The Economic Significance of National Border Effects - Example

TRADE BARRIERS REPORT INTRODUCTION After the World War II President Harry Truman then the president of the United States of America merged with other likeminded leaders like Winston Churchill to assist the Europe and Asia which lay completely in ruins due to the war. After the World War II the USA and the Soviet Union emerged as the world superpowers. However their corroboration was not to last for a long time since the period of ‘cold war; was to start. In the period following the World War II the two global powers had shown a lot of co-operation, but their conflicting policies took them objectively apart. The Truman Marshall plan of 1947 was the beginning of a bigger global trade between the countries (Goldstein, 2000). International trade is very important and free trade is seen as the best way to promote the flow and availability of goods globally. The background of international trade would be traced to GATT 1947 and the formation of international bodies like International Monetary Fund (IMF) and World Bank. There are numerous trade barriers tariff and non tariff policies imposed by countries to restrict trade (Evans, 2003). The current regime is governed by the General Agreement on Trade and Tariffs (GATT) 1994 which is monitored by an international body called the World Trade Organization (WTO) (Freeman, 2003). The barriers that country may introduce include quotas, tariffs, import quotas and also non-tariff barriers like voluntary export restraints, licences and embargos, standards, import deposits, antidumping policies, domestic content regulation, exchange management policies, sanitary and phytosanitary barriers to trade and enviromentary based restrictions (Francois, 2001). The importance of the eliminating trade and barriers can be illustrated by the number of round table meetings that have been recalled to address the larger issue of international trade. The establishment of the GATT agreement 1994 was in reduction of the trade barriers to promote economic development. The rounds are (Zhihao, 2000); a. Annecy Round of 1949. b. Torquay Round of 1951. c. Geneva Round of 1955-1956. d. Dillon Round of 1960-1962. e. Kennedy Round of 1962-1967. f. Tokyo Round 1973-1979. g. Uruguay Round 1986-1994. h. Doha Round- the current one (Oatley, 2007). 1. Tariffs These are perhaps the oldest means through which various governments continue to impose trade restrictions in their country. Though seen as a major incentive to a country’s source of revenue, it is a great hindrance to free flow of goods. Tariffs are fairly recognised and embraced by the governments because they promote the local industry. A restriction of the goods from the outside translates to better markets of the local industries that get very stiff competition from foreign exporters (Goldstein, 2000). The flipside of the tariff implementation is that they cause the consumers to pay a lot of money. A free flow of the goods from foreign countries would essentially mean that the consumers would receive the same kind of commodities at a fairly cheaper price. Thus restriction and imposition of tariffs by countries lead to a detriment on the consumers who are charged heavily by the monopolies in their country (Zakher, 2001). The Uruguay round of negotiation was the most influential platform as regard the agreement concerning the agricultural products. The goals of the meeting was to agree on how the countries would work together to eliminate barriers in agricultural trade essentially caused by the subsidies in various countries thus allowing greater access of products around the world (Evans, 2003). A Tariff rate Quota integrates the idea of quota and tariffs together. Countries will oftenest a maximum quantity of the products which they need. A lower tariff will be imposed for the agreed quantity of products and a higher tariff is then surcharged for any excess quantity of the products. Quotas set a limit of the products that can be brought into a country. This is very important especially on the agricultural products where the government wishes to shun away from destroying the local industry (Mansfield & Busch, 2002). The Uruguay round which culminated with GATT 1994, resolved that the countries would do away with import quotas and allow the TRQ. This would facilitate a lower tax regime and thus encourage greater flow of products. The members resolved that the rate of tariffs would be reduced and further raise the amount of products to be imported using the low tariffs agreed on. NON-TARIFF TRADE BARRIERS Apart from the tariff regime, countries have many non-tariff barriers. Most countries however oppose the many non-tariff barriers and encourage tariffication which is imposition of tariffs by the countries. They essentially restrict trade but they are not informing of tariffs. Non-tariff barriers (NTBs) are often encouraged where the effect is to protect the natural resources, health and sanitation of the citizens. They include, antidumping measures, import quotas, countervailing duties, licences and embargos, export restrictions, customs delay, export subsidies, technical barriers to trade, standards stipulation and Sanitary and Phyto-sanitary measures (Bermudez, 2004). a. Domestic Content Requirements. This occurs where the government gives specific requirements that a specific percentage should be produced locally. This has the effect of restricting the imports. The major reason that the government is inclined to impose such a percentage is to promote the domestic industries. Most countries impose this kind of percentage inorder to foster agricultural production. Over history Australia has used the concept of domestic content requirements and import substitution to promote the growth of the leafy tobacco (Zhihao, 2000). The manufacturers are required by the government to use a percentage of 57% of the domestically produced tobacco. The domestic content requirement also influences the loyalty of members belonging to a specific trade region, therefore putting a wall to non-members (Bagwell et al, 2004). b. Licences. This is a very important avenue of restricting imports. It is a non tariff barrier that stipulates that a state issues licences and permits to any transactions that involve exports and imports. A country comes up with a list of products which are to be licensed if they are imported or exported. The license can be in form of one time license or a general licence that put blanket