Dept. of Computer Science Engineering JIET, Jodhpur

Acknowledgement

I would like to take this opportunity to express my gratitude to Prof. Komal Sharma for giving me the opportunity to give presentation on my topic of interest i.e. International Trade Barrier which has proved to be a great learning experience for me. In spite of her busy schedule she gave me ample amount of time in solving my queries. She brightens me with her excellent knowledge and guidance.

INDEX

Pages1. Introduction 32. Import Duties 43. Import Quotas 4 4. Import Licenses 55. Tariffs 66. Export Licenses 6 7. Subsidies 7 8. Non-tariff barriers to trade 109. Voluntary Export Restraints 10 10. Tariffs v/s Import Quotas 1111. Three Major International Trade Agreements 1212. International Trade in India 1613. Indian EXIM Policy 1714. References 19

INTRODUCTION

What Is International Trade?International trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance. The international trade accounts for a good part of a countrys gross domestic product. It is also one of important sources of revenue for a developing country.

What Is Trade Barrier?Trade barriers are government-induced restrictions on international trade. Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. Trade Barriers for the convenience are classified into following 8 categories: Import duties Import quotas Import licenses Tariffs Export licenses Subsidies Non-tariff barriers to trade Voluntary Export Restraints IMPORT DUTIESIt is a tax collected on imports and some exports by the customs authorities of a country. This tax is used to raise state revenue. It is based on the value of goods called ad valorem duty or the weight, dimensions, or other criteria of the item such as its size. Also referred to as customs duty, tariff, import tax and import tariff.

Import tax, better known as Import Duty is an indirect tax levied by the Central Board of Excise & Customs (CBEC) which is a part of the Depart of Revenue in the Ministry of Finance.

The customs will levy an import duty on nearly any goods or products that you try to bring into the national borders. The rate of this duty can vary from the basic 5% to 45% depending upon the type and quantity of the product.

IMPORT QUOTAS

An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically.

It is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. If a quota is put on a good, less of it is imported. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.

Quotas are numerical limits imposed on imported goods. Consumers are harmed by quotas, while domestic and foreign producers benefit by receiving higher prices. In the graph below, the market initially clears at P0, Q0. The supply curve Sd+i0 represents the quantity supplied by both domestic and foreign producers before the imposition of the quota. D0 is the domestic demand curve. After the quota, the supply curve looks like Sd+i1. Both foreign and domestic producers receive higher prices while consumers lose out.

Effect of Quotas on the Supply Curve

IMPORT LICENSESAn import license is a document issued by a national government authorizing the importation of certain goods into its territory. Import licenses are considered to be non-tariff barriers to trade when used as a way to discriminate against another country's goods in order to protect a domestic industry from foreign competition.Each license specifies the volume of imports allowed, and the total volume allowed should not exceed the quota. Licenses can be sold to importing companies at a competitive price, or simply a fee. However, it is argued that this allocation method provides incentives for political lobbying and bribery. Government may put certain restrictions on what is imported as well as the amount of imported goods and services. For example, if a business wishes to import agricultural products such as vegetables, then the government may be concerned about the impact of such importations of the local market and thus impose a restriction.TARIFFS

Tariffs are taxes imposed on imported goods; they will increase the price of the good in the domestic market.

Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues. In the graph below, S0 and D0 represent the original supply and demand curves which intersect at (P0, Q0). St shows what the supply curve is with the introduction of the tariff. The market then clears at (Pt, Qt). Less of the good is produced, and consumers pay higher prices. Effect of a Tariff on a Supply Curve

EXPORT LICENSES

An export license is a document issued by the appropriate licensing agency after which an exporter is allowed to transport his product in a foreign market. The license is only issued after a careful review of the facts surrounding the given export transaction. Export license depends on the nature of goods to be transported as well as the destination port. So, being an exporter it is necessary to determine whether the product or good to be exported requires an export license or not. While making the determination one must consider the following necessary points: What are you exporting? Where are you exporting? Who will receive your item? What will your items will be used?CanalizationCanalization is an important feature of Export License under which certain goods can be imported only by designated agencies. For an example, an item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.Application for an Export LicenseTo determine whether a license is needed to export a particular commercial product or service, an exporter must first classify the item by identifying what is called ITC (HS) Classifications. Export license are only issued for the goods mentioned in the Schedule 2 of ITC (HS) Classifications of Export and Import items. A proper application can be submitted to the Director General of Foreign Trade (DGFT). The Export Licensing Committee under the Chairmanship of Export Commissioner considers such applications on merits for issue of export licenses.

