What Is a Tariff?

In simplest terms, a tarif is a tax. It adds to the cost of imported goods

and is one of several trade policies that a country can enact.
Who Benefits?
The benefits of tarifs are uneven. Because a tarif is a tax, the
government will see increased revenue as imports enter the
domestic market. Domestic industries also benefit from a reduction
in competition, since import prices are artificially inflated.
Unfortunately for consumers - both individual consumers and
businesses - higher import prices mean higher prices for goods. If
the price of steel is inflated due to tarifs, individual consumers pay
more for products using steel, and businesses pay more for steel
that they use to make goods. In short, tarifs and trade barriers tend
to be pro-producer and anti-consumer.

Benefits of Tariffs
Tariffs provide an array of benefits, especially to domestic producers in terms of
reduced competition locally. A reduction in competition on the local market in turn
causes price fluctuations, which increases job opportunities creating employment for
local residents. Tariffs also help government profit which boosts the economy as a
whole. This article will discuss the benefits and perks of introducing tariffs in trade.
1.Prevents job

loss

In any type of business, businesses are expected to avoid paying taxes. For instance,
when British consumers decide to buy low-priced products domestically, overseas
producers

definitely

become

disadvantaged,

and

this

in

turn

leads

to

minimal trade with US companies. As a result, overseas companies can decide

to import their goods to countries where there are no tariffs. In other words, high
tariffs impose on imported goods discourage trade and lead to job loss.
2.Restricts competition
Tariffs are often imposed to discourage foreign competition, providing more

opportunities for local based companies. Although tariffs typically lead to retaliation,
they allow job retention when local producers hire more people to sell their products.
Imposing tariffs can however encourage the growth of inefficient firms, while\e other
countries place high tariffs on exports.
3.Protects consumers from exploitation
Although the purported benefits of tariffs are still under scrutiny, consumers can
benefit from a rise in prices as a result of stiff competition from foreign companies.
For example, domestic producers can benefit from agricultural tariffs. As a result of
cheaper competition, domestic producers can sell their products to the local market.
4.Increases government

revenues

The government collects tariffs to support its many functions. In fact, customs
provide about 2 percent of total government revenue. Therefore, the government
directly and indirectly benefit from imposing tariffs on exports.
Because tariffs eliminate foreign competition, prices of goods are likely to increase
leaving employees with minimal purchasing power.

EFFECTS OF TARIFFS ON
INTERNATIONAL TRADE.
Tarifs can afect import volume, prices, production and
consumption. They also afect the terms of trade, the balance
payments, etc. By this the govts. Get revenues and with the help of
which the deficits can be corrected.
Price Effect :
The exact price efect depends upon the volume and elasticity of
supply and demand in the trading countries. The elasticity of supply,
however, depends upon the costs conditions-constant, increasing or

decreasing - which play an important role in determining the price

efect of the tarif.
The Protective Effect :
A tarif is a restrictive measure which seeks to control the quantity
of import so that, domestic industry may be protected. A tarif duty
is purely protective only if it is so high as to prohibit total imports of
a commodity. In practice, however, in its restrictive efect upon the
quantity of imports tarif, no matter how high, need not prove
absolutely protective. Obviously, any imports may flow in after the
payment of duties, unless regulated otherwise.
Nevertheless, the protective efect of a tarif can be seen in the
expansion of domestic production of a commodity which becomes
possible due to rise in prices in the domestic market. High prices
enable the home producers to cover their high rising marginal costs
on a larger output.
Revenue Effect :
Tarifs which are not totally prohibitive certainly bring some revenue
to the state. Usually, the government collects customers' revenue
equal to the duty multiplied by the volume of imports.
Transfer or Redistribution Effect :
After the imposition of a tarif, domestic prices will rise; hence,
receipts of producers will increase, while consumer's surplus to that
extent declines. This is called transfer efect. Thus, the increase in
receipts which is in excess of marginal costs is an "economic rent"
to the producers, which is derived by subtraction from consumer's
surplus.
Consumption Effect :
A tarif generally reduces the total consumption of a commodity
because of the rise in its price.
There is a loss in consumer's satisfaction Out of the gross loss in
consumer's satisfaction, the revenue received by the state and
transferred to producer should be deducted to find the society's net
loss in consumer satisfaction as a result of tarif.
Terms of Trade Effect :