restrictions on the included list of products. Definitely the use of licences restricts foreign trade by countries (Anderson, 2003). An example of a country that has used the licensing system is Mexico. The Mexican government put restrictions on any import of agricultural products. Without directly utilizing the quota system it imposed hurdles to trade by requiring that importers of agricultural products especially wheat had to acquire a special license of importation (Roorbach, 2004). c. Involvement of Import State Trading Enterprises (STEs). STEs are government agencies that are fully controlled and monitored by the state. In some countries like the USA the STEs at given the mandate to act as single importers of the commodities. Due to their immense power and influence they affect the market since they will monopolize the markets and supply the imported products. The Japanese Food Agency is great influential STEs in the world market. It involves itself in the import of barley rice and wheat which are not common in the Japanese market. Due to their immense power in the importation of products, this eliminates the presence of competition and directly affects the prices of commodities in the state (Brown et al, 2003). STEs act as NTBs in the sense that they are involved in hidden tariffs. This essentially means since they are governmentally controlled they can influence the import tariffs and quotas. They also manage to chase away any potential importers by virtue of the immense resources and support they get from the government. They generally affect the market in the sense that they can buy the products at world prices and sell them at higher or lower prices in the domestic market thereby reducing competition. This is known as hidden tariff mechanism (Cline, 2004). Secondly there immense powers can influence the value and quantity of the imports. Often their involvement in the export is coupled with legislation of laws that make the import business for any new player or state unprofitable. d. Technical Barriers to Trade Different states influence the trade by the technical rules that are imposed in the way the goods are defined, labeled and packaged. This is a non-tariff barrier that pushes away the developing countries ability to trade since their packaging methods is considered in some cases substandard. An example to illustrate this is the trade of oranges by different countries. If Korea was to have a rule that it could allow oranges of only less than 2 inches in diameter, this would translate to a barrier to a state like California which produces very big oranges. Thus in imposing such a rule technically, the Korean government would essentially be protecting the domestic market and also discouraging an orange trade partnership with a state like California that produces the Navel oranges. This would essentially violate the GATT 1994 that provide that the imports and exports should as far as possible be treated in an equivalent manner (Copland and Taylor, 2003). e. Foreign Rate Policies. Countries would restrict foreign trade by imposing excessive foreign trade rates. The use of exchange rates can encourage or hinder trade. The exchange rates of countries determine the extent to which they can control foreign restriction and trade controls. A depreciation of a currency for example the dollar would make such other currencies like Japanese Yen to influence the market. This has been the common trend especially in the automobile business where Japan has established a stake in the business. There currency rates in some cases have led many countries to shun away from the trade of the commodities (Goldstein, 2000). Developed countries are known of operating multiple exchange rates that cause discrepancies in the free trade of commodities and a great influence on the balance of payments. The countries usually implement policies that ensure importers are charged different rates for the different commodities that they impose. These policies are often geared towards realization of more revenues by the states (Easterly, 2001). f. Sanitary and Phyto-sanitary measures The NTBs is founded on the ground that every country should take precaution on the kind of products that get into the country. If any products is alleged to be marred by toxic substances, can cause environmental degradation, depletion of the natural resources and citizen harm, then countries under the WTO agreement can use this precautionary measure (Corden, 2007). In a world where trade is skeptical and products continue to flood the market that have harmful effects, countries are justified in coming up with standards and cautionary measures to ensure that ozone depletion is not affected, health concerns are well addressed and species extinction are curbed (Evans, 2003). Though countries are justified in taking the precautions against such products, some rigid observance of the rules results in hindrance of trade. Some countries especially in the developing economies have used this leeway, in denying the market of genetically modified foods which are scientifically good food. The government rigidity on precautionary measures, would deny the consumers the opportunity and means of accessing products that would improve their health and economical development. The current WTO regime requires that the country should scientifically prove the viability of its precautionary measures; this is based on the need to restrict the use of unjustified barriers. As a result of such regime many unjustified barriers that have over time been used by the countries have been ultimately relaxed (Freeman, 2003). g. Export Subsidies This results in instances where the government offers some financial support to the domestic industry. This essentially means that the imported products will be higher in value than the local products produced locally. Governments have continued to defy the Uruguay round of negotiation by providing subsidies in the automobile and agricultural industry (Goldstein, 2000). As a result of such kind of subsidies the domestic consumers tend to buy the locally produced goods which are cheaper and evade the imported products (Francois, 2001). Consequently availability of subsidies would propel the domestic manufacturers in getting a share in the export market. Due to the assistance given in the production of the commodities this translates to cheaper products in the international market. Thus a non-competitive market is encouraged by use of subsidies and thus hinders