CHAPTER 6 MECHANICS OF PROTECTIONISM

Transcription

1 1 of :40 CHAPTER 6 MECHANICS OF PROTECTIONISM Protection stands for restrictions imposed on the import of foreign goods. The theoretical and logical arguments for free trade have equal validity in all countries; yet the international trader must face the reality that he lives in a world of tariffs, quotas and non-tariff barriers. All these governmentally imposed barriers are imposed through the political pressures of business for protection of their markets. Thus one can see that the arguments of classical economists based on assumptions of full employment, economic growth, etc., will not yield the benefits of free trade as implied in the theories. The arguments in favour of barriers or protective tariffs are many. But all arguments can be essentially classified as below: i) Protection of Infant Domestic Industry ii) Protection of Home market iii) Need to keep Money at Home iv) Conservation of Natural Resources v) Reduction of Unemployment vi) National Defence vii) Retaliation and Bargaining The preference as to free trade or protection depends on the circumstances prevailing in a country. An economy with strong cost advantage in manufactured goods or having capacity to manufacture more goods, enjoying high standard of living will prefer free trade. Similarly a country with a monopoly will also prefer free trade. But restrictions on trade may be necessary for developing countries to encourage its industrial production and also to increase employment and economic activity. In an economy depending primarily on agriculture, protection also helps in diversification of its production activities. Arguments against protection are that it prevents trade, prevents better productivity, results in higher price, leads to competitive protection and wars, etc. Protection is essential for countries that are in the process of development and this fact has been recognised universally. As a result, a number of international institutions have been established for the help of developing and undeveloped economies. TRADE BARRIERS Trade barriers may be (i) Tariff Barriers and (ii) Non Tariff Barriers or protective barriers. i) TARIFF BARRIERS : Tariff barriers have been one of the classical methods of regulating international trade. Tariffs may be referred to as taxes on the imports. It aims at restricting the inward flow of goods from other countries to protect the country's own industries by making the goods costlier in that country. Sometimes the duty on a product becomes so steep that it is not worthwhile importing it. In addition, the duty so imposed also provides a substantial source of revenue to the importing country. In India, Customs duty forms a significant part of the total revenue, and therefore, is an important element in the budget. Some countries use this method of imposing tariffs and Customs duties to balance its balance of trade. A nation may also use this method to influence the political and economic policies of other countries. It may impose tariffs on certain imports from a particular country as a protest against tariffs imposed by that country on its goods. Tariffs may be classified according to (a) the purpose (b) how they are levied. As far as the purpose of taxes are concerned tariffs may again be classified as Revenue Tariffs and Protective Tariffs.

2 2 of :40 Revenue Tariffs are basically intended to raise the Government's revenue. It does not intend to protect any industry of the country. It is levied at a very low rate and does not obstruct the free flow of trade. Protective Tariffs on the other hand aim at protecting the domestic industries and are generally levied at a very high rate and therefore, obstruct the free flow of imports. Its purpose is hence not to provide revenue to the Government but to safeguard the domestic industries. On the basis of how tariffs are computed, they may be put into two categories as: Specific Duties, imposed on the basis of per unit of any identifiable characteristic of merchandise such as per unit volume, weight, length, etc. The duty schedules so specified must specify the rate of duty as well as the determining factor such as weight, number, etc. and basis of arriving at the determining factor such as gross weight, net weight or tare weight. Ad valorem Tariffs are based on the value of imports and are charged in the form of specified percentage of the value of goods. The schedule should specify how the value of imported goods would be arrived at. Most of the countries follow the practice of charging tariffs on the basis of CIF cost or FOB cost mentioned in the invoice. As tariffs are based on the cost, sometimes unethical practices of under invoicing are adopted whereby Customs revenue is affected. In order to eliminate such malpractices, countries adopt a fair value (given in the schedule) or the current domestic value of the goods as the basis of computing the duties. One example is edible oils. India's production from oilseeds cannot meet the demand of refined oil for cooking and other uses, leading us to necessarily import the balance requirements. The major import is crude palm oil from Malaysia / Indonesia. In order to protect the domestic industry, our Govt. revises customs duties upwards whenever the fob ( ex exporting country ) cost or cif ( cost insurance, freight at any Indian port ) cost of crude palm oil goes down, to enable the Indian manufacturer to have a level playing field. In other words, the tariff on raw material, crude palm oil, is adjusted so that there is a level playing field between the indigenous manufacturer ( from crude palm oil ) and the refiner ( from imported palm crude ). ii) NON - TARIFF MEASURES (BARRIERS) To protect the domestic industries against unfair competition and to give them a fair chance of survival various countries are adopting non-tariff measures. Some of these are : Quantity Restrictions, Quotas and Licensing Procedures :- Under quantity restriction, the maximum quantity of different commodities which would be allowed to be imported over a period of time from various countries is fixed in advance. The quota fixed normally depends on the relations of the two countries and the needs of the importing country. Here, the Govt. is in a position to restrict the imports to a desired level. Quotas are very often combined with licensing system to regulate the flow of imports over the quota period as also to allocate them between various importers and supplying countries. Foreign Exchange Restrictions - Exchange control measures are used widely by a number of developing countries to regulate imports. Under this system an importer has to ensure that adequate foreign exchange is available for imports by getting a clearance from the exchange control authorities of the country. Technical Regulations -

