International Business Management

KMBN IB 01
Instruments of Trade Policy
Dr. Riju A. Singh
Astt. Professor, HIMCS
 Free Trade
when a government does not attempt to restrict
what its citizens can buy or sell
from another country.
Advantages:
1. International Specialization
2. Economic Efficiency- Increase in world production &
consumption; optimum utilization of resources
3. Competition
4. Increased Profits/ Higher earnings of the factors of production
5. Increased Goodwill of Company & Brand Recognition
6. Lower Prices & better quality goods- benefits to consumers
7. Less Corruption
8. Interconnectedness- reduced likelihood of war
Disadvantages:
1. Job loss
2. Predatory Pricing
3. Increased vulnerability- Dependence & demise of critical industries
4. New industries can’t develop
5. Tax troubles
6. Free Trade isn’t Fair
7. Labor & Environmental Abuses
Why do governments intervene in trade?
Reasons why a country imposes restrictions on trade:
1. Protecting established domestic industries from foreign competition- If foreign
goods & services easily enter the domestic market, it increases domestic
competition.
2. Protecting strategic industries- Such industries usually contribute to national
security, employment, technology, or value chains with various other industries.
3. Securing domestic employment & income- Imports benefit foreign producers as
money flows from domestic to them. Besides, when imports increase, they will
decrease domestic production, reducing jobs & income in one’s own country.
4. Help generate government revenue- By imposing import tariffs, the government
obtains a source of income other than individual taxes or business taxes.
5. Retaliating for similar restrictions imposed by trading partners- Countries do
not like unfair trade practices by their partner countries, for example, dumping.
Hence, it is in their interest to get even with the partner country.
1. Political Arguments for government intervention include
1. Protecting jobs.
2. Protecting industries deemed important for national security.
3. Retaliating to unfair foreign competition.
4. Protecting consumers from “dangerous” products.
5. Furthering the goals of foreign policy.
6. Protecting the human rights of individuals in exporting countries.
7. Protecting the interests of politically important groups (businessmen),
often at the expense of other groups (normally consumers).
Country Focus: Trade in Hormone-Treated Beef
This note traces the history of the longstanding US-EU dispute over trade in beef, beginning
with the introduction of the use of growth-promoting hormones for raising beef cattle. In
1989, Europe banned the use of these hormones. The ban covered all beef, including meat
imported from the US where growth-enhancing hormones were widely used. In retaliation,
the US imposed punitive tariffs on approx $100 million worth of European food imports.