international trade. The WTO has come up with a subsidy ceiling program, by which the countries are given the maximum limit through which they should put a subsidy, beyond which the subsidy becomes illegal (Hillman, 2003). h. Countervailing Duties. These are measures put in force to address the issue of dumping. Dumping in the international trade means that a country would sell a product in another country at a price that is below its selling costs. Manufacturers often conduct dumping inorder to wipe away a technology. Government can impose anti dumping duties which are countervailing to protect domestic industry (Oatley, 2007). i. Bureaucratic Delays. If the custom department administers delays of products, it becomes NTBs to products. WHY GOVERNMENTS INTERVENE TO RESTRICT TRADE. POLITICAL: The government is pushed to restrict international trade and impose tariffs and NTBs because first, they wish to protect their domestic infant industry. This is very common among the developing economies that continue to get stiff competition from the developed economies. The case of Australian Automobile industry is a good illustration of how the government intervenes to protect the industry (Anderson, 2003). Secondly the government would wish to protect the jobs of its citizens. By imposing tariffs and NTBs it barricades the foreign labour export and in so doing the government products numerous jobs of the domestic industry. Thirdly the government would impose restrictions inorder to boost its national security. An example is the trends taken by the South Africa and Israel who imposed embargoes on foreign arms. This ensured that the domestic arms manufacture was promoted and thus increasing the level of the national security (Goldstein, 2000). Fourthly a government would impose restrictions for selfish political motives; this is often a retaliation measure by most developed economies. In case a country has been a victim of unfair trade practices, it may retaliate back by imposing restrictions on its foreign trade partnership. Fifth the government would impose restrictions inorder to promote the welfare of the consumers. As noted in the sanitary and Phyto-sanitary measures, the state would impose NTBs to protect consumers from toxic substances and products that would lead to environmental depletion and depletion of natural resources. Sixth the restrictions would be imposed in an endeavour to protect the human rights of the citizens. The citizens have a right to good health and if this is threatened by foreign trade then the country would impose restrictions (Brown et al, 2003). Economic Reasons: First a country would push the argument that it needs to protect the domestic infant industries. Countries argue that their upcoming industries need to be protected from the stiff competitions of the multinational that enjoy economies of scale. This was the argument extended by the Australian government when it imposed restrictions to protect the Australian automobile Industry which was facing stiff competition from global automobiles. The problem with this is establishing the time this countries cease to have the infant industries. Secondly a country would argue that it’s imposing restrictions to protect a strategic trade policy. The government would wish to enhance the industry by boosting subsidies to encourage economies of scale. The major challenge with such a view is that it would be a gamble and in some instances the state would incur heavy costs and result in the inefficiency of the industry. Cultural Reason: The main reason why the government would impose restriction is to protect its national identity. Most developed economies would wish to continue being held in high esteem by the rest of the world. Thus they would ensure a free foreign trade zone through which they promote the production of products (Cline, 2004). An example is US which is known for higher production of wheat and maize. It would thus impose restrictions inorder to continue being known of its production prowess. It would thus adopt NTB like subsidies to restrict foreign trade in wheat and maize. References Anderson, K. (2003). ‘Measuring Effects of Trade Policy Distortions: How Far Have We Come?’ The World Economy 26(4): 413-40, April. Bagwell, K. and R.W. Staiger. (2004). ‘Subsidy Agreements’, NBER Working Paper 10292, Cambridge : MA. Bermudez, E. (2004). Sustainability Assessments of Trade Policies and Programmes. Gland: WWF International. Brown, D., A.V. Deardorff and R.M. Stern. (2003)., ‘Multilateral, Regional and Bilateral Trade- Policy Options for the United States and Japan’, The World Economy 26(6): 803-28. Cline, W.R. (2004a). Trade Policy and Global Poverty, Washington DC: Center for Global Development. Copland, B. and M.S. Taylor (2003). Trade and the Environment: Theory and Evidence, Princeton NJ: Princeton University Press. Corden, W.M. (2007). Trade Policy and Economic Welfare (second edition), Oxford: Clarendon Press. Easterly, W. (2001). The Elusive Quest for Growth, Cambridge MA: MIT Press. Evans, C. (2003). ‘The Economic Significance of National Border Effects’, American Economic Review 93(4): 1291-1312. Francois, J.F. (2001). The Next WTO Round: North-South Stakes in New Market Access Negotiations, Adelaide: Centre for International Economic Studies and Rotterdam: Tinbergen Institute. Freeman, R.B. (2003). ‘Trade Wars: The Exaggerated Impact of Trade in Economic Debate’, Research Paper 2003/42. Frieden, J., Lake, D.( 2005). International political economy: perspectives on global power and wealth, London: Routledge. Goldstein, J. (2000). ‘International Institutions and Domestic Politics: GATT, WTO, and the Liberalization of International Trade’, University of Chicago Press. Hillman, A.L. (2003). The Political Economy of Protection, New York: Harwood Academic. Mansfield, E., Busch, M. (2002). The political economy of Non-tariff barriers: a cross national analysis; International Organization, Vol. 49, No. 4. Oatley, T., (2007). International political economy: interests and institutions in the global economy; Harlow: Longman. Roorbach, G.(2004). Tariffs and Trade Barriers in Relation to International Trade; Proceedings of the Academy of Political Science, Vol. 15, No 2. Yu, Zhihao.(2000). A model of Substitution of Non-Tariff Barriers for Tariffs; The Canadian Journal of Economics, Vol. 33, No. 4. Zakher M.(2001). The GATT and the regulation of Trade Barriers: Regime Dynamic and Functions; International Organization, Vol. 35, No. 4. Read More