3 3 of :40 Another measure to regulate the imports is to impose certain standards of technical production, technical specification, etc. The imported commodity has to meet these specifications. Stringent technical regulations and standards beyond international norms, expensive testing and certification, and complicated marking and packaging requirments. Consular Formalities - A number of countries specify that the shipping documents must accompany the consular documents such as certificate of origin, certified invoices, etc. Sometimes, it is also insisted that the document should be drawn in the language of the importing country. Fees charged for such documentation is also very heavy. Voluntary Export Restraint: The agreement on 'voluntary' export restraint is imposed on teh exporter under the threat of sanctions to limit the export of certain goods in the importing country. Similarly, establishment of minimum import prices should be strictly observed by the exporting firms in contracts with the importers of the country that has set such prices. In case of reduction of export prices below the minimum price level, the importing country imposes anti-dumping duty which could lead to withdrawal from the market. Voluntary export restraints mostly affect trade in textiles, footwear, dairy products, cars, machine tools, etc. A local content requirement is an agreement between the exporting and the importing country that the exporting country will use some amount or, content of resources of the importing country in its process of production. If the exporting country agrees to do that only then the importing country will import their goods. Local Content Requirement:- Embargo:- Embargo is a specific type of quota prohibiting trade. Like quotas, embargoes may be imposed on imports, or exports of particular goods, regardless of destinations, in respect of certain goods supplied to specific countries, or in respect of all goods shipped to certain countries. Although the embargo is usually introduced for political purposes, the consequences, in essence, could be economics. Customs and administrative procedures such as rules of origin, customs classifications, anti-dumping duties, import licensing procedures and others were second major barrier set. SPS measures relating to maximum residue levels, pest/disease free zones, etc, were the third most often citied notifications. Quantitative restrictions, charges on imports and others are there. The purpose of tariff and non-tariff barriers is to regulate the free-flow of imports. With tariffs, the Govt. receives revenue while with non-tariff barriers there is little revenue but protection is given for the domestic industries. Recently, non tariff measures have become more important than tariff regulating the imports in the desired direction, keeping in mind the balance of trade and balance of payment situations. Main Points International Trade involves Tariffs, quotas & Non-tariffs Protection stands for restrictions imposed on imported goods to protect

4 4 of : domestic industry, market & economy bargaining power and reduce unemployment Trade Barriers are of 2 types : Tariff Barriers Non-Tariff Barriers a) Tariffs are taxes levied on imports under terms of GATT Different types of Tariffs: Revenue Tariff - Increases Govt. revenue Protective Tariff - protects domestic industry Counter active Tariff - Similar to anti-dumping Specific Tariff - based on per units/vol./ Length/number of goods Ad valorem Tariff - based on certain percentage Of FOB/CIF value Anti-dumping Tariff - to counter dumping activity STANDARDS Standards are increasingly being used as a protectionist measure to restrict imports. As such, standards related trade barriers are of deep concern for exporting countries like India. While on the one hand, international trade has become more open with reduction in tariff removal of quotas, on the other hand, non tariff barriers (NTBs) in the form of standards, testing, labeling, certification and registration requirements is on a steady rise. Almost all countries use some type of NTBs to protect their domestic industries from rising imports. Standards are necessary as they serve two key purposes of providing compatibility and information. If products are not standardized, especially the electronic products they may be suitable for domestic requirements in the importing country. Further, standards provide useful information on the quality of the product, which is immensely important for food products, as sub-standard quality could prove harmful to human/animal health. Standards related barriers can be of different types product standards, process standards, testing requirements, environmental standards, packaging and labeling requirements, etc. While all these standard act as safety measures, undue use of these measures can act as NTBs. Several industries in India are facing standard related barriers while exporting their product in international markets. Some of the sectors greatly affected by NTBs include agricultural products, marine products, pharmaceutical, processed foods, textiles, leather and chemicals. Two agreements under WTO, viz., Sanitary and Phtyosanitary Measures (SPS) and Technical Barriers on Trade (TBT) encourage member countries to use common international standards, which can reduce the cost of adapting to different national standards for the developing countries. Industries in developed countries are facing tough competition from cheaper imports from developing countries and as such they are increasingly lobbying with their respective governments to impose regulations and standards suited to their interests. Consequently, incidence of standards related NTBs is unlikely to fade off in the near future. As such, there is a need to equip Indian exporters to meet these barriers effectively, without affecting their exports. Steps are needed to build up the capabilities of Indian exporters to meet the international standards. India's systems of inspection, testing and certification need to build up the capabilities of Indian exporters to meet the international standards. India's systems of inspection, testing

