124890866 Tariff and Non Tariff (1)

7/23/2019 124890866 Tariff and Non Tariff (1)

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CHAPTER 1: INTRODUCTION

This report examines tariff and non-tariff policies that restrict trade between countries in

agricultural commodities. Many of these policies are now subject to important disciplines

under the 1994 GTT agreement that is administered by the !orld Trade "rgani#ation$!T"%. The paper is organi#ed as follows. &irst' tariffs' import (uotas' and tariff rate

(uotas are discussed. Then' a series of non-tariff barriers to trade are examined' including

)oluntary export restraints' technical barriers to trade' domestic content regulations'

import licensing' the operations of import *tate Trading +nterprises $*T+s%' and

exchange rate management policies. &inally' the precautionary principle' an en)ironment-

related rationale for trade restrictions' and sanitary and phytosanitary barriers to trade are

discussed.

1.1 BACKGROUND

Tariffs and Tariff Rate Quotas

Tariffs' which are taxes on imports of commodities into a country or region' are

among the oldest forms of go)ernment inter)ention in economic acti)ity. They are

implemented for two clear economic purposes. &irst' they pro)ide re)enue for the

go)ernment. *econd' they impro)e economic returns to firms and suppliers of resources

to domestic industry that face competition from foreign imports.

Tariffs are widely used to protect domestic producers, incomes from foreign competition.

This protection comes at an economic cost to domestic consumers who pay higher prices

for importcompeting goods' and to the economy as a whole through the inefficient

allocation of resources to the import competing domestic industry. Therefore' since

194' when a)erage tariffs on manufactured goods exceeded / percent in most

de)eloped economies' those economies ha)e sought to reduce tariffs on manufactured

goods through se)eral rounds of negotiations under the General greement on TariffsTrade $GTT%. "nly in the most recent 0ruguay ound of negotiations were trade and

tariff restrictions in agriculture addressed. 2n the past' and e)en under GTT' tariffs

le)ied on some agricultural commodities by some countries ha)e been )ery large. !hen

coupled with other barriers to trade they ha)e often constituted formidable barriers to

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mar3et access from foreign producers. 2n fact' tariffs that are set high enough can bloc3

all trade and act just li3e import bans.

tariff-rate (uota $T% combines the idea of a tariff with that of a (uota. The typical

T will set a low tariff for imports of a fixed (uantity and a higher tariff for any

imports that exceed that initial (uantity. 2n a legal sense and at the !T"' countries are

allowed to combine the use of two tariffs in the form of a T' e)en when they ha)e

agreed not to use strict import (uotas. 2n the 0nited *tates' important T schedules are

set for beef' sugar' peanuts' and many dairy products. 2n each case' the initial tariff rate is

(uite low' but the o)er-(uota tariff is prohibiti)e or close to prohibiti)e for most normal

trade. +xplicit import (uotas used to be (uite common in agricultural trade. They allowed

go)ernments to strictly limit the amount of imports of a commodity and thus to plan on a

particular import (uantity in setting domestic commodity programs. nother common

non-tariff barrier $5T6% was the so-called 7)oluntary export restraint8 $+% under

which exporting countries would agree to limit shipments of a commodity to the

importing country' although often only under threat of some e)en more restricti)e or

onerous acti)ity. 2n some cases' exporters were willing to comply with a + because

they were able to capture economic benefits through higher prices for their exports in the

importing country,s mar3et.

1. I!!UE!

2n the 0ruguay round of the GTT:!T" negotiations' members agreed to drop the use of

import (uotas and other non-tariff barriers in fa)or of tariff-rate (uotas. ;ountries also

agreed to gradually lower each tariff rate and raise the (uantity to which the low tariff

applied. Thus' o)er time' trade would be taxed at a lower rate and trade flows would

increase.

Gi)en current 0.*. commitments under the !T" on mar3et access' options are limited

for 0.*. policy inno)ations in the


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Non"Tariff Trade Barriers

;ountries use many mechanisms to restrict imports. critical objecti)e of the 0ruguay

ound of GTT negotiations' shared by the 0.*.' was the elimination of non-tariff

barriers to trade in agricultural commodities $including (uotas% and' where necessary' to

replace them with tariffs > a process called tarrification. Tarrification of agricultural

commodities was largely achie)ed and )iewed as a major success of the 1994 GTT

agreement. Thus' if the 0.*. honors its GTT commitments' the utili#ation of new non-

tariff barriers to trade is not really an option for the


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1.& I'PORT (ICEN!E!

