World Trading System

1
World Trading System Regional Trade Agreements

• Tariff and Non-tariff barriers
• International financial system exchange rate,
• exchange control trends of exchange rate
  system
• Role of International financial institutions
  World
• Bank, IMF, ADB, Evolution of GATT WTO
• Regional groupings EU, NAFTA, ASEAN
• SAARC

2
Tariff Non-Tariff Barriers

• Trade barriers and restrictions are instruments
  of
• trade control are usually in form of
  government
• laws, regulations, policies, practices
• Why restrict/barrier?
• Protection of domestic producers from foreign
• competition or artificially stimulated exports
• Broadly Tariff and Non-Tariff barriers

3
Trade barriers
Price
Tax on imports (P2-P1) raises the price, which
reduces quantity demanded Q1-Q2
D
S
P2
Tax
P1
Q2
Q1
Sales
4
Trade barriers
Price
Quantity limits on imports (Q1-Q2) reduces the
supply available and raises prices from P1 to P2.
Price rise is charged by producers
D
S
S1
P2
P1
Q1
Q2
Sales
5
Tariff

• Tariff (sometimes called duty) may affect either
  price or quantity directly
• Tariff most common type of trade control and is
  a tax government levy on good shipped
  internationally
• Tariff collected by exporting country is called
  export tariff
• If collected by a country through which goods
  have passed, it is transit tariff
• If collected by an importing country is called
  import tariff

6
Why Tariff?

• Support local/domestic industry with tariff
  process
• of imported goods are raised so domestic
  industry
• have relative price advantage
• Protective reduce expenditure on foreign goods
• thus effect the balance of payment
• Revenue mainly in LDCs it is source of revenue
• for government

7
Tariffs barrier

• How are tax rates applied
• Specific duties fixed charges per measurement
  unit, like Rs.35/ Kg
• When the prices are higher, specific duties
  become smaller of the value being less
  restrictive to import
• Ad Valorem duties meaning according to value
• Fixed percentage of cost more cost more tax (
  of price)
• Compound duties combination of specific and ad
  valorem, like Rs.35/ KG 12 ad valorem

8
Tariffs controversy

• Industrial countries discouraging LDCs exports
• Raw material duty free while finished good
  restricted with taxes
• Shirt price per unit is Rs. 100 (raw material Rs.
  50 manufacturing cost Rs. 50)
• Tax on shirt (ad velorem- 10) Rs. 10
• Effective tax Rs. 10/Rs. 50 100 20
• (Since material cost Rs. 50 would not have
  been taxable)
• In industrial countries like US, restrictions are
  more on commodities and cheaper goods than luxury
  goods

9
Non-Tariffs barrier

• Non-Tariff barriers are not as transparent
• as tariff barriers
• Two major types
• a) Direct price influence
• b) Quantity controls

10
Non-Tariffs barrier Subsidies

• Government sometimes make direct payments to
  domestic companies to be competitive e.g. US
  provides subsidies to cotton exporters
• Subsidies to overcome market imperfections like
  providing business development services such as
  market information, trade expositions, foreign
  contacts are least controversial
• Example US directly subsidies Boeing through
  payments for developments in military aircraft
  than also have commercial production

11
Non-Tariffs barrier Subsidies

• Agriculture Subsidies
• Subsidies exists in agriculture products in
  developed countries
• Government logic is that food supplies are too
  critical to be left to chance
• Subsidy lead to surplus production, surplus are
  preferable to food shortages
• Surplus production from developed countries is
  exported at prices below those in the products
  domestic markets

12
Non-Tariffs barrier Subsidies

• Aid Loans Tied aid is if recipient required to
  spend funds in donor country (in form of purchase
  of equipment, contractor) helps to win contracts
  in big sectors like telecom
• Skepticism of tied loan/aid is it increases
  inefficiency of local suppliers
• Recipients to use suppliers in donor country that
  may not be best
• China using tied aid for nearly all its foreign
  projects

13
Non-Tariffs barrier Customs Valuation

• Exporters and importers have temptation to
  declare a low price on invoices in order to pay a
  lower ad valorem tariff
• Customs officials exercise their authority to
  over value the imports so as to charge more as
  valorem duty
• Sometimes custom office/officials increase
  invoice prices based on domestic market prices
• Customs officials must use declared invoice price
  if not or doubt on authenticity, on basis of
  value of identical goods or similar goods
  arriving in or officials may compute a value
  based on final sales value or reasonable cost
• Valuation problems
• Trading of many different products creates
  problems (it is easy to misclassify a product
  its corresponding tariff)