SUBSIDIES

A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. Derived from the Latin word 'subsidium', a subsidy literally implies coming to assistance from behind.

Like indirect taxes, they can alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Subsidies in areas such as education, health and environment at times merit justification on grounds that their benefits are spread well beyond the immediate recipients, and are shared by the population at large, present and future. For many other subsidies, however the case is not so clear-cut. Arising due to extensive governmental participation in a variety of economic activities, there are many subsidies that shelter inefficiencies or are of doubtful distributional credentials. Subsidies that are ineffective or distortionary need to be weaned out, for an undiscerning, uncontrolled and opaque growth of subsidies can be deleterious for a country's public finances.Subsidies, by means of creating a wedge between consumer prices and producer costs, lead to changes in demand/ supply decisions. Subsidies are often aimed at:1. Inducing higher consumption/ production2. Offsetting market imperfections including internalization of externalities;3. Achievement of social policy objectives including redistribution of income, population control, etc.Forms of subsidies A cash payment to producers/consumers is an easily recognizable form of a subsidy. However, it also has many invisible forms. Thus, it may be hidden in reduced tax-liability, low interest government loans or government equity participation. If the government procures goods, such as food grains, at higher than market prices or if it sells as lower than market prices, subsidies are implied.Subsidies can be distributed among individuals according to a set of selected criteria, e.g. 1) merit, 2) income-level, 3)social group etc. two types of errors arise if proper targeting is not done, i.e. exclusion errors and inclusion errors. In the former case, some of those who deserve to receive a subsidy are excluded, and in the latter case, some of those who do not deserve to receive subsidy get included in the subsidy programme.Effects of subsidies Economic effects of subsidies can be broadly grouped into:1. Allocative effects: These relate to the sectoral allocation of resources. Subsidies help draw more resources towards the subsidised sector2. Redistributive effects: These generally depend upon the elasticities of demands of the relevant groups for the subsidised good as well as the elasticity of supply of the same good and the mode of administering the subsidy.3. Fiscal effects: Subsidies have obvious fiscal effects since a large part of subsidies emanate from the budget. They directly increase fiscal deficits. Subsidies may also indirectly affect the budget adversely by drawing resources away from tax-yielding sectors towards sectors that may have a low tax-revenue potential.4. Trade effects: A regulated price, which is substantially lower than the market clearing price, may reduce domestic supply and lead to an increase in imports. On the other hand, subsidies to domestic producers may enable them to offer internationally competitive prices, reducing imports or raising exports.Subsidies may also lead to perverse or unintended economic effects. They would result in inefficient resource allocation if imposed on a competitive market or where market imperfections do not justify a subsidy, by diverting economic resources away from areas where their marginal productivity would be higher. Generalized subsidies waste resources; further, they may have perverse distributional effects endowing greater benefits on the better off people. For example, a price control may lead to lower production and shortages and thus generate black markets resulting in profits to operators in such markets and economic rents to privileged people who have access to the distribution of the good concerned at the controlled price.NON-TARIFF BARRIERS TO TRADENon-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and countervailing duties, which, although called non-tariff barriers, have the effect of tariffs once they are enacted.Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, sanitation, or depletable natural resources. In other forms, they are criticized as a means to evade free trade rules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use of tariffs.Non-tariff barriers to trade include import quotas, special licenses, unreasonable standards for the quality of goods, bureaucratic delays at customs, export restrictions, limiting the activities of state trading, export subsidies, countervailing duties, technical barriers to trade, sanitary and phyto-sanitary measures, rules of origin, etc.

VOLUNTARY EXPORT RESTRAINTS These restraints limit the quantity of goods that can be exported from the country to one or more of its trading partners. They are usually "voluntarily" negotiated so that quotas or tariffs are not imposed.VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to deter the other party from imposing even more explicit (and less flexible) trade barriers.Also, VERs are typically implemented on a bilateral basis, that is, on exports from one exporter to one importing country. VERs have been used since the 1930s at least, and have been applied to products ranging from textiles and footwear to steel, machine tools and automobiles. They became a popular form of protection during the 1980s, perhaps in part because they did not violate countries' agreements under the GATT. As a result of the Uruguay round of the General Agreement on Tariffs and Trade (GATT), completed in 1994, World Trade Organization (WTO) members agreed not to implement any new VERs and to phase out any existing VERs over a four-year period. Exceptions can be granted for one sector in each importing country.Some examples of VERs occurred with auto exports from Japan in the early 1980s and with textile exports in the 1950s and 1960s.

