Trade Barriers in International Trade - Essay Example

1 Introduction Growth of International Trade has reached new dimensions. With more countries, especially the developing nations, now adopting the path of liberalisation, competition between firms and multinationals has involved the governments of all nations on a much larger scale. Trade barriers have either blurred or fallen through as a result of national policies. Regionalism has begun to be seen as strength for negotiating with more power. All over the world a new order has come to prevail in economic terms and that is promotion of regional economic powers through what is known as Free Trade Areas (FTA). With the fall of imperialism the captains of the industry, working alongside their national governments, evolved a system of reducing tariffs or bringing uniformity in them to trade with their neighbours that offered them better terms with respect to exchange of goods and services. The aim was economic prosperity through reduction in costs and higher profits through competitive advantage. This brought about bi-lateral agreements between two nations. 2 Evolution of Free Trade Area With expansion of trade between several countries these agreements involved more countries and this was the birth of Free Trade Areas (FTA). FTA’s are drivers of growth and development.  They make use of country comparative advantages, encourage specialization and division of labor, expand the size of export markets, and promote efficiency and competitive environment within the region. The oldest FTA was the former European Economic Community (EEC) that was formed by six nations, Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. The intention was to form a designated group of countries that agreed to eliminate tariffs and restrictions on most goods traded between themselves to promote greater economic benefit. When others realized the benefits of this association, they too joined and the EEC expanded and became an economic bloc that negotiated uniformly as one unit with other nations to set quotas and preferences for the benefit of EEC members. It has now expanded to become the European Union (EU) with more things in common besides free trade between its members. The basic FTA is an agreement between member countries to reduce or eliminate trade barriers and tariffs among them. However in such cases member nation are not bound to have a common external trade policy for non member countries. A prime example of this is the North American Free Trade Agreement (NAFTA) comprising of the United States, Canada, and Mexico. When members of an FTA decide to have a common external policy with a non member nation, group of nations or even with another FTA it upgrades itself to a Custom Union. The EEC became a Custom Union when its members opted to have a common external policy towards non member nations. But by1990 it took another giant step by becoming a Common Market when it allowed free movement of labour and capital between its members. Now it is working towards becoming a Monetary Union by having a common currency, the Euro. It is also becoming a Political Union by working towards having common laws for its member states. The EEC and its Common Market became a model for formation of other FTA’s around the globe. With the advent of globalisation of trade and with economics in mind the FTA evolved at great speed and now there are three distinct trade regions; Europe, the two American continents, and the Asia Pacific Rim, with their members turning into flourishing economic regions. 3 Trade Barriers All nations strive to protect their domestic industries for economic and political reasons. The economic reasons are to make them profitable for tax and other revenue generation. The national government has to promulgate laws to protect them from the onslaught of cheaper goods exported to their country by foreign companies. They charge duties for inbound goods and services to enable their own national industries to offer goods at competitive prices. The other reason is that a thriving national industry creates employment opportunities which in turn expand the market as the same employees also turn consumers. The political reasons are created by vote bank politics. There are always a set of people that are opposed to open trade and liberal policies and they demand protection on both economic and egoistic nationalistic grounds. The national democratic governments have to adopt policies of both protectionisms as well as subsidies to appease this section. Lately, with recognition and acceptance of the Green movement, both the governments and the public in general have become aware of the need to have environmental policies for their own good. National governments therefore are increasingly promulgating laws for goods to become environment friendly and this has the popular local support. But such national environmental policies may have an adverse effect on trade. First, environmental policies may affect the international competitiveness of a domestic company and second, they may affect the competitiveness of foreign companies in the national market. These policies stand for additional costs for the domestic companies putting them at a disadvantage in the international markets. It can also force some companies with higher pollution levels to migrate to countries that are not so strict. This then becomes a national loss. But it is relatively bearable as it is also in the interest of the nation to have high grade technology introduced in the industry for further economic benefits. This is only possible when environment friendly policies are adopted at the national level. The loss is greater when these regulations or standards lead to a competitive disadvantage for foreign firms. Compliance with these standards will result in higher costs to them in comparison to the domestic companies. In fact these standards become a technical barrier to international trade. Normally environmental policies are aimed at promoting more environment friendly economic activities. The objective is to encourage the making and usage of environmentally friendly products. Typically higher taxation is the weapon used to discourage production and consumption of environmentally unfriendly products. This means there will be discrimination within a set of similar products. This can be interpreted as protectionism for the local industry against a foreign product that does not match this standard. A potential conflict will arise here purely because of the place or country of origin where this product is considered as standard. It will be impossible to distinguish whether the related policy is an environmental policy that happens to be discriminative against the foreign product or whether it is a protection camouflaged as an environmental policy. 