5 5 of :40 and certification need to be strengthened further. Steps should be taken to spread greater awareness amongst exporters about various foreign standards and regulations. Difference between Tariff and Non-Tariff Barriers New Tariff Barriers New tariff barriers faced by Indian products in various overseas markets are severely constraining our exports. These barriers may broadly be enumerated as : restrictive import policy regimes (import charges other than customs tariff, quantitative restrictions, import licensing, custom barriers); standards, testing, labelling and certification (including phytosanitary standards), which are set at unrealistic high levels for developing countries are scientifically unjustified; export subsidies (including agricultural export subsidies, preferential export financing schemes, etc.,); barriers on services (visible and invisible barriers restricting movements of service providers, etc,); government procurement regimes; and other barriers including anti-dumping and countervailing measures QRs Quantitative restrictions, especially in the textiles area, are one of the most important

6 6 of :40 of the non-tariff barriers affecting India's trade. The major trading partners of India have not made any industrial adjustment nor have accorded any meaningful access to developing countries like India. The integration programme implemented by the importing countries has not been in line with the spirit of the Agreement on Textiles and Clothing (ATC), though it may have conformed to the narrow technical and legal requirements of the Agreement, in the first stage starting from 1 January 1995, major restraining countries integrated no product under restraint for India; and in the second and third stages, integration of restraint products has been negligible. The result is that even in the tenth year of the transition period, more than 95% of India's apparel and yarn trade would remain un-integrated with some of its major trading partners. Further, the integration schedules have a greater concentration of low value added products. It is, thus obvious that the major importing countries have continued to back load the integration process and the bulk of integration would take place only at the conclusion of the transition period. Non-Tariff Measures In a number of other product sectors of export interest to India, market access has been affected by several non-tariff Measures (NTMs). Qualitative Requirements for Agricultural Products In the agricultural product sector, there are barriers to export of mangoes and other fruit on account of insistence of some of our major trading partners to use only the Vapour Heat Treatment (VHT) procedure. In the floriculture sector, there are certain plant quarantine procedures in some importing countries including zero tolerance for some insects and pests, which affect our market access. The export of Indian milk product is affected on account of certain conditions like proof of absence of TSE/Scrapie in India insisted upon by some trading partners. There is continuing ban on import of Indian meat by some countries even though India has been free from rinderpest for the last three years and the same has been published in the OIE bulletin released from Paris. There are different regulations on use of pesticides and pesticides residues by various importing countries, which has affected market access of Indian products like grapes, egg products, gherkins, honey, meat products, milk products, tea and spices, Non-harmonisation of regulations for approval of exporting units of Indian egg products and non-approval of Indian egg processing establishments by one of our major Trading partner is another market access barrier. NTMs for Leather Products In the leather products sector, Indian exporters face NTMs like chemical and dye content of leather, other standards ( like different shoe size standards, more than appropriate stringent standards for flex testing, tearing strength, colour fastness and flammability testing), packaging and labelling requirements (like insistence on use of recyclable card boxes for packing footwear, at times insistence on reshipping packaging material back to the point of origin), violation of MFN and national treatment (for instance testing, double certification and standards compliance may not be mandatory or as strict for local manufacturers or for some other exporting countries), visa restrictions and other import bans (like ban on use of nickel in footwear, ban on use of colour pigments with additive base). Social Security Unreasonable social security requirement and visa restrictions enforced by some of our major trading partners have affected the growth of our software exports.

7 7 of :40 Safety Norms The requirement of assembly of bicycles according to the security and safety norms of a trading partner in a discriminatory manner and need for a certificate of compliance by an authorised organisation has severely affected market access of Indian bicycles to that country. The illustrative examples of NTM given above indicate the significant financial and time costs, which have adversely impacted on the market access for Indian goods and services. (Source : WTO) Anti - Dumping Anti dumping is a new weapon in the trade war. Anti dumping is one policy which is creating a non tariff barrier, hindering free trade. If a company exports a product at a price lower than the one charged in its home market, it is said to be dumping. If the importing company succeeds, its country will levy an anti dumping duty on the product exported by the Indian Co. to him. This adds to the landed cost of the product and reduces the Indian exporter's competitiveness. Over the last century, GATT ( now WTO) has framed rules and regulations to be followed before an importing member country levies anti dumping duty on imports from another member country. In case of non settlement between the exporting and importing members of WTO, the case is referred to Dispute Settlement Body of WTO at Geneva. The fight is a long drawn out battle and involves legal expertise and enormous collection of data. The exporting industry should get prepared for eventualities of AD quite well in advance and face with the help of our Govt.