International Trade - Essay Example

Together quotas and tariffs are ified as trade protectionism. Tariffs and quotas both help to control the quantity of foreign goods that enters the domestic market by the way of foreign trade. In this way, they also protect the domestic industry from uncertainties of the global economy. Countries tend to regulate and protect the home industry and environment through tariff and quota regimes. Tariffs and quotas may also allow a certain volume of commodities to be imported duty free. Both quotas and tariffs yield monopoly rents, which enable the domestic producers to rate their products higher, thus reaping greater profits (Jackson, 1997:140). Tariffs and quotas allow domestic industry to reap more profits than it would do under free trade. Pertinently tariffs and quotas are fairly transparent, when compared to other forms of trade interventions (Kenen, 2000: 177). However, loss to the economy and society from the protection of tariffs and quotas is higher as the loss to the consumers exceeds the gain of the producer. According to the US Department of Labor, protectionism destroys eight jobs in general economy for every one saved in the protected economy (Miller and Elwood, 1998). Free trade, on the other hand, encourages nations to manufacture only those commodities in which they have specialization thus creating more and better job opportunities. Cross-national trade, thus, makes the rates of goods more competitive and allows goods to be shipped and traded internationally. Tariffs and quotas decrease the choice of goods for the consumers and raise the cost of doing business. Trade protectionism impedes economic growth, and its costs are far higher than its benefits. Apparent similarities apart, there are major conceptual and practical differences between quotas and tariffs. There is a general non-equivalence between tariffs and quotas. Quotas restrict the import of commodities, into the home country, in a given period of time. Through a quota, a country directly decreases the import of goods. It is a protectionist regime employed to benefit a few importers, and producers, of a particular commodity. Quota can also be referred to as the quantitative restriction on the import of goods. Kenen (2000:176) argues that quotas also provide an absolute limitation on the volume of imports. There can be a total ban of import of quantities exceeding the quota or they can be subject to a high duty rate. Transparency in the quota system is far less than that in tariff system. Normally, quotas are allocated without any charges. They are managed through dispensation of licenses for import, which becomes a potential source of corruption. Under rare circumstances, does the government charges fees for the licences. Quotas, apparently intended to benefit the producers, have a negative impact on the entire economy of the importing country. Quite similar is the application of export quotas that restrict the export of commodities from the home country. Countries like the US also ask their trade partners to impose voluntary export restrictions, which are another form of quota system (Kenen, 2000:177). Due to the fact that ‘quotas breed inequities, interfere with efficiency, and lead to corruption, they are prohibited by GATT’ (Kenen, 2000:177). The World Trade Organization, too, is making it increasingly difficult for countries to levy quotas. The WTO guidelines favour the tariff system to the quota system. There is also the provision, in the WTO guidelines of Tariffs Rate Quota (TRQ), which permits the import of a volume of commodity at a reduced rate of custom duty during the quota period. Tariffs are taxes that are meant to restrict trade across political boundaries. They are either imposed to protect the domestic industry or raise revenue for the state. Tariffs are priced-based whereas quota is quantity based regulatory measure. Tariffs provide more equivalent levels of protection than quotas. Tariffs increase the prices of the imported goods, thus decreasing the quantity of the goods that are imported. A domestic producer acts more competitively with a tariff than a quota. The monopoly rents are partly pocketed by the governments in the tariff system (Jackson, 1997:140). Tariffs are considered more beneficial to the world economy, and they help in protection of the domestic consumer better. Tariffs exert control not only over the price of goods, but also control the volumes sold due to the interaction with supply and demand. Generally, tariff is imposed on imports, but in some cases they are also imposed on exports. Tariffs are used both by the developed and the developing countries to protect their home businesses against international competition. It is easier to implement tariffs than quotas. Often, their removal or imposition is politically motivated. If a negative value of tariff is selected it can be used to encourage imports. In other words, it can be also called subsidizing of the imports (Furusawa, Higashida, Ishikawa, 2000:3). When trade levels between two nations balance each other, and tariff levels are the same, a lateral free trade area agreement, a free trade agreement (FTA) is known to exist between the two (Panagrayia and Duttagupta, 2004:5). Corruption is prevalent in both the private and the public sectors. In our context, corruption signifies use of public office for personal gains. Such gains may be immoral or illegitimate. Corruption is also acceptance of bribes by public official for taking or not taking certain decisions. It is abuse of a position of trust to take undue advantage. Corruption is inseparable from protectionism. A manifesto signed by eminent economists talks of protectionism, bringing with it the baggage of unfair advantage