 The imposition of a tarif may serve to improve a country's terms of

trade {i.e., the amount of imports it receives in exchange for a given
quantity of exports). This the tarif can do easily when the foreign
demand for the exports of the tarif imposing country is both large
and inelastic. In such a situation, the efect of tarif is to reduce
imports to some extent, thereby making it difficult for foreigners to
earn (through their exports to this country) for their imports from
the country.
Thus, in an attempt to expand their exports (to the tarif imposing
country) foreigners may be inclined to reduce their prices, so that,
to the tarif imposing country the imported articles are now
relatively cheaply available in the foreign market. In this way, the
efect of a tarif is to lower import prices relative to export prices,
thereby improving the terms of trade for the tarif imposing country.
It should be noted that the improvement in the terms of trade
through tarifs depends upon the extent of the price rise in the
importing country and the extent of the price fall in the exporting
country, which in turn depends upon the elasticities of reciprocal
demand of the trading countries.
Balance of Payments Effects :
When a tarif afects the volume of imports and prices, it also afects
the country's balance of payments position. A country having a
deficit balance of payments position can restore and maintain
equilibrium by means of tarif restrictions upon imports.
Tarifs restrict imports through price rise and contraction in demand,
and may lead to improvement in terms of trade also under
appropriate circumstances, which helps in bringing about a balance
of merchandise accounts.
Tarif as a means of correcting disequilibrium have been, however,
criticised severely as follows:
1. It brings equilibrium through a contraction of foreign trade.
2. It thus, inhibits the advantages of a large and expanding world
trade and prosperity.
3. It adjusts the equilibrium without mitigating the root causes of
disequilibrium.

 4. Sometimes, the imposition of a new or higher tarifs may

aggravate a disequilibrium in case of a country already experiencing
a surplus in its balance of payments. In such a case, new or higher
tarifs will tend to intensify the existing maladjustment in the
balance of payments.
5. Since the imposition of tarif duties does not necessarily imply a
reduction in the value of imports, the efect of a tarif on the balance
of payments cannot be very certain.
Income and Employment Effect :
It was firmly believed in the thirties that imposition of tarif would
lead to expansion of employment and incomes.
By reducing imports, tarifs stimulate employment and output in the
import-competing industries. A new flow of income will be generated
with its 'multiplier efect. 'In an expanding economy, more capital
goods investment will also be made which produces 'acceleration
efect.' Thus, under conditions of less than full employment, the
interaction of multiplier-accelerator will lead to a cumulative
expansion of investment, employment, output and income in the
country.
Another possible impact of tarifs is that the imposition of tarif
duties may attract foreign capital in the country concerned, when
they find that they may lose market for their products in the country
due to contraction of import demand and expansion of home
industries under the protective efects of tarifs.

OPTIMUM TARIFF.
An optimum tariff, or optimal tariff, is a tariff, or tax, designed for maximizing the
welfare of a country. Optimum tariffs are found in international trade.
1.
o

Purpose
An optimum tariff is designed to increase the wealth of a country.
Tariffs are taxes levied by a country and charged for sales internationally. Tariffs
increase the country's overall income. Often other countries retaliate by also charging
an optimum tariff. In this case neither country really benefits through the imposition
of optimum tariffs.

Considerations
o

Only large countries use optimum tariffs and benefit from them. Small
countries with small economies do not have optimum tariffs. The tariff in this case is
considered zero. Large countries using optimum tariffs, however, are considered to
have a positive tariff because of the effect on trade.
Effects

While these tariffs were designed to increase a country's wealth, in

reality this is true only when other countries do not raise their tariffs. A common
effect is a decrease in demand for products offered by those countries.

NON TARIFF BARRIERS.

QUOTAS.

Quota, in international trade, is government-imposed limit on the

quantity, or in exceptional cases the value, of the goods or services
that may be exported or imported over a specified period of time.
Quotas are more efective in restricting trade than tarifs,
particularly if domestic demand for a commodity is not sensitive to
increases in price. Because the efects of quotas cannot be ofset by
depreciation of the foreign currency or by an export subsidy, quotas
may be more disturbing to the international trade mechanism than
tarifs. Applied selectively to various countries, quotas can also be a
coercive economic weapon.
Tarif quotas may be distinguished from import quotas. A tarif quota
permits the import of a certain quantity of a commodity duty-free or
at a lower duty rate, while quantities exceeding the quota are
subject to a higher duty rate. An import quota, on the other hand,
restricts imports absolutely.
If the quantity imported under a quota is less than would be
imported in the absence of a quota, the domestic price of the
commodity in question may rise. Unless the government maintains
some system of licensing importers in order to capture as revenue
the diference between the higher domestic price and the foreign
price, the importing of such commodities can prove a lucrative
source of private profit.

 Quantitative trade restrictions were first imposed on a large scale

during and immediately after World War I. During the 1920s quotas
were progressively abolished and replaced by tarifs. The next great
wave of quota protection came during the Great Depression in the
early 1930s, with France leading the European countries in
introducing a comprehensive quota system in 1931. After World War
II, the western European countries began a gradual dismantling of
quantitative import restrictions, but the United States tended to
make more use of them.