In the years that followed, new multilateral institutions and agreements were put in place
to govern disputes like the beef quarrel during the Uruguay Round of trade talks. Despite
these changes, the story was very much the same a decade later. Though the new WTO
ruled against the European ban, the EU continued to refuse beef raised with growth-
promoting hormones. In 1999, once again, the US imposed punitive tariffs on
approximately $117 million on foods imported from Europe. The US argued that the
European regulatory process had been captured by politics. US officials were frustrated by
what they saw as a political move to protect the EU beef market by invoking scientifically
unsupported claims about the detrimental health effects of hormones.
2. Economic arguments for gov. intervention include
 Boosting the overall wealth of a nation- to the benefit of all, both
producers and consumers.
 Strategic trade policy- there may be important first mover advantages,
governments can help firms from their countries attain these advantages.
Governments can help firms overcome barriers to entry into industries
where foreign firms have an initial advantage.
 Infant industry argument- an industry should be protected until it can
develop, be viable & competitive internationally. This has been accepted
as a justification for temporary trade restrictions under the WTO. Critics
argue -
• it is useless unless it makes the industry more efficient
• if a country has the potential to develop a viable competitive position,
its firms should be capable of raising necessary funds.
ADVANTAGES OF PROTECTIONISM
While the list of protectionism pros (and cons) is a long one, here are a few key ways it can
benefit an economy.
Stimulates local job growth: By making imports or outsourced services prohibitive in their
costs, it can create local opportunities for workers and businesses.
Corrects imbalances: The cost of living varies internationally, so labor costs in making a pair
of shoes in Mexico might be 75% lower than making them in the United States. Naturally,
the Mexican shoes can sell for cheaper on Los Angeles shelves than their American
counterpart might. Tariffs, subsidies and other protectionist policies can level the retail
playing field.
Boosts tax revenues: Governments make money off tariffs since they are a tax collected by
them. In 2017, American tariffs raked in over $44 billion in funds for the government.
Protects industries: New or old, tariffs and other protectionist stances can ensure a
struggling or new industry is given a competitive advantage.
DOWNSIDES TO PROTECTIONISM
By limiting or shutting down trade, the first reaction is to think domestic markets will do
fantastically without all that external competition. Unfortunately, history shows the opposite to
be true.
Prices go up: Jobs may get created, but all kinds of factors can play into why this results in higher
prices. Those tariffs on Jimmy’s wrenches need to be paid by someone, and that someone is the
consumer. But even if it is not an imported finished product, it is often raw materials and
agriculture that take the brunt of tariffs.It is then the family of four in San Diego who is caught
paying 20% more for groceries because the government launched a trade war. Or it could be the
cost of lumber from Canada skyrockets and brings down the rate of new home construction,
which can impact the entire American economy; it can be a wild game of dominoes.
Trade wars happen: When the United States moved to protect farmers, the ripple effects in the
1930s wound up playing out over the next few years as costs were passed to consumers around
the world thanks to everyone bringing in their protection moves. Economic recovery was
hindered internationally. A trade war with China in 2019 has echoed those alarm bells because it
is hurting American companies trying to sell in the Chinese market (particularly in agriculture)
and it is having ripple effects domestically.
Choice is limited: When protectionism kicks in, it is possible that consumers can be spoiled for
choice locally, but the reality is it often goes the other way. It can also mean quality goes down if
the competition is not healthy and forces producers to aim high to maintain market share.
How do governments intervene in international trade?

Instruments of Ways to restrict trade

Trade Policy using trade barriers

Tariff Non-Tariff
Barriers Barriers
are in form of taxes levied on imports are in forms other than taxes
Tariff Barriers
are taxes imposed by government on goods entering the border/ imports
that effectively raises the cost of imported products relative to domestic
products.

 SPECIFIC Tariff- levied as a fixed charge for each unit of imported good.
 AD-VALOREM Tariff- charged as a certain percentage of the original price
of the imported product. Although the percentage is fixed, if the price
changes, the nominal import tariff will also change. Proportionate to Value
of imported good.
Pros & Cons of Tariffs?
 Price of imported products increases,
 Domestic consumers have to bear a higher price or may have to unwillingly
settle for domestic products.
 Protect domestic producers against foreign competition, and allows them to
capture higher sales.
 For the government, tariffs are a source of revenue.

Tariffs reduce the overall efficiency of the world economy

 Non-Tariff Barriers

7
6
1 2 3 4 5 Anti-
Admin
Subsidy Quota VER Sanction Embargo dumping
Policies
policy
1. Subsidy
 viewed as the converse of a tax, it is an instrument of fiscal policy.
 Government’s payment to domestic producers to help them-
o compete against low-cost foreign imports
o gain export markets
 It can be cash subsidy, tax concession, or interest reduction/ waive off
 Consumers typically absorb the costs of subsidies
Petroleum Subsidy (Pan India) decreased substantially in the last 10 years.
Give Up LPG Subsidy is a campaign that was launched in March 2015 by the Indian
government led by PM Narendra Modi. It is aimed at motivating LPG users who are able
to afford to pay the market price for LPG to voluntarily surrender their LPG subsidy. As of
23 April 2016, 10 million people had voluntarily given up the subsidy. The surrendered
subsidy is being redistributed to poor families in rural households free of cost.
Maharashtra, UP, Karnataka, Delhi & TN are the top five states to give up the subsidy.
Food Security (PDS) (Pan India)
The National Food Security Act 2013 (also 'Right to Food Act') aims to
provide subsidized food grains to approx. 2/3rds of the country's 1.2 billion
people. The Midday Meal Scheme and the Integrated Child Development
Services Scheme are universal in nature whereas the Public Distribution
System (PDS) will reach about 2/3rds of the population (75% in rural areas and
50% in urban areas). Under the provisions of the bill, beneficiaries of the PDS
are entitled to 5 kgs per person per month of cereals at the following prices:
Rice at Rs 3 per kg; Wheat at Rs 2 per kg & Coarse grains (millet) at Rs 1 per kg.

