japan is necessary in order to avoid the proliferation of the radioactive contamination.

Thus some trade restrictions may be necessary for countries to ensure the safety of the food supply and the health of plants, animals and the environment. However, sometimes governments go beyond what is necessary to protect domestic industries.

Moreover, free trade can increase the poverty gap. This is so because developing countries and LDCs will not be able to compete with developed countries and multinationals may implant themselves in the LDCs just to reap the benefit of cheap labour and resources and does not contribute more to the development of those LDCs.