EFFECTS OF QUOTA.
The following are important economic efects of quotas:
The price effect: Import quotas by limiting physical quantities tend
to raise the price of commodities to which they apply. While this is
generally true also of a tarif, there is one important diferent in the
impact of quotas. Mostly the rise in rice caused by a tarif is limited
to the amount of the duty imposed less any decrease in price
abroad. Thus the range of the price change due to tarif can well be
circumscribed.
In contract a quota can raise price to any extent since it paces and
absolute limit upon the volume of imports nd leaves price
determination in the domestic market to the interaction of supply
and demand force. The price efect of quotas is thus related to (i)
the restrictiveness of the quota the degree to which the supply of
imported commodity is restricted (ii) the degree of elatisticity of
domestic and foreign supply of the commodity; and (iii) the nature
of the demand the intensity or elasticity of demand for the
commodity in the importing country.
The terms of trade effect: As a result f the fixing of import quotas
the terms of trade of a country change. The new terms of trade may
be either more or less favourable to the country importing the
quota.
The balance of payments effect: It has been argued that import
quotas can also serve as a useful ends of safeguarding the balance
of trade. By restricting imports quotas seek to eliminate deficit and
influence the balcony of payments situation favourable. Further it is
usually assumed that administrative reduction of imports through

import quotas, would be a less harmful measure for correcting

disequilibrium in the balance of payments than such microeconomic
measures like defilation or devolution more over there is a greater
expansive income efect of efect of quotas considered important for
underdeveloped conjures which usually sufer from balance of
payments difficulties resulting from domestic inflation.
Due to import quotas the marginal propensity to import becomes zero
after the quote limits is reached which thus reduces leakages and increase
the value of income multipliers in the country.
Other miscellaneous effects: Another important efect of quotas
is that have a protective efect. By limiting imports to a fixed
amount irrespective of supply and demand conditions or price in the
domestic or foreign markets import quotas may tend to be
absolutely protective. They stimulate home production.
Further import quotas raise domestic price causing reduction in
overall consumption. This is the consumption efect of quotas. They
tend to discourage consumption of imported goods as also domestic
consumption of good involving foreign raw materials since the price
of these goods rise due to the artificial scarcity created by import
restriction.

Benefits of Quotas

A quota is described as a kind of trade restriction imposed to limit the

movement of a certain amount of goods imported in a particular period of
time. Just like other trading barriers, quotas benefits producers in that
country and restrict consumers choice. Although critics say that quotas
typically lead to bribes in order to acquire quota allocation, they do provide a
number of perks for domestic producers. Listed below are some of the benefits
of imposing quotas in trade.
1.Boost

local investment

While they are considered less economically than tariffs, quotas play an
essential role in trade as they put a limit on goods that are imported in a

country, creating shortages that cause price fluctuations. Although quotas

work in a similar manner as tariffs, the additional cash often benefits foreign
producers and not the local government.
2.Protects local companies
The basic principle behind imposing quotas in trade is to restrict the
movement of goods from foreign countries in the hopes of protecting local
firms from take-overs. In addition to that, some governments offer loans and
subsidies to companies that lack the resources to compete with foreign
competitors. Some people however believe that this move is geared towards
promoting anti-globalization.
3.Creates

more job

opportunities

When a company is on the way of growing strong to compete with other

foreign companies, quotas help safeguards it from stiff competition. As a
result, this creates more job opportunities local workers.
4.Goods

become

less

expensive

Through quotas and protectionism, the prices of imported goods become

inexpensive so that people opt to buy local goods. This way, the government
can still get a steady source of revenue, which improves the economy in the
process.Consumers always pay high prices for domestic products when
producers increase prices due to lack of competition. In other words, lack of
competition can lead to exploitation.

EXCHANGE CONTROL.
Meaning of exchange control.

 For purposes of exchange control, Government designates a central control

agency, usually the central bank to function as the actual buyer and seller of
foreign exchange on government account. Under the most comprehensive
form of exchange control, exporters and other recipients of foreign exchange
are not free to dispose of their foreign exchange earning in any manner they
like.
They are required to surrender all their foreign exchange for local currency. To
ensure against evasion, export licences, which certify the delivery of foreign
exchange to the exporters, must be presented to customs officials before
shipment is permitted.
This is how the government secures its supply of foreign exchange. The central
bank or control agency is in a position to ration its supply of foreign exchange
for any uses that may be found desirable.
In allocating foreign exchange to various buyers (importers), the central bank
takes into account the needs of the country. Relatively liberal rations of
exchange will be allowed for the import of only those goods which are
essential to the functioning of the economy, such as basic foodstuffs, raw
materials, capital goods etc. while the control agency can flatly refuse to
release exchange for luxury goods or non-essential commodities.

Broadly speaking, exchange control refers to a governments

intervention in the foreign exchange market. In other words, it
means legal restrictions on the business involving foreign exchange
and its sale and purchase in the national market. It is government
domination in the foreign exchange market. In the words of
Haberler, Exchange control is the state regulation excluding the
free play of economic forces from the free play of foreign exchange
market Summing up, exchange control is a, method of influencing
international trade, investment and the payments mechanism.
Methods or Devices of Exchange Control.
There are large numbers of methods or devices of exchange control.
Broadly, these methods are grouped under two main heads. (1) Unilateral

Methods and (2) Bilateral or Multilateral Methods.

