IP 325 European Integration

ZS 2011/2012

26.10.2011

Trade Policy and its Instruments

• Trade Policy – set of intensions, strategies, principles, instruments, applicable measures, agreements and institutions through which sovereign governments control international economic relations of companies and countries. Two basic directions of Trade Policy:

• Liberalism (free trade)• Protectionism (restrictions and regulations)

Neither of these two exists in its pure form, in reality it is always a mixture of the. Autarchy – extreme internal application of protectionism; Embargo – political decision

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Trade Policy -- cont.1

Trade in goods: • Industrial goods• Agricultural goodsTrade in Services (banking and finance, tourism, transport,

educational, health, legal services),Government and Public Orders,Intellectual Property, International Investments, Competitiveness,Ecology, Health and Safety (Mutual Recognition Agreements)

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Instruments of Trade Policy

Basic division:1.protecting internal market

supporting export2.tariff

non-tariff

3. autonomouscontractual (bi- or multilateral)

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Instruments of Trade Policy - Tariffs

• Tariff: tax collected by a state authority, related to goods crossing the custom borders.Historically: income of the sovreign

• Toll – tariff collected for using roads or crossing rivers or bridgesIn middle ages one of the principal sources of income of the sovereign; nowadays often used in PPP projects (highways, tunnels, bridges etc.)

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Tariffs - cont. 1

Ungelt or Tyn Courtyard: the complex of buildings around a courtyard near the Prague Old Town Square. It was founded in the 12 th century as a place, where merchants from foreign countries paid customs for the goods they brought to Prague. The courtyard was there to protect them and their goods.Everyone who entered the Tyn courtyard was under the protection of the king, that´s why everyone had to pay to get there. This payment evolved into customs and the old German word for customs was “ungelt”, hence the second name of the courtyard.

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Tariffs - cont. 2

• USA: Tariffs (customs) were by far the largest source of federal revenue from the 1790s to the eve of World War I, until they were surpassed by income taxes (1913). Customs duties as set by tariff rates were up to 1860 usually about 80-95% of all federal revenue (now only slightly more than 1 %).

• Tariffs are being gradually replaced by non-tariff and especially contractual instruments of trade policy, as they represent a powerful bargaining tool.

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Tariffs - cont. 3

Tariffs: • import tariffs• export tariffs• historically also transit tariffsTariff calculation:• specific tariffs – fixed charge for each unit of goods imported• ad valorem tariffs – percentage of the value of goods• mixed tariffs (higher amount of the two)• compound tariffs

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Tariffs - cont. 4

Tariffs: • fiscal• protectionist (prohibitive, preferential, differential)Tariffs:• prohibitive (infant industry argument)• differential (shipment requirements, good governance)• compensational (above the MFN tariff)• retaliatory (can lead to trade wars)Harmonized Commodity Description and Coding System (WCO)97 chapters, 6-digits code (HS code) for each commodity

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Trade Control Measures

• UNCTAD Coding System of Trade Control Measures, established in late 1980’s after several revisions, contains:

• 1 chapter for tariffs, • 1 for para-tariffs and• 6 chapters for NTMs• NTMs are divided into Core and non-Core

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Non-tariff Barriers to Trade

• Growing importance of Technical Measures as Barriers to Trade in the face of elimination of Core-Measures

1994 2004

Non-Core Measures 55.3% 83.1%Core Measures 44.7% 16.9%

Source: Background paper to the UNCTAD Expert Group Meeting on NTBs, September 2005

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Non-tariff Barriers

Para-tariff barriers to trade:A charge on an imported good instead of, or in addition to, a tariff.

Measures that increase the cost of imports in a manner similar to tariff measures, i.e. by a fixed percentage or by a fixed amount, calculated respectively on the basis of the value and the quantity.

Four groups of para-tariff barriers are:customs surcharges; additional charges;internal taxes and charges levied on imports;decreed customs valuation.

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Non-tariff Instruments of Trade Policy

UNCTAD – Non-Tariff Barriers to Trade:Collection of Non-Tariff Measures started in 1980’UNCTAD classification does not cover:• Corruption• Export-related Measures• Government Procurement• Intellectual Property Rights• Investment-Related Measures• Service

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Non-tariff Barriers to Trade

• quantitative restrictions: are considered to have a greater protective effect than do tariff measures, and are more likely to distort the free flow of trade. When a trading partner uses tariffs to restrict imports, it is still possible to increase exports as long as foreign products are price-competitive enough to overcome the barriers created by the tariff.

• However, when a trading partner uses quantitative restrictions, it is impossible to export in excess of the quota no matter how price competitive foreign products may be. Thus, quantitative restrictions are considered to have a much greater distortional effect on trade than tariffs.

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Non-tariff barriers to trade

• Non-tariff barriers to trade – Import licenses– Import quotas– Subsidies– Voluntary Export Restraints– Local content requirements– Export licenses– Embargo– Currency devaluation

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Import Licence

A document issued by a national government authorizing the importation of certain goods into its territory. Import licenses are considered to be non-tariff barriers to trade when used as a way to discriminate against another country's goods in order to protect a domestic industry from foreign competition. Each license specifies the volume of imports allowed, and the total volume allowed should not exceed the quota. Licenses can be sold to importing companies at a competitive price, or a fee. Government may put certain restrictions on what is imported as well as the amount of imported goods and services.

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Import Quota

• sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.

• Quotas may lead to corruption (bribes to get a quota allocation), smuggling (circumventing a quota), and higher prices for consumers.

• In economics, quotas are thought to be less economically efficient than tariffs which in turn are less economically efficient than free trade.

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Subsidy (subvention)

• A subsidy (subvention) is an assistance paid to a business or economic sector. Most subsidies are granted by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production.

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Voluntary Export Restraint

• voluntary export restraint (VER) or voluntary export restriction is a government imposed limit on the quantity of goods that can be exported out of a country during a specified period of time.

• Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to deter the other party from imposing even more explicit (and less flexible) trade barriers. 1981 voluntary restraint agreement limited the Japanese to exporting 1.68 million cars to the U.S. annually.

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Local content requirementsExport licenses

• Local content requirements: large industrial complexes or machines can be imported only if they include a certain percentage of locally produced parts (Czech trams to USA – up to 60 %)

• Export licenses: government limits export of a scarce commodity or product by putting ceiling in either value or some other indicator to the total amount of such product that would be allowed for exportation.

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Embargo

• Embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is imposed. Embargoes are similar to economic sanctions and are generally considered legal barriers to trade (not to be confused with blockades, which are often considered to be acts of war).

• One of the most comprehensive attempts at an embargo happened during the Napoleonic Wars. In an attempt to cripple the United Kingdom economically, the Continental System – which forbade European nations from trading with the UK – was created. In practice it was not completely enforceable and was as harmful if not more so to the nations involved than to the British.

• The US imposed an embargo (still standing) on Cuba in 1962.

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Contractual Instruments of Trade Policy

Contractual instruments are:• bilateral• multilateral

They come into force on the basis of contracts (agreements) with other countries.

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