14
Non-Tariffs barrier Customs Valuation

• Valuation problems
• Large number of categories of product means
  customs agent must use professional discretion to
  determine goods fall under which category
• Other direct price influence
• Means to affect prices, includes special fees,
  requirements that customs be deposited in
  advance, minimum price at which product can be
  sold

15
Non-Tariffs barrier Quantity Controls

• Quotas
• Import quota prohibits or limits the quantity of
  
• products that can be imported in a given year
• Governments allocate quotas among countries
  based
• on political or market conditions
• Because of quotas goods from one country might
  be
• transshipped or deflected to another country
  to take
• advantage of latters unused quota
• Country might establish export quota to assure
  domestic consumers of sufficient supply of goods,
  depletion of natural resources, or to attempt to
  raise export prices by restricting supply in
  foreign markets

16
Non-Tariffs barrier Quantity Controls

• Quotas
• Voluntary Export Restraint (VER)
• Country A asks Country B to reduce its exports to
  country A voluntarily
• But voluntarily is bit misleading cause in normal
  practice (either country B reduces its export or
  country A impose tougher sanctions)
• Export quota
• To assure domestic consumers of a sufficient
  supply of goods to prevent depletion of natural
  resources to attempt raise export prices by
  restricting supply

17
Non-Tariffs barrier Quantity Controls

• Quotas
• Export quota
• India allows export of Basmati rice only
• India agreed to provide fixed quantity of rice
  exports to Nepal
• Embargoes
• Specific type of quota that prohibits all forms
  of trade is a embargo
• Government impose embargoes in the efforts to use
  economic means to achieve political goals

18
Non-Tariffs barrier Quantity Controls

• Buy Local legislation
• Governments being largest buy adopt Buy Local
  legislation would adopt trade
• In US Buy American legislation requires
  government procurement agencies to favour
  domestic agencies
• In some instances government buy from foreign
  product of price is at predetermined margin or
  prescribed minimum of domestic content
• In Nepal also there is a policy that local
  products to be used at least in government
  offices

19
Non-Tariffs barrier Quantity Controls

• Standards Lables
• Different standards are created by different
  nations for imports to meet the domestic
  expectation and protect the health and safety of
  customers
• Problem slight modification in importing
  products can make the process tiresome and
  lengthy creating delay
• Specific permission requirements
• Some countries require potential importers or
  exporters secure permission permission from
  government authorities before conducting
  transactions, this is known as import license
• A foreign exchange control requires an importer
  of a given product to apply to government agency
  to secure the foreign currency to pay for the
  product

20
Non-Tariffs barrier Quantity Controls

• Administrative delays
• Increase uncertainty, increase cost of carrying
• If govts take 30 days to clear some merchandise,
  that leaves no room for perishables export with
  increased cost of storing
• Reciprocal requirements
• Recent practices show importing countries
  agreeing to trade only if the exporting country
  agrees to buy importing countrys goods
• This is like barter, also known as counter-trade
  or offsets
• Russian airlines Aeroflot exchanges Russian crude
  oil for airbus aircraft

21
Non-Tariffs barrier Quantity Controls

• Counter trade
• Reciprocal requirements are made between
  countries with ample access to foreign currency
  that count to secure jobs or technology as part
  of transaction
• E.g. McDonnell Douglas sold helicopter to UK
  government but had to equip them with Rolls-Royce
  engines (made in UK)

22
Non-Tariffs barrier Quantity Controls

• Restriction on Services
• Essentiality
• Certain service sectors in some countries are
  regarded to be essential as they serve strategic
  purpose or provide social assistance to its
  citizens e.g. health, education, transportation
• In such cases government subsidize sate owned
  services or set price for private companies
• Not-for-profit services
• Mail, education, hospital are often
  not-for-profit services in which few foreign
  firms compete

23
Non-Tariffs barrier Quantity Controls

• Restriction on Services
• Not-for-profit services
• Control of essential services may preclude
  foreign firms from competing
• In U.S. restriction for foreign companies from
  transporting cargo and passengers over domestic
  route
• Sometimes essential services like media,
  communication are banned from foreign investment

24
Non-Tariffs barrier Quantity Controls

• Restriction on Services
• Standard
• Government limit foreign entry into many service
  professions to ensure practice by qualified
  personnel
• Licensing standard varies from country to country
  and generally includes professions like
  accounting, lawyers, real estate brokers,
  teachers, architects, physicians (doctors)
• Immigration
• Satisfying the standards of a particular country
  does not guarantee that a foreigner can then work
  there
• Countries protect the job opportunities and
  security of their citizens