(A) Unilateral Methods.
Unilateral methods are those methods of exchange control which are
adopted by the government of a country without any consultation or
understanding with any other country. The main methods under this head
are as follows:
1. Exchange pegging. Exchange pegging means the act of fixing the
exchange value of the currency to some chosen rate. When the
exchange rate is fixed higher than the market rate (overvaluation),
it is called pegging up. When the exchange rate is fixed lower than
the market rate, it is called pegging down (undervaluation). The
exchange pegging is a temporary measure to remove fluctuations in
the foreign exchange rate.
Pegging operations take the form of buying and selling of the local
currency by the central bank of a country in exchange for the
foreign currency in the foreign exchange market, in order to
maintain an exchange rate whether, it is overvalued or undervalued.
Thus, pegging may be pegging up or pegging down. Pegging up
means holding fixed overvaluation, i.e., to maintain the exchange
rate at a higher level. Pegging down means holding fixed
undervaluation, i.e., to maintain the exchange rate at a lower
(depressed) level.
2. Exchange Restrictions.
Exchange restrictions refer to the policy or measures adopted by a
government which restrict or compulsory reduce the flow of home
currency in the foreign exchange market. Exchange restrictions may
be of three types:
(i) The government may centralise all trading in foreign exchange
with itself or a central authority, usually the central bank; (ii) the
government may prevent the exchange of local currency against
foreign currencies without its permission; (iii) the government may
order all foreign exchange transactions to be made through its
agency.
3. Clearing Agreement. Clearing agreement may be defined as an
undertaking between two or more nations to buy and sell goods and
services among themselves according to specified rate of exchange.
The payments are to be made by buyers in the buyers home
currency. The balance, if any, is settled among the central banks of
the nations at the end of stipulated periods either by exporting gold
or of an acceptable third currency, or they are allowed to for another

period in which the creditor country works of the balance by

additional purchases from the debtor country. The main objectives
for entering into clearing agreement are to liquidate the blocked
accounts, to ensure equilibrium in the balance of payments and to
check the fluctuating exchange rates.
4. Stand still Agreement. Stand still agreement aims at
maintaining status quo in the relationship between two countries in
terms of capital movement. If a country is under debt to another
country, payments of short term debts may be suspended for a
given period by entering into an agreement called the standstill
agreement. The creditor country allows the debtor country to repay
the debts in easy installments or convert the short terms debts into
long terms debts.
5. Compensation Agreement. Compensation agreement
resembles the old fashioned deal. The two countries import and
export commodities from each other of equivalent value and so
leave no balance requiring settlement in foreign exchange. Since no
payment is made to foreign exchange, problem of foreign exchange
does not arise.
6. Blocked Accounts. Blocked accounts refer to a method by
which the foreigners are restricted to transfer funds to their home
countries. The extreme step of freezing the bank accounts of the
foreigners is taken when the government faces the acute shortage
of foreign exchange say in wartime.
Blocked accounts refer to bank deposits, securities and other assets
held by foreigners in a country which denies them conversion of
these into their home currency. Blocked accounts, thus, cannot be
converted into the creditor country's currency.
7. Payment Agreements. The payment agreements are made
between a debtor and a creditor country. This method of exchange
control facilities the debtor country to make more and more exports
to the creditor country and import less and less quantity from it.
Under this system, the international transactions in foreign
exchange are settled and cleared.
8. Rationing of Foreign exchange. Under this system, the
government monopolizes the foreign exchange reserves. The
exporters are required to surrender foreign exchange earnings at
the fixed exchange rate to the central bank of the country. The
importers are allotted foreign exchange at the fixed rate and in fixed
amount.

 9. Multiple Exchange Rates. Under this system, diferent

exchange rates are fixed for import and export of diferent
commodities and for diferent countries. This system of exchange is
adopted for earning maximum possible foreign exchange by
increasing exports and reducing imports.
In the early thirties, Germany had initiated the device of multiple
rates, as a weapon to improve her balance of payments position.
10. Gold Policy :
Through a suitable gold policy, the country can bring the desired
exchange control. For this, the country may resort to the
manipulation of the buying and selling prices of gold which afect
the exchange rate of the country's currency. In 1936, for instance,
the U.K., France and U.S.A. signed the Tripartite Agreement in this
regard for fixing a suitable purchase and sale price of gold.
(B) Bilateral or Multilateral Methods.
When two or more than two countries decide to adopt certain
measures for stabilizing the rates of exchange between them, these
are called bilateral or multilateral methods. The main methods are: (1) Changes in Interest Rates :
Changes in interest rate tend to influence indirectly the foreign
exchange rate. A rise in the interest rate of a country attracts liquid
capital and banking funds of foreigners. It will tend to keep their
funds in their own country. All this tends to increase the demand for
local currency and consequently the exchange rate move in its
favour. It goes without saying that, a lowering of the rate of interest
will have the opposite efect.
(2) Export Bounties :
Export bounties of subsidies increase exports. As such the external
value of the currency of the subsidy-giving country rises.
It should be noted that import duties and export bounties are
treated as indirect instruments of exchange control only if they are
imposed with the object of conserving the foreign exchange.
Otherwise, the fundamental aim of import duty is merely to check
imports and that of export bounty is to encourage exports.
(3) International Liquidity. For solving the availability of
internationally acceptable means of payments, International
Monetary Fund, Special Drawing Rights (SDRs) Scheme etc. (IMF)
have been established.

