International Business

Trade Barriers
Import Aversion Propensity!
• Every nation likes to export, not import!

Reasons:
1) Keeping money at home
2) Reducing unemployment
3) Equalizing cost and price
4) Enhancing national security
5) Protecting infant industry
Barter System is that system in which
goods are exchanged for goods. In ancient
times when money was not invented trade
as a whole was on barter system. This was
possible only in a simple economy but
after the development of economy, direct
exchange of goods without the use of
money, was not without defects.
1. Keeping money at home
• Lead to an outflow of money, which
eventually will make foreigners richer and
local people poorer.
Arguments based on Fallacy:
- Is money the sole indicator
of wealth?
- Foreigners receive money
without having to give
something in return?
2. Reducing employment
Standard practice for trade unions and politicians to attack importers and

international trade in the name of job protection.

• Import reduction= Less reliance

on foreign products =create more
jobs in Domestic country

• Local manufacturer can not hold

temptation to earn quick profit by
increasing their prices.
 Inflation often results due to the persistence
of such situation.
 Higher prices > Less purchasing power>
Economy suffers.
 Foreign countries will retaliate by refusing to
import that country’s product which in turn
worsens the relationship.
3. Equalizing cost and price
 Some protectionists argue that foreign goods have
lower prices because of lower production costs. It
makes imported products less competitive and local
items more competitive.
This is erroneous. Cause-
Finding out the cause of price
differentials is unusually
difficult. (Is it caused by labor,
subsidy, raw materials,
efficiency or other reasons..)
 - Secondly, even if the price differentials get identified, it is hard to understand why it should
be equalized as trade between nations takes place due to differentials or incentives.

-Example: If wages are too high in one country, that will attract labor from a lower wage
country and thus drive the wage rate down. (Vice Versa)- Equalization Achieved!
4. Enhancing national Security
 Protectionists often use patriotic theme. They claim that nations need to be
self sufficient and thus enhance national security.
 Is it even possible!

• A nation can never be completely

self sufficient because of scarcity
of natural resources/ raw
materials.
• North Korea’s brand of self sufficiency, coupled
with its defense budget has virtually driven its
nation to starvation.
5. Protecting Infant Industry
• The most credible argument
among all the reasons.
 It’s not easy though. Because:
 It is not easy to protect industries due to various factors.
 Appropriate incentives must be provided to encourage productivity.
 Government has to make sure that the resultant decision is only temporary.
US , CHINA
trade tit for tat
 In 2009, the US signaled a new
direction in trade policy by slapping a
35% tariff on tires from China. The
US Trade Representative said that
Chinese tire imports had tripled and
China’s share of the American market
had jumped from 4.7% to 16.7%
between 2004 and 2008.
 In response, China initiated
investigations into cars and SUVs
imported from the US. In May 2011,
China’s Ministry of Commerce issued
determinations that the American-
made vehicles had indeed been
dumped on China and had benefited
from US government subsidies.
Accordingly, China imposed
antidumping and countervailing
tariffs.
 On U.S.-China Trade War, Biden Should Declare
Victory, End Tariffs

 https://www.forbes.com/sites/kenroberts/2022/07/15/on-us-china-trade-war-bide
n-should-declare-victory-end-tariffs/?sh=6ad03a141a66
The Instruments of Trade Policy
 Trade policy encompasses all instruments that govt. may use to promote or
restrict imports and exports.

 Trade policy also includes the approach taken by countries in trade

negotiations.

 The trade policy obligations shape the national trade policies.

 The
instruments of
Trade policy

Export Related
Tariffs NTMs
Measures
Tariffs:

 It means rate, price, or a list of charges, customs duty

or tax on products that move across borders.

 Tariffs are most visible and universally used trade

measures that determine market access for goods.

- 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.
 Classification of Tariffs
1) Direction
2) Purpose
3) Length
4) Rate
5) Distribution Point
6) Trade Relationship

These classifications are not however mutually exclusive.

1) Directional Classification
IMPORT DUTY :
An import duty is a tax imposed on a commodity originating in another
country by the country for which the product is designated. The
purpose of heavy import duties is to earn revenue, to make imports
costly and to provide protection to domestic industries.
On basis of product movement, on import or export (export is very rare!)