Fertilizer Subsidy (Rural)- subsidy is paid on fertilizers sold for direct Agriculture
uses.
Government Subsidy on Electric Vehicles in India
To increase the usage of electric vehicles, the Government has increased its
subsidy scheme for the purchase of electric vehicles.
According to Budget 2022-23, Faster Adoption and Manufacturing of Hybrid and
Electric Vehicles (FAME) scheme
 Phase 1 (April 2015- 2019)- provide subsidy of upto INR 2908 Cr. The incentive
provided was INR 10,000 with a 20% incentive cap.
 Phase 2 (till March 2024)- supported >200,000 vehicles, & subsidy amounted to
INR 900 Cr. The incentive of INR 15,000 per KWh on 2-wheeler EVs with an
incentive cap of 40% of the vehicle cost.
We can avail tax exemptions of up to INR 1.5 Lakh if we purchase the EV by taking
a loan. Road Tax & discounts on registration fees are among the other subsidy on
EVs offered by the State Government.
2. Quota/ Import Quota
Direct restriction on quantity of good that may be imported into a country.
Quotas reduce supply by limiting the quantity of goods entering the domestic
market. If domestic producers cannot compensate by increasing output,
quotas create shortages (excess demand). As a result, the price of domestic
goods rises & domestic producers benefit. But, the domestic consumers have
to bear higher prices.

China's Largest Fuel Export Quota of 2022 could spark Oil Demand Growth
Global oil demand could soon pick up pace after the world’s top crude oil
importer, China, issued its biggest fuel export quotas (15 million tons) to its
refiners for this year, and the quota could be rolled over into early next year.
 India
Sugar export quota for 2022-23 soon
India exported 8 mt of surplus sugar in the 2021-22, after meeting domestic
demand and diversion towards ethanol. It helped maintain domestic sugar
prices. “The government will soon announce export quota of sugar for the next
marketing year (2022-23)” food secretary Sudhanshu Pandey, Sep, 2022.

Main Imports- Chemical Fertilizers, Cashew nuts, Edible oils, Food grains,
Paper, Precious stones, Transport equipment.
China, US, UAE, Saudi Arabia & Switzerland.

Major Exports- Refined Petroleum, Diamonds, Pharmaceuticals, Jewelry, Rice.

United States, United Arab Emirates, China, Hong Kong, Germany.
World’s 17th largest export economy.
3. Voluntary Export Restraint (VER)/ Export Visas
Is a self-imposed/voluntary restriction/limit (by government) on the quantity
of some category of goods that can be exported to a specific country during a
specific period of time. Done on pressure of importing country’s government
(to seek protection from competing imports), to appease the importing
country and deter it from imposing explicit (and less flexible) trade barriers.

Japan imposed a VER on its auto exports to the U.S. as a result of American
pressure in 1980s. The VER subsequently gave the U.S. auto industry some
protection against a flood of foreign competition.

In 1994, WTO members agreed not to implement any new VERs and to
phase out existing ones, within one year, with some exceptions.
4. Sanctions
Penalties applied by a country against another- may be imposed for a
variety of political, military, & social issues. They can include limiting of
trade activity, increased administrative actions– or additional customs &
trade procedures– that slow or limit a country’s ability to trade.
Example: Following Russia's invasion of Ukraine in February 2022,
the US, EU, & other countries applied sanctions on Russia. The sanctions
were wide-ranging, targeting individuals, banks, businesses, monetary
exchanges, bank transfers, exports- imports, and cut off "selected Russian
banks" from the SWIFT network triggering the 2022 Russian financial crisis
and a massive international boycott of Russia and Belarus, which supports
the invasion. Two countries that had not previously taken part in sanctions,
namely S. Korea & Taiwan, engaged in sanctions against Russia.
India has historically & largely not supported sanctions imposed by individual
countries. The Government of India has largely supported United Nations sanctions.