Objectives of Exchange Control:

The exchange control is instituted for the fulfillment of a variety of
objectives. The main objectives are:

1. To Correct an Adverse Balance of Payments. One of the

main objectives of the exchange control to be followed by a country
is to correct its adverse balance of payments. This objective is
achieved by restricting the volume of import to essentials items
and according to availability of its reserves.
2. To conserve Foreign Exchange. A country may introduce
exchange control for conserving its hard earned foreign exchange.
These reserves are restricted for (1) payment of external debt (2)
import of essential goods and (3) purchase of defence material.
3. To Protect Home Industry. Exchange control is also employed
with the object of protecting home industry. If certain domestic
industries are facing stif competition from abroad and the
government desires to protect them from foreign competition, it will
not sanction foreign exchange for the import of these commodities.
4. To Stabilize Exchange Rate. A government may introduce
exchange control for keeping exchange rate stable. The fluctuations
in exchange rate cause disequilibrium in the economy. In order to
create confidence and stability in the economic life of the country,
the government officially fixes the exchange rate at a
predetermined level.
5. To Prevent the Flight of Capital Abroad. Exchange control
has also been instituted for checking the flight of capital abroad. If
the capital is moving abroad due to depreciation of currency at
home, or in response to higher rate of interest in other countries,
then the large scale movement of the capital can be checked by the
introduction of exchange control.
6. To Practice Discrimination In International Trade. If a
country wishes to give concessions or desires to strengthen its trade
relation with a country or countries it fixes favorable rates of
exchange for them. Exchange control, thus, helps in following the
policy of discrimination in international trade.
7. To check the Import of Non-essential Items. Exchange
control is also used for restricting the import of non-essential and
harmful goods in the country.
8. Source of Income. A government may use exchange control
as a. source of income. In the multiple exchange rate system, if the
selling rates of foreign exchange are fixed higher than the buying
rates, the diference between the two rates goes as income to the
state.

 9. Important for planning. Exchange control helps in the proper

use of foreign exchange according to the national priorities.
10. Overvaluation. Exchange control is a method of influencing
international trade, investment and the payments mechanism. In
case a government fixes the value of a currency at a rate higher
than the free market rate (overvaluation), it makes the home
currency dearer to the foreigners. This policy is adopted when there
is a serious imbalance in a countrys balance of payments
11. Undervaluation. Undervaluation or devaluation if adopted
makes the currency of a country cheaper for the foreigners. It
reduces the prices of exports for the foreigners. and. raises the
prices Of imports. This step is taken for promoting exports and
discouraging imports.

OTHER QUANTITATIVE
RESTRICTIONS.
LICENCES
Licenses
The most common instruments of direct regulation of imports (and
sometimes export) are licenses and quotas. Almost all industrialized
countries apply these non-tarif methods. The license system
requires that a state (through specially authorized office) issues
permits for foreign trade transactions of import and export
commodities included in the lists of licensed merchandises. Product
licensing can take many forms and procedures.
Countries levy Import and Export Duties on specific items and also based on
countries of origin. The management of duties and tariffs is managed through Trade
Laws and Policies. Besides imposing duties, countries also restrict and manage the
import and export of items with the help of Licenses to Import and Export.
Types of Licenses
1. Open General Licensed Items
While normal items and traded goods like textiles, consumer durables,
Handicrafts, electronics items, Food articles, Drugs etc are generally allowed
to be imported and exported by all countries freely without restrictions.
2. Imports against Specific Import Licenses

Many items like second hand capital equipment, plant and machinery, engines
etc are traded, transferred and imported normally by developing and under
developed economies.
Such second hand machinery and goods are allowed to be imported into the
receiving countries only through specific license obtained for the said
purpose. Such license would set forth conditions required to be met by the
importer to prove the residual life of the machinery etc.
Import of Fire Arms and Ammunitions are always covered under specific
licenses in most of the countries.
3. Import - Quantity Restrictions or Quota
Some countries like USA do allocate quantity restrictions for import of items
like textile on certain countries and exporters would have to adhere to the
quota norms, which are periodically reviewed and amended as required.
4. Export Licenses
While the domestic industries are engaged in export of some important
natural resources and raw materials like iron and steel, certain kinds of herbs
etc, Governments control and restrict the export through issuing Export
Licenses.
5. Negative List
Most countries maintain a negative list of items which prohibit import and
export of certain items like animal hides and other wildlife, precious wild life,
live stock, narcotics and many more sensitive items.