TARIFFS V/S IMPORT QUOTASBoth tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease welfare of domestic consumers, increase welfare of domestic producers, and cause deadweight loss. However, a quota can potentially cause an even larger deadweight loss, depending on the mechanism used to allocate the import licenses. The difference between these tariff and import quota is that tariff raises revenue for the government, whereas import quota generates surplus for firms that get the license to import.For a firm that gets a license to import, profit per unit equals domestic price (at which imported good is sold) minus world price (at which good is bought) (minus any other costs). Total profit equals profit per unit times quantity sold.Government may charge fees for import license. If the government sets the import license fee equal to difference between domestic price and world price, the import quota works exactly like a tariff. The entire profit of the firm with an import license is paid to the government. Thus government revenue is the same under such an import quota and a tariff. Also, consumer surplus and producer surplus are the same under such an import quota and a tariff.So why do countries use import quotas instead of always using a tariff?When an import quota is used, it allows a country to be sure of the amount of the good imported from the foreign country. When there is a tariff, if the supply curve of the foreign country is unknown, the quantity of the good imported may not be predictable.If world supply in the home country is upward-sloping and less elastic than domestic demand (as may be the case when the home country is the United States) then the incidence of the tariff may fall on producers, and the price paid domestically may not rise by much. Then if the tariff is supposed to make price of the good rise to allow domestic producers to sell at a higher price, the tariff may not have much of the desired effect. A quota may do more to raise price. However in competitive markets there is always some tariff that raises the price as high as the quota does.

Three Major International Trade Agreements(FREE TRADE AREAS)

Three major International Trade Agreements are: EU(European Union) NAFTA(North American Free Trade Agreement) ASEAN(Association of Southeast Asian Nations)European Union:

The European Union (EU) is an economic and political union of 27 member states that are located primarily in Europe. The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states.

The European Union is composed of 27 sovereign member states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. The Union's membership has grown from the original six founding statesBelgium, France, West Germany, Italy, Luxembourg and the Netherlandsto the present-day 27 by successive enlargements as countries acceded to the treaties and by doing so, pooled their sovereignty in exchange for representation in the institutions.

The EU has developed a single market through a standardized system of laws that apply in all member states. Within the Schengen Area (which includes 22 EU and 4 non-EU states) passport controls have been abolished. EU policies aim to ensure the free movement of people, goods, services, and capital, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries and regional development.

North American Free Trade Agreement:

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade block 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.

The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all US-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.

The agreement opened the door for open trade, ending tariffs on various goods and services, and implementing equality between Canada, USA, and Mexico. NAFTA has allowed agricultural goods such as eggs, corn, and meats to be tariff-free. This allowed corporations to trade freely and import and export various goods on a North American scale.

Association of Southeast Asian Nations:

The Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress, and cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully.

ASEANIndia Free Trade Area:

The ASEANIndia Free Trade Area (AIFTA) is a free trade area among the ten member states of the Association of Southeast Asian Nations (ASEAN) and India. The initial framework agreement was signed on 8 October 2003 in Bali, Indonesia and the final agreement was on 13 August 2009. The free trade area came into effect on 1 January 2010.The ASEAN-India Free Trade Area emerged from a mutual interest of both parties to expand their economic ties in the Asia-Pacific region. India's "Look East" policy was reciprocated by similar interests of many ASEAN countries to expand their interactions westward.After India became a sectoral dialogue partner of ASEAN in 1992, India saw its trade with ASEAN increase relative to its trade with the rest of the world. Between 1993 and 2003, ASEAN-India bilateral trade grew at an annual rate of 11.2%, from US$ 2.9 billion in 1993 to US$ 12.1 billion in 2003. Much of India's trade with ASEAN is directed towards Singapore, Malaysia, and Thailand, with whom India holds strong economic relations.The signing of the ASEAN-India Trade in Goods Agreement paves the way for the creation of one of the worlds largest FTAs a market of almost 1.8 billion people with a combined GDP of US$ 2.8 trillion. The ASEAN-India FTA will see tariff liberalization of over 90 percent of products traded between the two dynamic regions, including the so-called special products, such as palm oil (crude and refined), coffee, black tea and pepper. Tariffs on over 4,000 product lines will be eliminated by 2016, at the earliest.While there are many benefits to the ASEAN-India FTA, there is concern in India that the agreement will have several negative impacts on the economy. As previously stated, the two regions aim to reduce their tariffs on a majority of their traded goods. This will allow them to increase the market access of their products. It is criticized, however, that India will not experience as great an increase in market access to ASEAN countries as ASEAN will in India. The economies of the ASEAN countries are largely export-driven, maintaining high export-to-GDP ratios (in 2007, Malaysia had a ratio of almost 100%). Considering this, as well as the global financial crisis and India's expansive domestic market, the ASEAN countries will look eagerly towards India as a home for its exports.Since the early 2000s, India has had an increasing trade deficit with ASEAN, with imports exceeding exports by more than US$6 billion in 2007-2008. It is feared that a gradual liberalization of tariffs and a rise in imported goods into India will threaten several sectors of the economy, specifically the plantation sector, some manufacturing industries, and the marine products industry. As a dominant exporter of light manufacturing products, ASEAN has competitive tariff rates that make it difficult for India to gain access to the industry market in ASEAN countries.Before the agreement was signed, the Chief Minister of Kerala, V.S. Achuthanadan, led a delegation to the Indian Prime Minister protesting against the FTA. The state of Kerala is an important exporter in the national export of plantation products. It fears that cheap imports of rubber, coffee, and fish would lower domestic production, adversely affecting farmers and ultimately its economy. Kerala has already experienced a flooding of its market with inexpensive imports under the South Asia Free Trade Agreement of 2006. Cheap coconuts from Sri Lanka and palm oil from Malaysia has since hindered Kerala's coconut cultivation.To alleviate the losses that arise from the initial stages of trade, the Government of India must be able to effectively redistribute some of the wealth to those industries who suffer from the increased competition with ASEAN markets. This way, total welfare gains in India would increase and India would ultimately benefit from trade with ASEAN.

INTERNATIONAL TRADE IN INDIA

The origin of Indias foreign trade can be traced back to the age of the Indus Valley civilization. But the growth of foreign trade gained momentum during the British rule. During that period, India was a supplier of food stuffs and raw materials to England and an importer of manufactured goods. However, organized attempts to promote foreign trade were made only after Independence, particularly with the onset of economic planning. Indian economic planning completed five decades. During this period, the value, composition and direction of Indias foreign trade have undergone significant changes.

Indias foreign trade has come a long way since 1950-51. The values of both exports and imports have increased several times over the period.

INDIAN EXIM POLICY

EXIM Policy or Foreign Trade Policy is a set of guidelines and instructions established by the DGFT in matters related to the import and export of goods in India.

DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to EXIM Policy. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947.

Objectives of the EXIM Policy: - Government control import of non-essential items through the EXIM POLICY. At the same time, all-out efforts are made to promote exports. Thus, there are two aspects of EXIM Policy; the import policy which is concerned with regulation and management of imports and the export policy which is concerned with exports not only promotion but also regulation. The main objective of the Government's EXIM Policy is to promote exports to the maximum extent. Exports should be promoted in such a manner that the economy of the country is not affected by unregulated exportable items specially needed within the country. Export control is, therefore, exercised in respect of a limited number of items whose supply position demands that their exports should be regulated in the larger interests of the country. In other words, the main objective of the EXIM Policy is: To accelerate the economy from low level of economic activities to high level of economic activities by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities. To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,' consumables and capital goods required for augmenting production. To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness. To generate new employment. Opportunities and encourage the attainment of internationally accepted standards of quality. To provide quality consumer products at reasonable prices.

REFERENCES

1. http://en.wikipedia.org/wiki/Subsidies_in_India2. http://en.wikipedia.org/wiki/Import_quota3. http://www.eximguru.com/exim/guides/how-to-export/ch_7_export_license.aspx4. http://en.wikipedia.org/wiki/Non-tariff_barriers_to_trade5. http://en.wikipedia.org/wiki/European_Union6. https://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement7. http://en.wikipedia.org/wiki/ASEAN%E2%80%93India_Free_Trade_Area8. http://www.exim-policy.com/

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