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CHAPTER NO. 5
Instruments of Trade
and Investment Policiesand Trade Barriers
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Commercial Policies
A countrys commercial policies are thosedesigned to influence its trade relations with therest of the world.
Although international trade policy can beregarded as the result of opposing forces of freetrade and protection it is pertinent to mentionhere that in theory many countries adhere to thefree trade but in practice most have been
reluctant to engage in unrestricted free trade With this they are creating different types of
trade barriers to international trade.
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Trade Barriers to international Trade
and Investment
1. Tariff Barriers
2. Non-Tariff Barriers
3. Other Barriers1. Export restrictions
2. Barriers to Trade in services
3. Foreign investment controls
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Tariff Barriers
In simple terms, a tariff ( or customs duty) is a
tax imposed by a government on physical goods
as they move into or out of a country.
It has a similar effect as an indirect tax in that it
provides the government with a source of
revenue, while in creasing the price of the goods.
This means that the local producers are able toprice their goods just under the price of the
imported product
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Types of Tariff
There are two type of customs duties and the
third is combination of the two
Ad Valorem Duty
Specific Duty
Compound Duty
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Ad Valorem Duty
AV duty is stated in terms of a percentage of
the value of an imported article
For example 10% or 20% of the total value
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Specific Duty
Is expressed in terms of an amount of money
per quantity of goods
For example 10% per Kilo or Per Gallon
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Compound Duty
A combination of an AV Duty and a specific
duty is called a compound duty.
Whereas specific duties are based on factors
such as weight or quantity, ad valorem duties
are based on the value of the goods.
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Non-Tariff Barriers
While import tariffs were traditional trade
policy instruments, since the 1960
governments have increasingly resorted to a
variety of non-tariff measures to restrict
imports or subsidies export
These measures are collectively designated as
non-tariff trade barriers.
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Types of Non-Tariff Barriers
Quotas
International Cartels
Dumping Export Subsidies
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Quotas
Quotas or quantitative restrictions are the
most visible kind of non-tariff barrier.
Unlike tariffs, these restrictions impose
absolute limitations upon foreign trade and
inhibit market responses, which makes them
extremely effective.
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Types of Quotas
Unilateral Quotas
Negotiated Bilateral or Unilateral Quotas
Tariff Quotas Embargo
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Unilateral Quotas
These are fixed quotas that are adopted
without prior consultation or negotiation with
other countries.
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Negotiated Bilateral or Unilateral
Quota
Under this system, the importing country
negotiates with supplying countries, or with
groups of exporters in those countries, before
deciding the allotment of the quota bydefinite shares.
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Tariff Quotas
Under such a system a specified quantity of a
product is permitted to enter the country at a
given rate of duty or even duty free.
Any additional quantity that may be imported,
however, must pay a higher duty.
Thus Tariff Quotas combines the features of
both a tariff and a quota.
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Embargo
A particular type of quota that sets the limit at
zero imports is called an embargo.
Often an embargo is placed on imports for
clearly political reasons rather than to serve
any strictly economic.
For example US has had an embargo on
imports from Cuba since 1961
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International Cartels
An international Cartel is an organization ofsuppliers of a commodity located in differentnations (Or a Group of Government) that agreesto restrict output and exports of the commodity
with the aim of maximizing or increasing the totalprofits of a organization.
Although domestic cartels are illegal in the UnitedStates and restricted in Europe, the power of
international Cartels cannot easily be counteredbecause they do not fall under the jurisdiction ofany one nation.
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Examples includes
Most notorious of present day international
cartels is OPEC (Organization of Petroleum
Exporting Countries) which by restricting
production and exports succeeded in quadruplingthe price of crude oil between 1973 and 1974.
Another examples is the international Air
Transport Association, a cartel of majorinternational airlines that meets annually to set
international air fares and policies.
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Cartels success lies in
An international cartel is more likely tobe successful ifthere are only a few international suppliers of anessential commodity for which there are no closesubstitutes
Since the power of a Cartel lies in its ability to restrictoutput and exports, there is an incentive for any onesupplier to remain outside the cartel or to cheat on itby unrestricted sales at slightly below the cartel price.
Cartels are inherently unstable and often collapse orfail. If successful however a cartel could behave exactlyas a monopolist.
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Dumping
Dumping is the export of a commodity at
below cost or at least the sale of a commodity
at a lower price abroad than domestically.
Dumping describes the practice of selling a
product in one national market at a lower
price than it is sold in another national
market.
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Types of Dumping
Persistent Dumping
Predatory dumping
Sporadic/Specific Dumping
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Persistent Dumping
Persistent Dumping or international price
discrimination, is the continuous tendency of
a domestic monopolist to maximize total
profits by selling the commodity at a higherprice in the domestic market than
international market
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Predatory Dumping
Is the temporary sale of a commodity at a
below cost or at a lower price abroad in order
to drive foreign producers out of business,
after which prices are raised to take advantageof the newly acquired monopoly power
abroad.
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Sporadic/Specific Dumping
Specific Dumping is the occasional sale of
commodity at a below cost or at a lower price
abroad than domestically in order to unload
an unforeseen and temporary surplus of thecommodity without having to reduce
domestic prices.
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Trigger-Price Mechanism
In 1978 USA Govt. introduced a trigger-Price
mechanism under which a charge that steel was
being imported into the USA at lower price was
subject to a speedy antidumping investigating. If investigation was proved, the USA Govt. would
provide quick relief to the domestic steel industry
in the form of a duty that would bring the price ofthe imported steel equal to that of the lowest
cost country.
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Export Subsidies
Export Subsidies is the form of dumping.
Export subsidies are direct payments or the
granting of tax relief and subsidized loans to the
nations' exporters or potential exporters and low-interest loans to foreign buyers so as to stimulate
the nations exports.
Although export subsidies are illegal byinternational agreement, many nations provide
them in disguised and non-so-disguised forms
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Barriers to Service Trade
Services account for about 20% of world trade
and services trade has been growing more rapidly
than merchandise trade
Despite its higher growth rate, trade in services isseverely curtailed by non-tariff trade barriers.
Many developing countries have nationalized
insurance companies, give their state insuranceenterprises sole right to domestic insurance
business.
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Export Restrictions
Export controls may be in the form of bans or
embargoes, quantitative restrictions,
licensing, export taxes, minimum export
prices, and the reservation of exports todesignated trading entities.
Malaysia has a ban on the export of timber
logs presumably to encourage furtherprocessing within the country.
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Foreign Investment Controls
Foreign investment controls range from therejection of all foreign direct investment, to limitson the activities of foreign owned firms such aslimits on profit remittances and other financialcontrols.
Many governments, particularly in the developingcountries, promote import substitution by
imposing local content regulations on certainindustries (For example Malaysia in the carmaking sector)
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