STANDARDS

Standards take a special place among non-tariff barriers. 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 sometimes entered under the
pretext of protecting the safety and health of local populations.

EMBARGOES.

Embargo is a specific type of quotas prohibiting the trade. As well as

quotas, embargoes may be imposed on imports or exports of
particular goods, regardless of destination, in respect of certain
goods supplied to specific countries, or in respect of all goods
shipped to certain countries. Although the embargo is usually
introduced for political purposes, the consequences, in essence,
could be economic.
A government order that restricts commerce or exchange with a
specified country. An embargo is usually created as a result of
unfavorable political or economic circumstances between nations.
The restriction looks to isolate the country and create difficulties for
its governing body, forcing it to act on the underlying issue.
Investopedia explains 'Embargo'
An embargo will restrict all trade with a
country, or aim to reduce the exchange of
specific goods. For example, a strategic
embargo prevents the exchange of any
military goods with a country. A trade
embargo will restrict anyone from exporting
to the target nation. Because many nations
rely on global trade, an embargo is a
powerful tool for influencing a nation.

A trade embargo is a political move by one country against another. Generally

speaking, the country imposing the embargo will prohibit most or all people in their
country from doing business with the country against which it is imposed. It may
even mean that citizens from the imposing country are banned from visiting the
prohibited country. Essentially, a trade embargo is a strategy to make another
country either do something or refrain from doing something.
Some trade embargoes may be meant to sanction a government that is not abiding
by laws, treaties, or agreements. They are sometimes called economic sanctions. It
is one means by which one country may compel others to cooperate with
international laws.
Perhaps, one of the most famous trade embargoes in recent times is that the United
States holds with Cuba. The embargo was established in the hope that prohibiting

trade with Cuba would weaken the countrys economy to the point where Cuba
would overthrow Fidel Castro and implement a democratic government. In fact, the
law prohibiting trade with Cuba was renamed the Cuban Democracy Act in 1992,
though the initial embargo began in 1962.
Under the terms of the Cuban Democracy Act, the United States does not transact
business with Cuba, and does not allow Cuban investors to spend money in the US.
Visiting Cuba means either traveling illegally, or obtaining a special license for a visit.
Political visitors from the US must account for the money they spend in Cuba, and
may also be restricted to a certain amount of spending per day. Purchasing items
from Cuba or sending money to Cuban family and friends is not permitted. Though
the Cuban economy has been weakened by the decades old US trade embargo, it
shows no signs of implementing a democratic government.

Administrative and
delays at the entrance

bureaucratic

Among

should

the

methods

of

non-tariff

regulation

be

mentioned

administrative and bureaucratic delays at the entrance, which increase

uncertainty and the cost of maintaining inventory.

IMPORT DEPOSITS

Another example of foreign trade regulations is import deposits. Import

deposits is a form of deposit, which the importer must pay the bank for a
definite period of time (non-interest bearing deposit) in an amount equal to all
or part of the cost of imported goods.

 At the national level, administrative regulation of capital movements is carried

out mainly within a framework of bilateral agreements, which include a clear
definition of the legal regime, the procedure for the admission of investments
and investors. It is determined by mode (fair and equitable, national, mostfavored-nation), order of nationalization and compensation, transfer profits
and capital repatriation and dispute resolution.

Foreign exchange restrictions

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. Also an
important part of the mechanism of control of foreign economic activity is the
establishment of the national currency against foreign currencies.

CARTEL.
A cartel is a group of companies, countries or other entities that agree to work
together to influencemarket prices by controlling the production and sale of a
particular product.
How It Works/Example:
Cartels tend to spring from oligopolistic industries, where a few companies or
countries generate the entire supply of a product. This small production base means
that each producer must evaluate its rivals' potential reactions to certain business

decisions. When oligopolies compete on price, for example, they tend to drive the
product's price throughout the entire industry down to the cost of production, thereby
lowering profits for all producers in the oligopoly. These circumstances give
oligopolies strong incentive to collude in order to maximize their joint profit.
Members of a cartel generally agree to avoid various competitive practices,
especially price reductions. Members also often agree on production quotas to keep
supply levels down and prices up. These agreements may be formal or they may
consist of simple recognition that competitive behavior would be harmful to the
industry.
A formal agreement between two or more companies or countries that agree
on certain ideas and operate internationally. The cartel will typically agree to
coordinate pricing and marketing standards with the intention of gaining a
monopoly status.
A cartel is a group of people, organizations, or companies which cooperates
together to control production, marketing, and pricing of a product. Under
antitrust laws in many regions of the world, cartels are explicitly illegal,
because

they

eliminate

fair

market

competition.