Sanctions imposed by India

South Africa 1946- 93 1st country to sanction S. Africa for the apartheid.
Fiji 1989- 99 Following deterioration of diplomatic ties, imposed a trade embargo.

Sanctions against India

Following 1974 nuclear tests, sanctioned nuclear expertise & equipment
Canada 1974
support.
Following nuclear tests. Sanctions were weakened through exceptions &
United States 1998- 99
lifted within a year.
Japan 1998- 01 Sanctions including the stoppage of loan aid.
~12 countries - Individual sanction following 1998 nuclear tests with marginal effect.
United States 1992- 11 ISRO sanctioned for sections of its space program.
Pakistan 2019- Sanctions such as closure of airspace for all Indians.
5. Embargo
is a government order that restricts imports from a specific country or
specific goods. It is usually created as a result of unfavorable political
circumstances between nations. It is designed to isolate a country and
create difficulties for its governing body, forcing it to act on the issue that
led to the embargo.
 Russia embargo on EU, US, Australia, Canada & Norway- since Aug
2014, on beef, pork, fruit & vegetable produce, poultry, fish, cheese,
milk & dairy.
 EU arms-embargo on Sudan in 1994
 UN international oil-embargo on S. Africa- to punish S. Africa for its
policies of apartheid, support of 130 countries.
US full-embargo on Cuba-
The US first imposed an embargo on the sale of arms to Cuba on Mar 14,
1958, during the Fulgencio Batista regime. Fulgencio Batista was a Cuban
military officer and politician who served as the elected president of
Cuba from 1940 to 1944 and as its U.S.-backed military dictator from
1952 to 1959.

On Oct 19, 1960, almost two years after the Cuban Revolution, he was
overthrown, the US placed an embargo on (prevent) exports to Cuba
except for food & medicine after Cuba nationalized the US-owned
Cuban oil refineries without compensation. On February 7, 1962, the
embargo was extended to include almost all exports. One of the longest-
standing embargoes in modern history.
EU & US arms- embargo on China
In August 2018, President Trump signed the National Defense Authorization
Act for Fiscal Year 2019 (NDAA 2019) banned Huawei Technologies Co. &
ZTE Corporation (telecom) equipment from being used by the U.S. federal
government, citing security concerns.
In Aug 2019, the US Treasury designated China a currency manipulator, which
resulted in China being excluded from U.S. govt. procurement contracts. The
designation was withdrawn in Jan 2020 after China agreed to refrain from
devaluing its currency to make its own goods cheaper for foreign buyers.

On July 9, 2020, the Trump administration imposed sanctions and visa

restrictions against senior Chinese officials. They & their immediate relatives
were barred from entering the US and will have US-based assets frozen.
6. Admin Policies
Are bureaucratic rules that are designed to make it difficult for imports to
enter a country. These polices hurt consumers by denying access to possibly
superior foreign products.
7. Anti-dumping policy
Additional duty imposed to punish foreign firms that engage in dumping,
also known as countervailing/ anti-dumping duties.
Dumping is selling goods in a foreign market below their cost of production/
or at below their “fair” market value. It can be a way for firms to unload
excess production in foreign markets. Sometime it may be predatory to drive
indigenous competitors out of that market, later raising prices & earning
substantial profits.
8. Local Content Requirements
 A local content requirement demands that some specific fraction of a
good be produced domestically. The requirement can be in physical
terms or in value terms.
 Local content requirements benefit domestic producers & jobs, but
consumers face higher prices.
Thanks