EXPORT DUTY :

When export tariffs are levied, they usually apply to an exporting country’s
scarce resources or raw materials (rather than finished manufactured
products).
- Specifically increases he products price overseas.
- In past, China placed an export tariff was placed on major grain products.
High international grain prices caused many producers export their grains.
This caused a domestic shortage. Hence, China imposed export tariff.
TRANSIT DUTY :
A transit duty is a tax imposed on a commodity when it
crosses the national frontier between the originating
country and the country which it is consigned to.
2) On Purpose Classification
• Protective Tariff: The purpose is to protect home
industry, agriculture and labor against foreign
competitors by trying to keep foreign goods out of
the country.

• Exm: Citrus food does not readily grow everywhere and

South American countries produce massive quantities of it.
Now, if a country can produce oranges but can import them
from South America cheaper than growing them
domestically, a protective tariff might be applied. This tariff
will inflate the price of imported oranges to make them
equal to the price of domestic oranges.
• Revenue Tariff (reverse tariff): The purpose is to generate revenues for the
government. Compared to the protective tariff this tariff is relatively lower.

Example: EU applies 236% tariff on meat and 180% on cereals while on

raw material and electronics it rarely exceeds 5%
 Anti-dumping duty :

Dumping is the commercial practice of selling

goods in foreign markets at a price below their
normal cost or even below their marginal cost
so as to capture foreign markets.
3) Length Classification
Tariff Surcharge: A temporary action. EX: Harley Davidson vs Japanese Importers. In 2002, HD
gained back the power due to tariff surcharge.

Countervailing Duty: A permanent action. It is often imposed on foreign products which are
subsidized by foreign govt. It is imposed to offset that benefit. Usually, a govt. provides tax rebates
on export oriented factory.
4) Rates Classification
a) Specific Rates: A fixed or specific amount of money per unit of weight, gauge or other
measures of quantity.
Ex: 350 euros/ton on sugar imports.
Note: Product costs are not relevant in this case. It’s a good tool of protection against cheap quality
products.
b) Ad Valorem: This duty is ‘according to the value’. A fixed percentage of
the invoice value and applied at a percentage to the dutiable value of the
imported goods.
Note: This is opposite to the specific duty as percentage is fixed but the total
duty is not. The absolute amount will increase or decrease depending on the
amount of imported products.
 Provides a continuous protection against all types of products.
 Provides easy comparison across countries and across products.

c) Mixed Tariff: Mixed tariff are expressed either

on the basis of the value of the imported goods
or on the basis of a unit of measure of the
imported goods depending on which generates
the most income.
d) Compound Tariff: Specific Rate + Ad valorem Duties

Example: The tariff may be 10% per pound plus 5% ad valorem.

e) Technical or other tariff: These are calculated on the basis of the specific
contents of the imported goods.

f) Tariff Rate Quotas: Tariff rate quotas combine two policy instruments:
quotas and tariffs. Imports entering under the specified quota portion are
usually subject to a lower tariff rate.
g) Most Favored nation tariff: MFN tariff are what
countries promise to impose on imports from other
members of the WTO, unless the country is part of a
preferential trade agreement.

h) Variable tariff: Nearly all countries are part of at

least one preferential trade agreement, under which they
promise to give another country’s products lower tariff
than their MFN rate.
i) Bound tariff: It is a tariff which a WTO member bind itself
with a legal commitment not to raise it above a certain level.

j) Applied tariff: An ‘applied tariff’ is the duty that is

actually charged on imports on a most favored nation basis.

k) Escalated Tariff: This structure refers to the system

wherein 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.
l) Import Subsidies: In some countries, import subsidies also
exist. An import subsidy is simply a payment per unit for the
importation of a good.

m) Tariffs as Response to trade distortions: Sometimes

countries engage in ‘unfair’ foreign trade practices which are
trade distorting in nature and adverse to the interests of the
domestic firms.

n) Anti-dumping duties: Dumping occurs when manufacturer

sell goods in a foreign county below the sales prices in their
domestic market or below their full average cost of the ptiduct.
5) Distribution Point Classification
A tariff/tax collected at a particular point of distribution or when purchase and consumption occur.
a) Single stage
b) Value added
c) Cascade
d) Excise
a) Single stage taxes: a tax collected at only one point in the manufacturing and production chain.