2mport licenses ha)e pro)ed to be effecti)e mechanisms for restricting imports. 0nder an

importlicensing scheme' importers of a commodity are re(uired to obtain a license for

each shipment they bring into the country. !ithout explicitly utili#ing a (uota

mechanism' a country can simply restrict imports on any basis it chooses through its

allocation of import licenses. =rior to the implementation of 5&T' for example'

Mexico re(uired that wheat and other agricultural commodity imports be permitted only

under license. +limination of import licenses for agricultural commodities was a critical

objecti)e of the 0ruguay ound of GTT negotiations and thus the use of this

mechanism to protect 0.*. agricultural producers is unli3ely an option for the


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such disclosure is not re(uired because they are (uasi-pri)ate companies. 2n spite of these

difficulties' the challenges pro)ided by *T+s will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the


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ton of 0.*. beef on world mar3ets is E


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therefore re(uires those responsible for an acti)ity or process to establish its harmlessness

and to be liable if damage occurs.

Most recent attempts to in)o3e the principle ha)e cited the use of toxic substances'

exploitation of natural resources' and en)ironmental degradation. ;oncerns about species

extinction' high rates of birth defects' learning deficiencies' cancer' climate change' o#one

depletion' and contamination with toxic chemicals and nuclear materials ha)e also been

used to justify trade and other go)ernment restrictions on the basis of the precautionary

principle. Thus' countries see3ing more open trading regimes ha)e been concerned that

the precautionary principle will simply be used to justify nontariff trade barriers. &or

example' rigid adherence to the precautionary principle could lead to trade embargoes on

products such as genetically modified oil seeds with little or no reliance on scientific

analysis to justify mar3et closure.

*ometimes' restrictions on imports from certain places are fully consistent with

protecting consumers' the en)ironment' or agriculture from harmful diseases or pests that

may accompany the imported product. The !T" *anitary and =hytosanitary $*=*%

pro)isions on technical trade rules specifically recogni#e that all countries feel a

responsibility to secure their borders against the importation of unsafe products. =rior to

1994' howe)er' such barriers were often simply used as excuses to 3eep out a product for

which there was no real e)idence of any problem.

These phony technical barriers were just an excuse to 3eep out competiti)e products. The

current !T" agreement re(uires that whene)er a technical barrier is challenged' a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achie)e its scientific objecti)es. This re(uirement has resulted

in a number of barriers being relaxed around the world.

A


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CHAPTER : NON TARI TRADE BARRIER! AND NE2

PROTECTIONI!' (EARNING OUTCO'E!

.1 ARGU'ENT! OR REE TRADE

The important arguments in fa)our of free trade are as follows

$i% &ree trade leads to the most economic utili#ation of the producti)e resources of the

world because under free trade each country will speciali#e in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparati)e disad)antage.

$2ii% s there will be intense competition under free trade' the inefficient producers are

compelled either to impro)e their efficiency or to (uit.$2)% &ree trade helps to brea3 domestic monopolies and free the consumers from

exploitation.

$)% &ree trade benefits the consumers. 2n different ways. 2t enables them to obtain goods

from the cheapest source. &ree trade also ma3es a)ailable large )arieties of goods.

$)i% &urther' under free trade there is no much scope for corruption which is rampant

under protection.

Cnow 5on tariff Trade 6arriers and =rotectionism

2dentify the fall and rise of protectionism ree Trade 3ersus Prote$tion &ree

trade refers to the trade that is free from all artificial barriers to trade li3e tariffs'

(uantitati)e restrictions' exchange controls' etc. =rotection' on the other hand'

refers to the go)ernment policy of according protection to the domestic industries

from foreign competition. There are a number of arguments for and against both

free trade and protection.

0nder free trade' di)ision of labour occurs on an international scale leading to

greater specialisation' efficiency and economy in production.

. ARGU'ENT! OR PROTECTION

Theoretically spea3ing' free trade has certain )irtues' as we ha)e seen abo)e. 6ut' in

reality' go)ernment are encouraged to resort to some manner of protecti)e measures of


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safeguard the national interest. There are a number of arguments put forward in fa)our of

protection. *ome of these arguments are )ery )alid while some others are not. !e pro)ide

below the gist of the popular arguments for protection.

$i% 2nfant 2ndustry rgument The infant industry argument ad)anced by lexander

Hamilton' &rederic3 Dist and others asserts that a new industry ha)ing a potential

comparati)e ad)antage may noI get started in a country unless it is gi)en temporary

protection against foreign competition. n established industry is normally much more

stronger than an infant one because of the ad)antageous position of the established

industry li3e its longstanding experience' internal and external economies' resource

position' mar3et power' etc. Hence' if the infant is to compete with such a powerful

foreign competitor' it will be a competition between une(uals and this would result in the

ruin of the infant industry. Therefore' if a new industry ha)ing a potential comparati)e

ad)antage is not protected against the competition of an une(ually powerful foreign

industry' it will be denying the country the chance to de)elop the industry for which it has

sufficient potential. The intention is not to gi)e protection for e)er but only for a period to

enable the new industry to o)ercome its teething troubles. The policy of protection has

been well expressed in the following words J5urse the baby' =rotect the child and &ree

the adultJ.