4 Differentiating between Protection & Environmental Policy Environmental policies are usually related to problems of external issues. It becomes important to distinguish two types of issues; one that occour when consuming a good and secondly, those occurring when a good is produced. There is another kind of distinction too. An external factor can either have global or local effect. The characteristics and properties of a product are seen in different ways by consumers. As a rule the market offers the consumers the varieties for which they have preferences. But the government perceives that some variety is not good for them and may set standards and impose taxes or tariffs to make them unviable for the consumers. The production of such goods will also be discriminated against by laying down environmental policies that will discourage its manufacture. Both are examples of how external issues will be viewed as environmental issues in the domestic scene. But when these are applied to a foreign company they can be viewed as discriminatory on protectionist grounds. It will be considered as denying the right to trade where the consumption is desired but denied to the consumer and production is costlier on grounds of compliance that is discriminatory. 5 Rationalization There is little available by way of academic literature on the subject of Environmental Regulations acting as a trade barrier for foreign firms in comparison to domestic companies. But there is no doubt that such regulations entail additional costs that are the cause of the unviability of the products of such companies which fail to meet standards. Of course they will apply both to the domestic as well as the foreign companies but the impact has been calculated with a different view taken by Porter and van der Linde (1995). They opine that properly designed standards will actually trigger innovations that will eventually reduce costs. These innovation offsets, as they call them, will not only reduce the cost but will lead to absolute advantage. It is further contended by the authors that pollution and inefficiency co-exist, and by setting higher non-polluting standards, the company is induced to bring about efficiency, with attendant cost benefits. It will indeed be a win-win situation both for the industry as well as the consumer. But there are others (Palmer et al) that are unconvinced of this theory. They do not agree with the above hypothesis and argue that there no relation between pollution and efficiency. They reject the idea that environmental policies bring about efficiencies. While they accept as a fact that environmental regulations have been the precursor of improvements in qualities and thereby resulted in savings in costs, the do not find merit that firms become efficient only when they are forced by regulations. They therefore do not accept this as a win-win formula. But rather reluctantly they do accept that further studies are required to establish the relationship between efficiency and pollution. 6 Measuring Productive Efficiency Since there is little literature on the above subject, it is prudent to look for ways and means to measure production efficiencies to arrive at some conclusion whether regulations indeed affect efficiencies. A firm’s performance is usually measured through calculation of productivity that is based on the estimated production of both good and bad outputs. Good output is pollution free while bad output has a pollution load on it. But this will end in a misleading result. With high output the production may be emitting higher pollutants and when it tries to control emissions, the output will reduce. This cannot be called inefficient production. Another measure is by using the Output Distance Function Approach. Production is defined as the maximum result of an external input while the cost is the minimum expense to result in the maximum output. The out put distance function is to find how far this cost and production can be stretched given in a situation where the external input is fixed to produce a certain quality or standard to measure performance. In current literature there are three methodologies to measure the above hypothesis. They are: (a) regulating or fine-tuning the output of the production to account for the marginal benefit or cost of the emission reduction, the shadow prices or estimated prices of pollutants (Pittman 1981, 1983; Fare et al 1993; Hetemaki 1996; Coggins and Swinton 1996; Repetto et al. 1996; Kumar1999; Murty and Kumar 2000); (b) calculating for the effect of pollution reduction costs on the total productivity and the plant cost function (Gollop and Roberts 1983; Barbara and McConnell 1990; Gray and Shadbegian 1995; Morgenstern et al. 1997); and (c) directly measuring efficiency and computing the changes in inputs and outputs if pollution levels or abatement expenditures were not constrained (Fare et al. 1986, 1989; Boyd and McClelland 1999). Using these measures for calculating performances will show the extent of elasticity between choices of pollution control measures to arrive at optimum levels of output that gives an acceptable level of pollution loaded output; at the same time offering reasonable return t the firm. This is how standards or regulations are set. 7 Conclusions While it is easy to see that apart from regionalization of economic powers it makes sense to have some regulation in place to ensure pollution free products for the population, it is the question whether such regulation poses a barrier for foreign firms in the host country. Conventional wisdom says yes it does and that it is a political maneuver that offers protection to the domestic industry which already follows the country’s norms that have led to the formulation of the regulation in the first place. But a deeper look and a wider perspective reveals that the global state of economic activity the demand is for competitive advantage. Porter M.E., (1996) states that today competitive advantage lies not in doing different things but doing the same thing differently. In following regulations that are actually setting higher standards, the firms are in fact becoming more competitive by improving in their performance. It is therefore concluded that there is little merit in the statement that “With free trade areas evolving around the globe, environmental regulations pose a greater burden on foreign producers than on their domestic competitors”. 8 Bibliography Barbara,A.J and V.D. McConnell, (1990), `The impact of environmental regulations on industry productivity: Direct and indirect effects’, Journal of Environmental Economics and Management 18: 50-65 Boyd, G. A. and J. D. McClelland (1999) The impact of environmental constraints on productivity improvement in integrated paper plants, Journal of Environmental Economics and Management, 3: 121-142 Coggins, J.S. and J.R. 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