However,

several

international cartels continue to exist despite these laws, and within nations,
private cartels may secretly control the market for certain commodities.
For the members of a cartel, cooperating together has a distinct advantage. By
agreeing to not compete, the members of the cartel mutually benefit. Cartels
are often successful in driving the price of the commodity they control up well
beyond what could be considered the fair market value. A classic example of
an international cartel is the De Beers diamond company, which controls the
market for diamonds around the world, causing an artificially inflated price.
De Beers has been criticized for its practices, and several governments have
attempted to undermine the company's stranglehold on global diamond
supplies, without success.

 Another well known example of an international cartel is the Organization of

Petroleum Exporting Countries (OPEC), which has controlled oil prices since
the 1960s. OPEC notably drove up the price of oil in the 1970s, using its
market leverage as a political tool. The member nations of OPEC claim that
their cartel protects world oil supplies and minimizes market fluctuations;
critics of OPEC are not so sure about this.

DUMPING.
Definition of 'Dumping'
In international trade, the export by a country or company of a product at a
price that is lower in the foreign market than the price charged in the domestic
market. As dumping usually involves substantial export volumes of the
product, it often has the effect of endangering the financial viability of
manufacturers or producers of the product in the importing nation. Dumping
is also a colloquial term that refers to the act of offloading a stock with little
regard for its price.
Types of Dumping9
1. Sporadic Dumping: Occasional sale of a commodity at below cost in order to
unload an unforeseen and temporary surplus of the commodity such as cheese, milk,
wheat etc. in the international market without reducing domestic prices.
2. Predatory Dumping: Temporary sale of a commodity at below its average cost or
a lower price abroad in order to derive foreign producers out of business, after which
prices are raised to take advantage of the monopoly power abroad.
3. Persistent Dumping: Continuous tendency of a domestic monopolist to maximize
total profits by selling the commodity at a higher price in the domestic market than
internationally (to meet the competition of foreign rivals

Causes of Dumping

Dumping usually occurs because of the following reasons:

(1) Producers in one country are trying to stay competitive with producers in another
country,
(2) Producers in one country are trying to eliminate the producers in another country
and gain a larger share of the world market,
(3) Producers are trying to get rid of excess stuff that they can't sell in their own
country,
(4) Producers can make more profit by dividing sales into domestic and foreign
markets, then charging each market whatever price the buyers are willing to pay.
While the World Trade Organization reserves judgment on whether dumping is
unfair competition, most nations profess to be against the practice. Dumping is legal
under World Trade Organization rules unless the foreign country can reliably show
the negative effects of the exporting firm on the domestic producers. In order to
counter dumping, most nations use tariffs and quotas to protect their domestic
industry from the negative effects of predatory pricing.
In an increasingly global economy, consumers in a nation that has been the
target of dumping activity may have few qualms about consuming products
that have been dumped, as long as they are of comparable quality to local
merchandise but are priced much lower. Over time, dumping may have a
negative impact on the local economy by driving domestic producers out of
business, which would result in job losses and a higher rate of unemployment.
In economics, "dumping" is a kind of predatory pricing, especially in the
context of international trade. It occurs when manufacturers export a product
to another country at a price either below the price charged in its home

market, or in quantities that cannot be explained through normal market

competition.
Legal issues
If a company exports a product at a price lower than the price it normally
charges in its own home market, it is said to be "dumping" the product. It is a
sub part of the various forms of price discrimination and is classified as third
degree price discrimination. Opinions differ as to whether or not such practice
constitutes unfair competition, but many governments take action against
dumping to protect domestic industry.
The WTO agreement does not pass judgment. Its focus is on how governments
can or cannot react to dumping it disciplines anti-dumping actions, and it is
often called the "anti-dumping agreement". (This focus only on the reaction to
dumping contrasts with the approach of the subsidies and countervailing
measures agreement.)
The legal definitions are more precise, but broadly speaking, the WTO
agreement allows governments to act against dumping where there is genuine
("material") injury to the competing domestic industry. To do so, the
government has to show that dumping is taking place, calculate the extent of
dumping (how much lower the export price is compared to the exporters
home market price), and show that the dumping is causing injury or
threatening to cause injury.

INTERNATIONAL TRADE
AGREEMENTS AND SERVICES.

NORTH AMERICAN FREE TRADE

AGREEMENT.
NAFTA was signed by President George H.W. Bush, Mexican President
Salinas, and Canadian Prime Minister Brian Mulroney in 1992
The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada,
Mexico, and the United States, creating a trilateral trade bloc in North America. The
agreement came into force on January 1, 1994. It superseded the CanadaUnited States Free
Trade Agreement between the U.S. and Canada.
NAFTA has two supplements: the North American Agreement on Environmental Cooperation
(NAAEC) and the North American Agreement on Labor Cooperation (NAALC).
NAFTA is short for the North American Free Trade Agreement. NAFTA
covers Canada, the U.S. and Mexico making it the worlds largest free
trade area (in terms of GDP). NAFTA was launched 20 years ago to reduce
trading costs, increase business investment, and help North America be
more competitive in the global marketplace.
Why Was NAFTA Formed?:
Article 102 of the NAFTA agreement outlines its purpose:

Grant the signatories Most Favored Nation status.