given to those who wield powers of ‘jobbery’ and ‘corruption’ (Bhagwati, 1995:31). The system empowers the custom officials to decide on which importer can import the commodity into the country. Quotas bear a direct link to corruption (Campbell, 2005:1-4), rather, they are likely breeding grounds for corruption. Quotas can be unfairly used to give preferential treatment to the companies that grant most favours to the custom officials. Corrupt custom officials can misclassify the goods for want or acceptance of bribe. It has also been noted that a shift from the quota system to tariff system leads to lesser corruption. Trade quotas are less beneficial to the economy than the tariffs. The benefit of tax revenue gain gets distributed amongst a few who are allotted the quota to import. Tariffs yield revenue to the state through the custom duties. When the same product is imported through quota, it leads to loss of revenue. It is difficult to manage quotas equitably as the individuals and companies garnering the maximum quotas, reap greater windfall of profits (Kenen, 2000: 176-177). Naturally, there will be a scamper amongst the importers to garner maximum amount of quota by greasing the palms of the custom officials. The authority handling distribution of quotas can use their power to reap profits for themselves (Kenen, 2000:177). Quotas are difficult to manage in face of constant fluctuations of demand and supply. In case the demand for a particular product being imported under a quota shoots up, it encourages its smuggling into the country. Tariffs were first imposed in the US in 1789 at 5% in wake of the Tariff Act. They were on the higher side in the early nineteenth century, being as high as 60% on the average. By the middle of the century, the tariffs had reduced to 20% on the average. Between 1860-1914, they were again on the upward spiral. Tariffs were cut sharply between 1914 and 1920, only to peak in 1930 (Jackson, 1997: 140). Towards the end of the eighteenth century, they were high enough to protect the domestic industry from the influx of foreign goods (Northrup and Turney, 2003: 357). Subsequent to the World War II, the US has been following a low tariff policy and pursuing the policy multilateralism in trade. The passage of the Tariff and Trade Act in 1984, subsequently led to the formation of the North American Free Trade Agreement (NAFTA). Canada and Mexico provide 40 percent of the entire total imports. These imports are duty-free as a result of NAFTA. Today, the Harmonised Tariff Schedule (HTS) provides the duty rates for goods to be imported. It divides goods, commodities, food items, and natural resources into 10,000 tariff lines. The US Customs Service is responsible for charging tariff on imports. According to the Progressive Policy Institute, the United States earns $20 billion a year from the import tariffs. In 2001, the US imported goods worth $ 1.132 trillion worth of merchandise incurring a tariff of 1.6 percent. The effective tariff in 2001 was 3.4%. On the average, US tariffs are below 2% today. Tariff on shoes and clothes, making up for 6.5% of imports, account for $10 billion in annual tariff revenue Other imports, at 93.3 % accounting for $ 1056.4 billion, generated tariff revenue of $9.9 billion (Gresser, 2002:1-7). It is always advisable to impose tariff system than the quotas. However, demand and supply of the commodities to be imported should be monitored closely to check a sudden increase in the monopoly rents. Quotas should be implemented under license fee arrangement. The license fee should be decided by bidding with the license going to the highest bidder. The custom officials should be routinely changed and transferred so that no individual gets sustained periods of authority to indulge in corruption. Non-tariff barriers (NTB) are a good option, whenever set product standards, and technical regulations are required. NTBs are preferred options under increasing trade liberalization and globalization. When tariff and quota based are being dismantled under the increasing influence of the World Trade Organization guidelines, erection of NTBs provide a viable option wherever there is need to protect the domestic industry or influx of foreign goods. References Bhagwati, J, N. (1995) Protectionism, Cambridge: MIT Press Campbell, N (2005) Tariffs, quotas, and the corrupt purchasing of inappropriate technology, International Journal of Business and Economics, 2005, Vol.4.No.1,1-9, Viewed 30 April, 2004 Duttagupta, R. and Panagariya, A. (2004) Politics of free trade areas: Tariffs versus quotas, [Online], Available http://www.columbia.edu/~ap2231/technical%20papers/jie9.pdf [28April2009] Furusawa, T., Higashida, K., and Ishikawa, J. (2000) Tariffs versus quotas in the presence of imperfect competition and cross-border externalities, [Online], Available http://www2.e.u-tokyo.ac.jp/~seido/output/Ishikawa/035.pdf [ 29April2009] Gresser, E. (2002) America’s hidden tax on the poor, [Online], Available http://economics.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=economics&cdn=education&tm=93&gps=265_640_515_715&f=21&su=p649.3.336.ip_&tt=2&bt=1&bts=0&zu=http%3A//www.ppionline.org/ppi_ci.cfm%3Fcontentid%3D250329%26knlgAreaID%3D108%26subsecid%3D900010 [30April 2009] Jackson, J, H. (1997) The world trading system, Cambridge: MIT Press. Kenen, P, B. (2000) The international economy, Cambridge, Cambridge University Press. Miller, V, H. and Elwood, J, R. (1998) Free trade or protectionism: the case against protectionism, [Online], Available http://www.isil.org/resources/lit/free-trade-protectionism.html [April30,2009] Northrup, C, C., Turney, E, C, P. (2003) Encyclopedia of tariffs and trade in U.S. history, Santa Barbara, Greenwood Publishing Group. Read More