The infant industry argument' howe)er' has not been recei)ed fa)ourably by some

economists. They argue that an infant will always be an infant if it is gi)en protection.

&urther' it is )ery difficult for a go)ernment to identify an industry that deser)es infant

industry protection. JThe infant industry argument. boils down to a case for the remo)al

of obstacles to the growth of the infants. 2t does not demonstrate that a tariff is the most

efficient means of attaining the objecti)e.J

$ii% ?i)ersification rgument 2t is necessary to ha)e a di)ersified industrial structure for

an economy to be strong and reasonably self-sufficient. n economy that depends on a

)ery limited number of industries is subject to many ris3s. depression or recession in

these industries will seriously affect the economy. country relying too much. on foreign

countries runs a number of ris3s. ;hanges in political relations and international

economic conditions may put the country into difficulties. Hence' a di)ersified industrial

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structure is necessary to maintain stability and ac(uire strength. 2t is' therefore' ad)ised to

de)elop a range of industries by according protection to those which re(uire it.

$iii% 2mpro)ing the Terms of Trade 2t is argued that the terms of trade can be impro)ed by

imposing import duty or (uota. 6y imposing tariff the country expects to obtain larger

(uantity of imports for a gi)en amount of exports' or con)ersely' to part with a lesser

(uantity of exports for a gi)en amount ofim-ports. 6ut the terms of trade could be

expected to impro)e only if the foreign supply is inelastic. 2f the foreign supply is )ery

much elastic a tariff or a (uota is unli3ely to impro)e the terms of trade' there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und (uotas.

The )alidity of this argument' is therefore' (uestionable.

$)% nti-?umping =rotection is also resorted to as an anti-dumping measure. ?umping'

certainly' can do harm to the domestic industryK the relief the consumers get will only be

temporary. 2t is possible that after ruining the domestic industry by dumping' the foreign

firms will obtain monopoly powers and exploit the home mar3et. *ometimes' dumping

represents a transmission of the recession abroad to the home country. These factors point

out the need to protect domestic industries against dumping.

$)i% 6argaining 2t is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its . exports. 2t has been

pointed out' howe)er' that the bargaining le)er' instead of being used to gain tariff

concessions from foreign powers' may be employed by others to extract additional

protection from the home go)ernment.

$)ii% +mployment rgument =rotection has been ad)ocated also as a measure to stimulate

domestic economy and expand employment opportunities. estric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries. These' naturally' create more employment opportunities.

This method of employment generation' howe)er' has some problems. &irst' when we

reduce imports from foreign countries employment and income will shrin3 abroad and

this is li3ely to lead to a fall in the demand for our exports. *econdly' the foreign

countries will be tempted to retaliate in order to protect their employment.

$)iii% 5ational ?efense +)en if purely economic factors do not justify such a course of

action' certain industries will ha)e to be de)eloped domestically due to strategic reasons.

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?epending on foreign countries for our defense re(uirements is rather foolish because

factors li3e change in political relations can do serious damage to a countryLs defense

interest. Hence' it is ad)isable to de)elop defense and other industries of strategic

importance by pro)iding protection if they cannot sur)i)e without protection.

$ix% Cey 2ndustry rgument 2t is also argued that a country should de)elop its own 3ey

industries because the de)elopment of other industries and the economy depends a lot on

the output of the 3ey industries. Hence' if we 4/ not ha)e our own source of supply of

3ey inputs' we will be placing oursel)es at the mercy of the foreign suppliers. The 3ey

industries should therefore be gi)en protection if that is necessary for their growth and

sur)i)al. 2mpro)ing 6alance of =ayments This is a )ery common ground for protection.

6y restricting imports' a country may try to impro)e its balance of payments position.