Eliminate barriers to trade and facilitate the cross-border movement

of goods and services.

Promote conditions of fair competition.

Increase investment opportunities.

Provide protection and enforcement of intellectual property rights.

Create procedures for the resolution of trade disputes.

Establish a framework for further trilateral, regional and multilateral

cooperation to expand NAFTA's benefits.

CAN.
The Andean Community (Spanish: Comunidad Andina, CAN) is a
customs union comprising the South American countries of Bolivia,
Colombia, Ecuador, and Peru. The trade bloc was called the Andean Pact

until 1996 and came into existence with the signing of the Cartagena
Agreement in 1969. Its headquarters are located in Lima, Peru.

Promote the Member Countries balanced and harmonious development

under equitable conditions through integration and economic and social
cooperation;
Step-up their growth and job creation
Facilitate their participation in the regional integration
process, with a view to the gradual formation of a Latin
American common market;
Reduce the Member Countries external vulnerability and
improve their position in the international economy;
Reinforce subregional solidarity and reduce differences in
development among the Member Countries; and
Seek the continuing improvement of the living standards
of the subregions inhabitants.

African, Caribbean, and Pacific Group of

States (ACP Group)
The ACP Group is an organisation created by the Georgetown Agreement
in 1975. It is composed of African, Caribbean and Pacific States signatories
to the Georgetown Agreement or the Partnership Agreement between the
ACP and the European Union
The ACP Groups main objectives are :

sustainable development of its Member-States and their gradual integration into the
global economy, which entails making poverty reduction a matter of priority and
establishing a new, fairer, and more equitable world order ;

coordination of the activities of the ACP Group in the framework of the

implementation of ACP-EC Partnership Agreements;

consolidation of unity and solidarity among ACP States, as well as understanding

among their peoples ;

establishment and consolidation of peace and stability in a free and democratic

society.

Asia Pacific Economic Cooperation (APEC)

An organization established in 1989 to promote trade and investment in the Pacific Basin.
APEC now comprises eighteen countries located in and around the Pacific Ocean: Australia,
Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New
Zealand, Papua New Guinea, the Phillippines, Sinapore, South Korea, Taiwan, Thailand, and
the United States.
Objectives
The current member economies represent the rich diversity of the region as well as differing
levels of economic growth. Despite such differences there is a growing sense of common
purpose and cooperation aimed at sustained regional and world growth. In the 1991 Seoul
APEC Declaration, APEC members agreed on specific objectives:

to sustain the growth and development of the region for the common good of its
peoples and, in this way, to contribute to the growth and development of the world
economy;

to enhance the positive gains, both for the region and the world economy, resulting
from increasing economic interdependence, to include encouraging the flow of goods,
services, capital, and technology;

to develop and strengthen the open multilateral trading system in the interest of AsiaPacific and all other economies; and

to reduce barriers to trade in goods and services among participants in a manner

consistent with GATT principles, where applicable, and without detriment to other
economies.

Caribbean Community and Common

Market (Caricom)
established on 4 July 1973; efective 1 August 1973
aim is to promote economic integration and development, especially
among the less developed countries
The objectives of the Community, identified in Article 6 of the Revised Treaty, are: to
improve standards of living and work; the full employment of labour and other factors of
production; accelerated, coordinated and sustained economic development and convergence;
expansion of trade and economic relations with third States; enhanced levels of international
competitiveness; organisation for increased production and productivity; achievement of a
greater measure of economic leverage and effectiveness of Member States in dealing with
third States, groups of States and entities of any description and the enhanced co-ordination
of Member States foreign and foreign economic policies and enhanced functional cooperation.

European Free Trade Association

(EFTA)

EFTA was founded in 1960 on the premise of free trade as a means of

achieving growth and prosperity amongst its Member States as well as
promoting closer economic cooperation between the Western European
countries. Furthermore, the EFTA countries wished to contribute to the
expansion of trade globally.
The European Free Trade Association (EFTA) was established in 1960 by the Stockholm
Convention (EFTA Convention). The original signatories were Denmark, Great Britain,
Norway, Austria, Portugal, Sweden and Switzerland. Later, Iceland (1970), Finland (1986)
and Liechtenstein (1991) joined. Denmark, Great Britain, Austria, Portugal, Sweden and
Finland are no longer members of EFTA as they have since joined the European Union (EU).
EFTA's current membership consists of Iceland, Liechtenstein, Norway and Switzerland.
The Stockholm Convention establishes a free trade area for the movement of goods among
the EFTA States under the terms of Article XXIV of the General Agreement on Tariffs and
Trade (GATT). Contractual relations between the EFTA States were for a long time limited to
trade in industrial products. The Convention was later supplemented by an economic
integration agreement for the services sector according to Article V of the General Agreement
on Trade in Services (GATS).