Instruments of Trade Policy Mohammad

Sohaib
 Instruments of Trade Policy- Learning Outcomes

• Trade policy and describe its objectives

• Various types of trade policy measures
• Evaluate the use of tariffs as a trade policy instrument
• The ‘trigger price mechanisms’ for protection of domestic
industry
• Outline the different Non-Tariff Measures adopted by
countries
 Trade Policy and its Objectives

• Trade policy encompasses all instruments that governments may use to

promote exports and contain imports .
• It also includes approaches taken by countries while conducting trade negotiations at
biliteral or multi lateral trade negotiations that shape their trade policies .
• It is basically classified into Trariff and Non-Tariff barriers.
• Tariffs, also known as customs duties, are basically taxes or duties imposed on goods
and services which are imported or exported. Different tariffs are generally applied to
different commodities.
• Tariffs are aimed at altering the relative prices of goods and services imported, so as
to contract the domestic demand and thus regulate the volume of their imports
• Tariffs leave the world market price of the goods unaffected; while raising their prices
in the domestic market. The main goals of tariffs are to raise revenue for the
government, and more importantly to protect the domestic import-competing
industries.
 Instruments of Commercial Policy – Tariff Barriers
• Tariff can be imposed on quantity or value of imports or both
• Specific Tariff : Quantity ( no of units, weight volume, capacity, size , dimensions etc
• Rs 1000 per solar panel imported
• The disadvantage of this type of tariff is that the degree of protection varies inversely with changes in import
prices. It does not discourage consumption of imported goods that are relatively more expensive because the
set amount of tax would be more negligent as the prices of foreign products increase.
• For example if the price of the imported solar is `5,000/- andthe rate of tariff is 20%; then, if due to inflation,
the price of a solar unit rises to`10,000, the specific tariff is still only 10% of the value of the import.
• Ad valorem tariff is levied on the basis of value of the item say 10%
• For example if solar panel price is Rs 5000 then 10% of it is Rs 500 revenue and if price doubles then revenue
also would double to Rs 1000
• While ad valorem tariff preserves the protective value of tariff on home producer, it gives incentives to
deliberately undervalue the good’s price on invoices and bills of lading to reduce the tax burden. Nevertheless,
ad valorem tariffs are widely used across the world.
• Compound Tariff or compound duty is a combination of both specific Tariff and Ad valorem
• Mixed tariff: is imposed on the basis of per unit (specific tariff) or on the basis of value (Ad valorem)
depending upon which one generates most income for the country. For ex Rs 3000 per car imported or 10%
duty on imported car whichever is higher.
 Types of Tariff
• Technical/Other Tariff: These are calculated on the basis of the specific contents of the imported goods i.e. the
duties are payable by its components or related items. For example: `3000/ on each solar panel plus ` 50/ per kg
on the battery.
• Tariff Rate Quotas: Tariff rate quotas (TRQs) combine two policy instruments: quotas and tariffs. Imports
entering under the specified quota portion are usually subject to a lower (sometimes zero) tariff rate. Imports
above the quantitative threshold of the quota face a much higher tariff
• Most-Favoured Nation Tariffs: MFN tariffs refer to import tariffs which countries promise to impose on imports
from other members of the WTO, unless the country is part of a preferential trade agreement (such as a free
trade area or customs union).
• E.g. Canada has a free trade agreement with Korea, and many Canadian goods imported into Korea are not
charged tariffs. While Korea charges tariffs on goods from its other trading partners equally, Canada does not
pay any tariffs at all because the free trade agreement overrules the most favoured nation principle. As a result,
Canadian goods enjoy a competitive advantage in Korea
• Variable Tariff: A duty typically fixed to bring the price of an imported commodity up to level of the domestic
support price for the commodity.
• Preferential Tariff: Nearly all countries are part of at least one preferential trade agreement, under which they
promise to give another country’s products lower tariffs than their MFN rate. These agreements are reciprocal.
A lower tariff is charged from goods imported from a country which is given preferential treatment
 Types of Tariff
• Bound Tariff: Under this, a WTO member binds itself with negotiations and a legal commitment not
to raise tariff rate above a certain level for individual products. A country can impose tariff < bounded
tariff. A bounded tariff ensures transparency and predictability.