The de)eloping countries' especially' may ha)e the problem of foreign exchange

shortage. Hence' it is necessary to control imports so that the limited foreign exchange

will be a)ailable for importing the necessary items. 2n de)eloping countries' generally'

there is a preference for foreign goods. 0nder such circumstances it is necessary to

control unnecessary imports lest the balance ofi payments position become critical. The

arguments mentioned abo)e ha)e been generally regarded as LseriousL. There are'

howe)er' a number of other arguments also which ha)e been branded as LnonsenseL'

LfallaciousL' Lspecial interestL' etc. ;ommon among them are the following

$xi% The =auper Dabour rgument The essence of this argument is that if in the home

country the wage le)el is substantially high compared to foreign countries' the foreign

producers will dominate the home mar3et because the cheap labour will allow them to

sell goods cheaper than the domestic goods and this will affect the interests of the

domestic labour. This argument does not recogni#e the fact that high wages are usually

associated with high producti)ity. &urther' labour cost differences may not be a

determining factor.

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$x% Ceeping Money at Home This argument is well expressed in the form of a remar3

falsely attributed to braham Dincoln J2 do not 3now much about the tariff' but 2 3now

this much !hen we buy manufactured goods abroad we get the goods and the foreigner

gets money. !hen we buy the manufactured goods at home we get both the goods and

the moneyJ. s 6e)eridge rightly reacted' this J...argument has no meritsK the only

sensible words in it are the firsteight word.J The fact that imports are ultimately paid for

by exports clearly shows that the L3eeping money at homeL argument for protection has no

sense in it.

$xii% *i#e of the Home Mar3et 2t is argued that protection will enlarge the mar3et for

agricultural products because agriculture deri)es large benefits not only directly from the

protecti)e duties le)ied on competiti)e farn1 products of foreign origin but also'

indirectly from the increase in the purchasing power of the wor3ers employed in

industries similarly protected. 2t may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection.

$xiii% +(ualisation of ;osts of =roduction *ome protectionists ha)e ad)ocated import

duties to e(ualise the costs of production between foreign and domestic producers and to

neutralise any ad)antage the foreigner may ha)e o)er the domestic producers in terms of

lower taxes' cheaper labour' or other costs. JThis argument allegedly implies a spirit of

Lfair competitionL' not the exclusion of imports. !hen' howe)er' by reason of actual cost

structure or artificial measures' costs of production become identical' the )ery basis of

international trade disappears. The logical conse(uence of this pseudo-scientific method

is the elimination of trade between nations. Thus' the e(ualisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful e)er

ad)anced in support of protection.

$xi)% *trategic Trade =olicy *trategic trade policy which ad)ocates protection and

go)ernment cooperation to certain high-tech industries in the de)eloped countries is

somewhat similar to the infant industry argument applied to the de)eloping countries.

The argument is that go)ernment support should be ac-corded to gain comparati)e

ad)antage in the high technology industries which are crucial to the future of the nation

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such as semiconductors' computers' telecommunications' etc. 2t is also argued that *tate

support to certain industries become essential to pre)ent mar3et monopolisation. &or

example' outside the former *o)iet 0nion' only three firms build large passenger jets. 2f

+uropean go)ernments do not subsidise the irbus 2ndustries' only the two merican

companies' 6oeing ;ompany and Mc-?onnell-?ouglas ;orporation' will remain.

The oft cited examples of industries de)eloped with the support of the strategic trade

policy include the steel industry in Bapan in the 19@/s' semiconductors in the 19A/s Ind

19/s' and the de)elopment of the supersonic aircraft' ;oncorde' in +urope in the 19A/s

and the de)elopment of the irbus aircraft in the 19/s.

s *al)atore obser)es' while strategic trade policy can theoretically impro)e the mar3et

outcome in oligopolistic mar3ets subject to extensi)e economies and increase the nationLs

growth and welfare' e)en the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out. The following difficultes are pointed out: in

particular. &irst' it is extremely difficult to choose the wimiers $i.e. choose the industries

that will pro)ide large externaly economies in the future% and de)ise appropriate policies

to successfully nlrture them. *econdly' since most leading nations underta3e strategic

trade policies at the same time' their efforts are largely neutralised so that the potential

benefits to each may be small. Thirdly' when a country does achie)e substantial success

with strategic trade policy' this comes at the expense of other countries $i.e.' it is a

Lbeggar-thy-neighbourL policy% and so' other countries are li3ely to retaliate.

The following defects are generally attributed to protection

$i% =rotection is against the interest of consumers as it increases price and reduces )ariety

and choice.

$ii% =rotection ma3es producers and sellers less (uality conscious.

$iii% 2t encourages domestic monopolies.

$i)% +)en inefficient firms may feel secure under protection and it discouragesL

inno)ation.

$)% =rotection lea)es the arena open to corruption.

$)i% 2t reduces the )olume of foreign trade.

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.& A(( AND RI!E O PROTECTIONI!'