- This tax is the most common form of tax in the USA

- Retailers and wholesalers make purchases without paying any tax
as they get a tax permit receipt.
- The tax is only received after purchasing by the final consumers.
b) Value Added Tax: A national, multi stage, non cumulative tax on
consumption of each unit of production and distribution system.

Note: Each time the product changes hands, even between intermediaries the
tax must be paid. But the tax collected at a certain stage is based on the added
value not on the total value.
Note: VAT is a nondiscriminatory tool since it applies to both to products sold on the domestic
market and to imported goods.

- So, it may contribute to a country’s trade balance.

c) Cascade Tax: Tax on tax. This tax is collected at each point in the manufacturing and distribution
chain are levied on the total value of a product, including taxes borne by the earlier party.

 The most severe tariff of all.

 It can create higher tax revenues compared to a single stage tax, because tax is
imposed on top of tax.
 For example, a govt levies a 2% cascade tax on all good produced and distributed.

1)A Company sells $1000 worth of stone for a tax inclusive price of $1020
($1000+2%cascade tax to an artist).
2) The artist makes a sculpture out of the stone and wants to make a profit of
$2000 when he sells it to an art dealer, so he adds this figure to what he paid
for to get $3020, and then adds on the cascade tax to bring the total to get
$3080 ($3020+2%cascade tax)
3) The art dealer then wants to make a profit of $5000 for the sculpture, adding this to $3080 for a
pre tax $8080. The he adds 2% cascade tax on the total figure making it $8242.
4) After all the sales happened and the product reached to the consumer’s hand, the govt. ultimately
collected a tax amount of $242, which is actually a rate of 3.025%. ($242/$8000)
d) Excise Tax: A one time charge levied on the sales of specified products.

 Alcoholic and cigarette taxes are good examples of it.

 Ex: A bottle of wine that normally costs $10 may have a specific excise tax
of $2 imposed on it. As per the intent of the excise tax the additional cost
of the wine is passed on to the consumer, making the retail cost of the wine
$12. While this seemingly does not affect the maker of the wine, who gains
still $10 in revenue, the increase in price however reduce the quantity
demanded, which would indeed affect his balance sheet.
6) On Trade Relationship
Single column tariff : under this system, tariff rates
are fixed for various commodities and the same
rates are made applicable to imports from all other
countries.

Double column tariff : under this system, two rates

of duty are fixed on all or some commodities. The
lower rate is made applicable to a friendly country
or to a country with which the importing country has
a bilateral trade agreement. The higher rate is
applicable to all other countries.
Triple column tariff :
Here three different rates of duties are fixed. They are general tariff,
international tariff and preferential tariff. The first two categories have
minimum variance but the preferential tariff is substantially lower than
the general tariff and is applicable to friendly countries where there is
a bilateral relationship.
 Effects of Tariffs
1) Tariff barriers create obstacle to trade, decrease the volume of imports
and exports and therefore of international trade.

2) By making imported goods more expensive, tariff discourage domestic

consumers from consuming imported foreign goods.
Cont.

3) Tariff encourage consumption and production of the

domestically produced import substitutes.

4) Producers in the importing country experience an

increase in well being as a result of imposition of tariff.

5) The price increase also induces an increases in the

output of the existing firms and possible addition of
new firms due to entry into the industry.
Cont.

6) Tariff increase government revenues of the importing

country by the value of the total tariff it charges.
REAL EXAMPLE
 How to Calculate Import stage?
 AV= Assessable Value.
 CD=Customs Duty.
 RD= Regularity Duty.
 SD= Supplementary Duty.
 VAT= Value Added Tax.
 AIT= Advance Income Tax.
 ATV= Advance Tread VAT.
New Toyota Axio Sedan Car 1500CC invoice value is $ 14300.155
 How to Calculate AV?
Assessable value= Cost of the goods and freight charges (C&F) + Insurance + Landing
Charge
BDT Conversion= Total invoice value X exchange rate

C&F Value = Cost, No insurance, Freight Value

C&F Value X 1% Insurance Surcharge

CIF Value = Cost, Insurance and Freight Value

CIF Value X 1% Landing charge

CIFL Value X Adjustment = Assessable Value

HS Code :

Type Tax Base Rate (%) Amount

CD 1239945 25%
RD 3%
SD 45%
VAT 15%
AIT 5%
ATV 4%

Original Price 1239945 After Tax Price