• Applied Tariffs: In reality some countries with higher bound tariffs decided to set their actual tariffs at
a lower than their bounded rates. The actual tariff rate is called the applied tariff rate

• Escalated Tariff structure refers to the system wherein the nominal tariff rates on imports of
manufactured goods are higher than the nominal tariff rates on intermediate inputs and raw
materials, i.e. the tariff on a product increases as that product moves through the value-added
chain.

• For example, a 4% percent tariff on iron ore or iron ingots and 12% tariff on steel pipes. This
type of tariff is discriminatory as it protects manufacturing industries in importing countries
and dampens the attempts of developing manufacturing industries of exporting countries. This
has special relevance to trade between developed countries and developing countries.
Developing countries are thus forced to continue to be suppliers of raw materials without
much value addition
 Types of Tariff

• Prohibitive tariff: A prohibitive tariff is one that is set so high that no imports can enter
• Import subsidies: Import subsidies also exist in some countries. An import subsidy is simply a
payment per unit or as a percent of value for the importation of a good (i.e., a negative import tariff
• Tariffs as Response to Trade Distortions: Sometimes exporting countries engage in 'unfair' foreign-
trade practices which are trade distorting in nature and adverse to the interests of the domestic
firms. The affected importing countries, upon confirmation of the distortion, respond quickly by
measures in the form of tariff responses to offset the distortion. These policies areoften referred to
as "trigger-price" mechanisms. The following sections relate to such tariff responses to distortions
related to foreign dumping and export subsidies.
 Anti-dumping: Dumping occurs when manufacturers sell goods in a foreign country below the sales
prices in their domestic market or below their full average cost of the product. It hurts domestic
producers. Anti -dumping measures are additional import duties so as to offset the foreign firm's
unfair price advantage.
 Countervailing duties are tariffs to offset the artificially low prices charged by exporters who enjoy
export subsidies and tax concessions offered by the governments in their home country.
 Effects of Tariff
 Tariff barriers create obstacles to free trade,
1. R educe the prospect of market access,
2. Reduce the volume of imports and exports
3. Make imported goods more expensive,
4. Increase the production and consumption of domestic goods,
5. Customers are required to pay higher price for the same good in domestic market and
suffer from loss of consumer surplus
6. Protect domestic industries and increase governmentrevenues of importing country
7. Producers in domestic industry would feel better off due to imposition of tariff
8. It prevents countries from enjoying gains from international trade arising out comparative
cost advantage of other countries
• Although WTO has a played a critical to bring down tariff barriers through successful
negotiations still non tariff barriers have remained a concern
 Non –Tariff Barriers

 countries have continued to use trade and Non-trade barriers as a result of strained
relationship between the two countries than more than anything else.
 Although WTO has a played a critical to bring down tariff barriers through successful
negotiations still non tariff barriers have remained a concern.
 Non-tariff barriers are discriminatory non-tariff measures imposed by governments to
favour domestic over foreign suppliers
• Technical barriers : health, and safety regulations sanitary regulations, that a
product should have, such as its size, shape, design, labelling packing and labelling
requirements, industrial standards. Unusually high standards to discourage imports.
The condition that the product will be tested and certified in importing country
• Non-Technical Barriers: These include different types of trade protective measures to
neutralize the possible adverse effects of imports in the market of importing
country. Non-technical measures relate to trade requirements;
• for e.g shipping requirements, custom formalities, trade rules, additional levies and
taxes etc.
 Non –Technical Barriers

• Import quotas is a direct restriction which specifies that only a certain physical
amount of the good will be allowed into the country during a given time
period, usually one year.