The period of o)er two-and-a-half decades until the early 19A/s witnessed rapid

expansion of the world output and trade. !orld trade' in fact' grew much faster than the

output. fter the *econd !orld !ar' there was a progressi)e trade liberalisation until the

early se)enties. Than3s to the efforts of GTT' the Jtariff reductions in the industrial

countries continued e)en after this. The a)erage le)els of tariff on manufactures in

industrial countries is now about per cent compared to 4/ per cent in 194A.

.+ DE'ERIT! O PROTECTION

$)ii% =rotection leads to uneconomic utilisation of worldLs resources' lthough the period

until the early 19A/s was characterised by trade liberalisation in general' there were

se)eral exceptions. 2n the de)eloped countries' hea)y protection was gi)en to the

agricultural sector through import restrictions and domestic subsidies. &urther' in

manufactured goods' textiles and clothe ing were subject to hea)y protection. There was

also protection associated with regional trade agreements li3e the ++;. 2mports to

de)eloping countries were in general highly restricti)e due to reasons such as balance of

payments problems and the need to protect infant industries. 2n the industrial countries'

anti dumping and counter)eiling duties began to assume more importance since the mid-

sixties. The o)erall trend in the industrial countries' howe)er' was one of liberalisation.

This trend was re)ersed in the se)enties.

*ince about the mid-se)enties' protectionism has grown alanllingly in the de)eloped

countries. This has ta3en mainly the fonn of non-tariff barriers $5T6s%.

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Bapan and de)eloping countries li3e' for example'

the *outh-+ast sian countries. ?ue to the fact that the competition has been )ery se)ere

in the case of labour intensi)e products' the import competing industries in the ad)anced

countries ha)e been facing the threat of large retrenchments. *e)eral other industries' li3e

the automobile industry in the 0*' ha)e also been facing similar problems. The demand

for protection has' therefore' grown in the industrial countries in order to protect

employment. =rotecti)e measures ha)e also been employed to pressurise Bapan and the

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de)eloping countries to open up their mar3ets for goods' ser)ices and in)estments of the

industrial countries.

s mentioned earlier' the 5T6s affect the exports of de)eloping countries much more

than those of the de)eloped ones. 2n other words' the main target of the de)eloped

country import restrictions in the last two decades' or so' has been the de)eloping

countries. 6y 19A' 5T6s were estimated to ha)e affected almost a third of "+;?

imports from de)eloping countries.4 !hile de)eloping countries as a group now face

tariffs .1/ per cent higher than the global a)erage' the least de)eloped countries face

tariffs / per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries' such as textiles' leather and agricultural commodities.

Dabour intensi)e products li3e textiles' clothing and footwear are among the most highly

protected imports. The restriction on the textiles and clothing' which account for nearly

one-fourth of the de)eloping country exports' has beenL exercised mainly by the Multi-

&ibre rrangement $M&% which denies the de)eloping countries an estimated E


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s the industrial countries face more competition' they increase protectionism. This

encourages one to thin3 that they wanted free trade only as long as they enjoyed a

dominant positionK when their dominance is challenged they increase the trade barriers

gi)ing one or another reason. "ne should not be surprised if tomorrow they restrict the

imports from de)eloping countries arguing that the cost ad)antage of the de)eloping

countries is because of the LinjusticeL done to the labour by paying wages lower than that

in the 0* or other industrial countriesN 2ronically' industrial countries are increasing trade

restrictions while the de)eloping countries are liberalising trade.

Trade restrictions pro)e costly not only for the affected exporting country but also for the

importing country restricting the trade. The consumers often pay a hea)y price for

protection. 2t is estimated that o)erall the merican consumers pay as much as E A@billion a year more for goods on account of import fees and restrictions-a sum roughly

e(ui)alent to about a sixth of the 0* import bill. 2n ;anada e)ery dollar earned by

wor3ers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated E A/. 2n the 0nited *tates' consumers paid E

1'14'/// a year for each job sa)ed in thc steel industry.

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CHAPTER &: DOHA ROUND O NEGOTIATION!

The ?oha ?e)elopment genda $??% of the !orld Trade "rganisation $!T"% was

launched in


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&.1 CII AND THE DOHA ROUND

;22 supports the negotiations for liberali#ing trade under the ?? and urges negotiators

to complete the ound at the earliest. The ?? is a ?e)elopment ound. ;22 endorses

the )iew that success and ambition in the ?oha ound will be measured by real mar3et

access pro)ided to de)eloping and least de)eloped countries by the ad)anced countries.

5egotiators will ha)e to ta3e care that the main pillars of the ?e)elopment ound namely

7*pecial and ?ifferential Treatment8 and 7Dess than &ull eciprocity8 a)ailable to

de)eloping countries are fully reflected in the modalities in all the pillars of the ??..

