The Instruments of Trade Policy, Meaning, Tariff and Non-Tariff Barriers

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Importance of Trade Policy

Understanding trade policy is essential because it:

Protection of Domestic Industries:

Trade policies, like tariffs and quotas, shield local businesses from intense international competition, enabling them to grow and sustain employment levels. 

Revenue Generation:

Tariffs and trade duties provide governments with a significant source of income to fund public services and development projects. 

Balance of Trade:

By controlling the flow of imports and exports, trade policies help manage trade deficits and surpluses, stabilizing the economy. 

Encouragement of Fair Trade Practices:

Policies discourage unfair trade practices such as dumping and excessive subsidies, promoting equitable competition. 

Economic Growth and Stability:

Well-designed trade policies foster economic expansion, attract foreign investment, and integrate nations into the global market. 

Consumer Impact:

They regulate the availability and pricing of goods, ensuring access to quality products while supporting local alternatives.

Also Check: Budget Cost

Tariff Barriers

Tariffs, also known as customs duties, are taxes levied on imported or exported goods. They are one of the most prominent instruments of trade policy. Here are the main types of tariffs:

Specific Tariff

A specific tariff is imposed based on the quantity of goods imported. For instance, a fixed charge per unit of a product, such as $500 per car imported. While straightforward, its protection level can vary with changes in product prices.

Ad Valorem Tariff

An ad valorem tariff is levied as a percentage of the value of the goods. For example, a 10% tariff on goods worth $10,000 would result in a $1,000 tax. This type maintains its protective value regardless of price changes.

Compound Tariff

A combination of specific and ad valorem tariffs, the compound tariff applies both a fixed charge and a percentage of the product’s value.

Tariff Rate Quotas (TRQs)

TRQs combine tariffs and quotas, allowing a certain quantity of goods to be imported at a lower tariff. Once the quota is exceeded, a higher tariff is applied.

Variable Tariff

These adjust to align imported goods’ prices with domestic market prices, ensuring local industries remain competitive.

Non-Tariff Barriers

Non-tariff barriers (NTBs) include regulations, restrictions, and policies that influence international trade without imposing direct tariffs. The following are some key NTBs:

Technical Barriers to Trade (TBT)

Technical barriers include standards for safety, health, and quality. For example, requiring imported toys to meet specific safety certifications.

Import Quotas

Import quotas restrict the quantity of goods that can enter a country within a specified period. This control helps protect domestic markets from saturation.

Price Control Measures

These measures influence the prices of imported goods, ensuring they do not undercut domestic products. For instance, additional taxes to raise the cost of imported items.

Administrative and Licensing Requirements

These include extensive documentation, licensing, and customs procedures that delay or restrict imports, acting as indirect trade barriers.

Embargoes and Sanctions

An embargo is a total ban on trade with specific countries, often due to political or security concerns. For example, trade embargoes on certain nations for violating international norms.

Trade-Related Investment Measures (TRIMs)

TRIMs regulate foreign investment to ensure it aligns with national interests. Key measures include:

Local Content Requirements

Mandating a certain percentage of a product’s components to be sourced locally. For instance, requiring 30% of an automobile’s parts to be domestically produced.

Performance Requirements

These compel foreign investors to meet specific targets, such as export volumes or employment levels.

Export-Related Instruments

While most trade policies focus on imports, export-related instruments also play a significant role. These include:

Export Subsidies

Governments provide financial assistance to domestic exporters to enhance their competitiveness in international markets.

Voluntary Export Restraints (VERs)

Agreements where exporting countries voluntarily limit the quantity of goods exported to a particular market.

Export Taxes

Taxes imposed on certain exported goods to regulate their supply and stabilize domestic prices.

Effects of Trade Policies

The implementation of The Instruments of Trade Policy has far-reaching effects:

1. Economic Growth: Facilitates the growth of domestic industries by protecting them from foreign competition.

2. Consumer Impact: May lead to higher prices for imported goods, impacting consumer choices.

3. Revenue Generation: Tariffs contribute significantly to national revenues.

4. Global Relations: Policies can either strengthen or strain international relations depending on their fairness and implementation.