• Price Control Measures: Price control measures (including additional taxes and
charges) are steps taken to control or influence the prices of imported goods in
order to support the domestic price of certain products when the import
prices of these goods are lower. These are also known as 'para-tariff' measures.

• Non-automatic Licensing and Prohibitions: These measures are

normally aimed at limiting the quantity of goods that can be imported,
regardless of whether they originate from different sources or from one
particular supplier
 Non –Technical Barriers

• Financial Measures: to increase import costs by regulating the access to and

cost of foreign exchange for imports
• Measures Affecting Competition: These measures are aimed at granting
exclusive or special preferences or privileges to one or a few limited group of
economic operators. It may include government imposed special import
channels or enterprises a statutory marketing board may be granted exclusive
rights to import wheat: or a canalizing agency (like State Trading Corporation)
may be given monopoly right to distribute palm oil.
• Government Procurement Polices: Government procurement policies may
interfere with trade if they involve mandates that the whole of a specified
percentage of government purchases should be from domestic firms rather
than foreign firms, despite higher prices than similar foreign suppliers. In
accepting public tenders, a government may give preference to the local
tenders rather than foreign tenders
 Non –Technical Barriers

• Trade-related investment Measures: These measures include rules on local content

requirements that mandate a specified fraction of a final good should be produced
domestically For eg 25% of the components sourced domestically or restricting the
level of imports or limiting the purchase
• Distribution Restrictionism: Distribution restrictions are limitations imposed on the
distribution of goods in the importing country involving additional license or
certification requirements. These may relate to geographical restrictions or
restrictions as to the type of agents who may resell
• Restriction on Post-sales Services: Producers may be restricted from providing after-
sales services for exported goods in the importing country. Such services may be
reserved to local service companies of the importing country
• Administrative regulations: make an importing country a frustrating experience
through filing in a long complicated form, delay, redtape in custom clearance,
elaborative and expensive licensing procedure, complicated procedures of obtain
permit etc
 Non–Technical Barriers

• Rules of origin: Rules of origin are the criteria needed by governments of

importing countries to determine the national source of a product.
• Safeguard Measures: These are initiated by countries to restrict imports of a
product temporarily if its domestic industry is injured or threatened with
serious injury caused by a surge in imports. Restrictions must be for a limited
time and non-discriminatory.
• Embargos: An embargo is a total ban imposed by government on import or
export of some or all commodities to particular country or regions for a
specified or indefinite period. This may be done due to political reasons or for
other reasons such as health, religious sentiments. This is the most extreme
form of trade barrier.
• Eg US sanactions on Russisa 2018, EU on Russia 2018 US on china 2018
 Export Related Measurers

• Ban on exports: Measures taken by the government to restrict exports in times of shortage
especially Agriculture products such as onions, wheat etc to protect the domestic economy
interests which might also lead to increase in international prices.
• Export Taxes: An export tax is a tax collected on exported goods and may be either specific
or ad valorem. The effect of an export tax is to raise the price of the good and to decrease
exports. Since an export tax reduces exports and increases domestic supply, it also reduces
domestic prices and leads to higher domestic consumption.
• Export Subsidies and Incentives: An export subsidy includes financial contribution to
domestic producers in the form of grants, loans, equity infusions or some form of income or
price support.
• Voluntary Export Restraints (VERs) refer to a type of informal quota administered by an
exporting country voluntarily restraining the quantity of goods that can be exported out of
that country during a specified period of time. It is imposed based on bilateral agreement
between the two countries.
True or false questions
I. Tariff will lead to change in prices of the goods in the world market
II. The purpose of tariff to bring revenue to the govt and not to
protect the domestic industries
III. Tariff is imposed on the basis of quantity only
IV. Ad valorem tariff has no limitations
V. Tariff imposed on the basis of specific contents comes under
specific tariff
VI. Variable tariff to make the imported good on par with domestic
good
True or false questions
VII. Applied tariff is more than bounded tariff
VIII. Under escalated tariff the nominal tariff is higher on raw materials
and lower on finished goods.
END OF PRESENTATION