&. NON"AGRICU(TURA( 'ARKET ACCE!! 4NA'A5

educing tariffs and non-tariff barriers $5T6s% on industrial goods was at the core of

multilateral trade negotiations under the GTT' and remains central to the objecti)es

agreed in ?oha. The ?? focuses on two main issues under 5M negotiations.

1. Tariff reduction commitments


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*ince the Hong Cong Ministerial meeting in ?ecember


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tariffs and should be subjected to lower percentage cuts in tariffs when compared to

de)eloped country members.

;22 is of the )iew that de)eloping country members should ha)e the flexibility of

3eeping at least fi)e to se)en per cent of their sensiti)e tariff lines unbound.

;22 supports ha)ing a coefficient in the *wiss formula for cutting industrial tariffs'

which respects the 7less than full reciprocity8 principle in ?oha ?e)elopment genda for

de)eloping countries. ;22 is of the )iew that there should be a


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This is one area of negotiations that has not witnessed progress despite se)eral reminders

and statements by ministers and senior negotiating officials.

?uring the negotiations it has been decided that

=rogressi)e liberalisation will be achie)ed through negotiation with appropriate

flexibility for members.

There will be plurilateral re(uests in addition to the bilateral re(uest-offer approach.

Groups of Members presenting plurilateral re(uests to other Members should submit

such re(uests by


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&.+ AGRICU(TURE

griculture is the main dri)er of the negotiations under the ??. These negotiations

assume tremendous importance since it in)ol)es the two critical issues for de)elopment >

food security and li)elihood concerns in de)eloping and least de)eloped countries.

The ?? focuses on three important areas for liberali#ing trade in agriculture goods and

commodities across the globe.

Tariff reductions

*ubstantial reductions in domestic support

+limination of exports subsidy

CII Position

;22 calls for elimination of all distortions in trade in agricultural goods and

commodities

;22 urges de)eloped country members to remo)e all high tariffs in agricultural

products

;22 will li3e to see substantial reduction in all domestic support $regardless of box

classification% pro)ided by de)eloped country members by


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&., TRADE ACI(ITATION

The Trade &acilitation greement is the only *ingapore issue that has sur)i)ed in the

?oha ound. 2n the !T" agreement of Buly


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CHAPTER +: TARI AND NON"TARI BARRIER! BENEIT

DE3E(OPING COUNTRIE! " NE2 !TUD6

There is considerable e)idence for the hypothesis that under certain conditions'

restrictions on trade can promote growth' especially of de)eloping countries' according to

a study published in the Bournal of ?e)elopment +conomics.

The study by Halit Rani33aya' an academic at the ;ollege of 6usiness and dministrati)e

*er)ices' ;elal 6ayar 0ni)ersity $Tur3ey%' has examined the growth effects on 1/

economies of a large number of measures of trade openness' using the same yardstic3s or

measures of openness and o)er the same periods' and applying econometric models and

regressions. The study has used two broad categories measures of trade )olumes and

measures of trade restrictions and measures their effects on growth in the 1/ economies.

The study and the results of the data analysed challenges what the author calls 7the

unconditional optimism in fa)our of trade openness among the economic profession and

policy circles.8

2t finds that on the basis of trade )olumes' there is a positi)e and significant association

between trade openness and growth.

ccording to the con)entional )iew and studies on the growth and trade restrictions' trade

restrictions ha)e an 7ad)erse association between trade barriers and growth.8

The study finds a contrary e)idence and says 7our estimation results from most

specifications $of tariff and trade barriers% show a positi)e and significant relationship

between trade barriers and growth8.

7+(ually important'8 the study adds' 7these results are essentially dri)en by de)eloping

countries' and thus consistent with the predictions of the theoretical growth literature that

certain conditions' de)eloping countries can actually benefit from trade restrictions.8


25/33

*e)eral empirical studies of the O/s and O9/s pro)ided an affirmati)e answer for the

)iew that 7open economies8 grew faster than closed ones' and that 7outward-oriented8

economies ha)e consistently higher growth rates than 7inward-oriented8 ones. These led

to a strong bias in fa)our of trade liberalisation and under-pinned the !orld 6an3:2M&

policy conditionalities and ad)ice to de)eloping countries and the !ashington ;onsensus

of the 199/s.

Rani33aya says that this strong bias in fa)our of trade liberali#ation was partly due to the

tragic failures of the import substitution strategies especially in the 19/s' and the

o)erstated expectations from trade liberali#ation. The !orld 6an3- sponsored studies' by

?ollar and others' said they had found positi)e correlations between open economies and

faster growth across countries.

The first major challenge from academia came from ?ani odri3' and followed by a

cross-country empirical analysis' using the same measures of Oopenness, across a range of

countries' which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardstic3s for countries and o)er

different time-periods 6ut when the same yardstic3s were used and o)er the same time-

periods' the results showed that fast growth had ta3en place in some of the countries with

higher trade restrictions $2ndia and ;hina%' but which had adopted a measured approach

to trade liberali#ation $after creating capacity domestically' and calibrating liberali#ation

measures%.

*ince then a number of studies ha)e come out challenging the )iew that liberali#ation of

trade and in)estments is always a plus and there is growth in the long-run. These studies

ha)e brought out that openness to external trade and trade liberali#ation are two different

concepts' and that the latter promoted growth $and brought in foreign direct in)estment

and associated technology% only under certain conditions' and when the host-country

*tate played an acti)e role.

The Rani33aya study notes that while there is a near consensus about the positi)e

correlation between trade flows and growth' the theoretical growth literature $which


26/33

studied growth effects of trade restrictions% came to the )iew that the effects were )ery

complicated in the most general case' and mixed in how trade policies play a special role

in economic growth.

This' the author attributes to the way Oopenness, is described )ery differently in )arious

studies' ma3ing classification of countries on basis of Oopenness, a formidable tas3.

Hence' using different measures of openness produces differing results.

The Rani33aya study loo3s at the growth effects on a large number of measures of trade

openness. Two broad measures of trade openness are used and studied one is on effect of

)arious measures on trade )olumes' which indicate a positi)e and significant association

between openness and growth' and is in line with conclusions of empirical and theoretical

growth literature.

Howe)er' the estimation results for )arious measures for trade barriers' contradicts the

con)entional )iew on the growth effects of restrictions' and suggests 7an ad)erse

association between trade barriers and growth. The estimation results from most

measures of trade restrictions show a positi)e relationship between trade barriers and

growth' a result dri)en by de)eloping countries.

These results are consistent with the predictions of theoretical growth literature' namely'

that under certain conditions' de)eloping countries can actually benefit from trade

restrictions.

2n a sur)ey of the literature' the study finds that international trade theory $based on static

trade gains% pro)ides little guidance to the effects of international trade on growth and

technical progress' the new trade theory argues that gains from trade can arise from

se)eral fundamental sources differences in comparati)e ad)antage and economy-wide

increasing returns.

!hile there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 19/s and the export-promotion policies - there

is a lac3 of clear definition of Otrade liberali#ation, or Oopenness,.


27/33

The most difficult has been measuring Oopenness,. n ideal one would be an index that

includes all trade barriers distorting international trade' such as a)erage tariff rates and

indices of non-trade barriers. *uch an index' incorporating effects of both tariff and non-

tariff measures has been de)eloped by B.+.nderson and B.=.5eary. 6ut it is not a)ailable

for a large number of economies. "ther studies' li3e those by ?ollar and' *achs and

!arner used a)ailable data.

2f the growth engine is dri)en by inno)ation and introduction of new products' then

de)eloping countries should benefit more by trading with de)eloped countries than with

other de)eloping countries. Howe)er' the Rani33aya study results do not support this'

both pro)iding growth regressions positi)ely and significantly.

The study finds that a de)eloping country benefits through technology diffusion by

trading with a de)eloped country' and since the 0* is the leader in technology'

de)eloping countries benefit through this bilateral trade. lso' countries with higher

population densities tend to grow faster than those with lower densities.

2n using measures of trade restrictions - se)eral of whom it ac3nowledges are not free

from measurement errors - the study reaches some )ery different conclusions than

con)entional trade theory suggests. Thus' it finds that trade barriers in the form of tariffscan actually be beneficial for economic growth.

2n the current context $of the ?oha ound and the dri)e of +urope and the 0* to tear

down and harmonise de)eloping country tariffs%' this is a significant and telling result'

pro)iding support for the )iewpoint of de)eloping countries in these tal3s. The

framewor3 for modalities for tariff liberalisation in industrial products in the 5M

negotiations put forward by the chairman $and !T" secretariat% is misguided and needs

to be opposed and jettisoned. !hen export taxes and total taxes on international trade are

used as a measure of trade restrictions' the study finds that sa)e for fixed effect estimates'

there is a 7significant and positi)e association8 between trade barriers and growth. This is

similar to the results for a)erage tariffs.


28/33

"n non-tariff barriers' there are difficulties of estimation because of data limitationsK

hence these are excluded in most empirical studies. 6ut studies by B.+dwards $cited in the

Rani33aya study% found such restrictions ha)ing an insignificant relationship with

growth' and came to the )iew that 5T6s are poor indicators of trade orientation' since a

broad co)erage of 5T6s did not necessarily mean a higher distortion le)el.

0sing se)eral new measures of trade openness and restrictions now a)ailable' and

applying them on a framewor3 model explained in details $but needs econometric

3nowledge for the lay trade person to test and see%' the Rani33aya study' says that there is

7considerable e)idence for the hypothesis that trade restrictions can promote growth'

especially in de)eloping countries' under certain conditions.8 The study ma3es clear that

it has no intention of establishing a simple and straightforward positi)e associationbetween trade barriers and growth' but rather to show that 7there is no such relationship

between trade restrictions and growth.8 *uch a relationship depends mostly on the

characteristics of a country. estrictions can benefit a country depending on whether it is

de)eloped or de)eloping $a de)eloped one seems to lose%' whether it is a big or small

country' and whether it has comparati)e ad)antage in sectors recei)ing protection


29/33

CHAPTER ,: CA!E !TUD6

NON"TARI BARRIER! !TU'P PHAR'A E-PORT! TO CHINA:

ICCI

2ndia,s exports of pharmaceuticals could ma3e a significant dent in the ;hinese mar3et

and help meet o)erall trade expectations of 0*E / billion by


30/33

The 5on-Tariff 6arriers identified by &2;;2 in pushing pharma exports to ;hina include

=rocedures for product and company registration and for procuring 2mport ?rug

Dicense are expensi)e and time consuming. ")er and abo)e the official cost of

0* A/// per product' they can cost anywhere between 0*E


31/33

clouds insight into the ;hinese mar3et and hampers mar3eting strategies of 2ndian

pharma companies in ;hina.

2n all of the abo)e' language is a major barrier to trade. There are )ery few

;hinese-spea3ing people in 2ndia that can be resourced as interpreters. lthough

the number of ;hinese who are learning +nglish is growing' communication

remains a major impediment to trade.

!hile ;hina has consistently complained about anti-dumping cases in 2ndia. 2ndia has

responded by deli)ering on its words and this is no longer a bone of contention between

the two nations. 2t is for the ;hinese now to set the ground rules right and ensure that all

non-tariff barriers are remo)ed. t the same time' ;hina needs to ensure that the (uality

standards are maintained in pharmaceutical products. 2ndia has the largest number of0*&? appro)ed plants outside the 0*. There more than A@ plants which are also !H"

GM= $Good Manufacturing =ractices% certified and could easily cater to the demand for

high (uality pharma products.

1


32/33

CONC(U!ION

!hen export taxes and total taxes on international trade are used as a measure of

trade restrictions' the study finds that sa)e for fixed effect estimates' there is a

7significant and positi)e association8 between trade barriers and growth. This is similar

to the results for a)erage tariffs. "n non-tariff barriers' there are difficulties of estimation

because of data limitationsK hence these are excluded in most empirical studies. *uch

restrictions ha)ing an insignificant relationship with growth' and came to the )iew that

5T6s are poor indicators of trade orientation' since a broad co)erage of 5T6s did not

necessarily mean a higher distortion le)el.

0sing se)eral new measures of trade openness and restrictions now a)ailable' andapplying them on a framewor3 model explained in details $but needs econometric

3nowledge for the lay trade person to test and see%' the Rani33aya study' says that there is

7considerable e)idence for the hypothesis that trade restrictions can promote growth'

especially in de)eloping countries' under certain conditions.8

The study ma3es clear that it has no intention of establishing a simple and

straightforward positi)e association between trade barriers and growth' but rather to show

that 7there is no such relationship between trade restrictions and growth.8

*uch a relationship depends mostly on the characteristics of a country.

estrictions can benefit a country depending on whether it is de)eloped or de)eloping $a

de)eloped one seems to lose%' whether it is a big or small country' and whether it has

comparati)e ad)antage in sectors recei)ing protection.


33/33

BIB(IOGRAPH6

BOOK! AND 7OURNA(!

Carbaugh, Robert J. International Economics, South-Western, 1995.

Cross, Fran !. "ara#o$ical "erils o% the "recautionar& "rinci'le,( Re)ision*51,

Washington an# +ee ome "age, olume 5/, 1990.

e2 "rinci'le to "rotect uman ealth an# the En)ironment,( ealth 3lert,

Earth 4uar#ian, CS, 1999.

67Rior#an, 8im an# James Cameron. Inter'reting the "recautionar& "rinci'le,(

Earthscan "ublications, +t#., Islan# "ress, 199.

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